7.2 Rating Factors and Risk Improvements

Study Focus

Construction and occupation influence fire rating. Vehicle, cargo and liability risks use different exposure measures.

Rating Factors by Major General Insurance Line

Underwriters utilize specialized rating matrices tailored to the risk characteristics of each general insurance line.

1. Fire Insurance Rating (The Revised Fire Tariff Framework)

In Malaysia, fire insurance rating historically derived from the Revised Fire Tariff (RFT) administered by the General Insurance Association of Malaysia (PIAM). The tariff classifies buildings and contents based on four primary parameters:

A. Construction Classification

The physical construction of external walls and roofs dictates the vulnerability of a structure to fire ignition and propagation:

• Class 1A (Fire-Resistive): External walls built entirely of reinforced concrete or masonry exceeding specified thickness, with reinforced concrete floors and non-combustible roofs (e.g., modern multi-storey commercial towers). Lowest base rate.
• Class 1B (Non-Combustible/Masonry): Brick or concrete walls with non-combustible steel framing, covered by tile, slate, or metal roofs. Standard commercial baseline.
• Class 2 (Semi-Combustible): Walls constructed of brick-nogging (timber framework filled with bricks), concrete blocks, or corrugated iron sheets on timber frames with hard roofs. Intermediate rate loading.
• Class 3 (Combustible / Timber): Walls built of wood, timber planks, or combustible composite panels, with corrugated iron, zinc, or asbestos roofs (e.g., traditional wooden village shophouses). Highest base premium rate.

B. Nature of Occupancy

Occupancies are categorized by fire load and operational hazards:

• Residential Dwellings: Low ignition hazard, minimal human activity during work hours, yielding the lowest base tariff rate.
• Offices and Retail Shops: Moderate fire load consisting primarily of paper records and consumer goods.
• Manufacturing and Industrial Risks: High fire load with mechanical processes, welding, boilers, and combustible dust (e.g., woodworking, textile spinning, chemical synthesis) requiring substantial rate surcharges.
• Hazardous Storage Warehouses: Storage of paints, petroleum derivatives, fireworks, or hazardous chemicals.

C. Exposure / Adjoining Hazards

A brick office building (Class 1B) located directly adjacent to a commercial fireworks warehouse or a timber sawmill faces severe external exposure hazard. The underwriter applies an exposure loading to reflect the risk of radiated heat and fire spread from the neighbor.

D. Fire Extinguishing Appliances (FEA) Discounts

To incentivize proactive fire protection, the Revised Fire Tariff grants substantial percentage discounts off the gross base premium for approved fire extinguishing installations maintained according to recognized engineering standards (such as MS or NFPA). The ranges below are illustrative only; the actual discount for each appliance is set by the tariff schedule and the insurer's survey:

To retain the FEA discount, the insured must comply with a mandatory FEA Maintenance Warranty, ensuring that all equipment is inspected, serviced, and certified by an authorized contractor at the intervals required by the applicable warranty.

2. Motor Insurance Rating Factors

Under phased liberalisation, Malaysian motor insurance has transitioned from rigid tables based solely on cubic capacity (CC) to dynamic, multi-factor risk-based pricing:

• Vehicle Characteristics: Engine capacity (CC), vehicle make and model, age of vehicle, market value, repairability indices, parts availability, and safety equipment (autonomous emergency braking, ADAS, dashcams).
• Driver Demographics: Age of driver (drivers under 25 represent statistically higher accident frequencies), driving experience, occupation, marital status, and gender.
• Usage and Location: Private pleasure vs. commercial commuting; geographic location categorized by postcode (high-congestion urban Klang Valley vs. low-density rural Kedah; flood-prone zones).
• Historical Driving Profile: Number of past at-fault claims, traffic summons records, and accrued No Claim Discount (NCD) percentage.

3. Marine Insurance Rating Factors

Marine underwriting is divided into Cargo and Hull & Machinery:

• Marine Cargo: Underwriters evaluate the vulnerability of the goods (fragility, susceptibility to moisture, pilferage risk for electronics), packaging standards (FCL containerized vs. LCL breakbulk), voyage routes (monsoon seasons, narrow straits, transshipment hubs), carrying vessel age and classification, and policy clauses selected (Institute Cargo Clauses A, B, or C).
• Marine Hull: Evaluates the vessel's age, tonnage, propulsion type, structural classification by an International Association of Classification Societies (IACS) member (e.g., Lloyd's Register, American Bureau of Shipping), flag registry, past casualty record, and operating limits (coastal waters vs. ocean-going).

4. Liability Insurance Rating Factors

Liability insurance indemnifies against third-party legal liabilities arising from negligence:

• Public Liability: Rated primarily on annual business turnover (gross revenue) or floor area, nature of business operations, foot-traffic volume of public visitors, and the requested Limit of Indemnity (Any One Occurrence - AOO, and In the Aggregate - AOA).
• Products Liability: Rated on annual turnover, product category (high hazard for pharmaceuticals, baby products, automotive components), target export markets (exports to the USA and Canada attract severe loadings due to litigious environments and jury awards), and recall contingency plans.
• Employer's Liability / Workmen's Compensation: Rated on total annual wage roll (payroll) broken down by occupational risk categories (for illustration, clerical staff might be rated at a small fraction of 1% of payroll, while hazardous trades such as offshore scaffolding attract rates several times higher).

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Risk Improvement and Underwriting Actions

When confronted with a proposal that exhibits higher-than-average hazards, an underwriter has several options beyond outright rejection:

+--------------------------------------------------------------------------+
|                       UNDERWRITING DISPOSITIONS                          |
|                                                                          |
|  1. Standard Acceptance   --> Accepted at normal published tariff/rates  |
|  2. Premium Loading       --> Add percentage surcharge (e.g., +25%)      |
|  3. Promissory Warranties --> Compel safety improvements                 |
|  4. Special Exclusions    --> Remove high-hazard peril (e.g., flood)     |
|  5. Deductible Increase   --> Shift high-frequency losses to insured     |
|  6. Declinature (Reject)  --> Risk outside appetite or extreme hazard    |
+--------------------------------------------------------------------------+

1. Risk Control Recommendations and Warranties

The underwriter can issue conditional acceptance subject to the implementation of physical risk improvements within a specified timeframe (e.g., 30 or 60 days). These requirements are formalized as promissory warranties. Because breach of a warranty can void or suspend policy coverage from the date of breach, warranties represent powerful tools for compelling risk management (e.g., "Warranted electrical systems rewired to SIRIM standards within 60 days of inception").

2. Premium Loadings

A loading is an additional percentage or flat rate added to the standard baseline premium to compensate the insurer for an identified higher hazard (e.g., applying a 30% loading on a timber-processing factory due to excessive sawdust accumulation).

3. Special Exclusions

If a particular exposure is unmanageable, the underwriter may accept the primary risk but excise the hazardous peril via endorsement. For example, an underwriter might cover a factory located on a river delta against fire, explosion, and aircraft damage, but attach an absolute Flood Exclusion Endorsement.

4. Adjusting Deductibles and Policy Excesses

By increasing the compulsory excess (e.g., raising the policyholder's out-of-pocket retention from RM 500 to RM 10,000 per claim), the underwriter eliminates small, high-frequency maintenance losses and motivates the insured to maintain strict operational safety controls.