Conventional insurance deals with the making of investments which can be refunded to the policyholder in case he/ she incurs a risk as well as generates profits which are usually kept by the company. On the other hand, Takaful insurance works with the concept of mutual co-operation and shared contributions whereby the company does not charge any interest on its members but provides protection to its members in terms of pooled compensation in case of risk. This paper discusses the differences which exist between the two insurance companies based on their principles, terminologies, mechanisms, and financial statements.
Indemnity is one of the principles of conventional insurance which requires the insurer to compensate the insured to his/her original state before the occurrence of a risk. This principle does not allow the insured to benefit in any way from the insurer since the former is usually expected to provide accurate information about the loss. This principle, therefore, holds that the insured should be compensated as per the limit of his/her loss and not more than that. Another principle of conventional insurance is the insurable interest. According to this principle, the insured is required to have an insurable interest which involves the act of possessing, owning or having a direct relationship towards something. This principle is usually useful for the policyholder since it determines whether the insured is in a position to make a claim or not. Therefore, this principle requires the insured to know the exact sources of the insurable interest in relation to the quality of the due as well as that of the article (Sabtu, 2010).
The third principle of conventional insurance is the principle of ultimate faith. It requires the insured to make a list of all his/her belongings without lying since the failure to do that will result in the cancellation of the contract. This will, therefore, imply that the insured will not make any claim against the incurred loss. Contrastingly, Takaful insurance has its own principles. Firstly, the policyholders are supposed to work together so as to achieve a common goal. This principle is important since it provides an avenue for the members of Takaful to share ideas about how some services can be improved by the company as well as learn more about the policy of the insurance. The second principle of Takaful is that every policyholder usually pays a certain amount of subscription to the insurer as an act of assisting those who are in need. Generally, this is important because the assistance helps to keep other members on the check with the insurance; hence, there is usually no withdrawal of any member of the company. Another principle of Takaful involves sharing losses and liabilities in the community so that no member is disadvantaged because of the issues related to profit or loss gaining. In addition, another principle of Takaful is that the company tries to eliminate the uncertainty in relation to the process of compensation and the subscription from the members.
“Insurance” is the term which is usually used in conventional insurance. Insurance refers to the process of being compensated in case of an uncertainty in the future. Another term of conventional insurance is “the premium” which refers to the amount paid for an insurance policy. “The deductible” is the amount which is usually deducted monthly by the company for its maintenance purpose. Moreover, the term “policy” in conventional insurance concerns the terms and conditions which help in the process of governing the insurance company. On the other hand, “Takaful policy” is one of the terminologies of the Takaful insurance which refers to the agreement between the participants and the operator for the general purpose of the company. Another term which is commonly used in Takaful insurance is “assurance” which relates to the act of sharing a risk which comes with the mutual understanding among the members and its guarantee. A “contribution” is another term which refers to the amount of money usually paid by members to the Takaful Protection Pool in order to cater for mutual protection. In addition, by the term “excess” Takaful refers to the amount of money which is paid to the members for each claim. “Sum covered” is used by Takaful to denote the maximum amount which the Risk Fund pays to any claim (Zayan Takaful, 2016).
Conventional insurance works on a mechanism which separates the ownership from the management of the company. The laws and regulations which govern this type of insurance company are man-made and mostly set by the state rather than the company. Also, conventional insurance processes the premiums of the insured in exchange for compensation against any loss which may be incurred. Additionally, the company aims at generating profits for its members in the following ways: risk bearing, managing speed, distribution of services, aggregating money, and information processing (Al-Salih, 2014). On the contrary, the Takaful insurance uses the mechanism of a flow chart. Firstly, premiums are paid to the Takaful Fund which is managed by the insurer whereby they are processed and then transferred to the next level as net investment income, claims payment, expenses, and reserves. After the claims payments, expenses and reserves are processed and move to the next level where they form the surplus. At this point, the surplus is shared equally by the policyholder and shareholder.
The financial statements of Takaful and conventional insurance indicate that the convectional insurance performs better than that of Takaful with regard to profitability and risk measurement. However, considering the premium to surplus ratio, the Takaful insurance performs better than the conventional insurance due to the fact that Takaful insurance has the underwriting practices which help to prevent information asymmetry. Moreover, the macro-economic variables do not have an impact on the Takaful insurance according to the net premiums. However, net investments income indicate a statistical significance in both insurance companies. The analysis of financial statements for the two insurance companies was based on the financial ratios, macro-economic variables known as the Gross Domestic Products, Consumer Price Index as well as the Treasury Bill Rate (Abdou, 2014).
In conclusion, there is a huge difference between the conventional insurance companies and Takaful insurance. This is evident throughout the four parts which make up this essay. Firstly, the principles of the two companies are far much different because those of Takaful Insurance advocate for sharing profits and liabilities among the members under mutual understanding. However, those of a conventional company advocate for the compensation of individual members according to the loss which they may incur. Furthermore, terminologies also reveal the difference between the two companies since some of the terms used by conventional insurance include insurance, premiums, the deductible, and policy. On the contrary, those which are used by Takaful insurance comprise Takaful policy, assurance, the excess, contribution, and sum covered. Under the mechanism of operation of both companies, conventional company works on a platform whereby the laws which govern the company are set by the state rather than the company itself. On the other hand, the Takaful insurance follows the mechanism which helps to generate a common surplus which is then shared among the members as well as the insurer. Furthermore, based on the financial statements of the two companies, convectional insurance performs better than Takaful insurance in terms of profitability and measurement while Takaful does better in premiums to surplus ratio.