4. Insurance Company

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Chapter 4: InsuranceCompanies

Insurance: The agreement between two partieswhere one party agrees to take the risk of futureuncertainty in exchange of receiving lump sum

or periodic receipt and the other party agrees totransfer the risk of future uncertainty inexchange of making lump sum or periodicpayment is called insurance. The party takes the

risk is called insurer and the party transfer therisk is called insured. The amount paid by theinsured to the insurer during the insuranceperiod is called premium.


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RISK MANAGEMENTTECHNI!ES

A: Non-insurance techniques:

1. Risk avoidance

2. Risk control3. Risk retention

4. Risk transfer

. Risk prevention

!. Risk distribution

". #edging and neutrali$ation

%. &iversi'cation


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RISK MANAGEMENTTECHNI!ES

B: Insurance techniques:

1. (ire insurance

2. )ife insurance3. #ealth insurance

4. *ccident insurance

. +arine insurance

!. #ouse property insurance etc.


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#$%ECTI&ES #' RISKMANAGEMENT

,liminating or reducing the factor that maycause a loss to a person or an organi$ation.

+inimi$ing the loss when it occurs.

To avoid risky ventures by accepting less riskyventure.

To have proper assessment of di-erent type of

risk so that appropriate action would be takenappropriately.

To minimi$e the burden risk either bydistribution or transfer to insurance company.


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NAT!RE #' THE INS!RANCE

Sharin) o* ris+

Co-operati,e e,ice

&a.ue o* ris+ /a0ment o* contin)enc0

Amount o* pa0ment

ar)e numer o* insure persons Insurance is not a )am.in)

Insurance is not a charit0


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ESSENTIAS #' INS!RANCEC#NTRACT

nprovoked o-er

n/uali'ed acceptance

0onsideration 0onsensus ad idem

0apacity to contract

)egality of obect tmost good faith

ritten document


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/RINCI/ES #' INS!RANCE

rinciple of utmost good faith

rinciple of insurable interest rinciple of indemnity

rinciple of subrogation

rinciple of contribution rinciple of proximate cause


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T0pes o* insurance1. Life insurance 5enerally when the insurance

company sells policies for covering risk against

death then this is called life insurance. The lifeinsurance company pays the bene'ciary of the lifeinsurance policy in the event of the death of theinsured.

2. Health insurance:hen insurance policies aresold by the insurance company for providingprotection against the risk of physical illness formedical treatment then this is called healthinsurance.


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T0pes o* insurance3. Property and casualty insurance:The insurance

policy issued by the insurance company for

covering the damage to various types of propertyis known as property and casualty insurance.

4. Liability insurance:nder this insurance the riskof future uncertainty is insured against litigation

and lawsuits due to actions taken by the insuredor others. (or example6 product liability insuranceand employers7 liability insurance.


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T0pes o* insurance5. Disability insurance:This insurance insures the

risk of unexpected future event against the inability of

employed persons to earn an income in either theirown occupation or any occupation. This policy may betwo types such as guaranteed renewable and non8cancelable.

6. Longter! care insurance:The insurance policyissued for providing custodial care for aged personswho are no longer able to care themselves. Thiscustodial care can be provided in either the insured7sown residence or a separate custodial facility.


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T0pes o* insurance". #tructured settle!ents: 5uaranteed periodic payments

over a long period of time6 typically resulting from asettlement on a disability policy or other type of policy.

$. %n&est!entoriented products:9nsurance companieshave increasingly sold products that have a signi'cantinvestment component in addition to their insurancecomponent. * life insurance company agrees in return for a

single premium6 to pay the principal amount and apredetermined annual crediting rate over the life of theinvestment6 all of which are paid at maturity date of thecontract.


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Insurance compan0

The 'nancial institution assumes the risk of futureuncertainty about incurring loss to a property or anindividual by receiving lump sum or periodic

payment from asset owners or individuals forproviding protection in future is known as aninsurance company. 5enerally insurance companysells di-erent types of insurance policies. :utsometimes insurance company also provides

underwriting services to other issuing companies of'nancial assets for raising funds. 9nsurancecompanies may be categori$ed into life insurancecompany and property ; casualty insurancecompany.


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un amen a s o e nsurance

inustr0

* fundamental aspect of the insuranceindustry results from the relationship

between revenues and costs. 9nsurancecompany collects premiums income initiallyfrom policy holders and invests thesereceipts in its portfolio. :ut payments

against policies are contingent on potentialfuture events. The timing and magnitude ofpayments are much less certain for


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un amen a s o e nsurance

inustr0

insurance company and there is a long lagbetween receipts and payments for an

insurance company. olicy holders receivethe payment on his


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u uinustr0

9nsurance companies are regulated by model laws andregulations developed by the =ational *ssociation of9nsurance 0ommissioners and >ecurities ; ,xchange

0ommission. 9nsurance companies are rated by the ratingagencies for both their ?claims paying ability@ and their?debt outstanding@. 9nsurance companies are monitoredby their accountants and auditors6 rating agencies andgovernment regulators. These monitors of insurance

companies are concerned about the 'nancial stability andthe volatility of payments. To assure 'nancial stability6these monitors re/uire insurance companies to maintainreserves or surplus6 which are excess of assets overliabilities.


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u u ucompanies

9nsurance companies are a composite ofthree companies such as the

manufacturer and guarantor of theinsurance policy6 investment companyand the distribution component. This

distribution component is consisted ofagents6 brokers and bank8assurance.


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companies

1. #toc' insurance co!pany:The insurance company that7sshares are owned by independent shareholders and aretraded publicly is known as stock insurance company. Theshareholders only care about the performance of theirshares6 that is the stock appreciation and the dividends.>hareholders view may be short term.

2. (utual insurance co!pany:The insurance company thathas no shareholders in the market but considers thepolicyholder as owner is known as mutual insurance

company. The policyholders care primarily or even solelyabout their policies6 notably the company7s ability to payon the policy. >ince these payments may occurconsiderably into the future6 the policyholders7 view maybe long term.


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T0pes o* .i*e insurance

1. )er! insurance:9f the policy holder dies during thespeci'c policy period only then policy bene't willbe given to the bene'ciary of the actual policy

holder.

2. *ash &alue or per!anent life insurance: Thepolicyholder will be given periodic cash bene't tillthe death of the policyholder in exchange of

premium payment. The policyholder can withdrawthe periodic bene't. The policyholder also can getcash bene't from the company by lapsing thepolicy before his death.


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3. +uaranteed cash &alue life insurance: The insurancecompany guarantees the policyholder a minimum cashvalue at the end of each year. This guaranteed cash valueis based on minimum dividend paid on the policy. :ased onthe adustment of the cash value payment for dividend6 thepolicy can be participating or nonparticipating.

4. ,ariable life insurance: This policy allows the policyholderto allocate the premium payments to and among separateinvestment accounts maintained by the insurancecompany6 within limits6 and also be able shift the policycash value among separate accounts. *s a result6 theamount of the policy cash value and the death bene'tsdepends on investment results of the separate accountsthe policy owners have selected. Thus there is noguaranteed cash value or death bene't.


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. (lexible premium policies8universal life premiumpayments for this policy are at the discretion of thepolicyholder A that is6 are Bexible except that there

must be a minimum initial premium to begin thecoverage. There must also be at least enough cashvalue in the policy each month to cover the mortalitycharge and other expenses.

!. >urvivorship or second to die insurance Two peopleare ointly insured and the policy pays the deathbene't not when the 'rst person dies6 but when thesecond person dies.

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Is.amic A.ternati,e to Insurance 8Ta+a*u.

The term ?ta'aful- is derived from the *rabic root word'afala-which means responsibility6 guarantee6 amenabilityor suretyship. #ence6 takaful literally means oint guarantee6shared responsibility6 shared guarantee6 collectiveassurance and mutual undertaking6 which reBects areciprocal relationship and agreement of mutual help amongmembers in a particular group. 9t is a system wherebyparticipants contribute regularly to a common fund andintend to ointly guarantee each other i.e. to compensateany of the participants who are a-ected by a speci'c risk.

Therefore takaful C9slamic cooperative insuranceD is anarrangement whereby a group of individuals each pay a'xed amount of money and compensation for the losses ofmembers of the group are paid out of the total sum.

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Is.amic A.ternati,e to Insurance 8Ta+a*u.

The concept of insurance is acceptable in islam because

i9The participants will cooperate among themselves for their commogood.

ii9,very participant will pay his contribution in order to assist any

fellow members who need assistance.iii9#is contribution is considered a donation to the members in the

group.

i,9The contributed donation is intended to divide losses and spreadliability according to the community pooling system.

,9The element of uncertainty will be eliminated insofar as the termsin the contribution and compensation are made clear to theparticipants.

,i99t does not aim at deriving advantage at the cost of other

individuals.


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Moe.s o* Ta+a*u.

19 Muaraah Moe.

2. WakalahMoe.

"9 H0ri o* wakalahan MudarabahMoe.

49 H0ri o* Wakalahan WaqfMoe.


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Shariah an Re)u.ator0 'rame;or+*or Ta+a*u.

1. Local /urisdiction: 0ountries allow any takafuloperator to evolove within the existing legal andregulatory framework without any discrimination

against it. 2. %0# standards: The 9(>: and the 9*9> prepared a

oint8issue paper in 2EE! titled ?9ssues in Regulation and>upervision of Takaful@ which deals with the applicationof the 9*9> core principles needed to accommodate

takaful such as corporate governance6 'nancial andprudential regulations6 transparency6 report and marketconduct and supervisory review process.


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Shariah an Re)u.ator0 'rame;or+*or Ta+a*u.

3. *ore principles of the %%#:9n a paper titled6 ?* =ew(ramework for 9nsurance >upervision@6 the 9*9> set outthe following three responsibilities

CaD reconditions for e-ective insurance supervisionsupporting the 'nance6 governance and functionalityof the insurance company in the market place.

CbD Regulatory re/uirements6 which are addressed in the

operations of the issuer.CcD >upervisory actions6 which relate to the

responsibilities and activities of the supervisoryauthority.

Documents

4. Insurance Company