BaKhabar, October 2010, Page-5

better light a candle than curse the darkness

Major Differences between Islamic Insurance and Conventional Insurance

... Shakeel Ahmad (shakeeluae@gmail.com)

From the main article: Islamic Banking and Finance

Characteristics	Islamic Insurance (Takaful)	Conventional Insurance
Guiding principle	Guided by Quranic edicts, Hadeeth, Islamic ethics and laws.	Guided by profit motive, with no religious considerations.
Risk coverage	Social welfare through mutual sharing of risk.	Transferring personal risk to the insurer.
Principle of Benefits to policyholder	Premium is paid as al-tabarru (donation) for solidarity and cooperation, for mutual benfit.	Only personal benefit - deriving advantage at the cost of other policyholders.
Functional technique used	Al-mudaraba (profits and loss sharing) is the most acceptable model used. Wakala (agency) model and the non-profit model are the other available techniques used.	Any means of earning money that is allowed by local regulations can be used. Interest (riba) based financing technique is not restricted.
Initial capital	Initial capital supplied by Rabb al Mal (Agent) or paid in via premiums from participants.	Initial capital supplied by shareholders.
Transfer of losses	Losses retained within classes of business written and sole obligation of participants.	Transfer of losses among insurance pools and from policyholders to shareholders.
Use of Claim proceeds by Policyholders	Insured may not "profit" from insurance and entitled to compensation only for repair or rebuild or replacement.	Insured may elect cost or replacement cost valuation and claim accordingly whether or not they choose to rebuild property.
Tax payments	Subject to governmental regulations (if any) plus annual Zakat donations to charity.	Taxes - subject to governmental regulations.
Supervision of Guiding Principle	Supervised by an independent body called the Sharia Supervisory Council, apart from the prevalent statutory requirements.	Prevalent statutory requirements, e.g., GAAP.
Investment	All proceeds must be invested only in Sharia compliant businesses, purification is necessary for minority investment allowed in limited non-compliant businesses.	No restrictions of any kind.
Asset distribution on liquidation	Policyholders’ assets go to charity, after meeting the outstanding liabilities and expenses. Some advocate distribution to Policyholders, also. Shareholders’ share their assets in proportion to their shares, after meeting outstanding liabilities and expenses.	All assets get distributed among the shareholders alone in proportion to the number of shares held by each shareholder, after meeting the outstanding liabilities and liquidation and other expenses.
Nominee	In family takaful, absolute gains to nominees are contrary to inheritance principles of Sharia.	The nominee is as an absolute beneficiary.
Sexual Discrimination in life insurance	Sexual discrimination by takaful operator cannot be justified by Sharia principles.	If life expectancy of females in a country is less than the males, premiums charged to females may be higher than those to males.
Agents and brokers	Use of agents and brokers cannot be easily justified.	The agents and brokers play important role as promoters of insurance practices.
Returns to Policyholders on surrender of Policy	All premiums paid should be returned, in principle, together with profits earned on investment of premiums.	The insured can receive back only a part of the premiums paid.
Right to elect the Directors	All members who pay a certain stipulated amount of premiums can participate to elect their representative.	No right to vote in the elections of the directors of the company.
Need for Insurance	Insurance is Sharia compliant only if the cover is genuinely required to safeguard the policyholders’ interests, and there exists no other means of doing so.	No such restriction.
Type of Contract	'Donation' contract, intended to fractionate losses and spread liability according to the community pooling system.	A normal contract between a policyholder and the insurance company.
Scrutiny of transactions & Accounts	Policyholders can scrutinise the company’s transactions and accounts.	No such rights. Annual audit and published annual reports may serve the purpose.
Profits from investment of Premium contributions	Only the policyholders are entitled to share these profits.	No entitlement for Policyholders per se.
Shareholders’ entitlement of profits	Shareholders, as mudarib, may receive an appropriate proportion of profits from investment of insurance funds and profits on investment of funds attributable to them.	Shareholders are entitled to all the profits generated by the insurance company.
Reduction of Premium	Profits generated from investment of premium contributions can be used for reduction of premiums during the subsequent year.	Not possible.