People have used insurance in the past to protect against impact of damages and risks.
In the absence of the social insurance, which Islamic countries shoulder to counter the effect and impact of damage to a nation and its assets, and as the majority of countries relinquished their responsibilities in reinforcing cooperation between their people, there grew the need to look for an alternative that guarantees to protect against damage and loss. This alternative is insurance companies operating in Islamic countries, similar to those commercial insurance companies operating in western countries.
Since the nature of transactions practiced within non-Islamic commercial insurance companies do not comply with provisions of Islamic shariah (and often insure establishments and companies that practice types of business not in compliance with shariah provisions), it became essential to look for an Islamic alternative, one that adopted cooperative insurance principles in its business transactions. Islamic insurance is known as “a collective insurance contract” by virtue of the fact that every contributor pays a specific amount of money as a donation for the purpose of indemnifying other contributions on the basis of solidarity and takaful.
Insurance operations are managed by a specialized company on basis of proxy wakala against a pre-determined charge. The subject of the contract is the commitment by all those insured to bear the risk sustained by another contributor. Thus, it is a contractual relationship based on solidarity and takaful to spread risk.
The role of insurance companies in the Islamic insurance system is to manage insurance operations by way of underwriting and execution since this is beyond the policy holder’s capabilities due to the large number of contributors. The company enters into agreement with the contributors by which it collects insurance premiums and pays incurred indemnity to those who have sustained damages in accordance with the regulations, principles and criteria dedicated for the purpose, in addition to all other operations which are required within the insurance industry. All these duties are performed in its capacity as a proxy wakeel against a predetermined charge. The company promises, in the name, and interest of the contributors, to either indemnify against a great portion of damages and losses sustained or indemnify it totally.
As for insurance premiums which are collected from contributors, it is usually enough to cover operational costs, pay incurred indemnity amounts or allot to all types of technical reserve amounts.
For the purpose of determining the amount of insurance premiums, formal statistical principles are applied for each type of cover. Should the premiums not be enough to meet the liabilities, the deficit will be covered by the shareholders on the basis of al qardh al hasan or “Good Loan,” and if the company has a reserve balance as a result of insurance premiums profit surplus, the deficit then will be met by that surplus.
Jihad Feitrouni is the general manager of Dubai Islamic Insurance & Reinsurance
