Why do you need Islamic insurance over interest based insurance policies?

 

Takaful- Provides Protection to our loved ones and our valuable possession in a halal way.

 

When our business volume begins to grow, we start thinking about the unforeseen events that can damage the company’s assets and bring a bad reputation in the market. We are familiar with this fact that there are plenty of options in insurance companies that provide a variety of services. Again, the question that makes you think, are these commercial financial institutions provide interest-free services and can they avoid uncertainty and speculation?

 

 

Islamic finance got answers to all this and provides a solution in the form of Takaful. If you are not familiar with this term then in this blog, we will highlight different aspects that will explain briefly the Islamic way of insurance. So, let’s discuss it in detail.

What is the Islamic Insurance, commonly known as ‘Takaful’?

Takaful means to give guarantee and share burden of each other when needed.  It is quite obvious when these qualities exist; it promotes brotherhood and contributes toward equal wealth distribution in the society; in form of charity.

 Therefore, these services are all about building humanity and defuse profit maximization; not allowing money to revolve in hands of few people.

Moreover, the funds generated through different pools are invested in those trade activities that are allowed in Islam. It means the basic principle is totally in complaint with the Sharia-Islamic standards and laws.   

What is the pool of funds and who manages it- the Structure of Takaful

Usually, we find some similarities between Islamic and conventional styles of trading. Before we jump to the conclusion, it’s important to understand, how does Islamic insurance work?  Here, we will discuss this model:

The parties involved: Mainly, two parties involved one is the policyholder, instead of paying a premium, they contribute to the pool of funds. With each participant’s contribution, one guarantees to help others at the time of claim.

Furthermore, the members are joint investors who get a share of ownership interest in the invested assets and the operations.

 The other party is fund manager; the Takaful operator. The Islamic financial institution will manage the policyholder finances in the halal ventures, unlike, in conventional insurance where money is invested in the stocks and commercial bonds. 

 The pool of funds: There is different pool of funds depending on which policy cover is used. The contribution amount will be used to compensate for the claim amount. Furthermore, administrative costs like marketing and salary expense will be paid from earning generated from these pools.

In case of any surplus, it will be considered ownership of the policyholders and will be paid in the shape of cash dividends or profit distribution.  Alternately any loss occurs, it will be shared among the parties involved.  So, not just the profit is divided, the members will face the risk of loss.

This giving out of income and loss will cut down the interest and give you purified earnings.

Avoiding Gharar and Maysir

 You may call gaharar a zero-sum game where one party gets all the benefits and other have to face all the losses and risks. This practice is used in the conventional style of insurance where one has to pay a premium whether he can claim it or not. And the insurance provider gets all the benefit when damage is not claimed.

Sharia does not allow this; both parties are open to the profit and failures involved in the transaction. We may also call it a joint partnership between the payee and the asset management company.  

The other thing which is also prohibited in the case of Islamic financing is called Maysir. Maysir means speculation; based on the events that may or may not occur in the future. Gharar and maysir and interconnected if there is gharar in a bargain, maysir will be present too.   

In case of no damage, not only the assured person will lose his money. On the flip side, the insurance company will be in loss; if the damage is more than the policy premium. Contrastingly, Islamic insurance promotes donation that is healthy for community development and not focusing entirely on personal goals.

Takaful is the best alternative to conventional insurance- Why?

Because commercial style of insurance is more present and has major share in the market. Therefore when people want to switch to the Islamic-way of insurance, they try to find the differences and similarities.

 Here, we will explain the differences between Islamic and conventional insurance to smooth our way towards Islamic insurance model.

	Conventional Insurance	Takaful
Policyholder contribution	Pays the premium against the entitled cover.	Will take the ownership interest in the Takaful fund
Profit and loss sharing	NO	YES
Uncertainty and Speculation	Yes	NO
Transfer of Risk	Focuses on Individual reward and benefits	Promotes mutuality and act of donation.
Compliance and Standards	As per the country’s regulatory framework and sometimes Insurer‘s policies.	Based on Sharia Standard and principles. Every company retains a Sharia advisory board who monitors and approves all the policies