ASSIGNMENT: 01

UNDERWRITING MANAGEMENT

Difference between
Takaful and
Conventional Insurance

Presented to: Sir Musab Tarar

Presented By: Mussarat fatima

Mi08mba021
4th smester

Hailey College of Banking & Finance,

Punjab University,
Lahore .
DIFFERENCE BETWEEN TAKAFUL AND CONVENTIONAL:

INSURANCE

Before discussing the difference between takaful and Conventional insurance it is better to first
understand the concept of insurance and takaful.

WHAT IS INSURANCE

Insurance provides the means for people to transfer the burden of uncertainty (of financial loss) to
the insurer, for an agreed financial consideration called the “premium”. In exchange, the insurer
promises to provide financial compensation to the insured should a specified loss occur e.g car and
life insurance.

Features of the conventional insurance:

• The account is known as general insurance account and life insurance account of fund.

• The operation aims a commercial gain on the basis of the principles of business.

• Conventional insurance consists on elements of interest, gambling, and

uncertainty.

• Insurance is a buy-sale contract. In which policies are sold and the policy holders are the
purchasers.

• Premium paid by the Policyholder is considered as income to the

company, belonging to the shareholders.

• Relationship between the company and the policy-holders is on one to one basis.

• No exact specification with regard to the profit-sharing in contract.

• May offer bonus or profit in general terms only especially with profit policies.

• It may also decide to give or not to give bonus for any particular year depending on the result
of the investment returns. The rate of bonus can vary from year to year up to the discretion
of the Board of Directors of the company.

• Laws & regulations are set by state and man-made.

• No coverage for the fetus.

• Initial capital supplied by shareholders.

 • Investment of premiums conducted by insurer with no involvement by
policyholders.

• Taxes are paid to local, state and federal taxes.

• Insurer gains all benefits paid from general insurance account.

• The minimum age for a person to buy a poliy is 16 years, but an infant between the age of 10
and 16 may also have the right to have it under respective guardian.

• In life insurance policy, if it is proven that the policy-holder has committed suicide within first
two (2) years of the policy with an intention of leaving benefits to his beneficiaries, no right of
claim shall be entertained.

• The paid-premiums of the policy-holders may sometimes be forfeited, especially for the
breach of utmost good faith.

• Insurance practices involve Riba (interest) and some other elements, which may not be
justified by the Shari’ah principles.

WHAT IS TAKAFUL :

The central idea of Takaful (Islamic insurance) contract is that it is a financial transaction of a mutual
co-operation between two parties to protect one of them from unexpected future material risk. In a
Takaful transaction, the party called the participant (insured) pays a particular amount of money known
as the contribution (premium) to the another known as Takaful operator (insurer) with a mutual
agreement that the insurer is under a legal responsibility to provide the participant with a financial
protection against unexpected loss, should it happens within the agreed period.

Features of the conventional insurance:

• The account is known as al-Tabarru’, which means donation.

• Optimizing operations for affordable risk protection as well as fair

profits for the operator.

• Specificies are given that how the profits from Takaful investments are to be shared between
the operator and the participants.Ratio of sharing the profit are already agreed.Based on
principles of al-Mudharabah.

• Sources of laws are based upon Divine revelations (Holy Quran and
Hadith).

• Initial capital supplied by Rabb al Mal (Agent) or paid in via premiums

from participants.
• The paid-premiums of the participant can for no reason be forfeited, even for a breach of
utmost good faith or any other offence or wrong committed by the participant.

• Under Takaful policy, the cause of death of the participant is immaterial e.g wether sucide
or not.

• A fetus may also have the right to be insured on the name of the respective mother for one’s
health protection.

• Element of Rabia is not in Takaful practices and also not include other unIslamic elements,
but is evolved around the elements of al-Mudharabah, al-Tabarru’ and other Syari’ah justified
elements.

• The entire operation aims at paving the way of brotherhood, solidarity and mutual
cooperation.

• Participants own the Takaful funds and managed by the operator. Participants give up
individual rights to gain collective rights over contribution and benefits.

• Company is better known as operator, which acts as trustee, manager and also
entrepreneur.

• The minimum age for a person to hold a Takaful certificate is 15 years and infant below 15
should also have the right to be insured under the supervision of respective guardian.

• Takaful contract specified under principles of al Mudharabah how

premiums will be invested and how results are shared. Under al Wakalah,
similar practice plus Participant can direct his investments into a range of
unitized funds.

• Taxes - subject to local, state and federal taxes (if any) plus obligated to
arrange annual tithe (Zakat) donations to charity.

• Takaful contract specifies in advance how and when profit/surplus

and/or Bonus units will be distributed.

• Right of insurable interest is determined by Islamic principles of Faraid

(inheritance).
• Takaful is free from interest (Riba), gambling, (Maysir), and
uncertainty (Gharar).
• The funds shall be invested in any interest free from Shari’ah justified scheme.
 • In case of the deficit of a Participants’ Takaful Fund, the Takaful operator
(Wakeel) provides free interest loan (Qard Hasan) to the Participants.
• Agents are employees of the Takaful and any sales commission should be
disclosed.

References:

Ahmad Ali Khan, 2009.Takaful and Conventional Insurance [online] (updated 18, march,
2010) Available at: http://www.scribd.com/doc/28581847/Takaful-and-Conventional-
Insurance [Accessed 2010-05-28]

Jamil Akhtar Khan, C.M., 2007. Development of Insurance Sector Through the Introduction
of Takaful, Business And Finance Review, pp.3-4.

Al-Zuhayli, D.W., 2003. Financial Transaction in Islamic Jurisprudence, Volume 2., Dar al-
Fikr al-Mouaser.

Omar Fisher and Dawood Y.Taylor,2000. Prospects for Evolution of Takaful in

the 21st Century[Online](Updated at :13January 2003)Available at:
http://www.takaful.com.sa/m4sub3.asp#ans8 [Accessed at:02 June 2010 ]

Institutes of Islamic banking and Insurance,1990.Tkaful Islamic

Insurance[Online]Available at: http://www.islamic-
banking.com/takaful_articles.aspx[Accessed at: 02 June 2010 ]
WikipidiA,Takaful[Online] (updated 05 May 2005) Available at:
http://en.wikipedia.org/wiki/Takaful [Accessed at o2 June 2010 ]