DPB5013 - PRINCIPLES AND PRACTICES OF INSURANCE

PROBLEM SCENARIO 1 :

Regulation and Supervision of Insurance Industry

&

General, Life, Medical and Health Insurance Products

SESSION : DIS 2018

PROGRAMME : DPM

NAME NO MATRIC

NUR SHAFAWANI BINTI MOHAMAD MUNIR 10DPM16F1079

1. The states regulate insurance by regulating the companies that develop the policies and sell the
insurance. States began regulating insurance companies by granting charters that authorized their
formation and operation within the state, but there were few other requirements.As the insurance
industry grew, states started creating commissions that had oversight of the industry. New Hampshire
created the 1st state insurance commission in 1851. In 1859, New York created a separate agency that
could license insurers and their agents, and could also conduct investigations. Nowadays, every state has
an insurance department that monitors and regulates insurance within the state.Insurance regulation
consists mostly of state laws and other regulations regarding the solvency and markets of insurance
companies. Solvency regulations seek to ensure that the solvency of insurers is maintained and to
remedy the effects of an insolvency when it does occur. Market regulations seek to ensure the fair
treatment of policyholders, to prevent discrimination and dubious claim practices, and to regulate
advertising and other marketing, underwriting, claims payment, rates charged, and insurance policies.
States also prohibit unfair or deceptive procedures when selling policies, settling claims, and other
procedures.The state has an interest in maintaining insurer solvency, because people can encounter
financial difficulties if an insurer becomes insolvent and is unable to pay claims.The main methods to
protect consumers includes ensuring that insurance agents and brokers do not misrepresent their
products, that contracts are readily comprehensible to most consumers, and that insurance policies have
specific provisions; otherwise, it would be very difficult to compare different policies.There are specific
terms that denote the relationship of the state in which insurance is sold, the location of the insurance
company, and where it is licensed to do business. Domestic insurance is insurance provided within a
state by an insurer domiciled, or chartered, in that state. Foreign insurance is insurance provided by an
insurer domiciled in a state other than where the policy is purchased or where the coverage is provided.
Alien insurance is an insurer domiciled outside of the United States. Admitted insurance is licensed by
the state in which it is purchased, and the insurer can be either domestic or foreign. Nonadmitted
insurance is provided by an insurer who is not licensed to do business within the state. Surplus-lines
insurance is nonadmitted insurance that is purchased through a surplus-lines broker. Foreign and alien
insurance companies are generally licensed to do business in the states in which they sell insurance, but
if they are not, then they must sell their policies through a surplus-lines broker as a nonadmitted insurer.
Indeed, nonadmitted insurers are almost always foreign or alien companies, since domestic insurers are
licensed in their state of domicile.Nonadmitted insurance can only be purchased through a surplus-lines
broker, and the broker can only sell nonadmitted insurance if there are no admitted insurance policies
that provide comparable coverage. A surplus-lines broker is required so that the state can regulate the
broker, since it cannot regulate a nonadmitted insurer. However, many have argued that the need for a
surplus-lines broker is unnecessary, since almost all nonadmitted insurance is purchased by large
companies that have the legal and financial wherewithal to evaluate the insurers and their policies
themselves; almost all consumer policies are admitted insurance.Insurance companies selling insurance
within a state must usually be licensed by that state. When an insurance company seeks a license, the
insurance commissioner of that state will determine whether the owners of the insurance company are
competent and experienced and that the insurance company has the statutory amount of capital to
settle potential claims and to maintain solvency. The amount of capital that the state requires the
insurance company to have will vary according to the state, to the type of insurance that the company is
selling, and whether it is organized as a stock or mutual company.
2. a) Self-regulation theory (SRT) is a system of conscious personal management that involves the
process of guiding one's own thoughts, behaviors, and feelings to reach goals. Self-regulation consists of
several stages, and individuals must function as contributors to their own motivation, behavior, and
development within a network of reciprocally interacting influences.Self regulation is impulse control,
the management of short-term desires. People with low impulse control are prone to acting on
immediate desires. This is one route for such people to find their way to jail as many criminal acts occur
in the heat of the moment. For non-violent people it can lead to losing friends through careless
outbursts, or financial problems caused by making too many impulsive purchases. Self regulations are
the cognitive bias known as illusion of control. To the extent that people are driven by internal goals
concerned with the exercise of control over their environment, they will seek to reassert control in
conditions of chaos, uncertainty or stress. Failing genuine control, one coping strategy will be to fall back
on defensive attributions of control—leading to illusions of control (Fenton-O'Creevy et al., 2003).

b) Advantages of self-regulation is an important mechanism for governing industry practices and has
many benefits over government regulation for consumers, producers, the government, and the economy
as a whole. Consumers benefit from self-regulation in multiple ways. While some policymakers promote
regulation as a way to reduce risk to consumers, the potential for overregulation also poses a risk to
consumers. Unnecessary or inefficient regulation raises production costs for businesses without any
corresponding benefits and these costs are ultimately borne by consumers. Government regulation by its
nature addresses identified harms, and as such can inadvertently create barriers to innovation or
competitive entry when it establishes norms that only address current market participants and practices.
Firstly, selfregulation can be more efficient for business, and these saving are passed on to consumers.
Rulemaking, monitoring, enforcement and remediation processes can also be faster using self-regulation
rather than government regulation, which means that consumers are protected sooner. Secondly, self-
regulation can help reduce information asymmetry in the market. For example, consumers can more
easily hire a good lawyer in the United States because of the certification provided by the state bar
associations. Thirdly, self-regulation can also help reduce information asymmetry when independent
third-party organizations are responsible for evaluating compliance with standards. Organizations such as
the Council of Better Business Bureaus (BBB) increase transparency of the monitoring and enforcement
activities of the regulatory process, which in turn boosts consumer confidence. With the BBB, for
example, consumers can learn about the history of consumer complaints against aparticular company
and how the company has responded. Lastly, self-regulation may also help businesses internalize ethical
behavior and principles since the rules are based on social norms and conduct of peers rather than top-
down prescriptive rules. This may help instill deeper respect and acceptance of the rules and result in
better firm behavior, and avoid adversarial situations in which firms try to find exceptions to externally
imposed rules.3
The major disadvantage is enforcement (point(1)). There needs to be incentives to monitor and enforce
standards, and self-regulatory regimes without statutory backing are, in general, weak. Traditionally, the
lack of enforcement and redress are weaknesses in self-regulation. It is possible that with the internet,
some of the traditional weaknesses may be minimized. For example, information flows faster on the
internet and so can bring the offender into disrepute. Even informal sanctions can be enough to spur
cooperation and thereby deter offenders.35 Nevertheless, it should be recognized that the problem of
enforcement is a part of any self-regulatory mechanism. This weakness needs to be taken seriously
because without adequate sanctions, the self-regulatory effort will fail.Another disadvantage is that self-
regulation is perceived as never going against the interests of the (self-)regulator. Fletcher's economic
analysis36 argues that the rational self-regulator will not rule against itself. This is debatable but the trick
lies in the definition of “rational.” It is possible for the self-regulator to vote against itself if the long-term
benefits of being regulated by the code outweigh the short-term loss.Having been involved for several
years in a self-regulatory regime in Singapore, this author can state that the issue of self-interest crops up
less frequently than might be perceived. The author has voted in favor of business just as business
representatives have voted against their own interests for the consumer. Nevertheless, the public
perception of the self-interested self-regulator is difficult to shake.Other disadvantages are less severe.
There is always a concern that self-regulatory codes could build cartels, as has happened in other
industries such as shipping.37 Arguably, such cartels lend stability to the industry, but they also confer
monopoly power on the “self” and so result in higher rates imposed on consumers. Indeed, self-
regulation by the professions, especially legal and medical, may excessively restrain competition without
corresponding benefit to the public. Such an issue is unlikely to arise where the internet is concerned. In
any case, a sensibly-designed industry code is unlikely to give rise to anti-trust problems.

3. Fire insurance is property insurance covering damage and losses caused by fire. The purchase of fire
insurance in addition to homeowner’s or property insurance helps to cover the cost of replacement,
repair, or reconstruction of property, above the limit set by the property insurance policy. Fire insurance
policies typically contain general exclusions, such as war, nuclear risks, and similar perils. Fire insurance
policies include payment for loss of use, or additional living expenses due to uninhabitable conditions as
well as damage to personal property and nearby structures. Homeowners should document the property
and its contents to simplify the assessment of items damaged or lost during a fire. A fire insurance policy
includes additional coverage against smoke or water damage due to a fire and is usually effective for one
year. On expiration, the policyholder may renew the policy according to the conditions of the
policy.Some standard homeowner’s insurance policies include coverage for fire. If excluded, fire
insurance may need to be purchased separately, especially if the property contains valuable items that
cannot be covered with standard homeowner's coverage. The insurance company’s liability is limited by
the policy value and not by the extent of damage or loss sustained by the property owner.Fire insurance
covers a policyholder against fire loss or damage from many sources. Sources include fires brought about
by electricity, such as faulty wiring and explosion of gas, as well as those caused by lightning and natural
disasters. Bursting and overflowing of a water tank or pipes may also be covered by the policy.Most
policies provide coverage regardless of whether the fire originates from inside the home. The limit of
coverage depends on the cause of the fire. The policy will reimburse the policyholder on either a
replacement-cost basis or an actual cash value (ACV) basis for damages. If the home is considered a total
loss, the insurance company may reimburse the owner for the current market value. Typically the
insurance will offer a market value compensation for lost possessions, with the total payout capped
based on the home's overall value. A policyholder should check the home's value each year to determine
if there is a need to increase the coverage amount. A policyholder cannot get insurance for more than a
home's actual value. Insurance companies may offer stand-alone policies for rare, expensive, and
irreplaceable items.

4. Two other popular life insurances are life insurance and general insurance. Both are two different
products that serve two different purposes. They also insure against different things. As the name
suggests, life insurance is an insurance against the loss of a life. Whereas, a general insurance is an
insurance that protects against more general things. To add to the confusion, there are also a variety of
different products that full under the category of life insurance or general insurance.Life insurance is a
type of insurance that insures against the loss of life. Most types of life insurance work on a similar
notion, even if their details might be different. Here, the life of a person, typically call the insured is
protected against loss. This means that when that person will die, the insuring company will pay an
agreed amount to the person’s family in order to help them with financial difficulties that may arise after
the person’s death. In order to avail this sum, the insured must pay a premium to the insuring company
through their lifetime, or for the duration specified in the policy.General insurance, on the other hand,
words under similar principals. In it, the insured must also pay a premium to the company, and in lieu of
that, they may be accessible to a payout later. However, instead of insuring against loss of life, general
insurance insures against financial losses incurred on the basis of assets. Such as financial loss incurred
by the theft or damage of a asset, such as machinery, or stock. The premium and the payout depend
upon what the insured item is as well as its cost and value.There are many different types of general
insurance, such as health insurance, property insurance, fire insurance, car insurance, etc. basically
everything other than life insurance is mostly categorized under general insurance. Each type of general
insurance is different and serves a different purpose. For example, car insurance protects a car, fire
insurance protects against damage caused by a fire, etc.However, it should be noted that not all life
insurances and general insurances are the same. Each company has their own set of rules and conditions
which must be met in order to receive a payout. For example, a life insurance policy might only protect
the life on a person until a certain age and if that person dies after that age, then the policy is null and
void, or some might pay a reduced sum. Another policy might pay out only if the insured dies a violent
death i.e. in an accident or is murdered. If the person dies of natural causes then the policy might be
void or might pay less. Each policy is different and one must read the policy and its conditions carefully
before signing.
5. Situation 1

Amount of Claim = Actual Loss × Amount of Policy/ The total of market value

. = ( RM90,000 × RM300,000 ) / RM300,000

= RM90,000

Situation 2

Amount of Claim = Actual Loss × Amount of Policy/ The total of market value

. = ( RM90,000 × RM200,000 ) / RM300,000

= RM60,000

The total amount of compensation that En Ahmad receive between Situation 1 and Situation 2 is
different because the fire insurance policy that he bought is not the same. Based on the situation 1, he
bought the fire insurance policy with the same price of market value so he can get a high amount of
compensation rather than situation 2 that he bought the fire insurance policy less than the market value
price so he can get less than the total of compensation to cover it.
6.Two other popular life insurances are life insurance and general insurance. Both are two different
products that serve two different purposes. They also insure against different things. As the name
suggests, life insurance is an insurance against the loss of a life. Whereas, a general insurance is an
insurance that protects against more general things. To add to the confusion, there are also a variety of
different products that full under the category of life insurance or general insurance.Life insurance is a
type of insurance that insures against the loss of life. Most types of life insurance work on a similar
notion, even if their details might be different. Here, the life of a person, typically call the insured is
protected against loss. This means that when that person will die, the insuring company will pay an
agreed amount to the person’s family in order to help them with financial difficulties that may arise after
the person’s death. In order to avail this sum, the insured must pay a premium to the insuring company
through their lifetime, or for the duration specified in the policy.General insurance, on the other hand,
words under similar principals. In it, the insured must also pay a premium to the company, and in lieu of
that, they may be accessible to a payout later. However, instead of insuring against loss of life, general
insurance insures against financial losses incurred on the basis of assets. Such as financial loss incurred
by the theft or damage of a asset, such as machinery, or stock. The premium and the payout depend
upon what the insured item is as well as its cost and value.There are many different types of general
insurance, such as health insurance, property insurance, fire insurance, car insurance, etc. basically
everything other than life insurance is mostly categorized under general insurance. Each type of general
insurance is different and serves a different purpose. For example, car insurance protects a car, fire
insurance protects against damage caused by a fire, etc.However, it should be noted that not all life
insurances and general insurances are the same. Each company has their own set of rules and conditions
which must be met in order to receive a payout. For example, a life insurance policy might only protect
the life on a person until a certain age and if that person dies after that age, then the policy is null and
void, or some might pay a reduced sum. Another policy might pay out only if the insured dies a violent
death i.e. in an accident or is murdered. If the person dies of natural causes then the policy might be
void or might pay less. Each policy is different and one must read the policy and its conditions carefully
before signing.

7. a) Fire insurance is property insurance covering damage and losses caused by fire. The purchase of fire
insurance in addition to homeowner’s or property insurance helps to cover the cost of replacement,
repair, or reconstruction of property, above the limit set by the property insurance policy. Fire insurance
policies typically contain general exclusions, such as war, nuclear risks, and similar perils. Fire insurance
policies include payment for loss of use, or additional living expenses due to uninhabitable conditions as
well as damage to personal property and nearby structures. Homeowners should document the property
and its contents to simplify the assessment of items damaged or lost during a fire.

b) Homeowners insurance is a form of property insurance that covers losses and damages to an
individual's house and to assets in the home. Homeowners insurance also provides liability coverage
against accidents in the home or on the property.When a mortgage is requested on a home, the
homeowner is required to provide proof of insurance on the property before the lending bank can issue
him or her a mortgage. The property insurance can be acquired separately or by the lending bank.
Homeowners who prefer to get their own insurance policy can compare multiple offers and pick the plan
that works best for their needs. If the homeowner does not have their property covered from loss or
damages, the bank may obtain one for them at an extra cost. Payments made toward a homeowners
insurance policy are usually included in the monthly payments of the homeowner’s mortgage. The
lending bank that receives the payment allocates the portion for insurance coverage to an escrow
account. Once the insurance bill comes due, the amount owed is settled from this escrow account.A
homeowners insurance policy usually covers four incidents on the insured property – interior damage,
exterior damage, loss or damage of personal assets/belongings, and injury that arises while on the
property. When a claim is made on any of these incidents, the homeowner will be required to pay a
deductible, which in effect is the out-of-pocket costs for the insured.
c) Home is an environment offering affection and security. To ensure complete security & protection
against accidental damages Householder policy provides cover both to building and its
contents.Householder Insurance Policy offers comprehensive protection for your home (residential
building) and its contents against a variety of risks. This is a composite policy spilt into ten sections
covering number of contingencies. Minimum of three sections are necessarily to be taken, out of which
Section IB relating to coverage of contents against Fire and allied perils is compulsory.

d) Critical illness insurance, otherwise known as critical illness cover or a dread disease policy, is an
insurance product in which the insurer is contracted to typically make a lump sum cash payment if the
policyholder is diagnosed with one of the specific illnesses on a predetermined list as part of an
insurance policy.The policy may also be structured to pay out regular income and the payout may also be
on the policyholder undergoing a surgical procedure, for example, having a heart bypass operation.The
policy may require the policyholder to survive a minimum number of days (the survival period) from
when the illness was first diagnosed. The survival period used varies from company to company,
however, 14 days is the most typical survival period used.The contract terms contain specific rules that
define when a diagnosis of a critical illness is considered valid. It may state that the diagnosis need be
made by a physician who specialises in that illness or condition, or it may name specific tests.In some
markets, however, the definition of a claim for many of the diseases and conditions have become
standardised, thus all insurers would use the same claims definition. The standardisation of the claims
definitions may serve many purposes including increased clarity of cover for policyholders and greater
comparability of policies from different life offices. There are alternative forms of critical illness insurance
to the lump sum cash payment model. These critical illness insurance policies directly pay health
providers for the treatment costs of critical and life-threatening illnesses covered by the policyholder’s
insurance policy, including the fee of specialists and procedures at a select group of high-ranking
hospitals up to a certain amount per episode of treatment as set out in the policy.

e) Disability income (DI) insurance provides supplementary income in the event of an illness or accident
resulting in a disability that prevents the insured from working at their regular employment. Benefits
usually are paid monthly so the insured can maintain their standard of living and continue to pay
ordinary expenses.Disability income (DI) insurance is designed to replace between 45% and 65% of the
insured’s gross income on a tax-free basis. The benefits tax-free because the individual used after-tax
dollars to pay for the plan. The policy pays a benefit in the event illness or injury prevents the
policyholder from earning their usual income in their occupation. Although some employer-offered plans
and Worker Compensation can provide help during a disability, the quality and scope of the coverage
may leave the disabled employee short of the protection they require. Many employer-offered plans are
part of a suite of coverage, and may not pay to the levels an employee needs to meet their expenses.
Also, Worker Compensation only covers injuries as a result of employment and not outside of the work
sphere.Self-employed individuals and small business owners must go it alone when it comes to disability
income. Even if an injury is work-related, an independent business owner may not claim Worker's
Compensation on themselves.