Understanding Insurance – Important Components of Motor Insurance

Motor Insurance – Important Components You Need to Know

We at iBanding love talking about Motor Insurance. Not just because Motor Insurance is the largest insurance class in Malaysia (which means that many of us owns one), but mainly because we know how important it is for all Malaysians who owns a motor vehicle to fully understand this policy and its components, so that they are able to:

1. make better decisions when it comes to choosing a cover for them
2. protect their rights as consumers, especially when a claim arises
3. not be taken advantage of by irresponsible parties, especially during an accident
4. not spent unnecessarily and waste money on insurance covers that are not needed
5. save money where it is possible to do so, such as with the discount from NCD

In this article we will be looking at several key components in the standard Motor Insurance policy in Malaysia to understand clearly their definitions and meanings, this includes:

1. Policy types and coverage
2. Premium calculation
3. Sum Insured
4. Add-on Covers
5. NCD
6. Excess
7. Betterment

Important Components You Need to Know in Motor Insurance Policy

1. Most Common Types of Policies

a) Third Party – insures against claims made by third party for injuries and/or damages to their property.
b) Third Party, Fire and Theft – insures against third party claims PLUS damage and loss on your own vehicle due to fire or theft
c) Comprehensive Cover – insures against third party claims PLUS damage or loss to your own vehicle due to fire and theft PLUS accident damage to your own vehicle.

Read our earlier article to read in detail the 3 types of policies and their coverage.

It is important to understand the different policies but it is equally important to know what these policies DO NOT cover. This is called “Exclusions”. The most important that everyone should know is that none of these policies insures against your own death and bodily injury when an accident is your fault, or that of your passengers. This is why we at iBanding highly recommend Malaysians to purchase a Medical and Hospitalization policy.

2. Premium Calculation

First and foremost, the premium is based on which policy you have selected for your vehicle, be it Third Party (TP), Third Party, Fire and Theft (TPFT) or Comprehensive. Comprehensive cover naturally costs more than Third Party as it has a broader coverage.

Motor insurance premium is calculated by taking into consideration the:

a) Sum insured – based on either current market value of your vehicle or the agreed value
b) CC – stand for cubic capacity of the vehicle (i.e. engine size)

Another factor that may affect your premium calculation is “Loading” which allows the insurance company to charge extra (no more than 15%) based on certain risk factors such as age of car (usually over 10 years old) and claim history. Therefore, it may be wise to shop around now for insurance company that charges lower “Loading” when you are looking to buy a motor insurance policy. Your NCD will also determine the price of your premium. This will be explained further.

3. Sum Insured

Sum insured is the maximum amount that you can claim from the insurer in the event of an accident, theft, fire etc., as agreed in your policy. The way sum assured is calculated is based on either:

a) Current Market Value of your vehicle
b) Agreed Value – a sum agreed between both you and your insurance company

It is important that you make sure the sum insured is not lower than the value of your car at the time of purchase of your policy. If you do, it is called “under-insurance”.

Under-insurance is dangerous, because it gives insurance company a reason to pay you much lower and you lose money!

If you are under-insured and you get into an accident, your insurance company will always pay less than your total damage. For example, your car value is RM 100,000, but you insure your car at RM 50,000 market value, because you want to save money. When your car is stolen, you will only get RM 25,000, that is if you are lucky! You might have thought you will get RM 50,000, but sadly you won’t. You under-insured your car by 50%, therefore you will only receive 50% maximum of your sum insured.

Similarly, you also need to make sure that your sum insured is not higher than your car’s current market value. This is called “over-insurance”, which means that you are paying a higher premium than you should. But this is not the only disadvantage. The main problem is that in the event of a claim, your insurance company will investigate you for fraud, because you insured higher than your car’s value and might pay you only the car’s correct market value.

4. Add-on Covers

There are additional covers that you can purchase on top of your Comprehensive Plan. Each of these covers are charged separately so you are free to choose whichever you would like to add to your plan. Most people however, prefer to keep their premium as low as possible and opt to not take up any additional cover. However, there are some important ones that we highly recommend to everyone that owns a car. Here are some of the noteworthy extensions:

a) Windscreen Cover – windscreen cover insures you against damage on your windscreen.

b) Named Driver & All Driver Coverage – this lets you authorize more than one driver to drive the insured car and have the same insurance coverage extended if the accident happens when one of them was driving the car.

c) Special Perils – this plan insures you against damages due to natural disasters such as flood, earthquakes, landslide, landslip, sinkhole etc. Malaysians may need to consider this especially those who live in flood-prone areas.

d) Legal Liability Cover – this cover protects you from legal liability from either your passenger(s) due to your negligence; or that of your passenger due to their negligence causing damage or injury to third party.

Do read our previous article where we spoke extensively about all the additional covers offered by insurance companies in Malaysia.

5. NCD

Non Claim Discount is a discount awarded to the policy holder during renewal of their motor insurance policy if no claims have been made during the previous 12 months of coverage. The discount rate is fixed by the Persatuan Insurans Am Malaysia (PIAM) which is transferable and honored by all insurance companies.

Read our previous article to learn more about NCD and how it can save you a lot of money.

6. Excess/ Deductibles

Excess, also known as deductible is the amount that you, the insured have to pay out of your own pocket before the insurance company will pay for the claim. There are 2 types of excess:

i) Compulsory excess – a fixed RM 400 excess is applicable in any of the 4 conditions below:

– When during an accident, your car was driven by a person:

a) not named in your motor policy
b) who is under 21-years old
c) who is holding an L license
d) who holds a full driving license of less than 2 years

ii) Other excess – This could be an amount imposed by the insurer based on certain considerations. It is advised that you look for an insurer who does not charge other excess, or negotiate with your insurer to forego this excess.

7. Betterment

When during repair work due to an accident, you have to replace a ‘used/ old’ part with a brand new part. This means you are in a better position than before the accident. This situation allows the insurance company to only pay part of the cost for the new part, while you will have to pay the difference in cost.

We urge everyone to take the time to understand each component clearly, and to take their time to read the policy. Let your insurance agent explain any clause that is ambiguous to you. Please drop us a comment or mail should you have any question for us, we would love to help.