Differences Between Conventional Insurance and Takaful Insurance

Insurance is one of the most controversial topics when it comes to Islamic financing. The speculative nature of some of the policies is what breeds confusion to most people. In most countries, the law requires one to take an insurance cover for some items such as a motor vehicle before it hits the road. In other cases, some employers will require you to subscribe to a certain medical cover before they employ you.

Islamic finance has a solution known as Takaful. It takes a different approach when compared to conventional policies. Takaful is an Arabic word which means guaranteeing each other. The following are some notable differences between Takaful and conventional insurance

  1. Transfer of risk

Conventional insurance-When you take a cover undertake this arrangement, you transfer the risk to the insurance company. The premiums you pay will protect you and the company will have to indemnify you in case the risk occurs. It thus means that you sell the risk to the insurance company and they have an obligation to pay you when the insured risk occurs.

Takaful insurance-This one operates on social solidarity, mutuality or cooperation. The members of a pool contribute funds and agree that they will indemnify one of the members in case a misfortune occurs. When you take such a policy, you do not transfer the risk to the insurance company but to the other pool members. The insurance company, in this case, is just a custodian of the money in this pool.

   2. Investment

Conventional insurance-When you take a cover, the company can invest that money provided that it will have something to pay you when the risk occurs. The company can invest in bills and bonds or fixed deposits that earn interest. An insured person does not have a say in how the company invests the money.

Takaful-The insurance company has to invest in causes that are sharia compliant. It thus means that the company cannot invest in gambling, liquor business or any other venture that contravenes Islamic teaching. You have a duty to know how the company intends to invest the money in your pool. Make sure that the element of Haram activities is at an acceptable level before you take the cover.

3. Profit and loss sharing

Conventional insurance-The type of relationship that exists here is that of a buyer and seller. The company will enjoy any surplus that arises from the investments that they make. The money simply goes to the pockets of the shareholders. The only obligation they have is to compensate the insured when a risk occurs. In case of losses, the company and its shareholders bear all the burden and still have to compensate those with claims.

Takaful-Any surplus from an investment activity belongs to the members of the pool. The terms of sharing will depend on total contribution and terms of the contract. The insurance company just takes the facilitation fee as stipulated in the contract as well. In cases of losses, the same principles apply as well.

Even though the two seek to compensate the insured when a risk occurs, they have some operational differences. A good Takaful insurance policy reduces the element of uncertainty to acceptable levels.

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