Islamic Insurance (Takaful)

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INTRODUCTION
With the presence of the prohibited elements such as Riba, Gharar and Maysir in the conventional insurance, it is therefore compulsory for Muslim to find the alternative way to provide them with a better security which is in line with Shari’ah. In 1979, the first modern concept of Islamic insurance was introduced in Sudan which is based on a cooperative model similar to the conventional insurance. Since then, Islamic insurance market or Takaful market has become a fast-growing insurance industry and gained its credibility and respect in international market. In Malaysia, Takaful industry is governed under Takaful Act 1984 and Insurance Act 1996. Among the leading Takaful companies in Malaysia are Syarikat Takaful Malaysia Berhad, Etiqa Takaful Berhad and Takaful Ikhlas Sdn. Bhd. DEFINITION OF INSURANCE

A contract of insurance is a conditional contract that involves two different parties in which one party undertakes, against premium, to pay to the other party certain amount (compensation) upon a certain event that occurred only due to pure risk. This contract is regulated by Insurance Contracts Regulation 1985 under Insurance Contracts Act 1984. It is valid and comes into existence by the offer and acceptance between both parties.

THE BASIC MECHANISM AND THE CONCEPT OF INSURANCE

No Claim

Profit

Premium

Protection/Coverage

Insurance Company
Policy holder

Compensationn

E.g.: accident

Insurance is a risk transfer mechanism from the policy holder to insurance company or operator. The policy holder (the insured) pay an agreed financial consideration called the “fixed premium” in exchange for “protection” provided by insurer (insurance operator) that indemnifies the insured of a defined loss. The contract of insurance operates against pure risk only in which loss is the only outcome and there is no beneficial outcome for instance death, fire, accident, or disabilities. This type of risk is opposite to speculative risk that may result in either a loss or gain for example is fluctuation in market value of trade goods. Basically insurance operates as a business with profit-maximization objectives in which it generates profit (underwriting surplus) where the total premium received from the insured is more than the total claims paid out.

UNLAWFUL ELEMENTS IN INSURANCE CONTRACT
There are 3 major elements in the insurance contract that makes it unlawful in Islam namely gharar (uncertainty), maysir (gambling), and riba (usury). Firstly, the element of gharar exists in the insurance contract through the policy of the insurance itself whereby subject matters in the contract which are goods and price are uncertain. In the insurance contract, goods can be regards as protection or coverage while its price is the premium paid by the insured. Since the actual value or amount of both goods and price are conditional upon the occurrence of the peril or hazard which is cannot be ascertained, thus the uncertainty of what the insured is buying or paying for is rejected in Islam. If no calamity happen to the insured, therefore he or she will receives nothing while if there is loss occurred upon the insured, then he or she will gets compensation in varying amounts. The situation above exhibits the existence of element of gharar in insurance contract which is prohibited in Islamic law because it may affect parties’ equal bargaining power. In addition, parties of the contract cannot make informed and correct decision and directly may affect their consent to contract. It is proven in Quran, “squander not your property amongst yourself unjustly except it be a trade among you by mutual consent” (4:29).

Secondly, the existence of riba element in the insurance contract can be noticed through investment of insurance fund in interest-based activities and the money paid to the insured is from riba. For instance the insurance company might invest the insurance fund in Conventional Bank that is clearly...
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