Conventional vs Takaful Insurance Companies in UAE - Essay Example

CONVENTIONAL VS. TAKEFUL INSURANCE COMPANIES IN UAE Student’s name Course & code Professor’s name University City Date Introduction The current contemporary society, Human beings are exposed to some risks and disasters such as loss of life, loss and damage of assets due to fire, accidents and theft . One possible approach of minimizing the listed risks is by purchasing the insurance covers. In Islamic states such as United Arab Emirates, the concept insurance is presumed to be a product offered for mutual assistance. As such, the basic concept of insurance is to create a mutual agreement between two parties to protect the clients from unexpected risks that could lead to financial losses. It is in this context that different types of insurances cover exist in the contemporary society. Basically, the insurance companies exists using different platforms that tend to persuade a large number of people to purchase their cover. In this context, the insurance companies tend to encourage people to purchase the cover as a means of high return activities in case the covered risks are likely to arise. As such, this retrospect paper seeks to identify the existing differences between conventional insurance companies and Islamic insurance companies. Conventional and Takaful insurance differences are showcased based on their operative platform by their principles, the modes of their mechanism and their financial statement situations. Lastly, the paper gives a conclusion analysis indicating which type of the insurance cover is most likely to meet the risk demand of the people within United Arabs Emirates. Principles Both the conventional and Takaful insurance companies pose fundamental differences when it comes to their functioning principles. The principle of Takaful insurance company adheres to the contract of tactful implying a mutual help. In this context, the consumers of Takaful insurance company are willing to assist the other customers that are facing difficulties. The conventional insurance differs from Takaful insurance whereby conventional insurance contract is tadabuli by buying and selling between customers and company. Funds generated from Takaful insurance companies through premiums are advocated towards mudaraba implying that the funds profits are to be shared. Contrarily, the conventional insurance the investments made in any sector are perceived to be an interest made for the benefit of the company. Additionally, the Takaful insurance companies collected investments are meant to be shared equally between the company and the clients, hence the principle of sharing while in conventional insurance company the collected benefits are meant for the company and if clients fail to present claims, the customer fails to obtain any benefit from the company. The resource collected in Takaful insurance companies are presumed to be social fund thus known as tabarru. All participants are entitled to social funds during diikhlaskan crisis. In this context, Takaful insurance principle adheres towards mutual help for the clients that have already been affected with some of the listed risks within Takaful insurance. Contrarily, the conventional insurance policy, any funds needed to support the clients is basically withdrawn from the company account. It is the principle of Takaful insurance companies to treat the premiums funds collected from its clients as the customer funds. In this concept, the insurance company does act as a fiduciary for assistance in managing the customer’s funds. Contrarily to the Takaful insurance companies, the conventional company’s premiums are presumed to be the company resources and it is the insurance company responsibility to fully authorize on how to use the available resources as a means of fund management. Mechanisms Takaful insurance companies advocate for solidarity, corporation and joint guarantee across its clients during a disaster loss. The Takaful insurance agreement basically implies that the registered individual needs to collectively share responsibility of the encountered loss inflicted upon any of them based on the funds they donated collectively. Contrarily, the conventional policy insurance companies, the encountered losses are indemnified by the organizations based on the rules and the regulations of the company insurance. In this context, the conventional insurance only advocates for subrogation and the doctrine of the proximate cause of the losses. Takaful insurance company adheres to the concept of mutual indemnity. As such, the company policy focuses on provision of insurance through protection and compensation to the involved parties that might encounter and suffer from the shortcomings from the disasters. On the other hand, the conventional insurance principle adheres to the transfer of the risks from the client to the company. In this context, the conventional policy principle works as a reduction of the risk from the insurer and transfer the risk to the insurer. The approach basically offers a restoration of the economic losses encountered by the insured. As such, the conventional insurance risks are transferred from the clients to the company. Islamic insurance differs from conventional insurance whereby the company operations are based into mutual co-operation basis while conventional insurance operations are based on risk assumptions. Takaful mutual co-operation basis implies that the company is not the major insuring board but it is its applicant members that are entitled to insure each other purposefully for the mutual benefits across the member. In this context, it can be argued that Takaful insurance provides a platform for a social program through collection of the funds to aid its clients in the future. Conventional and Takaful insurance companies are easily differentiated based on the nature of the contracts issued. Firstly, conventional insurance is less likely to experiences additional risks in comparison to the Takaful insurance (Abdou 2014). The conventional insurance companies have the tendency of investing large amounts of resources into their fixed income securities in the company balance sheet purposefully to eliminate the expected risks and the differences associated with the equity. Contrarily, the Islamic insurance companies under the Shariah norms are inhibited to engage into interest activities hence ruling out the possibilities of Takaful insurance in investing through fixed income securities. Secondly, the conventional insurance applies the principle of the exchange of the interest. The principle is adhered to whereby the insured purchases the protection based on the available premiums and the insurer offers protection against the client insured risks. Contrarily to the approach, the Takaful insurance companies are unable to conclude the principle of exchange of the interest simply because the Islamic law does not recommend for buy and sell contract. Lastly, Takaful insurance company guarantee premium refunds to its insurance holders once the client decides to voluntarily terminate the contract irrespective of the policy terms and conditions while in conventional insurance, clients terminating their insurance are assumed to forfeit their premiums based on the termination policy in place. Terminologies Used Gharar Basically, the Muslims use the term Gharar to describe risks. In business, Gharar simply implies that an agreement might be issued in such a way that payment is given in uncertain events outcome (Nordin 2014). Both the conventional and Takaful insurance companies used a different approach regarding Gharar. In Takaful insurance, Gharar is held invalid by adhering to payments upon the happening of a specified event. In Conventional insurance, Gharar is upheld whereby through risk taking and uncertainty. Generally, in conventional insurance, Gharar exists through contractual period, based on the outcome and the results of the exchange made. Maisir In insurance, maisir simply implies that through risk taking, the insured has the possibility of getting huge amount of resource without an equivalent amount of the input given (Hussain 2011). In this context, maisir is basically avoided in Takaful insurance due to an almost resemblance to Gharar. Contrarily, the conventional insurance platform is embedded with maisir through a gambling approach whereby the insured places a bet on the expected loss to be encountered and the similar strategy is applicable towards the insurer. As such, it can be argued that maisir in conventional insurance pose the possibility of its client to acquire wealth or luck at the cost of others. Profit Distribution In profit distribution, Takaful insurance greatly advocates that every policyholders of the insurance has the right to be informed on how profits made from different investments are split across its participants while in conventional insurance, the policyholders are not adhered to the first rule for profit distribution implying that the profit distribution totally depend on the company management (IIBI 2016) Investment of Funds Investments of funds greatly showcase distinction in conventional insurance and the Takaful insurance. For insurance investments, the conventional insurer’s policy invests on assets that are strictly forbidden by the shariah such as in the field of gambling, alcohol or pork. Contrarily, Takaful investment funds operate in free interest avenues whereby the insurance and the companies tend to observe the expected norms of the Hale-o-Haram. Riba Literature review indicates that the Islamic philosophy fails to advocate for payment and collection of interest (Stucke 2013). In this context, riba practices are condemned by the religious billiefs from the Quran and Sunnah hence the reason as to why the Islamic economy fails to advocate for the reward of the money. In this context, the conventional insurances places insurance resources to riba through interest generating platforms like issuing bonds and loans. Financial Statements This analytic paper seeks to provide an in depth understanding of the differences in conventional and Takaful insurances financial statements across different companies in United Arab Emirates. The findings are solely based on the data provided by the institutions on their financial statements. Large Companies Encountering Losses Research findings indicate that at least 9 out of 21 conventional companies have recorded a total loss of up to AED 673 million in 2015. Additionally, the net profit loss of the similar companies in the year 2014 amounted to AED 304 million. For the Takaful companies, 4 out of the 8 companies showcased a total net loss of AED 215 million in the year end 2015, while the 4 companies managed to record a profit worthy AED 29 million (Taha 2016) Lower Profits Findings indicate that 12 out of the identified 21 conventional insurance companies managed to record a net profit of AED 697 million in the year ending 2015 while in the year 2014, the companies managed to record a net profit of AED 1,015 million. In comparison to the conventional insurance companies, 4 out of 8 Takaful insurance companies manage to raise a profit amounting to AED 67 million at the end of 2015, while in 2014 the Takaful companies managed to amount its profit up to AED 74 million (Taha 2016) Reduction Investments and other Income Reduction investments and other income between conventional companies and Takaful companies showcase a sharp decreased in 2015 in comparison to the year 2014. 16 out of the 21 conventional companies indicate a sharp decrease of I & OI year on year. In 2015 the convention I&OI investments managed to generate AED 179 million while in the year 2014, the similar companies managed to pose a record of AED 699 million in I & OI. Regarding Takaful insurance companies, 6 out of the 8 companies managed to generate only AED 39 million while in 2014, similar companies managed to pose a record of up to AED 110 million (Taha 2016) Findings Analysis Net Profits Comparing to 2014, the total net profit of both the conventional and Takaful companies declined significantly whereby Takaful companies showcased a decrease of up to 97% while conventional companies showcased 242% net profit loss. In this context 9 conventional companies and 4 Takaful companies indicated negative net profit as per the year 2015 (Taha 2016) Equity 4 conventional and 6 Takaful insurance companies showcase the higher risk of equity simply because the companies are operating the share capital level. Assessing the value of the equity based on the assets percentage, conventional companies outshine the Takaful companies with 39% while Takaful companies indicate a 29% outcome (Janjua 2015) Assets against Liabilities Generally, in 2015 29 companies both from Takaful and conventional indicated an AED 42 billion of assets against liabilities that posed AED 26 billion. In comparison to the year 2014, the companies managed to showcase an improving assets of up to 5.1 % while the liabilities improved by 12 %. Contrarily, Takaful Company’s performance differed with those from conventional companies. Based on average variation sector, the Takaful insurance companies showcased a 7% decrease of equity against liabilities while the conventional companies recorded a 5.6% decrease of equity against the liabilities (Central Bank of the U.A.E 2015) Total Gross Premium Conventional insurance companies total gross premium in the year 2014 were AED 13 billion while for the Takaful insurance companies was at 2 billion in the similar year. For 2015, Conventional insurance companies total gross premium rose to AED 14 billion while for Takaful insurance companies the outcome was still at AED 2 billion (Taha 2016) Conclusion From the above discussions, varied conclusion can be position between Conventional and Takaful insurance across the contemporary society. Basically, it can be argued that companies adhering to the principles of Takaful insurance are geared towards countering poverty and deprivations. In this context, it can be argued that Takaful tends to deal with poverty across the society no matter how its techniques seem to be backdated. As such, a further new strategies and well implementation of Takaful policies, Takaful insurance policies are most likely to spearhead the United Arabs Emirates towards societal regenerations purposefully to alleviate poverty or even its elimination in the coming years. As such, Takaful insurances have the ability to pave way for further sustainable economic development in United Arabs Emirates. In comparison to Takaful insurance, the conventional insurance indicates different arguments. Basically, the conventional insurances companies are showcased to motivate by the desire for profit making hence interested in financial benefits. In this context, it can be argued that convention insurance companies are most likely to be subjected to exploitative practices to its clients. Convention insurance company can be presumed to be exploitative especially if the company tends to charge high premium rates especially if the chances of monopolistic environment are likely to arise. Chances of the monopolistic environment pose a working environment for convention insurance companies to over price some of its services. References List Abdou, H 2014, ‘A Comparative Study of Takaful and Conventional Insurance’. Insurance Markets and Companies: Analysis and Actuarial Computations, vol. 4, no. 1, p. 23 Central Bank of the U.A.E 2015, ‘Financial Sustainability Report’. Available at http://www.centralbank.ae/pdf/reports/FinancialStabilityReport2014.pdf. [Accessed on 2nd December 2016] Husain, M 2011, ‘Conceptual and Operational differences between General Takaful and Conventional Insurance.’ Australian Journal of Business and Management Research, vo. 1, no. 8, p. 25. IIBI 2016, ‘Takaful Islamic Insurance’. Available at http://www.islamic-banking.com/how_does_takaful_work.aspx. [Accessed on 2nd December 2016] Janjua, P 2015, ‘A Comparative Analysis of Economic Efficiency of Conventional and Islamic Insurance in U.A.E’. U.A.E Business Review. Nordin, N 2014, ‘Contracting with Gharar (Uncertainty) in Forward Contract: What does Islam say?’ Asian Journals of Social Sciences, vol. 10, no, 5, p. 37. Stucke, M 2013, ‘Is Competition always good?’ Journal of Antitrust Enforcement, vol. 1, no. 1, p. 163. Taha 2016, ‘Financial Analysis of the Reported Earnings in December 2015’. UAE National Insurance and Takaful Companies. Available at http://www.eiauae.com/files/pdf/42fe0edba0ad2456b16280cffeb8d46e.pdf. [Accessed on 2nd December 2016] Read More