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COMPARATIVE ANALYSIS BETWEEN TAKAFUL AND CONVENTIONAL INSURANCE
Abdurasulov Behzodbek -
Doctoral student of Research Center
“Scientific Bases
and Issues of the
development of Ecenonomy of Uzbekistan
”
Insurance is a way of safeguarding oneself against risks and uncertainties. It provides
financial security in case of unexpected events. Insurance has been around for centuries, and
over the years, it has evolved to cater to different markets and segments. In recent years, a
new type of insurance has emerged, called Takaful Insurance, which is gaining popularity
among Muslims. This article aims to provide a comparative analysis between Takaful
Insurance and Conventional Insurance.
Takaful insurance and conventional insurance are two types of insurance that differ in
their underlying principles and operations. While conventional insurance has been around for
centuries, takaful insurance is a relatively new concept that is gaining popularity in Muslim-
majority countries. In this article, we will compare takaful insurance and conventional
insurance in terms of their principles, operations, and benefits.
Takaful Insurance, also known as Islamic insurance, is a cooperative system based on
the principles of mutual assistance and solidarity. It is a Shariah-compliant insurance system
that follows Islamic laws and ethics. Takaful operates on the principle of pooling resources
and sharing risks among participants. The policyholders contribute to a common fund, which
is managed by a Takaful operator. If a participant suffers a loss, the Takaful operator pays out
from the common fund.
Conventional insurance is a type of insurance where the policyholder pays a premium to
the insurance company in exchange for coverage. The insurance company invests the
premiums in various investment vehicles, such as stocks, bonds, and mutual funds, to
generate profits. If the policyholder makes a claim, the insurance company pays out from its
funds, which come from the premiums paid by all policyholders.
Conventional insurance is based on the principles of risk transfer and risk sharing. The
insurance company assumes the risk of an insured event occurring and charges a premium in
exchange for this assumption of risk. In case the insured event does occur, the insurance
company pays out a predetermined amount of compensation to the policyholder.
Takaful insurance, on the other hand, is based on the principles of mutual cooperation
and shared responsibility. Takaful is derived from the Arabic word "takaful" which means
"mutual guarantee". In takaful insurance, policyholders pool their resources together to help
each other in times of need. The takaful operator acts as a facilitator and manages the pool of
funds. Any surplus that is generated is shared among the policyholders as per a pre-agreed
profit-sharing ratio.
Conventional insurance companies invest the premiums collected from policyholders in
various financial instruments such as stocks, bonds, and real estate. The returns generated
from these investments are used to cover the claims made by policyholders and to generate
profits for the company.
In contrast, takaful insurance companies invest the contributions made by policyholders
in Shariah-compliant investments such as Islamic bonds (sukuk), real estate, and Islamic
stocks (Shariah-compliant companies). The returns generated from these investments are
used to pay out claims and to generate profits. Shariah-compliant investments follow the
principles of Islamic finance which prohibit interest (riba), speculation (maisir), and
investment in businesses that deal with prohibited products or services (haram).
The two differs from each ther by means of:
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Ownership Structure. The ownership structure of takaful insurance is based on the
principles of mutual cooperation and assistance, where policyholders collectively share the
risks and profits. The policyholders are the owners of the takaful fund, and the surplus funds
are distributed among them as per the profit-sharing ratio. In contrast, conventional
insurance is based on the shareholder ownership model, where the insurer is owned by
shareholders who invest in the company to earn profits.
Shariah Compliance. Takaful insurance is designed to be Shariah compliant, where the
operations and investments are in accordance with Islamic principles. The investment of
takaful funds is restricted to Shariah-compliant investments, such as real estate, equities, and
commodities, whereas conventional insurance companies have no such restrictions.
Risk-sharing. Takaful insurance operates on the principles of mutual cooperation and
risk-sharing, where the policyholders collectively bear the risks. The premiums paid by the
policyholders are pooled in a fund, and claims are paid out of this fund. In contrast,
conventional insurance is based on risk transfer, where the insured transfers the risk to the
insurer in exchange for a premium.
Transparency. Takaful insurance companies are required to disclose their operations
and financial statements to policyholders, and the investment of funds is subject to external
Shariah audits to ensure compliance with Islamic principles. Conventional insurance
companies also disclose their financial statements, but they are not subject to external Shariah
audits.
Takaful also has a different fee structure compared to conventional insurance. Takaful
operators might impose a ‘wakalah’ charge depending on the product and model. The wakalah
charge is similar to a service fee. In contrast, conventional insurance typically charges a fixed
commission fee of 2%
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There are also studies that compare the performance of Takaful and conventional
insurance firms. One such study evaluated the performance of Takaful vs. conventional
insurance firms with focus on the standard structure of production as a two-stage process,
that is, operations and profitability
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. Another study examined the performance levels of
Takaful and conventional insurance in emerging markets and reported that conventional
insurers perform better than Takaful
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.
So we can conclude all above by mentioning pros and cons of takaful insurance. Takaful
can be more expensive than conventional insurance.Takaful is a relatively new industry, and
there is less information available about it compared to conventional insurance. Takaful is not
as widely available as conventional insurance, especially in non-Muslim countries
But Takaful is a growing industry, with many new players entering the market. This
means that there is more competition, which can lead to better products and services for
consumers.
It is a cooperative system where members contribute money into a pool system to
guarantee each other against loss or damage. This system is considered more ethical and fair
than conventional insurance
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.Takaful is compliant with Sharia law. It is void of any elements
of gharar, maisir, or riba
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. Takaful is open to everyone, regardless of their religion or beliefs.
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https://ringgitplus.com/en/blog/Insurance/Takaful-vs-Conventional-Insurance-Whats-the-Difference.html
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Tarifa Almulhim. “Analysis of Takaful vs. Conventional insurance firms’ efficiency: Two
-
stage DEA of Saudi Arabia’s
insurance market”, Cogent Business and Management, Volume 6, 2019
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Abdou, H., Ali, K. & Lister, R. (2014) ‘A comparative study of Takaful and conventional insurance: empirical evidence
from the Malaysian market’, Insurance Markets and Companies: Analyses and Actuarial Computations, 4 (1), pp. 23
-35.
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https://www.investopedia.com/terms/t/takaful.asp
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https://www.policystreet.com/articles/conventional-insurance-vs-takaful
