The current practice in Malaysia is to apply the average clause when property is not insured for its full value (indemnity or reinstatement basis). This means the insured will have to bear a rateable proportion of the loss as the sum insured bears to the value at risk at the time of the loss happening. The value of risk can sometimes be difficult to establish and disputes as to the degree of under-insurance have occurred leading to difficulties in settling the claims.
In many advanced markets, the problem has been recognised and the average clause has been amended to allow for it not to be applied when the sum insured represents not less than 85% of the value at risk. Inflation, rising cost of re-building, machinery replacement and other things along with currency fluctuation have all added to the problem of maintaining an adequate sum insured.
Do do think the Malaysian insurance market will adopt this practice when liberalisation takes place in 2016?
- Andrew Cheng I will be more than delighted to see this happen, and feeling positive about it.
Kianbeng Tan Our current average clause is strict. I would agree if it can be adjusted to 85%. As we know sometime stocks and machine price fluctuate without customer knowledge
Wong Woon Hock When detariffication takes place in 2016, brokers will certainly propose for things of this nature and more. Underwriters will need to be more knowledgeable to decide whether or not to grant and the implication
Terence Opulence Would be great if adjusters can share their data on how to calculate the sq foot rate for each area ...
Yam Lim Song The 85% Average Clause has already been included by brokers in IAR policy for Large and Specialised Risks. However, the clause is applicable to stocks in trade which are more vulnerable to fluctuation in prices particularly those tagged to USD at this moment. A case in point is fertilizer stocks which are imported in USD but insured in RM under the Fire policy. I agree that this Clause should be implemented in a liberalized market.
Raymond Huang For stocks as highlighted by YLS, the matter could be dealt with using the Stock Declaration method of insuring. Fix a high sum insured to take care of fluctuation in currency, prices and varying levels of stocks and declare actual holding at end of each month. You will be paying average premium but will get maximum cover and avoid under-insurance. You will get refund if over-insured.
Ong Chun Keat Addtional note on insuring stock. Ensure the sum insured represent the highest stock value stored in a year. And for the refund, max is 50% of the provisional premiums.- Yam Lim Song RH, your proposal is ideal when the provisional premium charged to stocks was based on 75% of the declared sum insured in the old days. The sum insured can be deliberately fixed at a higher end to take care of the stock and price fluctuations in the knowledge that the insured will be paying 75% of the premium at the outset of the policy.The Fire Tariff on stock declaration policy is now charged at full premium rate and adjusted at the end of the year subject to a maximum 50% refund to put the ball on the insured's court to declare the monthly/quarterly value of the stocks regularly failing which no refund will be given by the insurer at the end of the year. Your proposal is a good solution but agents will be hard pressed to convince the insured to insure stock value at a higher amount due to the upfront 100% premium payable at the inception date of the policy.
- Raymond Huang YLS - So far I have no problems with my insureds on this. I think it boils down to giving a clear and convincing explanation on the working and benefit of stock declaration.
- Wong Woon Hock Just a bit of background information. The reason why provisional premium is now based on 100% is because some Insureds did not declare the monthly stocks and thus there was no adjustment of premium and escaped with 25% discount as the provisional premium charged then was only 75%. PIAM & Insurers had subsequently decided that the provisional premium be 100% charged upfront. It is for the benefit and advantage of the Insureds to declare so as to enjoy paying the actual premium chargeable based on the average of the 12 declarations. When there is no declaration for certain month, the underwriter will take the sum insured as the declared amount.
Agnes Lee Hong What I understand that the calculation of stock declaration refund is based on average declared value for that year. If the Insured declared higher value than the Sum Insured (only on the particular month of loss incurred) , we should take policy sum insured (clause stated -highest value for the month) or the declared value to calculate the refund for the stock declaration? If we take the policy sum insured as the max value, then how the additional premium will come into the picture?- Raymond Huang Agnes Lee Hong - Since liability is limited to the sum insured, the maximum sum to be used for premium calculation would be the sum insured even if the declared value is higher.
Richard Foong RH. Fyi, BNM is concerned on the underinsurance and we just received a circular from PIAM on this matter. Agents must educate the insured on the importance of adequate cover and its effect on underinsured. Hope when market liberalised, there is no question on adequacy of cover. Hope it would be what you paid is what you get. Can this happen?- Raymond Huang RF - I do know what will happen after liberalisation. Under-insurance is a problem encountered even in well developed markets? I doubt this problem will go away easily but efforts must continue to be made to educate the insuring public on the dangers of under-insurance. Agents must also play their part.
- Richard Foong Well 4 months left for liberalsation. Are Malaysian insurers ready? There seemed to be no reaction and agents are not been trained to prepare for this eventuality. I think those foreign companies will be able to sustained if there is drop in premium. I am not sure Takaful players. Hope everything would run smoothly.
- Wong Woon Hock The basic principle of insurance is that if you insure 75% of the value of the property you are self-insured for the remaining 25%. It will continue to be a problem even after liberalisation. As such it is very important that the agents/brokers must stress the importance of adequate sum insured and explain to the clients how the average condition will apply, so that there is no dispute or dissatisfaction in the event of a loss.
- Ong Chun Keat One way to minimise underinsurance is apply appropriate clauses or extension. I.e Escalation Clause and Upward Adjustment.
- Raymond Huang Good idea Ong Chun Keat - these involve payment of premium and many clients are not happy to pay more. Maybe agents lack the skills to convince insureds to increase s/i or use the clauses & extensions as suggested by you. I hope agents will work harder in this particular area.
- Richard Foong There is a fixed ceilings on escalation by insurers on building and plant & machinery. Upward adjustments are for fire con loss only, right? I just queried my agents on the sum insured for class 1A building. The insured wanted to insure at RM 20,000. I was shocked as what can 20k do if it burn down or partial loss. This is the attitude of agents who just want to close the deal without checking further. Time are not on our side if agents adopt lackadaisical attitude.
- Raymond Huang RF - I am shocked to learn that an agent would close the case for 20k s/i on a class 1A building. He is doing a very wrong thing not advising the insured properly. It will certainly create problems in the event of a claim. Such agents help to create a bad image for insurers. I think the client is thinking that not much damage can be caused by fire to a class 1A building and so chose to insure 20k. If the loss is 20k and below, he would expect to be paid in full. He does not know anything about average clause and the agent just could not be bothered to explain. Just want to do the business and not be bothered with the problems later on. Maybe no loss at all for the next 50 years? Do I sound cruel in my comments?
- Richard Foong Ha ha. I told the agent to discuss further with the insured before proceeding otherwise it not only damage agent credibility but company image at stake for accepting. I don't know how many such agents out there. Hopefully only a handful otherwise I pity the insured when claim happen.
- Ong Chun Keat 20k might as well don't insured. Haha
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