Pre-Contract Exam Certificate Examination In Investment-Linked Life Insurance (CEILLI), Study Guides, Projects, Research of Lease Finance and Investment Banking

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PCEIA-CEILLI (PCIL)

Pre-Contract Examination (PCE) &

Certificate Examination In Investment-Linked Life

Insurance (CEILLI)

Summary of MII PCE & CEILLI Textbook

v1 First^ Sales^ Academy

Examination Format

 100 questions

 2 hours

 Computer-based examination (Multiple choice)

 Part A: Basic Insurance = 40 Questions

 Part C: Life Insurance =30 Questions

 Investment-Linked = 30 Questions

 Passing Mark = 50%

 Language = English/Bahasa/Mandarin

Content

Section Topics Chapter

Part A The Basics of Insurance Chapter 1 – Chapter 6

Part C Life Insurance Chapter 11 – Chapter 16

Investment- Linked

Investment-Linked Life Insurance Chapter 1 – Chapter 9

Pure Speculative Fundamental Particular

Risk

Part A : The Basics of Insurance

Chapter 1: Risk and Insurance

Meaning of Risk

1. Risk can mean hazard, danger and chance of loss or injury, the degree of probability of loss, a person, thing or factor likely to cause loss or danger.
2. A large number of similar loss exposures enable an insurance company to predict an expected loss. However, there is loss.

3. Risk can also be referred to as

as the actual loss may vary with the expected

Classification of Risk

1. Pure Risk  The basis of insurance cover  May result in financial loss or break even  E.g. A factory fire or death from a road accident
2. Speculative Risk  Cannot be insured  May result in a loss, gain or break even  E.g. Investments in the share market or in foreign currencies

an element of

3. Fundamental  Cannot be measured in financial terms  May affect a large number of people or the entire economy at one time  E.g. Pandemic, natural disaster, terrorism, war or recession.
4. Particular  May affect only an individual, a family or a group travelling together.  E.g. Death, illness or accident

Peril, Hazard and Loss

Risk Management

Peril Hazard Example

Fire Physical

The risk of fire is increased with wooden construction instead of bricks or concrete.

Accident

Moral

This hazard is prevalent in motor insurance if the driver is a drug addict.

Note: Moral hazard is a character defect in an individual (i.e. dishonesty,

carelessness etc.)

Legal

This hazard arises in motor third party liability risks where generally large court awards for personal injuries obtained.

5. Risk Transfer

 Insurance is a risk transfer mechanism by an insured to an insurance company.  Reinsurance: Risk is transferred from an insurer to a reinsurance company for cost stabilization, peace of mind and other insurance benefits.

Insurance and Takaful

What Is Insurance?

- The concept of insurance began with marine insurance. Cargo owners transferred the risk of their cargo being lost or damaged at sea by paying a small premium to a group of businessmen who willingly assumed the risk. - The role of insurance has been further developed and refined by the original purpose as a risk transfer mechanism remains unchanged. - As there are uninsured or underinsured losses that are not recoverable from insurance, it is important for risk management to complement insurance in enforcing preventive measures to reduce the probability of loss. - In Malaysia, motor insurance (Road Transport Act 1987) and professional indemnity for the legal profession and licensing insurance brokers and financial advisers are compulsory.

What Is Takaful?

- An Arabic term which means ‘to protect’ or ‘to guarantee’ - An alternative form of insurance based on the principle of - Policy owners are known as ‘participants’ and the Takaful company is known as an ‘operator’ which also functions as a trustee, manager and entrepreneur - Revolves around the elements of Mudharabah (profit and loss sharing), Tabarru’ (donation) and other Shariah justified elements.

Shariah Advisory Council of Bank Negara Malaysia (SAC)

- SAC consists of prominent Shariah scholars, jurists and market practitioners. - SAC was established in May 1997 as the highest Shariah authority in Islamic finance in Malaysia. - It has the sole authority to ascertain Islamic laws with regards to Islamic banking business, Takaful business, Islamic financial business, Islamic development financial business or any other business which is based on Shariah principles. - It is supervised and regulated by Bank Negara Malaysia (BNM) - It is the reference body and advisor to BNM on Shariah matters, responsible for validating all Islamic banking and Takaful products to ensure compatibility with Shariah principles.

Functions of Insurance

The three functions of insurance are interrelated:-

1. Sound Risk Transfer Mechanism The insured pays a sum of premium in exchange for protection, transferring the responsibility of carrying the risk of loss or damage to the insurer. As a result, the primary insurer is in the same position as the insured in relation to uncertainties associated with risk.

2. Creation of Common Pool

All premiums collected are placed in a pool known as a class of portfolio (e.g. fire, theft). In the event of any loss suffered by anyone contributing to this pool, the loss amount will be paid out from this pool.

6. Capital for Investment

Insurance companies have large amounts of money at their disposal because there is a time gap between the receipt of premiums and the payment of claims. The investment of funds constitutes a wide range of different forms such as long, medium and short-term investments which in turn contribute towards overall economic growth and development.

7. Creation of Employment

The insurance industry provides employment to many professionals as well as others in insurance companies, insurance broking firms, loss adjusting, financial advisory services as well as to life and general insurance agents.

Nature of Insurable Risks

An uninsurable risk is one where a condition or situation fails to meet the requirements of an

insurable risk. Insurable risks have the following characteristics:-

1. Fortuitous

The event must be entirely accidental in nature. The frequency and severity of any risk must be beyond the control of the insured. It is impossible to insure against an event which will definitely occur, damages caused by wear, tear and depreciation as well as deliberate acts with intention to commit fraud.

2. Financial Value

The risk which is to be insured must result in a loss which is capable of being measured in financial terms. In life assurance, the level of financial compensation is agreed at the beginning of a contract.

3. Insurable Interest

There must be some kind of legal relationship between the insured and the financial loss which is described as ‘insurable interest’. An insured must have insurable interest in the subject matter of the insurance, meaning that he stands to benefit from its preservation and will suffer from its loss.

4. Homogeneous Exposures

There must be similar exposures to enjoy the benefits of the law of large numbers in order to forecast the expected extent of their loss.

The law of large numbers states that as the number of loss exposures increases, the predicted loss tends to approach the actual loss. This principal can only operate efficiently if the loss exposures are independent and there is a random occurrence of a loss.

5. Pure Risks

Insurance is concerned mainly with pure risks and not speculative risks. Pure risks involve the chance of loss or no loss whereas the probability of loss or gain or break even exists in speculative risks.

6. Particular Risks

Particular risks affect individuals whereas fundamental risks are widespread and indiscriminate in nature. Fundamental risks which are widespread in nature, such as hurricanes and earthquakes may be insurable depending on geographical location and the frequency and severity of the risk.

7. Public Policy

It is not acceptable to insure against the risk of a criminal venture which contravenes the law or an act which in contrary to what society would consider the right or moral thing to do.

The Insurance Market

The insurance market comprises of below:-

General public, individuals, business entities and organisations

Insurance Brokers, Financial Advisers and Insurance Agents

Insurance companies, Lloyd’s underwriting members and Reinsurers

stipulates that a

In other

words, composite insurance companies (carrying on both life and general insurance business) are

required to convert to single insurance businesses.

licensed professional reinsurer shall not carry on both life business and general business.

Section 16(1) of the Financial Services Act 2013 (FSA) licensed insurer other than a

Chapter 2: Basic Principles of Insurance

There are 6 basic principles that all insurance policies rely on so that insurers remain in business and customers can make better purchasing decisions.

The 6 basic principles of insurance are:

1. Utmost Good Faith

The duty of utmost good faith (uberrima fides) is central to the buying and selling of insurance.

The insurer and insured have a duty to deal honestly and openly with each other in the negotiations that lead up to the formation of the contract. In other commercial contracts, there is no need for parties to disclose information not requested as each party is expected to make the best bargain. Such contracts are governed by

the legal principle of caveat emptor (let the buyer beware).

1.1 Disclosure Requirements

i. Pre-contractual stage

Both parties have a duty to disclose accurate and relevant information in a clear, concise and timely manner to enable the consumer to make an informed decision and the insurer to decide on suitable terms of acceptance of the risk.

ii. Renewal of general insurance contracts

Both parties must observe this principal during renewal. The insured has the onus to inform the insurer of any material changes in the risk to be insured so that an appropriate assessment of the risk can be carried out and a premium that commensurate with the risk accepted can be determined.

iii. During the contract

The insured is under the duty to disclose new material facts affecting the risk being insured under two circumstances:

 Changes in the contract: E.g. The insured changes his car or wishes to add new drivers  Increase in the risk: E.g. The insurer must be notified of any alteration in the property insured which increases that risk of damage.

1.5 Remedies for Breach of Good Faith by the Insured

Insurer Innocent Breach Fraudulent Breach

1. Right to void the policy as a whole? Yes^ Yes
2. Right to keep the premium? No^ Yes
3. Right to ignore the breach and allow the policy to stand?

Yes Yes

4. Right to refuse a particular claim but allow the policy to stand?

No No

1.6 Schedule 9 of the Financial Services Act 2013 (FSA)

Prescribes the application of ‘pre-contractual disclosure and representations, and remedies for

misrepresentations’ and distinguishes between a ‘consumer insurance contract’ (entered by an

individual not related to the individual’s trade, business or profession) and a ‘non-consumer

insurance contract’

1) Non-consumer insurance contracts [para 4(1) part 2 Schedule 9 of FSA] reinforces the duty of

disclosure on the proposer to disclose all relevant material facts even when a specific question is not asked or contained in the proposal form.

However, this duty does not require the disclosure of a matter that:-

a) Diminishes the risk to the insurer

b) Is of common knowledge

c) The insurer knows or in the ordinary course of his business ought to know

d) In respect of which the insurer has waived any requirement for disclosure

2) Consumer insurance contracts [para 5 (6) part 2 Schedule 9 of FSA] are considered as having

complied with duty of disclosure if the individual applicant has fully and faithfully answered all questions contained in the proposal form.

 It is the legal right to insure arising from a in the subject matter of insurance.

which the insured has

 refers to financial interest which is recognised by law.

2.1 Who has Insurable Interest?

 A person has insurable interest in his own life to an unlimited extent (Para 3 Schedule 8

of FSA)  Any person effecting a life insurance policy on the life of another must have insurable interest at the time of effecting the policy; otherwise, the policy is void  A person shall be deemed to have insurable interest in relation to another person who is:- a. his spouse, child or ward under the age of majority (18 years old) at the time the insurance is effected; b. his employee; or c. a person on whom he is at the time of the insurance is effected, wholly or partly dependent for maintenance or education.

2.2 When should Insurable Interest Exist?

In respect of general insurance (except marine insurance), insurable interest must exist at the

2.5 Assignment of Policy Proceeds can be effected when the insured instructs his insurer to pay

the claim amount to a third party.

2.6 Payment of Policy Monies under Life and Personal Accident Policies

 Schedule 10 of FSA 2013 deals with the payment of policy monies under life and personal accident policies

 A policy owner who has attained the age of 16 years may nominate a person to receive

the policy monies upon his death (Para 2 Schedule 10 of FSA 2013).

 The insurer shall be provided with the name, date of birth, identity card number or birth

certificate number and address of the nominee.

 Such nomination shall be witnessed by a person of sound mind who has attained the age of 18 years and is not a nominee named under the policy.

3. Indemnity

Insurance contracts promise “to make good the insured loss or damage”. This principle restores the insured to the same financial position as he had been enjoying immediately before the loss. The object of the principle is to ensure that the insured, after being indemnified, shall not be better off than before the loss. General insurance contracts are contracts of indemnity because the subject matter of insurance can be measured in terms of monetary value or replacement value.

3.1 Measurement of Indemnity

Type of Insurance Basis of Indemnity

Property Cost of repair, replacement or reinstatement to make good property lost or damaged. Market value is the basis of sum insured for property other than buildings where deductions will be made for wear, tear and depreciation.

Liability Potential court award for special and general damages including costs and legal expenses incurred in defence of the insured.

Pecuniary Financial loss suffered by the insured. For example, fidelity guarantee insurance indemnifies the employer for the financial loss caused by dishonest employees.

Marine Identifiable insured value which is agreed at the start, and this is unaffected by subsequent market price variation. The ‘agreed value’ is paid to settle a total loss claim.

4. Subrogation

The principle of subrogation allows an insurer who has indemnified an insured for a loss to take over the insured’s legal rights to recover from a negligent third party responsible for the loss. This is to prevent the insured from getting more than indemnity when he has two or more avenues to recover the loss. Subrogation supports the principle of indemnity and is a natural consequence of indemnity which ultimately reduces the insurer’s cost of claims and penalizes the wrong doer.

4.1 How Subrogation may Arise

i. Subrogation rights exist at common law and do not need to be stated in the policy. The

policy condition allows the insurer to commence recovery action before it pays a claim,

thus giving the insurer more control over proceedings and a better chance of making a recovery

ii. Subrogation rights may arise under a contract. E.g. A business owner engages a security

firm to escort his money while in transit to and from the bank and simultaneously takes up a money insurance policy. If his money is lost, he can either make a claim from his insurer or recover the loss from the security firm. If he takes the latter action, the insurer will be entitled to subrogation rights to recover the same loss from the security firm under contract with the business owner

iii. Salvage. In the event of a total loss and upon claim settlement, the insurer is entitled to

exercise subrogation rights by taking possession of any wreckage or salvage in order to recover some amount of the total loss paid.

5. Contribution

When a loss is covered by two or more policies by the same insured, the principle of contribution allows an insurer who has indemnified an insured to call upon other insurers liable for the same loss to contribute proportionately to the cost of the indemnity payment. Contribution if also a corollary of indemnity; it has been developed to prevent the insured with two or more policies from being more than indemnified for the same loss. The principle of contribution arises under common law and its application has caused much

difficulty for insurers. As such, most property insurance policies contain a contribution condition

to state that whenever contribution applies, the insured is obliged to claim against all the insurers, each of whom will have to pay a rateable proportion of the loss in accordance with their respective sum insured. The amount that each insurer has to pay is arrived at by the following formula:-