Conventional vs Takaful Insurance in Islam - Essay Example

Conventional vs. Takaful insurance Name Institutional Affiliation Conventional vs. Takaful insurance Introduction Insurance in Islam is mainly based on the principles of mutual help. There are many differences between Takaful and conventional insurance. The main difference between the two types of insurance is that one is based on Sharia principles while the other is not. Since the inception of Takaful insurance, similar to the concepts of mutual insurance, it is sharia compliant, and there are investment conditions. However, there has been a common misconception that Takaful is the only version of insurance that is accepted in Islam and therefore confines it to Muslims only. However, Takaful is also open to other people despite their creed or religion (Kwon, 2007). If the Takaful insurance is used adequately, it is more acceptable in Islamic nations that conventional insurance. The paper will seek to analyze the differences between Takaful and Conventional Insurance. Insurance contracts often minimize the risks that occur due to ill-fated situations or accidents. In the conventional system, the agreements are often unproblematic but their acceptance according to sharia or Islamic Law is debatable. Various sharia scholars have different opinions regarding the acceptance of conventional insurance. On one side of the divide, the scholars believe that the possession of a particular matter or opinion is always lawful until there is proof that it has been prohibited. According to this argument, mutual insurance is acceptable. They are advised that they have to accept the risks or catastrophes that may occur because Allah has allowed them to happen (Kwon, 2007). However, they are also advised to take the adequate steps to ensure they reduce the impact of the unfortunate occurrences. On the other side of the divide, they argue that having insurance is illegal because no one knows the outcome or results of the contract or agreement. The nature of the agreement becomes illegal according to this school of thought because the results cannot be determined. Takaful Insurance It is the Islamic option to conventional insurance that is based on the notion of joint indemnification of losses, social solidarity, and cooperation of the members. It refers to the contract among a group of people who have agreed to jointly indemnify the risks or losses that may affect any one of them through the funds that they have donated collectively. In literal terms, Takaful insurance may be referred to as ”Islamic Insurance” or “social solidarity.” However, its concepts have not been fully understood. Despite the fact that takaful is quite significant in the Islamic Financial system, its nature, and concept of operations have been relatively neglected in comparison to Islamic Banking (Kwon, 2007). In essence, it is a plan that has its foundation in brotherhood and solidarity that provides mutual assistance and aid to all the members during a need where the members or participants have mutually agreed to donate for that objective. The term “Takaful” has its origins in Arabic meaning a process of Islamic insurance that is based on the principles of tabarru meaning voluntary contribution and taawuni meaning mutual assistance. It can then refer to a joint guarantee where the members of the policy have mutually agreed to guarantee each other in the event of that defined loss occurring. Therefore, in such agreements, the participants are insured while acting as insurers. Nevertheless, the concept of the insurance business and its emphasis on the occurrence of uncertainties or losses is detested by a majority of Muslims because conventional insurance operates on the aspects of gambling, uncertainty, and interest (Kwon, 2007). Most Muslim Ummah believes that takaful Insurance cannot operate in the absence of the factors that they detest in conventional insurance. However, it should be noted that Takaful insurance makes arrangements on how to avoid the three factors. Conventional Insurance Insurance offers a way for people to shift financial loss or the burden of a catastrophe from themselves to the insurer in exchange for a financial consideration referred to as premiums, on the other hand, the insurer makes a promise to compensate the insured if the specific risk takes place financially. It is often an efficient technique of transferring risks where organizations or persons exchange the uncertainties of the risks with the certainty of the premiums that they offer to the insurer (Kwon, 2007). When there is a fixed premium, the insured is confident that they will not pay more for the insurance for that particular period. The service of offering certainty at a fixed premium is of great importance to businesses because it allows them to budget their finances confidently. It is the type of security offered by the majority of modern insurance firms. Modern insurance involves making a contract where an individual makes regular premiums to the insurance company while the company makes a promise to compensate the insured financially if they lose their lives or are injured, or to pay a certain quantity of money that is equivalent to the value of the property is it is stolen, lost or damaged. It is a way of security against financial loss. It is mainly utilized to weather the occurrence of uncertain loss or contingent (Kwon, 2007). The insurer or entity that offers the security is the insurance carrier or company. The individual or company that purchases insurance is the policyholder or the insured. The contract involves the policyholder making an assumption that a loss would occur and they pay a sum of money to the insurer in exchange for a guarantee that they will be compensated when the specific loss occurs. The risk that occurs may not be in monetary terms, but the risk is converted to financial terms. Also, the insured can only receive a policy if they can establish a pre-existing relationship, ownership or possession. The individual or business that has been insured receives the policy or contract that contains all the circumstances or conditions where the insured can receive financial compensation. The premiums are also specified in the insurance policy (Kwon, 2007). The premiums defined the financial amount that the insured will incur or pay the insurer so that the risks that have been stipulated in the policy are covered. When the individual or company experiences a loss or risk that has been stipulated or covered by the policy, the insured is supposed to submit a claim to the insurance company so hat t can be processed by the claims adjuster. Comparison between the Takaful and Conventional Insurance Takaful focuses on the mutual cooperation of the parties that are involved while conventional insurances focus on commercial interests. There is no evidence to contradict that takaful offers financial security when the insured people enter the contract to contribute to a fund that will mutually assist any member who has been affected by the risk stipulated in the contract and require monetary assistance. Contrary to takaful insurance, conventional insurance policies are purchased based on an individual’s financial security where the insurance carriers bear the risk of the occurrence of uncertainties (Kwon, 2007). The investments that are made in the two policies are also different. Conventional aspects of insurance base their decisions on investment according to what would make the maximum profit while takaful follows strict Islamic principle. Takaful investments cannot be made in any sector that involves usury where money is lent out through high-interest rates, gambling or any form of uncertainty. The takaful investments are always are assessed by the sharia regulator. Takaful insurance ensures that it does not involve itself with al-maisir or gambling. In conventional insurance policies, the insured may lose the premium or money they had offered the insurer if the loss does not take place or if they do not claim the loss. Also, the insured can be offered a larger amount of money in comparison to the premiums they had paid. T means that the insurer makes an indemnity or a promise to compensate a specified amount of money to the policyholder if the risk takes place while the insured offers to give a certain sum of money or premium if the risk does not take place (Kwon, 2007). Nevertheless, in Takaful insurance, the insured or policyholders agree to contribute a certain amount of money to assist each other in case one of the participants incurs a loss. The other difference involves gharar or uncertainty. Sharia prohibits the selling or purchasing of contracts that involve probability, uncertainty or doubt. According to various Islamic scholars, uncertainty is not allowed on business contracts. In reference to conventional insurance, none of the insured or insured is certain that a risk will occur, the amount that it will involve or the time that the loss may occur. On the other hand, Takaful insurance fund is designed that the policyholders can assist each other when the risk occurs (Kwon, 2007). The company does not provide a guarantee to the policyholder. The insurers are placed on a mutual assistance contract that does not involve uncertainty factors when they make the required contributions. Furthermore, they can attain a surplus due to the rule of sharing profits and losses. In this case, the risk is not transferred because the risk is retained by the insured while the loss is shared among the insured. Moreover, riba or interest has also been a bone of contention. It can be described as making money after lending out money. Sharia law prohibits all activities that involve making of interest. A majority of conventional insurers invest the amount of money they receive from policyholders interest-bearing assets such as company or government bonds. On the other hand, takaful businesses are confined to a system that is interest-free (Kwon, 2007). In practice, it means that the takaful insurer should ensure that both the shareholder and policyholder invest in assets that do not charge or earn interest and that all the entities that the takaful company involves itself with should not be related with riba. Also, businesses that are takaful should only invest in assets that are sharia-compliant that adhere to local regulatory restrictions. For instance, there are countries that limit a person’s investment in equity because of solvency restrictions. On the other hand, conventional insurance is not sharia compliant but is subject to local regulatory restrictions. In Takaful insurance, if there are surplus funds because the claim rates were minimal, the remainder would be shared among the participants. Also, the investment profits are shared among the shareholders and participants according to the pre-agreed standards. Furthermore, takaful insurance does not charge a fee on the gains in the form of sharing the surplus of performance fee (Kwon, 2007). Nevertheless, to ensure that there is legitimacy during the operations, the total sum of remuneration from the surplus that is payable to the takaful operators, should not be bigger than the surplus accrued or paid to the policyholders. However, when it comes to conventional insurance, all the profits or surpluses are a property of the shareholders according to their stake in the company. Summary The paper has analyzed the differences between Takaful and Conventional Insurance. In the conventional system, the agreements are often unproblematic but their acceptance according to sharia or Islamic Law is debatable. On one side of the divide, the scholars believe that the possession of a particular matter or opinion is always lawful until there is proof that it has been prohibited. Takaful insurance is an Islamic option to conventional insurance that is based on the notion of mutual indemnification of losses, social solidarity, and cooperation of the members. It refers to the contract among a group of people who have agreed to jointly indemnify the risks or losses that may affect any one of them through the funds that they have donated collectively. On the other hand, conventional insurance involves making a contract where an individual makes regular premiums to the insurance company while the company makes a promise to compensate the insured financially if they lose their lives or are injured, or to pay a certain quantity of money that is equivalent to the value of the property is it is stolen, lost or damaged. The main differences are their approach to interest, uncertainty, and gambling. References Kwon, W. J. (2007). Islamic principle and Takaful insurance: a re-evaluation. Journal of Insurance Regulation, 26(1), 53. Read More