3.1 Risk and Insurance Coverage
Every person is constantly exposed to risks and unforeseen events such as accidents, property damage due to fire, and critical illnesses. While such occurrences cannot be fully avoided or predicted, insurance provides financial protection to transfer these risks and alleviate the financial burden borne by individuals and families.
Learning Objectives
- Explain the meaning of risk and the importance of insurance coverage.
- Determine and differentiate the types of life insurance and general insurance that protect against various risks.
- Investigate, interpret, and perform calculations involving insurance rates and premiums for life insurance and motor insurance.
- Solve problems involving insurance, including the application of deductible and co-insurance provisions.
Classification of Insurance Policies and Problem-Solving Provisions
Categorise Life vs General Insurance and distinguish between Deductible and Co-insurance.
Life Insurance
- Death
- Total and permanent disability
- Critical illness
General Insurance
- Motor
- Fire
- Medical & Health
- Personal Accident
- Travel
Deductible
A fixed amount deducted upfront before the insurer pays the remaining eligible claim.
Co-insurance
Proportional cost sharing between the insurance company and the policyholder.
Brief Explanation
What is Risk?
Risk is the possibility of an unavoidable disaster. Important elements of risk: risk is unpredictable, and risk involves loss.
What is Insurance?
Insurance is a contract signed between the insurance company and the policyholder to transfer risks from individuals to insurance organisations.
Premium and Compensation
Premium is an amount of money payable by the policyholder to the insurance company. Compensation is payment made by the insurance company to the policyholder for covered losses.
Principle of Indemnity
The Principle of Indemnity ensures the insurance company pays compensation to restore the financial position of the policyholder to the pre-loss condition, for an amount not exceeding the actual loss incurred, subject to the sum insured. It does not allow the policyholder to gain profit from insurance.
| Type of Insurance | Coverage | Key Notes |
|---|---|---|
| Life Insurance | Death, total and permanent disability, critical illness | Protects dependents financially |
| Motor Insurance | Loss or damage related to motor vehicle use | Compulsory under Road Transport Act 1987 |
| Fire Insurance | Damage caused by fire, lightning, explosion | Additional perils can be added for extra premium |
| Medical & Health Insurance | Hospitalisation, surgery, critical illness, disability income | Covers medical expenses |
| Personal Accident Insurance | Bodily injury, disability, death from accidents | Direct result of accidents |
| Travel Insurance | Death, permanent disability, luggage/money/passport loss, medical expenses | Protects against losses during travel |
| Group Insurance | Groups such as employees or students | Example: Takaful Pelajar Sekolah Malaysia (TPSM) |
Try Answering First
Read the question, answer it in your mind, then press “Check Answer”.
Mr Tan buys a life insurance policy with a face value of RM150 000. The annual premium rate is RM2.26 per RM1 000 face value. Calculate his annual premium.
Encik Rizal has a motor insurance policy with a deductible provision of RM400. In an accident, his car suffered damage worth RM1 850. Calculate the compensation amount paid by the insurance company.
Puan Aminah owns a house with an insurable value of RM300 000. Her fire insurance policy requires an 80% co-insurance and has a RM2 000 deductible. She insures her house for RM240 000. If her house suffers a partial fire loss of RM30 000, what is the compensation amount she will receive?
Common Mistakes
- Forgetting to subtract the deductible after calculating the proportional loss in co-insurance formulas.
- Applying co-insurance penalty calculations when a total loss occurs; for total loss, compensation is simply the amount of insurance purchased minus deductible.
- Assuming that third-party motor insurance covers the policyholder's own car damage or medical expenses.
- Forgetting to deduct the No Claim Discount (NCD) when computing gross motor insurance premium.
Misconceptions
Believing insurance can be bought to make a financial profit.
Under the principle of indemnity, compensation only restores the policyholder to the pre-loss financial condition and does not exceed the actual loss.
Believing that motor comprehensive insurance covers medical costs of the driver and their passenger.
Standard motor comprehensive policies protect third parties and own vehicle damage/theft/fire, but exclude bodily injury and death claims for the driver and passengers.
Thinking that co-insurance penalty applies to medical and health insurance.
Co-insurance penalty applies to property insurance when the property is under-insured; health insurance co-insurance is a predetermined cost-sharing participation ratio.
Summary
- Risk: Unpredictable possibility of loss.
- Principle of Indemnity: Restoring pre-loss financial standing without profit.
- Life Insurance: Protection against death, disability, or critical illness based on age, gender, face value, and smoking status.
- General Insurance: Includes Motor, Fire, Medical & Health, Personal Accident, and Travel insurance.
- Deductible: A pre-agreed amount borne by the policyholder before insurance payout is made.
- Co-insurance (Property): Condition requiring insurance up to a certain percentage of the insurable value; under-insuring results in a co-insurance penalty.
Short Activity
Complete all parts first, then press the check answer button.
A. Objective Quiz
1 Which type of motor insurance policy provides coverage against liability to third parties, loss of property suffered by third parties, loss to own vehicle due to accidental fire or theft, AND loss and damage to own vehicle due to an accident?
2 Under the principle of indemnity, what is the maximum financial compensation an insurance company will pay to a policyholder?
B. Fill in the Blanks
3 The amount of money that must be borne by the policyholder before they can make a claim from the insurance company is known as the .
4 In property insurance, the penalty borne by the policyholder for failing to meet the required insurance sum under the co-insurance clause is known as the penalty.
C. Drag and Drop: Match Each Insurance Term to Its Definition
Drag each term to the correct description. On a phone, tap the answer choice first, then tap the description box.
