Conventional Insurance vs. Takaful
Content
UNDERWRITING MANAGEMENT
Topic: Conventional Insurance Vs. Takaful
SUBMITTED TO: SIR MUSAB BASHIR TARAR SUBMITTED BY: NEELAM ANWAR MI08MBA007 4TH SEMESTER (IRM)
HAILEY COLLEGE OF BANKING & FINANCE UNIVERSITY OF THE PUNJAB
DIFFERENCE TAKAFUL
BETWEEN
CONVENTIONAL
INSURANCE
AND
Before discussing the difference between Conventional insurance and Takaful it is better to first understand the concept of insurance and the Takaful.
WHAT IS INSURANCE?
“An agreement whereby one party, the Insurer, in return for a consideration, the premium, undertakes to pay to the other party, the Insured, a sum of money or its equivalent in kind on the happening of a specified event, which is contrary to the Insured’s financial interest”. Malaysian Insurance Institute (MII) Text Book - Risk and Insurance.
WHAT IS TAKAFUL?
Takaful is a system of Islamic insurance based on the principle of Ta’awun (mutual assistance) and Tabarru (voluntary contribution) where risk is shared collectively by a group of participants paying contributions to a common fund against loss to any one of them.Takaful is operated on basis of shared responsibility, brotherhood, solidarity and mutual cooperation.
DIFFERENCE BETWEEN CONVENTIONAL INSURANCE & TAKAFUL
Conventional insurance
Law & regulation:
Sources of laws & regulation are set by stat and man-made.
Takaful
Risk transfer:
It is a risk transfer mechanism whereby risk is transferred from the policy holder to insurance company in consideration of insurance premium paid by insured.
Sources of laws are based upon divine revelations (Holy Quran and Hadith). It is based on mutuality hence the risk is not transferred but shared by participants who form a common pool. The company acts only as manager of pool (Takaful Operator).
Uncertainty/gharrar:
It contains the element of uncertainty which is forbidden in Islam.There is an uncertainty as to when any loss would occur and how much compensation would be payable. The element of uncertainty is brought down to acceptable levels under Shariah by making contributions as “Conditional Donations”(tabarru) for a good cause i.e. to mitigate the loss suffered by any one of the participants.
Gambling/maisir:
It contains an element of gambling in that the insured pays an amount (premium) in expectations of gain (payments against claim).if anticipated loss does not occur the insured loses the amount paid as premium. if the loss does occur, the insurer loses a far larger amount than collected as premium and insured gains by the same. The participant pays the contribution (tabarru) in spirit of Ne’ea (purity) and brotherhood hence it obviates the elements of ” maisir” while at the same time without losing benefits of Takaful in same way as conventional insurance.
Investment of Funds:
Funds are mostly invested in fixed interest bearing instruments like bonds, TFCs, securities etc. Hence these contain element of “riba” (usury) which is forbidden in Islam. Funds are only invested in noninterest bearing, i.e. riba-free instruments.
SURPLUS:
Surplus or profit belongs to shareholders. The insured is covered Surplus belongs to participants and
during policy period but is not entitled to any return at end of such period.
is accordingly returned to them at the end of accounting period.
Capital:
Initial capital shareholders. is supplied by Initial capital is supplied by Rabb al Mal or paid in via premiums from participants.
Interest:
Separation of policyholder and insurer with differing interests. Coincidence of interests between policyholder and operator as appointed by participants.
Transfer of Loss:
Transfer of losses among insurance pools and from policyholders to shareholders. Losses retain within class of business written and sole obligation of participants.
Right of Insurable Interest:
Right of insurable interest is vested in the nominee absolutely in life insurance. Right of insurable interest is determined by Islamic principles of Faraid (inheritance).
Compensation criteria:
Insured may elect cost or replacement cost valuation and claim accordingly whether or not they chose to rebuild property. Insured may not “profit” from insurance and entitled to compensation only for repair or rebuild or replacement.
Agents\brokers:
Agents or brokers are independent from insurer and paid a fee from the premium charged to policyholders that is not disclosed. Agents or employees of Takaful and their sales commission should be disclosed.
Involvement of Policyholder:
There is no involvement of policyholder in investment of premiums which Is solely conducted by insurer. Takaful contract specified under principles of al Mudharaba how premiums will be invested and how results are shared. Under al Wakalah similar practice plus particiants can direct investments into a range of unitized funds.
Motive:
In conventional insurance motive is to maximize the profit this is returned to shareholders. In Takaful shareholder of the company, if any, are not entitled to participate in the profits generated by the insurance Operators.
Disclosure:
Disclosure of material facts or matters includes both moral and physical hazards of the subject matter of the policy. Disclosure of material facts or matters needs not necessarily include the past moral hazard of the subject matter of the policy.
Taxes:
Taxes are subject to local, state and federal taxes. Taxes are subject to local, state and federal taxes plus obligated to arrange annual tithe (zakat) donations to charity.
.
Benefits:
Benefits are paid from general insurance account owned by insurer. Benefits are paid from contributions (al tabarru) made by participants as mutual indemnifications.
Accounting standards:
Accounting consistent with GAAP and prevailing statutory rules. Auditing for uniform application of accounting standards. Accounting standards consistent with national rules (with may be GAAP) plus prevailing statutory rules. Auditing same standards plus confirmation with Islamic rules typically with Shariah Advisory oversight.
Capacity:
The minimum age for a person to buy a policy is 16 years, but an infant between the age of 10 and 16 may also have the right to have it subject to the written consent obtained from the respective guardian.
The minimum age for a person to hold a Takaful certificate is 15 years (As justified by the majority Ulama’s views).
Topic: Conventional Insurance Vs. Takaful
SUBMITTED TO: SIR MUSAB BASHIR TARAR SUBMITTED BY: NEELAM ANWAR MI08MBA007 4TH SEMESTER (IRM)
HAILEY COLLEGE OF BANKING & FINANCE UNIVERSITY OF THE PUNJAB
DIFFERENCE TAKAFUL
BETWEEN
CONVENTIONAL
INSURANCE
AND
Before discussing the difference between Conventional insurance and Takaful it is better to first understand the concept of insurance and the Takaful.
WHAT IS INSURANCE?
“An agreement whereby one party, the Insurer, in return for a consideration, the premium, undertakes to pay to the other party, the Insured, a sum of money or its equivalent in kind on the happening of a specified event, which is contrary to the Insured’s financial interest”. Malaysian Insurance Institute (MII) Text Book - Risk and Insurance.
WHAT IS TAKAFUL?
Takaful is a system of Islamic insurance based on the principle of Ta’awun (mutual assistance) and Tabarru (voluntary contribution) where risk is shared collectively by a group of participants paying contributions to a common fund against loss to any one of them.Takaful is operated on basis of shared responsibility, brotherhood, solidarity and mutual cooperation.
DIFFERENCE BETWEEN CONVENTIONAL INSURANCE & TAKAFUL
Conventional insurance
Law & regulation:
Sources of laws & regulation are set by stat and man-made.
Takaful
Risk transfer:
It is a risk transfer mechanism whereby risk is transferred from the policy holder to insurance company in consideration of insurance premium paid by insured.
Sources of laws are based upon divine revelations (Holy Quran and Hadith). It is based on mutuality hence the risk is not transferred but shared by participants who form a common pool. The company acts only as manager of pool (Takaful Operator).
Uncertainty/gharrar:
It contains the element of uncertainty which is forbidden in Islam.There is an uncertainty as to when any loss would occur and how much compensation would be payable. The element of uncertainty is brought down to acceptable levels under Shariah by making contributions as “Conditional Donations”(tabarru) for a good cause i.e. to mitigate the loss suffered by any one of the participants.
Gambling/maisir:
It contains an element of gambling in that the insured pays an amount (premium) in expectations of gain (payments against claim).if anticipated loss does not occur the insured loses the amount paid as premium. if the loss does occur, the insurer loses a far larger amount than collected as premium and insured gains by the same. The participant pays the contribution (tabarru) in spirit of Ne’ea (purity) and brotherhood hence it obviates the elements of ” maisir” while at the same time without losing benefits of Takaful in same way as conventional insurance.
Investment of Funds:
Funds are mostly invested in fixed interest bearing instruments like bonds, TFCs, securities etc. Hence these contain element of “riba” (usury) which is forbidden in Islam. Funds are only invested in noninterest bearing, i.e. riba-free instruments.
SURPLUS:
Surplus or profit belongs to shareholders. The insured is covered Surplus belongs to participants and
during policy period but is not entitled to any return at end of such period.
is accordingly returned to them at the end of accounting period.
Capital:
Initial capital shareholders. is supplied by Initial capital is supplied by Rabb al Mal or paid in via premiums from participants.
Interest:
Separation of policyholder and insurer with differing interests. Coincidence of interests between policyholder and operator as appointed by participants.
Transfer of Loss:
Transfer of losses among insurance pools and from policyholders to shareholders. Losses retain within class of business written and sole obligation of participants.
Right of Insurable Interest:
Right of insurable interest is vested in the nominee absolutely in life insurance. Right of insurable interest is determined by Islamic principles of Faraid (inheritance).
Compensation criteria:
Insured may elect cost or replacement cost valuation and claim accordingly whether or not they chose to rebuild property. Insured may not “profit” from insurance and entitled to compensation only for repair or rebuild or replacement.
Agents\brokers:
Agents or brokers are independent from insurer and paid a fee from the premium charged to policyholders that is not disclosed. Agents or employees of Takaful and their sales commission should be disclosed.
Involvement of Policyholder:
There is no involvement of policyholder in investment of premiums which Is solely conducted by insurer. Takaful contract specified under principles of al Mudharaba how premiums will be invested and how results are shared. Under al Wakalah similar practice plus particiants can direct investments into a range of unitized funds.
Motive:
In conventional insurance motive is to maximize the profit this is returned to shareholders. In Takaful shareholder of the company, if any, are not entitled to participate in the profits generated by the insurance Operators.
Disclosure:
Disclosure of material facts or matters includes both moral and physical hazards of the subject matter of the policy. Disclosure of material facts or matters needs not necessarily include the past moral hazard of the subject matter of the policy.
Taxes:
Taxes are subject to local, state and federal taxes. Taxes are subject to local, state and federal taxes plus obligated to arrange annual tithe (zakat) donations to charity.
.
Benefits:
Benefits are paid from general insurance account owned by insurer. Benefits are paid from contributions (al tabarru) made by participants as mutual indemnifications.
Accounting standards:
Accounting consistent with GAAP and prevailing statutory rules. Auditing for uniform application of accounting standards. Accounting standards consistent with national rules (with may be GAAP) plus prevailing statutory rules. Auditing same standards plus confirmation with Islamic rules typically with Shariah Advisory oversight.
Capacity:
The minimum age for a person to buy a policy is 16 years, but an infant between the age of 10 and 16 may also have the right to have it subject to the written consent obtained from the respective guardian.
The minimum age for a person to hold a Takaful certificate is 15 years (As justified by the majority Ulama’s views).
