FACULTY OF MANEGEMENT
TRIMESTER 3, 2012/2013

BFN 2094
Corporate Risk Management
Lecturer: Miss. Kwan Jing Hui

Major Assignment
Commercial Property Insurance

NAME | STUDENT ID | Yap Shoon Eu | 1102700243 | Tan Yi Ling | 1102700899 | Lee Jia Kee | 1102701272 | Kong Yoong Kwang | 1102701903 | Cho Der Hwa | 1102700103 | Loh Jian Li | 1102701693 |

Contents

1.0 Overview and Objectives 1 1.1 Objectives ……………………………………………………..1 1.2 Overview………………………………………………………2 2.0 Scope of Coverage and Pricing Policy 3 2.1 Scope of Coverage………………………….…………………3 2.2 Pricing Policy…………………………………………………7 3.0 Relation to Current Practice in Malaysia 11 4.0 The Growth of Individual Health Insurance 15
5.0 References………………………………………………….……….19

1.0 Overview and Objectives
1.1 Overview
Commercial Property Insurance (CPI) is an insurance that is used to cover risk of loss to an organization’s properties. Business owners can buy commercial property insurance regardless of whether they own, rent, or lease a building.
Commercial Property Insurance provided either replacement cost coverage, actual cash value coverage, or a combination of both. Replacement cost coverage is to cover the payment of replace your property with new property while actual cash value coverage is to pay the replacement cost of the property minus depreciation. Although replacement cost coverage is more expensive than actual cash value coverage, it might better ensure that your business fully recovers after a significant loss.
Commercial Property Insurance distribute to few parts, it included Fire Insurance, Fire Consequential Loss, Burglary & Robber Insurance, Plate Glass Insurance, Employer Liability and Public Liability. Fire insurance is an insurance that covers damage or loss caused by fire, lightning and domestic gas explosion. It can be extended to cover extraneous perils subject to an additional premium. Fire consequential loss is an insurance that have to taken up together with fire insurance. It provides coverage against financial loss as a result of fire and its insured danger covered under the fire insurance.
If your property was robbed, Burglary & Robber Insurance will covers the loss or damage that caused by burglary or robbery. Burglary & Robber Insurance covers the loss of damage to the insured items, as well as damage caused to the building or any stuffs of the premises. Plate Glass Insurance provides cover for breakages of any plate glass including any writing or decoration due to any incident. This insurance also compensates for any boarding up required pending the replacement of the broken glass.
Employers' Liability Insurance provides indemnity to the Insured against liability at law for compensation costs of body injured or illness sustained by any person who under a contract of a company. Public Liability Insurance is an insurance to covers the compensation of accidental body injury or accidental damage to the public that caused by negligence of the insured or employees or by any defect in the premises owned.
In Malaysia, only Tokio Marine Group provided all the Commercial Property Insurances. Meanwhile AIA Malaysia, OCAC and Zurich Insurance provided few parts of Commercial Property Insurances and other insurers didn’t provide any of it.

1.2 Objective
Commercial Property Insurance help businesses pay to repair or replace buildings, structures, and contents that are damaged, destroyed, or lost that caused by different situations. Commercial property insurance will cover the loss under these few situations: man-made disasters, natural disasters and decline in property value.
Man-made disasters are those disasters that caused by human being, for example vandalism, theft, robber, fire and so on. If one of these happened to your business property, the insurance will covers all the lost.
In some countries, there are a lot of natural disasters, such as earthquake, hurricane, tornado, blizzard and so on. Although in Malaysia there is no earthquake or blizzard, however, thunderstorm, landslip and tsunami are always happen in our countries and these natural disasters can bring a huge lost to us. Thus, commercial property insurance helps us to cover the lost that caused by the natural disasters.
Commercial property insurance also covers the loss of depreciation of property value. For example, if you bought a property in an area and the area happened some tragedy like murder or accident and caused the value of property in that area declined, commercial property insurance will covers the loss of it.

2.0 Scope of Coverage and Pricing Policy
2.1 Scope of Coverage Commercial property insurance policies generally fall into three categories which are basic form policies, the broad form policies and special form policies. * Basic form policies -Usually cover common risks such as damaged caused by fire, explosions, storms, smoke, riots, and vandalism. * Broad form policies
-Usually cover the common risks in addition to water damage, structural collapse, sprinkler leakage, and falling objects. (Note that theft isn’t typically covered under either basic or broad form policies.) * Special form policies
-Offers the widest range of protection, it cover all types of risks except those the policy specifically excludes. Common exclusions include damages from flood, earth movement, war, terrorism, nuclear disaster, wear and tear, and insects and vermin
Types of coverage by Commercial Property Insurance
Commercial property policies provide various types of coverage, either as part of the base policy or through policy endorsements. Following are the typical coverage offered by the commercial property insurance: * Building occupied by the insured coverage
- Covers the risks of a business which occupies a particular property but does not own it. * Newly acquired or constructed buildings coverage
- Insures a new building if you add it to your policy within the specified period of time. . If the insurance company is not notified within the time period, typically 30 days, the coverage will not apply. Commercial property policies generally only cover buildings named in the policy. * Employees’ personal property coverage
-Insures personal property belonging to the insured’s employees against covered losses if the property is on the insured’s premises. Coverage for such property beyond limited amounts must be obtained through special endorsements. * Off-premises property coverage -Covers your property located off site. Some policies might not cover off- premises property or may provide only limited coverage. * Business interruption coverage
- Covers the loss of income if your business is damaged and you can’t perform your normal business operations * Valuable papers coverage
-Provide limited coverage of an insured’s business records and other valuable papers. You may be able to purchase endorsement to increase this coverage. * Extra expense coverage
-Insures any additional costs to return your business to normal after it’s damaged. * Ordinance or law coverage
-Pays costs required to repair or rebuild a facility to current building codes after it’s damaged. Many policies provide limited ordinance coverage, which can increase it with an endorsement.

* Boiler and machinery coverage
-Covers boilers, air conditioning units, compressors, steam cookers, electric water heaters are examples of machinery typically covered by this endorsement. Coverage is usually only for machinery listed in the policy and to any subsequent losses, such as when a boiler explosion or water heater leak causes damage to other property. * Inland marine coverage
-Insures goods in transit by land, air, or inland waterways. It also covers projects under construction and transportation and communications structures, such as bridges, tunnels, and communications towers.
Crime coverage A business owner can buy several types of coverage to protect its business from crime. Following are the common crime coverage : * Loss of glass and money due to theft pays for damage to glass and for a theft of money resulting from a break-in. * Robbery and safe burglary (property other than money) is a more limited form of coverage that does not include money or securities. * Forgery or alteration protects your business against forgery or alteration of checks, drafts, promissory notes, or other types of payments. * Theft, disappearance, and destruction coverage insures money, securities, and other property against losses, both on your premises both on your premises or in the custody of an employee or messenger while off premises.

The table below shows the example of Commercial Property Insurance Products in Malaysia. | Package | Coverage | Benefits | AIA Malaysia | Bundled Insurance Package | Fire Insurance, Burglary and Robbery Insurance, Accidental Damage to Fixed Glass and Signboards, Public Liability Insurance | Section I – Fire Insurance- Loss of or damage to property insured caused by Fire , LightingSection II – Burglary & Robbery Insurance- Loss of or damage to property insured under Section 1- Loss of money and securities.Section III – Accidental Damage to Fixed Glass and Signboards.- Provide coverage to fixed glass and signboard against accidental damage. Section IV – Public Liability Insurance- Provides protection against legal liability for accidental bodily injury or illness to third party | Zurich Insurance | Bundled Insurance Package | Immobile Equipment Insurance, Burglary insurance, Plate glass insurance, Fire Consequential Loss | |
Sources : AIA Malaysia and Zurich Insurance

2.2 Pricing Policy
Policy Premium Calculation The price of policy is the amount of cash that the policyholder pays to the insurer in order to repair, replace or get compensation when losses incur. That amount of cash is called the “premium”. Normally some of the premiums received from clients are used by the insurance companies to cover their expenses cost while the rest is invested in the financial securities. The pricing policy is not calculated based on the cost only, but also insurance companies care about the profit margin. Basically, insurance companies calculate the premium price based on fair premium.
Factors Affecting The Premium The most important factors that affect the premium price of the insurance policy are the class of construction, occupation and the sum insured.
Basically there are four classification of the building construction:
1- Class 1A Construction, which is characterized as: * -------------------------------------------------
Walls: the external walls up to the top level of the building thickness must be 4 inches or more (100 mm or more) and must be made by a fire resistive materials of 2 hours. (excluding doors and windows) (examples of reinforced concrete, brickwork .. etc) * -------------------------------------------------
Floors: must be constructed of reinforced rigid and stark. * -------------------------------------------------
Roofs: the roof’s external must be totally nonflammable material.
2- Class 1B Construction: * -------------------------------------------------
Walls: the external walls up to the top level of the building thickness must be 4 inches or more (100 mm or more) and must be made by a fire resistive materials of 2 hours and party of nonflammable material. . (excluding doors and windows)
And some of mixed material (example of cement board or cement wood). * -------------------------------------------------
Roofs: the roof’s external must be totally nonflammable material.
3- Class 2 Construction: * -------------------------------------------------
Walls: partly of brick, hollow blocks or any other materials which has the same fire resistive that classified by law in building, and partly of wood or any other flammable material. In this class of construction the using of wood or any other flammable material shouldn’t exceed 50% of the total wall. * -------------------------------------------------
Open-sided: it’ sheds with nonflammable columns and with wall(s) that constructed of nonflammable material and nonflammable columns. * -------------------------------------------------
Roofs: the roof’s external must be totally nonflammable material.
4- Class 3 Construction: * -------------------------------------------------
The rest of construction that doesn’t match with the characteristic of class 2 construction, Class 1A and Class 2B construction.
Occupancy
The importance of the occupancy is analyzed by the insurance company based on how dangerous it is within a schedule. Occupation refers to the nature of operation and activities of the company that is being protected. Usually the basic occupancy charges are formed in a percentage form based on the danger of the occupant of the building.
Occupational categories 1. Highly Hazardous where the people work in a dangerous environment and involved manual works that doesn’t need and skill or qualified people. Example is cleaner or road workers. 2. Hazardous is the work that involved manual works but required some skills. Example is security guard or road work supervisors. 3. Medium Hazardous is where people work in a non-dangerous environment and there work is not purely office work but involves some manual works. Example is retail sales. 4. Low Hazardous is people who work in an office based and not involving any manual works at all. Examples is teachers and administrative.

Sum insured
Basically sum insured is the maximum amount that the insurance company should pay to the policy holder when he claims his compensation.
Sum insured shouldn’t be less than the full amount or value for the property, that’s because the premium is calculated upon the asset value and it wouldn’t be fair to understate the property value in order to pay fewer premiums.
Actual Cash Value and Replacement Cost

There are many different methods on how company or corporation wants to calculate the payment that they need to pay to cover their losses. For this chapter, we will focus on actual cash value method (ACV) and replacement cost value method (RCV).
ACV method is defined as the method to replace the loss of our property to new property that has the same quality but minus depreciation. In other words, actual cash value is defined as replacement cost minus depreciation (Trupin, 2012). Besides that, there are three standard methods in determining the actual cash value which are; fair market value, replacement cost less depreciation and the broad evidence rule. For example, a company purchased machine RM 5 million ten years ago and today it is destroyed by the flood. The useful life of the machineries is 20 years and the machineries cost RM 7 million today. It means that the actual cash value is Rm7 million (replacement cost) X 50% of useful life remaining or RM3.5 million.
Replacement cost is defined as the method to replace the loss of the property with a new one that has the same quality but it did not include the deduction of depreciation. The company will get insurance that can cover the cost to buy new same features of machineries at the current price. In the case of property damaged, (Lawyers, 1994) had mentioned the rules or standard that needs to follow in order to get the replacement cost of the property. The rules are; the usable space of the property must be equal, it has the same utility, it has the features of heating, lighting, plumbing and electricity, and the old architecture or design must be followed. These are to make sure that the company cannot simply claim for everything or make changes at the property.
These two methods have their own specialty which bring pros and cons to company. The most common method used is actual cash value as it is the fair market value. The actual cash value method usually will be in the policy unless the insured then to customize the policy and choose different else. Insurer prefers to use this method because they only need to cover the loss by replacement cost minus the depreciation. It means that they do not need to pay the full amount of the loss.
Compare to the other method, the policyholder will choose the replacement cost value due to some reasons. This is because of the replacement cost method will completely protect them from any loss. Standard rule of life is that nobody wants to suffer from any loss, so does the policyholder. The replacement cost will cover any loss without deduct the depreciation. However, the insurance company will only cover for the actual cash value loss first and they will pay for the depreciation once the property damaged has been replaced. This process is called “holdback”. The policyholders will have to use their money as upfront to cover the loss. In addition, sometimes actual cash value is better compare to replacement cost because of the fair market value. This is because we need to follow the market value and sometimes the values of property may fluctuate.

3.0 Relation to Current Practice in Malaysia

Table 3.1 Currently in insurance industry of Malaysia, many insurance companies offer commercial property insurance (CPI). The table above show the insurance company in Malaysia and the type of insurance that each company offered. The 2 largest companies offered CPI within Malaysia is Zurich Insurance Malaysia and AIA Malaysia (recently merge with AIG Malaysia). ING Insurance and Prudential Insurance do not offer CPI. From the table above, we can see that both Zurich and AIA do not offer Employers Liability and Public Liability. Others insurances provided by this two company include Fire Insurance, Fire Consequential Loss, Burglary & Robbery Insurance and Plate Glass Insurance. Beside, Tokio Marine Group offered bundled insurance call Biz-Pack Partner that includes Burglary & Robbery Insurance, Plate Glass Insurance, Employers Liability and Public Liability. Two major type among the few of commercial property insurance that customer bought and insurance company focusing is Fire Insurance and Burglary Insurance. Let’s compare the coverage of this two insurance that offer by the Zurich Insurance Malaysia and AIA Malaysia.

Difference between two insurance company offer burglary insurance coverage:

Zurich Insurance Malaysia | AIG Malaysia | Damage to the building due to theft or attempted threat. | Loss/damage to Household Goods and Personal Effects due to Burglary or Robbery. | Hold up or armed robbery | Loss/damage to Personal Valuables (cash, watches, items of platinum, gold, silver articles and jewellery) due to Burglary or Robbery (Reimbursement basis). | Theft consequent upon actual forcible and violent entry into the insured premises. | Fatal injury provided death ensues within 3 calendar months due to Burglary or Robbery. | Theft or any attempted threat by a person feloniously concealed on the said premises | N/A |
Table 3.2

From the table above, we can see that Zurich Insurance Malaysia and AIG Malaysia have provided almost the same coverage. There is an additional coverage for burglary insurance from Zurich Insurance as compared to AIG Malaysia, which gives more benefit to policyholder. Yet, the coverage description of Zurich Insurance Malaysia is not as specific as AIG Malaysia. For example, “Hold up or armed robbery” is too ambiguous, it do not state any exception or what kind of item damage and loss is under cover. This may due to company policy to handle problem such as moral hazard and adverse selection.

Difference between two insurance company offer fire insurance coverage:

Zurich Insurance Malaysia | AIG Malaysia | A standard Fire Policy provides cover against loss of or damage to Insured property as a result of fire or lightning or domestic explosion. | Damage by fire, lightning and domestic gas explosion. | (Additional Premium)Aircraft damage, impact damage, explosion, storm & tempest, flood, bursting or overflowing of water tanks or pipes, subsidence & landslip, earthquake and volcanic eruption, riot, strike and malicious damage, spontaneous combustion, sprinkler leakage, bush/lolling fire, damage by falling trees or branches and objects. | Electrical Installation Clause B, Smoke Damage and Cold Storage Clause B | |
Table 3.3

The basic of all commercial property insurance, fire insurance, that offer by the 2 largest CPI insurance company has the same coverage which is the loss of fire, lightning and domestic gas explosion. The different is on the extension coverage of fire insurance which require customer to pay additional premium. Zurich Insurance Malaysia provided extra coverage on “Electrical Installation” and “Smoke Damage and Cold Storage” when customers pay more which AIG do not.

Moral Hazard and Adverse Selection Insurance company often face two problems from the policyholder which is moral hazard and adverse selection. Moral hazard is problem that behaviour of the policyholder changes especially after their property has insured. For example, the property owner changes their behaviour to take more risky actions toward fire or explosive thing. In other word, the policyholders take less precaution to prevent their loss. Adverse selection is problem that information gathered by both insurer and policyholder is different. Policyholder knows more about the risk of the property insured than insurer do makes the policyholder to take advantage on insurer. This will cause insurer to incur losses when they underwrite their policy with collecting relatively low premium.

4.0 The Growth of Individual Health Insurance
Following are the factor that causes the growth of the Commercials Property Insurance: * Growth of the Commercial Property price * Growth in the Malaysia population

Growth of the Commercial Property price from 2000 to 2010

Source : valuation & property services department Malaysia Year | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | Price (‘000) | 140 | 145 | 141 | 156 | 152 | 165 | 160 | 182 | 173 | 184 | 196 | Percentage Change(%) | | 3.5 | -2.7 | 10.6 | 9.27 | 8.55 | -3.0 | 13.8 | -5.2 | 6.35 | 6.52 |

As we can see from the graph, Commercial Property price in Malaysia increase steadily from year 2000 till year 2010.There is a significant increase in percentage changes in year 2003 ,year 2004, year 2009 and year 2010. This shows that Commercial Property prices in Malaysia are having uptrend in future. As the market price of commercial property price in Malaysia increases and thus claim cost increases, the policy buyer have to pay more premium.
Growth of the Malaysia population from 2000 to 2012

Source : Index mundi homepage Year | Number of Population in Malaysia | 2000 | 21,793,290 | 2001 | 22,229,040 | 2002 | 22,662,360 | 2003 | 23,092,940 | 2004 | 23,522,480 | 2005 | 23,953,140 | 2006 | 24,385,860 | 2007 | 24,821,290 | 2008 | 25,274,130 | 2009 | 25,715,820 | 2010 | 28,274,730 | 2011 | 28,728,610 | 2012 | 29,179,950 |

As we can see from the graph, Malaysia population in Malaysia increase steadily from year 2000 till year 2012. This shows that Malaysia population increase from 21m to 29m in 12 years. When Malaysia population increases, the demand for commercial property in Malaysia will increase as well. When the demand of commercial property in Malaysia increases, the demand for commercial property insurance also will increases.

Threat and Opportunities of growth of Commercial Property insurance in Malaysia in future

* Keeping up with new regulations In future, government may impose new regulation for the commercial property. Insurer should keep up with these new regulations and makes changes so that It able to penetrate into the market * Expanding distribution options In order to educate more people about commercial property insurance, expanding distribution options is essential. Insurer company can expanding distribution options by increases carrier and agent and thus create more competitiveness. * Making alternatives investments Insurers will likely become more aggressive in their quest for higher yields by exploring or increasing investments in various alternative asset classes such as real estate, private equity, developing-country stocks and bonds, hedge funds, commodities, and oil and gas assets. In addition to higher yields, some alternative investments can provide an additional hedge to insurers against low interest rates, due to their negative correlation with traditional investments. * Adapting to climate changes Global Warming, earthquake and other catastrophe may affect more in Malaysia on future. Insurer should calculate and make new strategy to adapt to this environment changes. Insurers should tap wider data sources to get a better handle on the potential exposures they face not only in known disaster areas, but in regions where such catastrophes have rarely been seen but where storms may be experienced more frequently or severely due to changing climate.

5.0 References
Advisors, A. K. (2007). Actual Cash Value and Replacement Cost Value: How To Get the Most from Your Property Insurance. Actual Cash Value and Replacement Cost Value: How To Get the Most from Your Property Insurance , 2.
Allan zamhari(2011),habitat-my. Retrieved from.Http://habitat- my.com/ 2011/05/13/12-92-average-growth-in-property-prices-in-2010/
AIA Malaysia. Retrieved from http://www.aia.com.my/en/business/products-and- services/commercial-insurance/
Anderson John J. (1972), "Financial Accounting Practices of Property and Liability Insurance Companies." Journal of RIsk and Insurance.
Chassagnon, A. and P.A. Chiappori, 1995, "Insurance Under Moral Hazard and Adverse Selection: the Case of Pure Competition", DELTA.
Commercial Property Insurance (2012). Texas Department of Insurance. Retrieved from http://www.tdi.texas.gov/pubs/consumer/cb021.html
Index mundi homepage. Retrieved from www.indexmundi.com/g/g.aspx?c=my&v=24
Lawyers, D. W. (1994). THE PRACTICAL IMPLICATIONS OF THE REPLACEMENT COST ENDORSEMENT. THE PRACTICAL IMPLICATIONS OF THE REPLACEMENT COST ENDORSEMENT , 7.
Michael K. McCracken. (2011). Actual Cash Value: What ls lt? How Do You Arrive at lt? Actual Cash Value: What ls lt? How Do You Arrive at lt? ,
Zurich Insurance Homepage. Retrieved from http://www.zurich.com.my/products/ General/Property %20Insurance/genproperty.aspx