Takaful Insurance; All you need to know (2)

Continuation from my previous post....

Takaful insurance and it operations is based on some underlying principles that serves as the bedrock on which it existence lies;

• It must operate according to Islamic co-operative principles.
• Policyholders come together for a common good.
• Profit/losses are divided and liabilities spread according to the community pooling system.
• Uncertainty is eliminated in respect of contribution and compensation.
• Each individual pays a part of the contribution to help those that need assistance.
• The company may invest its funds only on a profit and loss sharing basis, as approved by the Sharia.

Taking a look at key elements in the operations of Insurance business and how it impacts on Takaful Insurance;

Underwriting

Insurance underwriting is the process of evaluating the risks of insuring a particular person or asset and using that information to set premium pricing for the various policies.

Underwriting as a management tool is applicable under Takaful Insurance. Its application is for the purpose of ascertaining and safeguarding the equity of contribution, at the same time determine a fair system of  contribution by the participants. 

If it is revealed during the underwriting process that a participant would pose an undue strain to the Takaful fund due to his poor health, or his property is relatively hazardous than his fellow participant’s, then he may have to agree to increasing his contribution to the level assumed to be fairly adequate in corresponding with the risk exposure covered by the Takaful Fund.

Sales System

The Agency system as a medium of sales universally practiced by conventional insurers cannot be applied to Takaful Insurance. This is based on the fact that such practice would not be in line with the contract of Takaful Insurance as outlined earlier.

Under the convention of an agency system, a certain proportion will be deducted from the Takaful contribution (premium) as remuneration to agent. On the contrary, under the contract of Takaful, the gross Takaful contribution paid by the participant shall be the amount stated in the agreement, which shall be the basis of the profit-sharing contract. 

Therefore, should this system be adopted for Takaful, the actual amount of Takaful contribution (which makes up the Capital and Investment Profit) received by the Takaful Insurance company  would in fact be less from the figure stated in the agreement, as a certain sum from the gross amount has been deducted to remunerate the agent. 

To be continue......