Conventioanl vs Islamic Insurance Essays

Conventioanl vs Islamic Insurance Essays Conventioanl vs Islamic Insurance Essay Conventioanl vs Islamic Insurance Essay ISLAMIC LIFE INSURANCE (TAKAFUL), ITS EVOLUTION, COMPARISON WITH CONVENTIONAL LIFE INSURANCE, AND ROLE OF DAWOO TAKAFUL ( AN INSURANCE COMPANY OFFERING LIFE INSURANC IN PAKISTAN ) FOR TAKAFUL INDUSTRY IN PAKISTAN Table of Contents 1. 0 LIFE INSURANCE/CONVENTIONAL LIFE INSURANCE 2 2. 0 ISLAMIC LIFE INSURANCE2 3. 0 WHY LIFE INSURANCE NECESSARY2 4. 0 COMPARISON BETWEEN COVENTIONAL LIFE INSURANNCE AND ISLAMIC LIFE INSURANCE 2 4. 1 HOW CONVETIONAL INSURANCE WORKS3 4. 2 DIFFERENTATION OF TAKAFUL FROM CONVENTIONAL INSURANCE 3 4. 3 PRONS AND CONS OF ISLAMIC INSURANCE3 4. 43 4. 4. 1 PRONS OF ISLAMIC INSURANC3 . 4. 2 CONS OF ISLAMIC INSURANCE 4 5. 0 LIFE INSURANCE IN PAKISTAN 4 5. 1 Takaful in Pakistan 4 6. 1 INSIGHT LOOK- A TAKAFUL COMPANY IN PAKISTAN-DAWOOD FAMILY TAKAFUL5 6. 2 OBJECTIVE OF DAWOOD FAMILY TAKAFUL5 6. 2 SHARIAH SUPERVISORY BOARD 5 6. 3 FINANCIAL ANALYSIS OF DAWOOD FAMILY TAKAFUL5 7. 0 CONCLUSION5 8. 0 REFERNCES5 1. 0 LIFE INSURANCE/CONVENTIONAL LIFE INS URANCE Life insurance is an undertake between the policy holder and the underwriter, where the insurance firm commitments to pay a selected beneficiary a quantity of money (the benefits) upon the death of the individual person. Looking on the contract, other effects such as period ill health or critical wellness may also trigger payment. In return, the policy bearer agrees to pay a specified amount (the premium) at every day intervals or in lump sums. In many countries, death outgoes such as observances are enclosed in the premium; even so, in the United States the predominated form only defines a lump sum to be paid off the insurer’s death (1). The valuable for the policy owner is the peace of mind in sapient to that the modification of the various persons will not issue in non financial adversity. Life insurance policy are lawful contract bridge and the price of the contract exposit the limits of the someone consequences. Specific exceptions are often written into the contract to end the financial obligation of the insurance firm; common examples are claims connecting putting to death, fake, state of war, rioting and civil commotion. In this era of modern finance too many financial products and services are offered by the banks, building societies and financial corporate and one of them is life insurance. New scenarios are developing with modern techniques of offerings for the potential customers. 2. 0ISLAMIC LIFE INSURANCE Takaful (Arabic: Al-Takaful) is an Islamic insurance concept which is grounded in Islamic muamalat (Islamic banking), observing the rules and regulations of Islamic law. This concept has been practised in various forms for over 1400 years. (2) A premier goal of Takaful system and its goods is to strike the right play with Muslim customers who may find formal products unacceptable and get them reluctantly. The takaful system of rules and product may be attractive to them. Ibn Abidin (1784-1836) was the basic learner in the Muslim world to talk about the message and lawful fictional character of insurance policy Islamicity of insurance has been below give-and-take since then. Popular opinion regarding lawfulness, approval, and adaptability of insurance are numerous. Newly, even so, a consensus was emergent for conforming insurance in the name of takaful and commonality. As a issue, several Islamic takaful and commonality companies have been accepted since 1979 The Islamic Insurance concept as known as Takaful (an Arabic word meaning â€Å"guaranteeing each otherâ€Å") is a shariah compliance mutual risk transfer arrangement which involves participants and operators. Shariah is based on the Qur’an and Assunah. Takaful as a concept that some extent is similar to conventional mutual risk sharing such as Mutual Insurance and Protection and Indemnity. It is a mutual sharing of risk based on the concept of Taawun (Mutual Protection). Takaful do not allow what is called Gharar (uncertainty or speculation) and Maisir (i. e gambling). In investment or fund management Riba (i. e usury) is also not allowed. These three Gharar, Maisir and Riba are the areas that must be totally avoided by the Takaful operation, and where it differs with the conventional insurance In order to avoid Gharar, there must be a complete clarity or full disclosuer of any Takaful contract. Full disclosure is aplicable on both sides, i. e on both the subject matter and terms of the contract (scope of cover, etc). Its not allowable in to enter into a takaful contract if there is any unknown element on the subject matter and/or unknown exposure to the extent of the contract itself. As this ideal situation is hardly exist, the Takaful contract then need to be made in a way that there is no exchange of Gharar from one party to another. Maisir (gambling) is regarded as the excessive side of the Gharar. Whilst the participants (insured) may have an insurable interest in the subject matter, if the risk transfer (risk sharing in Takaful) contains any speculative element, the it is prohibited under the Takaful. Riba (usury) is totally prohibited under the shariah law and under a Takaful arrangement. In order to avoid the Riba, Takaful treats participants’ contribution to the risk sharing scheme not as a premium in the way conventional insurance does. In Takaful terms it is treated as being a contribution (Mushahamah) in the from of donation with a condition of compensation (Tabarru). Furthermore, the pool of funds secured from those participants’ contributions or donations, must be managed and invested in accordance with the Shariah. In the same way that Gharar and Maisir represent a continous challenge for Takaful operators to ensure that pure Takaful arrangements are free of them, Riba free investment and fund management is also becoming a specialist discipline which requires more in depth elobaration. Whilst risk are nature of human life, it is impossible to eliminate this nature from human life. What is not allowed in Islam is not the risk or uncertainty itself (so it need to be eliminated)- but selling or exchange of risk or risk transfer to the third party using sales/exchange contract that is not allowable. On the other hand helping each other in any situation including in the event misfortune is highly encouraged in Islamic teaching as Allah mentioned in the Qur’an (Holy book of Muslims). 3. 0 WHY LIFE INSURANCE NECESSARY Life insurance is a kind of policy that look for to kind financial provisions to beneficiaries upon the death of a only provider. Even so, some people seek life insurance for a multiplicity of reasons. Most people will want to die with the notion that their family will be well taken care of economically. (3). It could be used for the settlement of debts and other bills, for the academic provisions of your children. Whatever the reason, the ultimate purpose is financial security upon death. 4. 0 COMPARISON BETWEEN COVENTIONAL LIFE INSURANNCE AND ISLAMIC LIFE INSURANCE The term life insurance is the almost basic of insurance policies. It is nothing more than an insurance policy that gives covering for accidental expiry and potentially debilitating harms for a specific period of time. If beneficiaries do not shuffle any claims during the term of much a policy, the policy will atypically expire no-account. Generally, term life insurance is low-budget to buy during the sooner years of life, when the danger of death is comparatively low. Prices rise in accordance of rights with increasing risks and progressive age (4). Comprehensive life insurance falls below a broader concept of policies sometimes have in mind to as cash-value, or permanent, insurance policy. These sorts of insurance policies combine death performances with a savings part or cash amount that is reinvested and levy shelved. The fund portion is collected throughout the living of the policy and can one time be cashed in at many future factor. Because these insurance policy are permanent, any advance ending of the bridge by the policy holder is open to penalties. During the early levels of life, a big part of the premium paid to this policy is path to the savings section. During the later levels of life, when the value of insurance is high, less of the premium is dedicated to the cash part and many to the purchase of policy. 4. 1 HOW CONVETIONAL INSURANCE WORKS For instance, if a 20-year-old adult purchases period insurance, his or her economic value might be $20 per month. With a world-wide policy, the same 20 year old strength pay $100 a month, with $20 of that going toward expiry insurance and the left over $80 going to the savings factor. When the person ranges age 45, term insurance strength cost $50 per period; even so, with universal insurance, the person intent still pay $100 a month, although a take down part of this would go into the savings element (5). 4. 2 DIFFERENTATION OF TAKAFUL FROM CONVENTIONAL INSURANCE There are five elements that must co-exist to establish a proper framework for a Takaful system as compared to conventional life insurance. 1. Sincerety of Intention - for knowingly following the guidance of, and adhering to the rule and purpose of, Takaful - co-operative risk sharing and mutual assistance. 2. Integration of Sharia principles - in particular, risk sharing under Ta’awuni principles, coincidence of ownership, participation in management by policyholders, avoidance of riba (an agreement in which the policyholder expects to receive a predetermined/ fixed amount that is greater than that invested), gambling (referred to as ‘qimar’ or ‘maisir’ in Arabic, which means any activity that involves an arrangement between two or more parties, each of whom undertakes the risk of a loss where a loss for one means a gain for the other), and al Gharar (activities that have elements of uncertainty, ambiguity or deception. In a commercial transaction, it refers to either the uncertainty of the goods or price of goods, or deceiving the buyer on the price of goods), and inclusion of the al Mudharabah (profitsharing arrangements) and/or al Wakalah (agents) principles for management practices (6). 3. Presence of moral value and ethics - whereby business is conducted openly in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealing. 4. No unlawful element - that contravenes Sharia and strict adherence to Islamic rules for commercial contract, namely: Parties have legal capacity and are mentally fit n Insurable interest n Principle of indemnity prevails Payment of premium is consideration (offer and acceptance) Mutual consent, which includes voluntary purifi cation Specific time period of policy and underlying agreement. 5. Appointment of a Sharia Advisory Council or Committee - to oversee the development and Islamic auditing of the Takaful operation and to make sure the investments are made in eligible areas that are allowed and approved by the Sharia board (7). . 3 PRONS AND CONS OF ISLAMIC INSURANCE A very common question which bear in mind of the people/potential customers is why Islamic Insurance is benefited as compared to the conventional insurance and what are the main prons and cons of the Islamic insurance as compared to the conventional insurance so lets have a very little crux of this differention:- 4. 4 4. 4. 1 PRONS OF ISLAMIC INSURANC It has become apparent that   Sharia compliant alternatives in the areas of banking and insurance are indeed attractive to consumers, end users, and financial intermediaries. The Middle East played key roles in the development of these services. The principles of Takaful are as follows: Policyholders co-operate among themselves for their common good. Every policyholder pays his subscription to help those that need assistance. Losses are divided and liabilities spread according to the community pooling system. Uncertainty is eliminated in respect of subscription and compensation. It does not derive advantage at the cost of others. Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of bear ye one another’s burden. Commercial insurance is strictly not allowed for Muslim as agreed upon by most contemporary scholars because it contains the following elements: i) Al-Gharar (Uncertainty) ii) Al-Maisir (Gambling) iii) Riba (Interest) 4. 4. 2 CONS OF ISLAMIC INSURANCE Even though the Takaful ( Islamic Insurance ) has been described as allowed (halal) for Muslims still Muslim finance scholars are not agreed to one convulsion due to the following reasons:- A . Risk Protection (insurance) is against Tawakkul total dependence upon Allah (swt)    No human actions change the Will of Allah (swt) for our destiny. Whether a person has insurance/Takaful or not has no effect on future events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah (swt): in Hadith narrated by Anas bin Malik when an Arab Bedouin asked Prophet Muhmmad (PBUH), Shall I leave my camel untied and seek Allahs protection on it, or should I tie it? The Holy Prophet replied, Tie your camel and then depend upon Allah (swt). {as quoted by Sunan Al Tarmizi, 1981,} (8). B. All Risk Protection (insurance) is Haram-prohibited Fiqh Council of World Muslim League (1398/1978) resolution and Fiqh Council of Organization of Islamic Conference (1405/1985) in Jeddah resolved that, .. conventional insurance as presently practiced is Haram. And that, .. cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles. Hence, conventional insurance is prohibited for Muslims because it contains elements of Riba, Al Maisir, and Al Gharar. By contrast, Takaful provides risk protection in accordance with Sharia using principles of Taawun (mutual assistance), brotherhood, piety and ethical operations (9). C. All Insurance is a form of Gambling of Wagering, which is forbidden in Islam   Risk or uncertainty can be divided into: Pure Risk and Speculative Risk. Pure Risk involves the possibility of Loss or No Loss. For example, damage to property due to fire. Pure Risks are the subject of insurance risk protection and Takaful. On the other hand, Speculative Risks involves the possibility of Loss, No Loss or Gain. For example, venturing into a new business, or gambling on horse race. Speculative Risks that include a potential gain or profit cannot be insured. Takaful schemes use the principle of indemnification to compensate for the loss that occurs to a Takaful Participant. Takaful insures only Pure Risks and claims pay in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum. In Takaful Taawuni (assurance), the compensation equals each participants accumulated savings plus investment profit added to a sum covered taken from the Takaful general pool. D. All Insurance seeks to maximize profits which takes benefits away from policyholders    Most conventional insurance companies are stock companies that seek to maximize profits. Since the interests of shareholders conflicts with policyholders, by raising prices, denying claims, etc. these insurers can boost profits for shareholders. Takaful operators, by contrast, are mutual or cooperative entities. The goal of Takaful is community well-being and self-sustaining operations not high profits. Under the Takaful Mudarabah Model, surplus (or profits) is shared fairly between shareholders and policyholders. Under the Takaful Wakalah Model, surplus is owned by the policyholders and may be reduced by a performance fee incentive for the operator before distribution to the policyholders. 5. 0 LIFE INSURANCE IN PAKISTAN Pakistan is in the operation of remould its economy to meet the inquires of a international sales outlet. The government has inserted a range of efforts designed to support and consolidate Pakistan’s point as an emergent market in the region. The modifications have issued in a deregulated and modified financial sector sales outlet. Pakistans life insurance body, nationalised in 1972, operated under the aegis of the State Life Insurance Corp. and Communicating Life Insurance until 1992, when the governing opened it to private sector involvement. International companies are no individual barred from the life policy business, but they are classified to minority relation. Private companies purpose in nonlife insurance regions, but the governing insurance business is contained by the International Insurance Corp. One of the states first track was to standardise and bring down insurance premium rates and to encourage insurance coverage among a wider section of the population. In 2001, there was US$$168 million of life insurance in writing Pakistan. Although storage of rates is no someone required, there are, even so, separate environment in the Ordinance on Marketplace Behavior Intermediaries which lay behind the works/responsibilities of Direct Insurance policy Companies and of Negotiant. The changes in the regulative environment in Pakistan are in form with those in the International classes. Compliance with regulations is becoming exceedingly important. 5. 1 Takaful in Pakistan The takaful market is silent in a formative level and market projections figuring growing rates between 15% and 20% all over the next 10 years, reaching US$7. 4 billion in economic value by 2015. With demands around customer divine service and productiveness, technology can modify this growing industry through its shaping level. Pakistan is among the best 10 most populous states in the world. This kinds t a very conceptive marketplace for Takaful, one with few interesting inquires. Takaful is the modish â€Å"movement† in business security. Pakistan saw its basic Takaful function, in the Generic part, start in 2006. India, a much larger neighbour, has an insurance penetration of 4. 8%, against Pakistan’s 0. 8%, and its policy density is US$38. 40, against Pakistan’s US$5. 90. These values sort it very clear that there exists a significant space in Pakistan for business securit y tools. As we know, achieving hopefuls is not as simple as formulating them. As a sample Islamic Insuranc Company, Dawood Takaful Family has been chosen for analysis. 6. 1 INSIGHT LOOK- A TAKAFUL COMPANY IN PAKISTAN-DAWOOD FAMILY TAKAFUL Dawood Family Takaful Limited is a member company of the renowned First Dawood Group (FDG) of Companies, Pakistan. FDG belongs to the famous Dawood Family of Bantwa, Gujrat, India, which has remained instrumental in the economic development of Pakistan ever since its independence. Dawood Family Takaful Limited is amongst the pioneers in the field of Family Takaful business in Pakistan. Family Takaful (or Islamic Life Insurance) is a relatively new phenomenon in Pakistan which is regulated by Securities and Exchange Commission of Pakistan. The Company has a vision to be the preferred provider of Islamic financial protection services in Pakistan. 6. 2 OBJECTIVE OF DAWOOD FAMILY TAKAFUL The Dawood Family Takaful is playing a vital role in Islamic Insurance in Pakistan. They describes their objectives as:- â€Å"We aim to provide these services based on Islamic values. We strive to help our valued customers/partners by establishing savings and protection funds with a view to provide comfort for their loved ones. The pro-active measures ensure them security and certainty as it provides monetary relief in the event of misfortune, and creates the habit of saving amongst our customers/partners. This, we believe, underlines the importance of our mission. † As a member of First Dawood Group of Companies, Dawood Family Takaful Limited is strongly capitalized with paid-up capital of PKR 750 million to ensure our ability to meet the promises to our customers timely, and to offer assurance of reliability to our business partners. Under the leadership of a highly respectable competent and experienced management team, the Company is set to pursue its mission vigorously, both domestically and in the international Islamic market as opportunities arise. â€Å"In view to remain competitive, we will continue to introduce innovative and market based customer-centric Family Takaful products that would feature distinctly from other protection plans available in the market. We aim to be the leader in setting new service standards notably in the area of claims management, as well as building long-term customer/ partner loyalty. â€Å" 6. 2 SHARIAH SUPERVISORY BOARD This is the most integral department of any Takaful Company as it is responsible for giving approval for the launch of any new product, scheme or structuring/participating in any transaction in terms of it being in the scope and parameters of Islamic Principles. The Shariah Advisors consist of eminent Islamic economic and financial scholars. The Shariah Advisors will advise the management company on matters relating to Shariah Compliance and recommend general investment guidelines, consistent with the Shariah. Any verdict issued by the Shariah Advisors in relation to any Shariah related matter would be final and acceptable by the Trustee, the management company and other parties related with the matter. 6. 3 FINANCIAL ANALYSIS OF DAWOOD FAMILY TAKAFUL Annual Report 2010 Fund Performance Reports April 30, March 31, and February 2011 are attached as are attached as Appendices. The Dawood Family Takafuls accounts shows its performance abourt groth individial Takaful 4 times increase (Rs 197,035,755 for the year 2010 and Rs 44,416,618 for the year 2009) as annulized contribution and growth in Group Takaful 3 times ( Rs 34,568,663 for the year 2010 and Rs 31,488,391 for the year 2009). The ocmpany earned Gross Income of Rs 232 million in the year 2010 which was 3 times higher than regular earned in 2009, which was Rs 6 million which expresses the contribution of Dawood Takaful Family for selling and marketing of Islamic insurance secor of Pakistan. The compay has weighted average of no of shares 57,000,000. The Profit and Loss Statement for the ended year 31stDec, 2010 shwos that the company is in loss after tax with the amount of Rs 65,561,188. Even though the company is playing vital role with its utmost maximum contribution to support islamic insurance as a financial product in Pakistan. The detailed reports are attached as Appendices 7. 0 CONCLUSION From the above discussion and analysis it is evident that Islamic Insurance ( Takaful ) is playig its prominent role at par with the conventional life insurance. From its name it is apparent that it is deemed to be for non muslims but in fact it is only a talilored fincncial product for the targeted segment of muslim customers whereas facts are there that non muslims are also practically buying this product due to its financial coparison with the conventional life insurance. Criticism is still three in Muslim world where muslims are reluctant to accept it as a perfectly Halal ( non-prohibited ) product but if the muslims have already accepted the conventioanl banking so it is not a big issue infact. The one thing is encouraging that its develpment pace is very slow but with the laps of time it is getting in popularity all over the world and UK where Principle Insurance Company was regulated by the Financial Services Authority in 2008. 8. 0 REFERNCES 1ME Waari, (1965), uncertain life time, life insurance , and the theory of the consumer,JSTOR (P39-40). 2LA Crosby, (1987), effects of relationship marketing on satisfation, retention, and pricies in the life insurance (P231). 3HU gerber, (1997) life insurance mathematics 3rd , Springer verlag(P52). 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