Insurance Contracts Overview

Questions and Answers

What consequence could a financial planner face if proven guilty of misrepresentation?

Increased client trust

Recognition in the industry

Guarantee of client business

Sanctions by the court (correct)

Which of the following actions could lead to compliance risk?

Adhering to ethical sales practices

Accurately reporting financials

Providing thorough client disclosures

Failing to comply with the Financial Services Act 2013 (correct)

How does reputational risk primarily affect a financial planner?

It increases client acquisition costs

It enhances their marketability

It leads to a loss of credibility and trust (correct)

It improves operational efficiency

What could result from the non-compliance with the Anti-Money Laundering and Counter Financing of Terrorism Act, 2001?

Sanctions or disciplinary action Signup and view all the answers

Which practice can be a source of reputational risk for financial planners?

Pressure selling tactics Signup and view all the answers

Which of these actions reflects legal risk in financial planning?

Fraudulent premium payments Signup and view all the answers

What is a potential penalty for contravening the insurance industry code of practice?

Possible termination Signup and view all the answers

Why is it critical for a financial planner to understand related guidelines and laws?

To effectively manage potential risks Signup and view all the answers

What is the main purpose of a contract of insurance?

To indemnify the insured against potential losses. Signup and view all the answers

What does the term 'utmost good faith' imply in insurance contracts?

Applicants must disclose all material facts to the insurer. Signup and view all the answers

Which law governs insurance contracts in Malaysia?

Contracts Act, 1950 (Revised 1974). Signup and view all the answers

What must be true for a risk to be insurable?

The risk must cause a detriment to the insured. Signup and view all the answers

Which document contains the terms of an insurance contract?

Policy document. Signup and view all the answers

What is the consideration that the insured pays to the insurer?

Premium. Signup and view all the answers

In what scenario can English law apply to insurance contracts in Malaysia?

Where the Contracts Act is silent on a specific subject. Signup and view all the answers

Which of the following is NOT an example of insurable interest?

An employee insuring their boss's car. Signup and view all the answers

Study Notes

Legal Risk

Arises from a financial planner's failure to exercise due diligence or illegal actions.
Clients may sue for losses resulting from reliance on negligent or fraudulent advice.
Severe cases may result in court-imposed sanctions, including fines or imprisonment.
Examples of legal risk:
- Misrepresentation to induce contract entry.
- Fraud related to premium payments.
- Collusion with insured parties to defraud insurers.

Compliance Risk

Involves actions taken by regulatory bodies due to non-compliance with laws and regulations.
Examples of non-compliance risks include violations of:
- Financial Services Act 2013.
- Anti-Money Laundering and Counter Financing of Terrorism Act 2001.
- Insurance industry code of practice.
Penalties for legal contraventions can include fines and imprisonment.
Infringements of codes can lead to sanctions or termination of services.

Reputation Risk

Associated with diminished client confidence resulting from reputational damage to the financial planner.
Sources of reputation risk:
- Conduct and practices of the financial planner.
- Failure to meet client expectations.
- Pressure selling practices.
- Unethical actions or legal infringements.
Loss of reputation can significantly impair the planner's business credibility and trust.

General Requirements of an Insurance Contract

Insurance contracts involve an agreement where the insurer indemnifies the insured against potential losses.
The risk insured is known as the "risk" faced by the insured.
The insurance policy is the document outlining the terms of the contract.
Consideration paid by the insured is called the premium and can be a lump sum or periodic payments.
Governed by the Contracts Act 1950 (Revised 1974) and influenced by the Civil Law Act 1956 allowing for English law under specific conditions.

Key Principles of Insurance

Utmost Good Faith:
- Obligates the applicant to disclose all material facts for accurate risk assessment by the insurer.
- Failure to disclose relevant information can jeopardize the contract.
Insurable Interest:
- Requires the insured to have a financial stake in the subject of the insurance.
- Example of insurable interest:
  - Car owner suffers a monetary loss if the vehicle is damaged.
  - Homeowners hold insurable interest in their property in the event of damage.

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Description

This quiz explores the general requirements of insurance contracts, focusing on the relationship between insurers and insured parties. It covers the importance of insurance in financial planning and how it helps manage risks effectively. Understand the critical elements that ensure a strong and successful insurance business.