Chapter 3 - Comparison Between Insurance and Takaful - Dpn1023

7/23/2019 Chapter 3 - Comparison Between Insurance and Takaful - Dpn1023

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CHAPTER 3 - COMPARISON BETWEEN INSURANCE AND

TAKAFUL

OF TAKAFUL

Basis of Insurance

Insurance is a process through which losses suffered by a few is spread to and borne by many.

In modern practice insurance is a medium through which the financial burden of a misfortuneis transferred from the Insured to Insurer.

The concept behind insurance is that a group of people e!posed to similar ris" come together

and ma"e contributions towards formation of a pool of funds. In case a person actually suffers

a loss on account of such ris" he is compensated out of the same pool of funds. #ontribution

to the pool is made by a group of people sharing common ris"s and collected by the insurance

companies in the form of premiums.

In general any person who has a legal right in financial interest in a property may insure

under a contract of insurance if as a result of loss or damage he will suffer financial loss. An

insurance contract is an agreement or promise that is legally enforceable between two parties

i.e. the Insurer and Insured whereby the Insurer in return for a consideration $premium%

agrees to underta"e for a stated length of time $period of insurance% to indemnity the Insured

up to an agreed amount $sum insured% for the &alue of such defined property $property

insured% if damaged by an insured peril.

A contract of insurance is a contract of indemnity $e!cluding Life and 'ersonal Accident

Insurance% and this principle is to put the Insured in the same financial position as he was in

before the misfortune occurs.

The sum insured must be fi!ed at a le&el which will pro&ide an ade(uate compensation at the

time of loss. For insurance in real property depreciation must always be ta"en into account.

The cost of insurance would depend on the scope of co&er as additional co&er re(uires

additional premium. )enerally spea"ing only unforeseen and fortuitous losses are insurable.

Therefore foreseeable misfortune or losses are generally not insurable $e!cept in Life

Insurance%.

DPN1023: PRINCIPLES AND PRACTICES OF TAKAFUL

1




TAKAFUL

OF TAKAFUL

*hariah +esolution on Insurance

The concept of con&entional insurance has not achie&ed full agreement from scholars whether it is permissible $halal% or prohibited $haram%. *ince con&entional insurance as it is being

practiced now did not e!ist during the 'rophet,s time -itihad, is used to determine whether it

is permissible or otherwise.

/./.0 Fatwas on 'rohibition of Insurance

1 The 2ational Fatwa #ommittee

Fatwa #ommittee of the 2ational #ouncil for Islamic +eligious Affairs 3alaysia at its

meeting on 04 5une 0678 discussed and deliberated on the issue of Life Insurance.

1 +esol&ed9

That Life Insurance pro&ided by present:day insurance companies is a business transaction

which is &oidable because it contradicts the Islamic business principles in &iew that the

contract contains the elements of )harar 3aisir and +iba.

1 As such from the *hariah point of &iew insurance is haram;. A committee "nown as

<Badan 'etugas Khas; was set up by the go&ernment in 06=8 to study the feasibility of setting

up Islamic Insurance in 3alaysia. The <Badan 'etugas Khas; concluded that con&entional

insurance contract is fasid howe&er the obection is not against the concept of insurance per

se but against the e!istence of certain wea"nesses in the insurance contract. The Ta"aful Act

06=/ was enacted and subse(uently the first ta"aful company namely *yari"at Ta"aful

3alaysia Bhd was formed in 06=/.

1 The Islamic Fi(h Academy OI#

The Islamic Fi(h Academy emanating from the Organisation of Islamic #onference meeting

in its *econd *ession in 5eddah Kingdom of *audi Arabia from 0> to 0? +abiul Thani 0/>?

@. $corresponding to 88 : 8= ecember 06=4%. And after re&iewing the presentations made by

the participating scholars during the *ession on the subect of Insurance and re:insurance,and after discussing the same and after closely e!amining all types and forms of insurance

and deeply e!amining the basic principles upon which they are founded and their goal and

obecti&es and ha&ing loo"ed into what has been issued by the Fi(h Academies and other

edifying institutions in this regardC

1 +esol&ed9

The #ommercial Insurance #ontract with a fi!ed periodical premium which is commonly

used by commercial insurance companies is a contract which contains maor element of ris"s

which &oids the contract and therefore is prohibited $@aram% according to the *hariah.


2




TAKAFUL

OF TAKAFUL

The alternati&e contract which conforms to the principles of Islamic dealings is the contract of

co:operati&e insurance which is founded on the basis of charity and co:operation. *imilarly is

the case of re:insurance based on the principles of co:operati&e insurance.

The Academy in&ites the 3uslims countries to wor" on establishing co:operati&e insurance

institutions and co:operati&e entities for the re:insurance in order to liberate the Islamic

economy from the e!ploitation and &iolation of the system which Allah has chosen for this

Ummah.


3




TAKAFUL

OF TAKAFUL

DIFFERENCES BETWEEN TAKAFUL AND INSURANCE

Items Pertinent Issues Takafu Insuran!e

>0. Dssence of Intention Intention is to create both

spiritual and legal relationship

.

Intention is to create legal

relation only.

>8. Formalities Unilateral contract. Bilateral contract.

>E. Accounts Treatment

For )eneral Ta"aful the accountis Tabarru, means donation. For

Family Ta"aful there are two

accounts 'A treated in line with

principles of 3udharabah while

'*A treated in in line with the

basis of Tabarru,.

For )eneral insurance the paid premium is credited into

the )eneral Insurance

Account. In life the premium

is credited into the Life

Insurance Account.

>/. *ubect matter. *ubect 3atter must be *hariah

5ustified.

*ubect matter must be

#ommon Law ustified.

>4. )uarantee. The Ta"aful Operator is only the

Fund 3anager. The 'articipant

mutually guarantees each other.

The company pro&ides the

guarantee.

>?. Fund. The fund belongs to the

'articipant and managed by the

Ta"aful Operator for a legitimate

consideration for the ser&ices

rendered.

The fund belongs to the

#ompany though separation

of assets is maintained

between the *hareholders

and the policy holders.

>7. 'ayment of contribution

premium

'aid contribution is treated as

donation $Tabarru%.

'aid premium creates an

obligation against the insurer

on a sale and purchase


"




TAKAFUL

OF TAKAFUL

contract.

>=. Forbidden Dlements. Islamic model is based on

Islamic principles and free from

any of the forbidden elements.

Insurance policy e&ol&es

around the element of

)harar +iba and 3aisir.

>6. +eligious *uper&isory +eligious *uper&isory is made

mandatory by the Ta"aful Act

06=/.

There is no +eligious

*uper&isory in Insurance.

0>. 'rofits. The profit is shared between the

'articipant and the #ompany.

In insurance the profit is at

the discretion of the

#ompany.

00. #ontract. A combination of tabarru,

contract $donation% and agency

or profit sharing contract.

An e!change contract $sale

and purchase% between

insurer and insured.

08. Indemnity. The indemnity is pro&ided by

the Ta"aful Fund.

The #ompany pro&ides

indemnity from the

#ompany,s fund.

0E. Operational 'rinciple. Operational principle in

Insurance is *hariah compliance.

Operational principle in

Insurance is not *hariah

compliance.

0/. +is"s Treatment +is"s sharing concept among

'articipants.

#oncept of ris"s transfer.

04. Ta!ation. Ta!ation and Ga"at Ta!.

0?. Benefits 'aid from the defined funds

under oint indemnity borne by

the participants.

'aid from the fund legally

owned by the company.


#




TAKAFUL

OF TAKAFUL

07. 'rofits Bonus *pecifies from the outset how

the profits are to be shared

between the participant and thecompany.

3ay offer bonus or profit in

general terms only especially

with profit participating policies.

0=. +esponsibility of

'olicyholders 'articipant

'articipants ma"e contributions

to the scheme.

'articipants mutually guarantee

each other under the scheme.

'olicyholders pay premium

to the insurer.

06. Liability of the insurer

operator

Ta"aful operator acts as the

administrator of the scheme and

pays the ta"aful benefits from

the ta"aful funds.

In the e&ents of deficiency in the

ta"aful funds operator will

pro&ide interest free loan to

rectify the deficiency.

Insurer is liable to pay the

insurance benefits as

promised from its assets

$insurance funds and

shareholders, fund%.

8>. In&estment of Fund Assets of the ta"aful funds are

in&ested in *hariah:compliant

instruments.

There is no restriction apart

from those imposed for

prudential reasons.


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Chapter 3 - Comparison Between Insurance and Takaful - Dpn1023