Conventional insurance and mutual or co-operative insurance Essay

Conventional insurance and mutual or co-operative insurance - Essay Example This paved way for the development of Takaful form of insurance that is Shariah compliant. Mutual risk arrangement Takaful envisages transfer of risk on mutual basis under which arrangement are the participants and operators. It is almost similar to conventional mutual risk sharing such as Mutual Insurance and Indemnity Club (P and I Club). The difference between Takaful and conventional insurances lies in the manner in which risk is managed and Takaful fund is operated. There are differences in relationships between the operator and participants who represent the insurer and insured respectively in the conventional insurance. The management of risk refers to the way risk is assessed (underwriting) and handled. Unlike conventional insurance, uncertainty, speculation (gambling) and interest elements are prohibited in Islamic life and the Takaful insurance is free from these vices known as Gharar (uncertainty), Maisir (gambling) and Riba (interest or usury). (Iqbal, 2005). In order to be free of Gharar, a Takaful contract must be subject to full disclosure from both sides so that there is complete clarity. The full disclosure or clarity should be in respect of the subject matter and terms of contract. If there is any unknown element or unknown exposure, Takaful contract cannot be entered into. But since this ideal situation does not always exist, Takaful contract ensures that there is at least no exchange of Gharar among the parties to the contract (Iqbal, 2005). Prohibition of Maisir (gambling) that is an extreme form of Gharar does not allow risk transfer on speculative basis. Riba, another prohibited element, is avoided by treatment of contribution from the participants as part of risk sharing scheme and not as a premium in conventional insurance. In Takaful, the contribution is envisaged as Mushahamah in the form of donation with a condition of Tabarru (compensation). Further, under Takaful, the funds so collected should be managed and invested following Shar iah principles (Iqbal, 2005). Islam does not prohibit risks as they are a reality. It only prohibits trading on risks. Islam does allow mutual help in any situation including when some misfortune strikes. Both the forms of insurance deal with risks but in a different manner from each other. Under conventional insurance, risks from various insured persons are transferred to the insurer by insured against exchange of premium collected by the insurer. On the other hand, under Takaful risks are shared by the participants (insured) by contribution to fund under a mutual guarantee scheme to be managed by Takaful operator Wakeel (agent). Thus, there is no risk transfer to the operator in Takaful insurance. The conventional insurance actually exchanges uncertainty for certainty. The uncertainty relates to whether or not loss will occur and if at all it occurs, when it will it occur and what will be severity of loss like and how many such losses are likely to occur within a given period. The conventional insurance envisages payment of fixed premium by the insured to insurance company who in turn will pay the loss if it ever occurs within ambit of policy terms. This exchange of uncertain loss is Gharar in Islam and hence not allowed. Therefore, the Takaful avoids risk transfer by the participants (insured) to the operator. This facilitates sharing of risks by among the participants under what can be called a mutual