Deductibles And Claims Processing Costs Business Essay

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Nowadays, the economy of Malaysia is growing and a highly open economy, people tend to purchase the luxury product, car is the one of the productivity industry. For the directly factors, automobile insurance sector in Malaysia able to stimulate our economic but also arising out of several unsympathetic factors. Increasing trend of awards given by High Court in cases of deaths or disabilities arising from motor accidents. In a study commissioned by PIAM, court awards for various types of injuries in 1980-1982 were almost 111% higher than those in the 1960s.Increasing number of vehicles on the road which results in a sharp increase in number of accidents, case of steal and hence, increasing the number of insurance claims. The number of the factor like administrative and capital loss, correlated losses, parameter uncertainty, moral hazard, and adverse selection, limit the extent to which risk exposures are insured. Contractual provision is the way to limit the amount of coverage.

2.1 Deductibles

Deductibles reduce premiums and limit amount of coverage by eliminating small claims or losses. With the real practice of automobile insurance, the clerical expenses of processing a loss claim are different in proportionately between a small losses in accident like a small dent at car body and for severe body damage.


Excess also known as a 'deductible'. This is the amount of loss you have to liable and contribute before insurance company will pay for the balance of your vehicle damage claim. Most of insurance plan have a excess fixed rate and the amount that policyholders are require to pay as per the policy terms & conditions in respect of each and every claim payable. It is including cost and expenditure incurred by the insurance company to conduct, defence and settlement of claim for the loss or damage to your vehicle, and damage to third party property resulted from the accident arising out of the use of your vehicle for liability to third parties (, "Claims - Frequently Asked Questions") in addition to any other excess that may be related.

For example, the excess of your policy is RM150 and the total claim amount is RM1450. Your insurer will only pay out RM1300 for the claim while you have to pay the remaining RM150.

The types of excess applicable are as follows:

Compulsory excess of RM400 -

if your vehicle is driven by a person not named in your policy or a person named in your policy that is under the age of 21, the holder of a provisional (L) driving licence or the holder of a full driving licence of less than two years.

Other excess -

applicable at the discretion of your insurance company and in some cases, no excess is imposed. Policy holder can negotiate with your insurance company on this excess.

Actually, when there is a claim, a higher excess amount which selected by policyholder can be decreased the amount of the premium which they pay every month. Especially for the younger drivers, they need to pay a higher excess amount, but their premiums can be reduced significantly. However premium to be pay is lower, but higher claim happened in an accident will occurs higher excess amount need to pay.

2.1.1 Deductibles and claims processing costs

One of the reasons that policies have deductibles is to reduce the cost of small claim that occurs relatively frequently. No Claim Discount (NCD) is a discount given to the policyholders upon renewal of their automobile insurance if no claim is made or arises from the policy for a continuous coverage period of 12 months in each of following instances.

NCD for Private Car


Period of Insurance


After the first year of insurance


After the second year of insurance


After the third year of insurance


After the fourth year of insurance


After five or more years of insurance


*The discount given is based on a fixed rate provided by PersatuanInsurans Am Malaysia (PIAM) Motor Tariff.  

NCD can let you save money by reducing your premium. Different NCD rates are applicable for different classes of vehicles. Thus, by eliminating small claims, insurers can reduce claim processing expenses and premiums without reducing coverage significantly.

"People are often too petrified to file a claim because they think they won't be able to afford a premium increase," says Eric Tyson, author of "Personal Finance for Dummies." We all want to be accident-free, but "it's important to remember that filing an insurance claim isn't necessarily bad," he says. "Insurance is there to protect you, and it makes good financial sense to use it when necessary."

However the claims processing costs make insuring a small claim that occurs reducing of discount rate of premium have to pay but understanding the logic behind filing a claim only in the event of a large loss also provides insight into how to save a few dollars on your insurance premiums. Because you aren't going to file a claim in the event of a minor loss, having a low deductible on your policy makes no financial sense. If you already plan to pay for the first RM500 or RM1000 worth of damage out of your own pocket, set aside that number of claim discount, period of insured, premium and raise your insurance deductible to match the number. Increasing your deductible will result in lower insurance rates, and the insurer will cover your out-of-pocket costs in the event of an accident.

2.2Policy limits

Each automobile insurance policy has its limits, with the policyholder who purchased the insurance determining most limitations. While states and finance companies set minimum limits, each policyholder designs a package of insurance with limits that he is comfortable with. Thesepolicies often limit the amount of coverage by placing an upper limit and scope of coverage which on the amount that the insurer will pay for the loss. Limitations on car insurance allow policyholders to save money by lowering limits to legal requirements and to secure greater protection by increasing limits. Higher policy limits increase policy costs but can close the financial window of liability caused by unforeseen events, including multiple vehicle collisions and collisions with uninsured motorists. Because of financing limits, when purchasing or leasing an automobile, drivers are required to maintain a full coverage policy. The limits of the policy must be adequate to cover the full cost of the vehicle in order to protect the finance company's financial collateral. Some certain insurance companies limits will result some of the companies allow the drivers to pay cash in the event of accidents, a basic liability insurance policy serves the same purpose and is the standard for most companies. The minimum limit of basic liability coverage varies from company to company but is designed to cover the minimum average financial loss in a vehicle-to-vehicle collision. Below is the example of four different Malaysia insurance company for term and conditions of automobile policy limit

Term and Conditions (Policy Limit)

Minimum Sum insured

Maximum sum insured













For car with Sum insured more than maximum sum insured, need to get special approval first or buy special coverage.

2.2.1 Third Party Cover

This policy insures policyholder against claims for bodily injuries or deaths caused to other persons (known as the third party), as well as loss or damage to third party property caused by policyholder's vehicle.Third Party Cover is the minimum level of cover policyholder need to legally be able to drive on the roads. This means that only third parties can claim for damages from insurer, and policyholder cannot claim for damages to own vehicle in any accidents or any fire damage to own vehicle, or if your vehicle is stolen, and is usually the cheapest insurance type available.

2.2.2 Third Party, Fire and Theft Cover

This policy provides insurance against claims for third party bodily injury and death, third party property loss or damage, and loss or damage to policyholder own vehicle due to accidental fire or theft.The coverage here is the same as Third Party Cover, with the added coverage of damages from fire and theft of policyholder'svehicle.

2.2.3 Comprehensive Cover

This policy provides the widest coverage and is the most common type of insurance in Malaysia. With this policy type, third party bodily injury and death, third party property loss or damage and loss or damage to own vehicle due to accidental fire, theft or an accident are covered.Comprehensive Cover is probably a good idea if your car is worth more than RM30000 and gets more important the more valuable your car is.

However, any liability to driver and passenger of own vehicle (bodily injury, property, death) is not included in any of the 3 types of policies. But for individual who are likely to know whether policy limits is below the level of potential damages, basic automobile insurance coverage does not included the driver and passenger of own vehicle. By the limiting coverage for third party injury and death or damage to own vehicle, and insurer are offering special coverage for driver and passenger of own vehicle. That is called an endorsement to the policy or with separate policy, for example "Driver & Passengers' Personal Accident Insurance" offered by Kurnia Insurances, Windscreen which covers the breakage of glass in windscreens, front, rear and side windows (NCD doesn't affected after claim)

Full coverage is usually just a blanket or overused term, and like other insurance terms, we must always be aware of the terms and conditions of the policy as even full coverage has a limit on the amount that will be paid out and is not fully coverage because limit is vary, depending on what coverage they buy. Full coverage insurance is actually comprised of three types of insurance coverage in one: liability, comprehensive and collision.

• Liability insurance covers your financial responsibilities if you are involved in an accident with another person. This coverage only covers the other person's injuries and property with zero coverage for yourself.

• Collision insurance covers your vehicle as well as the other person's vehicle in the event of a crash. It also provides medical coverage for anyone injured in the accident. Limit amounts vary depending on the policy that is selected.

• Full coverage insurance typically covers you in any vehicle that you might drive; however, the insurance carried on that vehicle would pay out before your own policy would be enacted. It also covers others who would drive your car, provided that they are licensed drivers without any driving restrictions who have not been named on an exclusion list.

2.4 Exclusions


A standard automobile insurance will not cover certain losses, such as your own death or bodily injury due to a motor accident, your liability against claims from passengers in your vehicle (except for passengers of hired vehicles such as taxis and buses) and loss or damage arising from an act of nature, such as flood, storm and landslide.

For damage or liability is caused by invasion, war (whether war be declared or not), warlike operation, acts of foreign enemies, hostilities, civil war, acts of terrorism, strike, riot, civil commotion, mutiny, rebellion, revolution, insurrection, military or usurped power or by any direct or indirect consequences of any of the said occurrences.

For any accident loss damage or liability caused sustained or incurred outside of Malaysia, the Republic of Singapore and Negara Brunei Darussalam insurer will not pay any liability under this circumstances.

However, you may pay additional premiums to extend your policy to cover flood, landslide, and landslip as well as cover your passengers. It is important to check your policy for the exclusions.

2.5 Future potential practice inMalaysia Automobile insurance

Pay-As-You-Go insurance is anusage based insurance, also known as pay as you drive (PAYD) and pay how you drive (PHYD) and mile-based auto insurance is a type of automobile insurance whereby the costs of motor insurance are dependent upon type of vehicle used, measured against time, distance, behaviour and place. It is popular in those Europe country.

This differs from traditional insurance, which attempts to differentiate and reward "safe" drivers, giving those lower premiums and/or a no-claims bonus. However, conventional differentiation is a reflection of history rather than present patterns of behaviour. This means that it may take a long time before safer (or more reckless) patterns of driving and changes in lifestyle feed through into premiums.

We are even seeing some insurers investigate relatively new mature market technologies such as Pay-As-You-Go insurance. Given the importance of customer choice, allowing consumers to vary deductibles and change price is surprisingly uncommon in Asia. Insurance companies that offer these choices are often more profitable potentially because offering this level of sophistication often comes with a more granular rating structure or due to the reduction of small claims that comes with an increase in deductible. result CONTRACT INSURANCE insurance inform table basic know LIST OF INSURANCE COM. -DEDUCTIBLE -market value



Third party cover

Third party, fire & theft cover

Comprehensive cover

Liabilities to third party for:



Property loss/damage




Loss/damage to own vehicle due to accidental fire/theft




Loss/damage to own vehicle due to accident




Liability to driver and passenger of own vehicle (bodily injury, property, death)