Takaful Insurance and Convectional Insurance
Insurance is a contract by an organization to provide an assurance towards compensation in a risk that has a probability of occurrence having a regular payment, premium, in return. The two parties in the contract; the insurer and the insured, has a policy, where the insurer gets some premiums, and the insured is safeguarded against uncertainties that he/she is likely to experience. In this case, insurance plays the role of availing the means through which individual can transfer the burden of financial loss to the organization playing the insurance role, at some premiums. In the contemporary society, there exist two major classifications of insurance; Takaful Insurance (TI) and the Convectional Insurance (CI), with the differences depicted with their how the work and operating principles. The purpose of my paper is to come up with a financial comparison between TI and CI, with close analysis on Gharar (Uncertainty), Maisir (Gambling), Riba (usury), Surplus, Deficit, Voting rights, Risk and Agreement.
According to the financial figures from the two files on TI and Mithaq TKFL, CI is in a better position concerning financial performance as well as managerial efficiency as compared to TI. CI exhibit a higher levels of the capital base than TI, hence the post of CI towards realizing a higher capital contingency than CI. On the other hand, TI has kept in places relatively lower levels concerning claim ratios due to the various underwriting policies that are quite prudent. These policies are relevant in curbing information asymmetry as well as doing away with the possible levels of moral hazards.
Considering the solvency ratios, TI have kept on focusing towards general insurance, unlike the CI, who has focused more on sounder capital base (Ahmed Salman, 11). CI insurance records better performances than TI when we consider such elements as profitability as well as solvency ratios among others. Therefore, CI has better standings and performances when considering the financial aspect of business operations in the insurance industries.
TI are centrally based on the issue of mutual indemnity when offering the protection and compensation services meant for the participants who have undergone the loss of perils or hazardous events. In the same line, CI emerges to be having an objectivity of risk reduction for a single party or entity, known as the insured, which entails risk transfer to reserve a restoration. The restoration is undertaken to cover the financial loss by the insured resulting from a particular destructive activity. Therefore in the whole process of insurance, whenever a catastrophic event comes in place, all the risks covered by the terms or the policies are covered by the insured. The coverage is through the risk transfer from the insurance company to the person or organization who engaged in the contract.
TI are always bound to the Shariah principles, unlike the conventional insurance who are purely linked to the economic, both macro and micro, and other financial policies that operate in the economy or the industry (Amri, Cummins and Weiss, 9). Due to the Shariah principles, all the activities undertaken in TI are bound to such elements of riba, since they believe that that it fully exploit the idea of exploitation in the society. Talking of riba, it is that interest that is usually charged on loans or grants, which are always evident in the insurance industry. The reverse is a reality when it comes to conventional insurance, which never miss any opportunity that is believed to be increasing revenue earnings in the organization. Therefore, the CI is full of riba; interest generating activity meant to improve the process of profit maximization and overall revenue generation in the firm.
In the CI, when undertaking a close analysis, we realize that the whole mechanism entails a risk transfer from the individual holding the policy, the insured, to the insurance organization, the insurer. In this case, considerations are made that the insured is to pay for regular payments, at agreed levels, premiums. On the other hand, TI entails total mutuality. In this case, the risk is not transferred to the insurer but instead shared by the participants who come together and make an agreement for sharing a common pool (Khan, 13). Unlike in the CI, in TK, the insurance company assumes the role of undertaking the management of the pool; Takaful Operator.
CI have the uncertainty elements, referred to as gharrar, which is wholly forbidden in the Islamic world. By engaging in gharrar, the business organization finds itself involved in such activities believed to be risky or hazardous sale since information regarding the sale item is purely uncertain and unknown. In this case, this kind of trade is supposed to be having excessive risk since they are characterized by high levels of uncertainties. The reverse is a reality when it comes to TI, where all the elements of risks are completely eroded and instead developing the aspect of conditional donations, referred to as tabarru. The tabarru is meant for mitigating such possible losses that are likely to be undergone by one of the individual participants in the mutual contract.
Considering CI, they embrace the different aspects of gambling, referred to as maisir. Maisir is whereby the individual insured makes a regular contribution, premium, with a total expectation of gaining whenever a financial loss occurred; compensation. In cases where the risk fails to take place, then the insured considers him/her a loser, since he/she has not gained anything from the premium he/she has been paying. On the other hand, when a loss occurs, the insurer is believed to lose a significant amount in comparison to the collected premium; thereby the insured gaining the same value or price.
The reverse is evident in TI where the participant is believed to make the regular contribution; tabarru, with the spirit of purity, known as Ne’ea and brotherhood. In this case, there is total obviation towards the element of maisir, accompanied by the benefits of Takaful, which is similar to the CI.
Finally, the difference between CI and TI is to the individual where the surplus or the profits belong to. In the case of CI, the surpluses, as well as the benefits, belong to the shareholders. This is created by the underlying notion that the insured is only covered during the timeframe of the policy, or rather the policy period. The insured is therefore not entitled to the possible returns that may exist at the end of the stipulated time fare for the policy.
The reverse of the above is true when it comes to TI where the surpluses are owned by the involved individuals. During the lapse of the contractual period, the surpluses are returned to the participant, and this is done proportionally with respect to their shares of contribution when the accounting period elapses (Maiyaki and Ayuba, 17).
The economy can only grow if there are macro investments in the different industries. Investments are only accelerated in an economic climate full of insurance companies who can cover the various business losses and uncertainties. Despite the common objective of reinstating business organizations and individuals to their original financial levels, CI and TI exhibit different characteristics with respect to
Ahmed Salman, Syed. ‘Contemporary Issues in Takaful (Islamic Insurance)’. Asian Social Science 10.22 (2014): n. pag. Web.
Amri, Khalid Al, J. David Cummins, and Mary A. Weiss. ‘Economies Of Scope, Organizational Form, And Insolvency Risk: Evidence From The Takaful Insurance Industry’. SSRN Electronic Journal n. pag. Web.
Khan, Hayat. ‘Optimal Incentives for Takaful (Islamic Insurance) Operators’. Journal of Economic Behavior & Organization 109 (2015): 135-144. Web.
Maiyaki, A. A., and Habibu Ayuba. ‘Consumers’ Attitude Toward Islamic Insurance Services (Takaful) Patronage In Kano Metropolis, Nigeria’. IJMS 7.2 (2015): n. pag. Web.