ISLAMIC INSURANCE (TAKAFUL) v/s CONVENTIONAL INSURANCE Takaful distinguishes itself from conventional insurance with many different features, the main distinction being the fundamental principles that govern each practice. Takaful is governed by the principles of Shari’ah, where transactions involving Riba, Gharar and Maysir are prohibited. Riba in conventional insurance is found in both transactions involving unequal exchange between contributions and indemnities and also in the income derived from interest gained from interest-bearing investment. In fact, there is a disparate value of money between premiums and compensations as payment received against the insurance may be higher than premium. And the way insurance funds are managed can also originate an unknown part of profits earned through investments of the premiums in interest-bearing financial instruments such as bonds and savings accounts. Conversely, Riba is avoided in Takaful using contracts for profit shares rather than fixed interest and investment in Shari’ah compliant schemes. The practice of conventional insurance also involves the use of Gharar due to uncertainties on how much will be paid, when it will occur and whether the payment will be accepted. When a claim is not made the insurance company may even get all the profits while the participant may not get any profit at all. Takaful contracts, on the other hand, have to follow specific rules to avoid Gharar, such as making sure that the matter of insurance is a legitimate and essential need, that the insurer is able to safeguard the interests of the insured and that the insurance is transacted on a co-operative basis under which ownership of the premium is with all contributors to the Takaful fund; they collectively bear the risk and can share profits or losses from the pool. Furthermore, conventional insurance is declared Maysir because the policyholders are seen to bet premiums on the condition that the insurer will pay indemnity on the happening of a specified event. The gain of one party is contingent upon the loss of the other because the insured would lose the money paid for the premium when that event does not occur and the insurer would suffer a deficit if the claims happen to be higher than the premium paid. In the case of Takaful, however, collected premiums are in a common fund. If the participant draws out of it by way of benefit in the case of a claim, it is drawing out of a fund of which he is a member and to which he has contributed. Another essential difference is that conventional insurance by its conception is a risk-transfer mechanism. Takaful on the other hand does not entail a risk transfer mechanism, but rather a social function of mutual risk-sharing. The contract of Takaful is not a sale or an exchange, but is rather a membership contract to a common pool, of which every member is entitled to certain benefits but also exposed to some risks of loss. This also what makes Takaful system commercially more viable, as the remaining money after all claims does not belong to the shareholders, but rather to the participants and it should thus be given back. In addition, motivations of conventional and Islamic insurance companies are different; while conventional companies are directed by the search of profit. Takaful companies are also directed by ethical means for the overall benefit of society and the environment. Regulation in Takaful is undertaken through Shari’ah supervisory bodies that ensure that all operations are conducted in line with the Shari’ah principles and fulfil Islamic objectives of social welfare. Besides, the distribution of profits in case of conventional insurance is a managerial decision from the insurer company which is not necessarily favorable for all parties. While, in case of Takaful, distribution mechanism is defined in advance and the operator has no claims in underwriting surplus; this reduces the possibility of conflict between shareholders and policyholders. Finally, in case of dissolution of a conventional insurance company, reserves and surplus belong to the shareholders. While in case of dissolution of a Takaful operator, capital is distributed back to participants or donated to charity.
Posted on: Tue, 04 Nov 2014 13:44:34 +0000
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