There are a myriad of different life insurance products available in the market. But they all share something in common. It is known as the Sum Assured. Insurers can promise the sun and moon in investment returns but at the end of the day only the Sum Assured is absolutely guaranteed. If you've ever wondered how an insurance company guarantees that you get paid when you make a claim, then read on.
The Sum Assured is the minimum amount the insurance company will pay out when a covered event occurs. In Malaysia, Bank Negara has done an excellent job in ensuring that insurers have enough funds to pay out claims. This is done through the implementation of the Risk-Based Capital (RBC) Framework.
Put simply, this means that insurance companies need to show that they have enough capital available to pay a claim in relation to the risk they assume when underwriting insurance policies.
Under the RBC Framework, Capital Adequacy Ratio (CAR) is the method used to ensure that insurers are able to pay up claims. The CAR measures the adequacy of the capital available in the insurance and shareholders’ funds of the insurer to support the total capital required (Source: Bank Negara Malaysia).
In Malaysia the benchmark Capital Adequacy Ratio (CAR) is 130%. Here is some encouraging news: as of the first quarter 2010, the industry wide CAR stood at 240%. This means that insurers in the country are cautious and have allowed for a much larger buffer.
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