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Anonymous
Asked: January 6, 20202020-01-06T22:08:09+00:00 2020-01-06T22:08:09+00:00In: Business & Finance

What is Islamic Insurance (Takaful), and what makes it different from conventional insurance?

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Insurance is haram (forbidden) in Islam. Takaful is the Islamic alternative for conventional insurance.

But what makes Takaful or Islamic insurance different from conventional insurance?

islamic economics
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    1. Abdul Al Ghazali Level 2
      2020-01-06T22:18:59+00:00Added an answer on January 6, 2020 at
      This answer was edited.

      Insurance is an important need for businesses and individuals for mitigating risks and losses which could have catastrophic implications for both lives and wealth.

      Conventional Interest

      However, conventional insurance is considered against Islam as it involves interest, uncertainty and gambling. Even sometimes, insurance companies can also be involved in some other haram (forbidden) businesses such as alcohol, pork, pornography, betting, and prohibited activities.

      Muslim jurists commonly agreed that the operation of conventional insurance does not comply with Islamic rules.

      Takaful

      Takaful is Islamic insurance which is based on the principle that individuals are responsible for helping each other. In more technical terms it is based on mutual assistance (ta’awun) and donation (tabarru). Under takaful members contribute money into a pooling system which in return get a guarantee against damages. In takaful, the risk is shared between insurers and insured.

      What differentiates Takaful from Conventional Interest

      The main concept of insurance, where resources are pooled to help the needy, is not against the Shari’a. However, what makes conventional insurance haram are the elements of uncertainty (al-gharar) in the insurance contract, gambling (al-maisir) is the presence of uncertainty while interest (al-riba) in the investment in interest-based assets by the insurance companies.

      Al-maisir (gambling) component in the conventional insurance is that the policyholder may lose the paid premium if he does not claim, or even, he can claim a larger amount compared to his premium. However, it is not the case under takaful where the policyholders donate money to help each other in case any one of them suffers a loss.

      Gharar (uncertainty) is against the Islamic rules to sell any contract involving uncertainty, doubt and probability. In conventional insurance, both insurer and the insured are unaware of the loss, amount of the loss and timing of the loss. On the other hand, in takaful, the policyholders’ fund will support if a loss occurs. But there is no guarantee from the takaful company to the policyholder. They may receive a surplus from the donations of sharing the losses and profits. The risk is shared amongst the policyholders.

      Riba (interest) which mean interest paid on the money. Most conventional insurers invest in interest-bearing assets such as bonds. Takaful, businesses are not investing in any interest-bearing assets.

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    2. Mohammad Ali Level 3
      2020-01-07T10:00:30+00:00Added an answer on January 7, 2020 at

      The key difference between Takaful and conventional insurance is that Takfual is risk-sharing model while conventional insurance is a risk-transfer model.

      The concept of tabarru (donations) eliminates gharar and maysir in Takaful. The donation makes sure that the uncertainty concerning the contributions and compensation is eliminated. For instance, in one of Takaful models, is the Mudharaba model, which divides the participants’ contributions into two parts (1) allocation of an amount for tabarru which is used to pay for the policyholder losses and (2) invest a portion of the contribution in profitable business according to Shari’a rules.

      Takaful companies are playing their role as a risk manager and not a risk-taker. In case of risks/losses, the companies can take interest-free loans which can be repaid through the future surpluses that arise from the fund.

      Conventional insurers are the risk-takers, and take the risk from policyholders in exchange for a premium.

      The other difference between Takaful and conventional insurance is Takaful operators/companies avoids investments in haram business such as alcohol, tobacco, pork, pornography, weapons, gambling and conventional banking and insurance. On the other hand, conventional insurance companies invest the policyholders’ contributions in interests based businesses or those forbidden businesses mentioned above.

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    3. Slide Share Level 4
      2020-01-07T10:08:36+00:00Added an answer on January 7, 2020 at
      This answer was edited.

      Below are the key differences between Islamic insurance and conventional insurance.
      Takaful vs conventional insurance
      Source: KPMG

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