CHAPTER 1 Background 1.

1 Introduction Insurance is a form of risk management primarily used to hedge against the risk of a contingent and uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. Insurance is needed to manage risks. The risks are losses caused by death, disability, losses caused by longevity, direct property losses, indirect losses and liability losses. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Insurance is classified into Life and General Insurance. General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance. It is called property and casualty insurance in the U.S. and non-life insurance in Continental Europe. It is preferable to call this as General Insurance
instead of non-life insurance. There are several types of general insurance products, such as household insurance, motor insurance, liability insurance and travel insurance. Household insurance cover home buildings, home contents and personal valuables. The property covered residence and outbuildings that are in the same property and used for domestic purposes, includes such as built-in furniture, paths, gates, fences, furniture, clothing, gold and jewelry. Protection against premature death, disability and

illnesses is an important element in human life. Nowadays, people buy life insurance product to get the protection. There are several types of life insurance products, such as term, whole life, universal life and endowment. Life insurance is a contract between the policyholder and the insurer, where the insurance company agrees to pay a designated beneficiary a sum of money upon the occurrence of an insured risk contingent on human life. In order to get the protection, the policyholder must pay premiums at regular intervals on the type of life insurance product that they have purchased. In the Malaysian market, there are many life insurance companies. The policyholders can choose the insurance company and the products that are suitable to their needs and best suits their life stage. As a policyholder, she/he must understand the scope of cover provided under the policy. In life insurance industry there are two policies, which are a participating
policy and non-participating policy. A participating policy would