CIX2003 APPLIED FINANCIAL PLANNING Sem. 1, 2022-23 CASE STUDY REPORT Case Study 8 – Personal Property Insurance Prepared by: Group 1 Monday (U2003187) Ng Hui (U2003229) Khoo Pei Ying (U2003092) Wong Soon Yong (U2003287) Thong Jia Cheng (U2003313) Ooi Chia Yee Assessment Rubric ORGANISATION Introduction Conclusion Logical Flow Layout Sentencing REFERENCES IDEAS (CONTENT) Problem Statement Evidence of Support Provision of Examples Presentation of Argument Total CASE Rani regularly renews her fire insurance with a sum insured of RM460,000 to cover a house that he currently rents out to a tenant. The current value of the cost of constructing the house is RM 935,000. At one time, the building was partially damaged by fire and the losses were estimated to be RM 230,000. Meanwhile, Rani’s brother Ranjit owns a house in Kelana Jaya, which is currently valued at RM390,000. He bought the property 15 years ago for RM 296,000, and it has estimated useful life of 40 years. Assume that Ranjit insured his house at the purchase price. Over the years, he did not update his coverage. Assume as well that there was a fire and the damage caused by the fire was RM 230,000. In this case, the property would have been underinsured. The insurance coverage is 75.8% of the current market value. Required: 1. Describe the concepts of a homeowner's insurance policy and a fire basic policy. Identify the three (3) differences between a homeowner's insurance policy and a basic fire insurance policy. 2. Using the average clause concept, determine Rani's maximum amount of compensation. 3. Calculate Ranjit's maximum compensation amount based on the actual cash value and ratio of amount insured to 80% of property value. 4. Which of the maximum compensation amounts, as determined by your response to Question 3, is higher? Using the actual cash value or ratio of 80% of the property value. 5. Rani and Ranjit intend to go on a Himalayan hiking trip to Annapurna at the end of this year. For this trekking trip, the travel agent advises Rani and Ranjit to purchase travel insurance. Please provide four (4) factors people should think about before purchasing travel insurance. QUESTION 1 Describe the concepts of a homeowner's insurance policy and a fire basic policy. Identify the three (3) differences between a homeowner's insurance policy and a basic fire insurance policy. Homeowner’s insurance policy is a policy that covers the physical structure of the property from the damages arising from not just fire, but also other causes such as natural disastersοΌrobberyοΌloss of rent, owner’s liability and so on. Basic fire insurance policy is a policy that covers the physical structure of the property from the loss or damage caused by fire, lightning and explosion. Differences between two policies: - Coverage of the policy o Homeowner insurance policy is more comprehensive than basic fire insurance because basic fire insurance policy only cover fire accidents, lightning and explosión while the damages cause by other than these will be excluded while homeowner insurance policy cover broad of losses caused by various incident such as fire, burglary, riot, theft, and natural calamities. - Premium rate o The premium rate of homeowner’s insurance policy is higher than basic fire insurance policy because the policy covers more comprehensive protection for the insured property. - Insured objects o Homeowner’s insurance policy usually designated residential or commercial properties such as offices, factories, hospitals, shopping malls since it provide more comprehensive protection to the property. o Basic fire insurance policy mainly designated for private house owners. QUESTION 2 Using the average clause concept, determine Rani's maximum amount of compensation. • • • Sum Insured= RM 460,000 Current Value= RM 935,000 Loss= RM 230,000 Average Clause Principle = = ππ’π πΌππ π’πππ πΆπ’πππππ‘ ππππ’π ππ π΅π’ππππππ π πΏππ π π΄πππ’ππ‘ π π 460,000 π π π 230,000 π π 935,000 = RM 113,155.08 The maximum compensation Rani will receive is about RM 113,155.08. QUESTION 3 Calculate Ranjit's maximum compensation amount based on the actual cash value and ratio of amount insured to 80% of property value. a) Actual cash value Replacement cost – Accumulated Depreciation Information retrieved from the given question: Replacement cost: RM 390,000 Number of years the property was purchased: 15 years Estimated useful life of that property: 40 years Actual cash value 390,000 – (390,000 x 15/40) = 390,000 – 146,250 = RM 243,750 b) Ratio of amount insured to 80% of property value Amount insured/ 80% of the market value of the property x loss amount Information retrieved from the given question: Amount insured: RM 296,000 80% of the market value of the property = 312,000 (390,000 x 80%) Damage RM 230,000 296,000/312,000 x 230,000= RM 218,205 RM 218,205 (insurance company would pay out) 230,000-218,205= RM 11,795 (responsible) The insurance company will pay out RM218,205, while Ranjit needs to pay the remaining RM11,795 by himself. QUESTION 4 Which of the maximum compensation amounts, as determined by your response to Question 3, is higher? Using the actual cash value or ratio of 80% of the property value. According to question 3 and its answers, the actual cash value has higher maximum compensation amounts compared to the ratio of 80% of the property value. Below shows the calculation between these two methods. Information retrieved from the given question: • Current Market Value: RM390,000 Purchase Price: RM296,000 • Year of Purchase: 15 years ago Useful life: 40 years • Insurance Coverage: RM296,000 • Damage Cost: RM 230,000 • Assumption 1: Ranjit insured his house at the purchase price. • Assumption 2: Ranjit did not update his insurance coverage over the years. • Assumption 3: Damage of Ranjit’s house is caused by the fire. Maximum Compensation Amounts of Actual Cash Value: Replacement Cost – Depreciation = RM390,000 - RM146,250 = RM243,750 Maximum Compensation Amounts of Ratio of 80% of the Property Value: Minimum Coverage = RM390000*0.8 = RM312,000 Proportion of minimum coverage represented by the actual amount of insurance purchased = RM296000/RM312000 = 37/39 Maximum Compensation Amounts = (37/39) * RM 230,000 = RM218,205 In general, a ratio of 80% of the property value will always result in higher claim payouts than the actual cash value if Ranjit insures his house for at least 80% of the replacement cost. This is because the insurer is responsible for paying any and all partial damages to his house, up to the amount of insurance purchased. However, in this case, the insurance coverage is 75.8% of the current market value, which does not reach the minimum amount of coverage, so that the property becomes underinsured. The insurance company will pay out RM218,205, while Ranjit needs to pay the remaining RM11,795 by himself. It’s defined as a coinsurance provision, and it requires that the insured pay a portion of his own losses in the event of purchasing inadequate insurance. Therefore, since Ranjit is unable to receive full coverage, the actual cash value has higher maximum compensation amounts than the ratio of 80% of the property value. QUESTION 5 Rani and Ranjit intend to go on a Himalayan hiking trip to Annapurna at the end of this year. For this trekking trip, the travel agent advises Rani and Ranjit to purchase travel insurance. Please provide four (4) factors people should think about before purchasing travel insurance. 1. Type of Plan There are different travel insurance plans that meet different needs or preferences. A single trip plan to meet those who travel for short period, a multi-annual trip plan to meet those who travel frequently as well as specific travel plans for students and senior citizens going outbound for a longer duration. 2. Exclusions Travel insurance will not cover every loss incurred during trips, especially injuries due to adventurous activities. Therefore, in this case, Rani and Ranjit should consider purchasing special add-ons for their hiking trip to cover any unforeseen accidents during their hiking activities. 3. Age and Medical Conditions People with no health issues will pay a lower premium as compared to senior travellers. Senior travellers and people with pre-existing illnesses will need to pay a higher premium. While drug and alcohol-related illnesses are not covered by travel insurance. 4. Travel destinations Travel insurance offers different plans based on the country that people intend to travel. For example, medical services in European countries (e.g. US) are significantly more costly than in South Asian countries (e.g. India). Other than that, politically unstable countries would have a higher risk, therefore higher premium rates will be charged for travellers who intend to visit high-risk countries. REFERENCES Chandralekha Mukerji. (2014). Factors to consider while picking a travel insurance plan. https://economictimes.indiatimes.com/wealth/insure/factors-to-consider-while-pickinga-travel-insurance-plan/articleshow/33238332.cms Aashika Jain. (2022). Things to Keep in Mind While Purchasing Travel Insurance. https://www.forbes.com/advisor/in/travel-insurance/things-to-keep-in-mind-whilepurchasing-travel-insurance/ HDFC ERGO General Insurance Company Limited. 5 Factors to Consider Before Buying Travel Insurance. https://www.hdfcergo.com/blogs/travel-insurance/5-factors-to- consider-before-buying-travel-insurance Policybazaar. (2022). 5 Factors to Consider Before Buying Travel Insurance. https://www.policybazaar.com/travel-insurance/articles/5-factors-to-consider-beforebuying-travel-insurance/ Difference between fire insurance and property insurance. Difference between Fire Insurance and Property Insurance | ICICI Lombard. (n.d.). Retrieved December 25, 2022, from https://sme.icicilombard.com/blogs/difference-between-fire-and-property-insurance Fire / house owner / house holder insurance. Persatuan Insurans Am Malaysia. (n.d.). Retrieved December 25, 2022, from https://piam.org.my/fire-house-owner-householderinsurance/#:~:text=BASIC%20FIRE%20POLICY,tempest%2C%20flood%2C%20eart hquake%20etc.
