Conventional Insurance vs. Takaful

8/3/2019 Conventional Insurance vs. Takaful

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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


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DIFFERENCE BETWEEN CONVENTIONAL INSURANCE ANDTAKAFULBefore 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 ofmoney or its equivalent in kind on the happening of a specified event, which iscontrary to the Insureds 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 Taawun (mutualassistance) and Tabarru (voluntary contribution) where risk is shared collectively by agroup of participants paying contributions to a common fund against loss to any one ofthem.Takaful is operated on basis of shared responsibility, brotherhood, solidarity andmutual cooperation.

DIFFERENCE BETWEEN CONVENTIONAL INSURANCE & TAKAFUL

Conventional insurance Takaful

Law & regulation:

Sources of laws & regulation are setby stat and man-made.

Risk transfer:

It is a risk transfer mechanismwhereby risk is transferred from thepolicy holder to insurance company inconsideration of insurance premiumpaid by insured.

Sources of laws are based upondivine revelations (Holy Quran andHadith).

It is based on mutuality hence therisk is not transferred but shared byparticipants who form a commonpool. The company acts only asmanager of pool (Takaful Operator).


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Uncertainty/gharrar:

It contains the element of uncertaintywhich is forbidden in Islam.There is anuncertainty as to when any loss wouldoccur and how much compensationwould be payable.

Gambling/maisir:

It contains an element of gambling inthat the insured pays an amount(premium) in expectations of gain(payments against claim).if anticipatedloss does not occur the insured losesthe amount paid as premium. if theloss does occur, the insurer loses a

far larger amount than collected aspremium and insured gains by thesame.

Investment of Funds:

Funds are mostly invested in fixedinterest bearing instruments likebonds, TFCs, securities etc. Hence

these contain element of riba (usury)which is forbidden in Islam.

SURPLUS:

Surplus or profit belongs toshareholders. The insured is covered

The element of uncertainty isbrought down to acceptable levelsunder Shariah by makingcontributions as ConditionalDonations(tabarru) for a goodcause i.e. to mitigate the losssuffered by any one of theparticipants.

The participant pays thecontribution (tabarru) in spirit ofNeea (purity) and brotherhoodhence it obviates the elements of maisir while at the same timewithout losing benefits of Takaful insame way as conventional

insurance.

Funds are only invested in non-interest bearing, i.e. riba-free

instruments.

Surplus belongs to participants and


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during policy period but is not entitledto any return at end of such period.

Capital:

Initial capital is supplied byshareholders.

Interest:

Separation of policyholder and insurer

with differing interests.

Transfer of Loss:

Transfer of losses among insurancepools and from policyholders toshareholders.

Right of Insurable Interest:

Right of insurable interest is vested inthe nominee absolutely in lifeinsurance.

Compensation criteria:

Insured may elect cost or replacementcost valuation and claim accordinglywhether or not they chose to rebuildproperty.

is accordingly returned to them atthe end of accounting period.

Initial capital is supplied by Rabb alMal or paid in via premiums fromparticipants.

Coincidence of interests between

policyholder and operator asappointed by participants.

Losses retain within class ofbusiness written and sole obligationof participants.

Right of insurable interest isdetermined by Islamic principles ofFaraid (inheritance).

Insured may not profit frominsurance and entitled tocompensation only for repair orrebuild or replacement.


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Agents\brokers:

Agents or brokers are independent

from insurer and paid a fee from thepremium charged to policyholders thatis not disclosed.

Involvement of Policyholder:

There is no involvement ofpolicyholder in investment ofpremiums which Is solely conductedby insurer.

Motive:

In conventional insurance motive isto maximize the profit this isreturned to shareholders.

Disclosure:

Disclosure of material facts or matters

includes both moral and physical hazards

of the subject matter of the policy.

Agents or employees of Takaful and

their sales commission should bedisclosed.

Takaful contract specified underprinciples of al Mudharaba howpremiums will be invested andhow results are shared. Under al

Wakalah similar practice plusparticiants can direct investmentsinto a range of unitized funds.

In Takaful shareholder of thecompany, if any, are not entitled toparticipate in the profits generatedby the insurance Operators.

Disclosure of material facts or

matters needs not necessarily

include the past moral hazard

of the subject matter of the

policy.


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Taxes:

Taxes are subject to local, state andfederal taxes.

Taxes are subject to local, state andfederal taxes plus obligated toarrange annual tithe (zakat)donations to charity.

.

Benefits:

Benefits are paid from generalinsurance account owned by insurer.

Accounting standards:

Accounting consistent with GAAP andprevailing statutory rules. Auditing for

uniform application of accountingstandards.

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 respectiveguardian.

Benefits are paid from contributions(al tabarru) made by participants asmutual indemnifications.

Accounting standards consistentwith national rules (with may be

GAAP) plus prevailing statutoryrules. Auditing same standardsplus confirmation with Islamic rulestypically with Shariah Advisoryoversight.

The minimum age for a person to holda Takaful certificate is 15 years (As

justified by the majority Ulamasviews).


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Conventional Insurance vs. Takaful

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