Insurable Risk

The loss must be accidental and significant enough to be considered a hardship to the insured.

The loss must be accidental and significant enough to be considered a hardship to the insured.

INSURABLE RISK
The loss must also be part of a similar group of risks, so as to make the loss foreseeable.
The loss must also be part of a similar group of risks, so as to make the loss foreseeable.
The possible loss must be plainly explained.
The possible loss must be plainly explained.

The loss must not occur at the same time as multiple others.
The loss must not occur at the same time as multiple others.
DEFINITION:
A risk that conforms to the following criteria:
DEFINITION:
A risk that conforms to the following criteria:

The insurer must be able to compute the probability of a loss and a realistic cost for the insurance.
The insurer must be able to compute the probability of a loss and a realistic cost for the insurance.

THE LOSS MUST BE DUE TO CHANCE.
Regular recurring losses such as shoplifting in a supermarket are built into the price and would not be insurable as it is not fortuitous.
THE LOSS MUST BE DUE TO CHANCE.
Regular recurring losses such as shoplifting in a supermarket are built into the price and would not be insurable as it is not fortuitous.
THE LOSS MUST BE DEFINITE AND MEASURABLE.
This means that there must be bills to establish "proof of loss," not just casual references.
THE LOSS MUST BE DEFINITE AND MEASURABLE.
This means that there must be bills to establish "proof of loss," not just casual references.

THE LOSS EXPOSURES MUST BE LARGE.
To avoid adverse selection, there must be enough exposure to losses for the frequency to be predictable and to be grouped for the purpose of establishing rates.
THE LOSS EXPOSURES MUST BE LARGE.
To avoid adverse selection, there must be enough exposure to losses for the frequency to be predictable and to be grouped for the purpose of establishing rates.
THE LOSS MUST BE PREDICTABLE it must be of such a nature that its frequency and average severity can be readily determined to establish the required premium.
THE LOSS MUST BE PREDICTABLE it must be of such a nature that its frequency and average severity can be readily determined to establish the required premium.

ELEMENT OF INSURABLE RISK
ELEMENT OF INSURABLE RISK

THE LOSS EXPOSURES MUST BE RANDOMLY SELECTED.
Concentration of risks by area, age groups, occupations, economic status, etc., can lead to adverse selection.
THE LOSS EXPOSURES MUST BE RANDOMLY SELECTED.
Concentration of risks by area, age groups, occupations, economic status, etc., can lead to adverse selection.
THE LOSS CANNOT BE CATASTROPHIC. All individual losses are personal catastrophes. The reference here is to national or area disasters, such as floods, riots, wars, earthquakes, etc. These events will often have coverage amount limitations in the property and casualty insurance areas.
THE LOSS CANNOT BE CATASTROPHIC. All individual losses are personal catastrophes. The reference here is to national or area disasters, such as floods, riots, wars, earthquakes, etc. These events will often have coverage amount limitations in the property and casualty insurance areas.

DIFFERENCES BETWEEN INSURANCE AND TAKAFUL ITEM | PERTINENT ISSUES | INSURANCE | TAKAFUL | 1. | Essence of Intention | Intention is to create legal relation only | Intention is to create both spiritual and legal relationship. | 2. | Formalities | Bilateral contract | Unilateral contract for Tabarru’ and bilateral contract for Mudarbah and Wakalah. | 3. | Accounts Treatment | For General insurance the paid premium is credited into the General Insurance Account. In life the premium is credited into Life Insurance Account. | For General Tkaful the account is Tabarru’ means donation. For Family Takaful, there are two accounts, PA treated in line with the principles of Mdarabah, while PSA treated in line with the basis of Tabarru’. | 4. | Subject Matter | Subject matter must be Common Law justified. | Subject matter must be Shari’ah Justified. | 5 | Guarantee | The company provides the guarantee. | The Takaful Operator is only the Fund Manager. The Participant mutually guarantees each other. | 6 | Fund | The fund belong to the company though separation of the asset maintained between the shareholders and the policy holder. | The fund belong to the participant and managed by the Takaful Operator for a legimate consideration for the service rendered. | 7 | Payment of contribution/premium | Paid premium creates and obligation against Insurer on a sale and purchase contract. | Paid contribution (portion for Takaful charges are treated as donation (Tabarru’). | 8 | Forbidden Element | Insurance policy evolves of Gharar, Maysir and Riba | Islamic model is based on Islamic principls and free from any of the forbidden elements. | 9 | Religious Supervisory | No | Made mandatory by the Takaful Act 1984. | 10. | Profits | Profit is at the discreation of the Company. | Shared between the Participant and the Company. | 11 | Contract | An exchange contract (sale and purchase) between the Insurer and the Insured | A combination of Tabarru’ contract (donation) and agreement or profit sharing contract. | 12 | Indemnity | The company provides indemnity from the Company’s fund. | The indemnity is provided by the Takaful Fund. | 13 | Operational Principle | Not Shariah compliance. | Shariah compliance | 14 | Risk Treatement | Concept of risk transfer | Risk sharing concept among participant. | 15. | Taxation | Tax | Taxation and zakat | 16. | Benefits | Paid from fund legally owned by the company | Paid from the defined funds under joint indemnity borne by the parcipants. | 17 | Profits/Bonus | May offer bonus and profit in general terms only especially with profit participant policies | Specifies from the outset hoe the profits are ti be shared between the participant an d the company. | 18 | Responsibility of Policyholders/ Participant | Policy holders pay premium to Insurer. | Participants make contributions to the scheme. Participants mutually guarantee each other under the scheme. | 19 | Laibility of the Insurer/ Operator | Insurer is liable to pay the insurance benefits as promised from its assets (insurance funds and shareholders’ fund). | Takaful Operater acts as the administrator of the scheme and pay the Takaful benefits from the Takaful benefits from the Takaful funds.In the event of deficiency in the Takaful funds, operator will provide interest free loan to rectify the deficiency. | 20 | Investment of Fund | No restriction apart from those imposed for prudential reason. | Invested in Shari’ah compliant instruments. |

SHARI’AH RESOLUTION ON INSURANCE * Ijtihad is is used to determine whether the conventional insurance is permissible or not, due to it inexistence during the Prophet’s time. * Prohibited element in Insurance Practices:
i.Gharar
-means uncertainty -type: * Al-Gharar Al-Kathir: The excessive gharar that would render the contract invalid. * Al-Gharar al-Yasir:The trifling gharar that is tolarable and permissible. * Al- Gharar al-Mutawassit: The average gharar which falls between the two. ii.Riba -means “increase in” or “addition to” anything. -type: * Riba al-Duyun * Riba al-Qard where interest is agreed upon at time of contract. * Riba al-Jahilliyah: There increased levied on the borrower for late or failure to repay the repay the loan. * Riba al-Buyu’
i.Riba al-Fadl: The difference in weight, volume and quantity. ii.Riba al-Nasi’ah: The difference in time.

iii.Maysir -means getting something too easily or getting a profit without for it
-Maysir in Insurance Contract : * Insured could receive huge amount of money, without equivalent input. * Paying premium without getting any amout in return. * Insurer loses if there are too many claimants. * Premium collected exceeds the claims, Insurers could make huge profits.