The Differences between Conventional Insurance & Sharia Insurance

Conventional insurance is an insurance product based on the principle of buying and selling risk. How customers are charged a premium in exchange for protection or protection against risks that may occur, both in the form of health and life risks.

Sharia insurance is an attempt to protect and help each other among a number of people through investment in the form of assets and/or tabarru? which provides a return pattern for facing certain risks through sharia-compliant contracts. In simple terms, sharia insurance is known as risk sharing in which each participant grants a certain amount of funds to help other participants who are stricken by a disaster. The funds are collected in one account called Tabbaru? Tabbaru Fund?.

So,Here are some of the Differences between Conventional Insurance & Sharia Insurance

1. Basic Principles

• Insurance based on sharia principles is an effort to help each other (ta'awuni) and protect (takaful) among participants through the establishment of a collection of funds (tabarru' funds) which are managed according to sharia principles to deal with certain risks.
• The principle of conventional insurance is that the risk coverage that occurs will transfer the risk from the customer to the company which is full (risk transfer). This means that the insurance company bears the customer's risk based on records and agreements agreed by both parties.

2. Agreement System

• Agreement System in Sharia Insurance is an agreement in an agreement between two or more parties to perform and/or not perform certain laws. The contract is a tabarru' contract as with the aim of benevolence and helping each other, not solely for commercial purposes (non-profit oriented).
• The contract for conventional insurance is the tabaduli contract. The contract is in the form of a buying and selling system with clarity regarding the buyer, seller, object being traded, price, and agreement by both parties on the understanding and approval of the transaction.

3. Ownership Of Funds

• Islamic insurance has a system of ownership of funds whose ownership is collective or shared. Therefore, if a customer experiences a risk, other customers will provide compensation through this pool of funds.
• Conventional insurance has a system of ownership of funds whose ownership is based on premium payments from customers. Customer protection against these risks is purely based on premiums paid and agreement by both parties.

4. Fund Management

• The way the management of Islamic insurance funds works is that the funds belong to all customers while the insurance company is only managing funds without ownership rights. The funds will be managed for the benefit of insurance participants in a transparent manner.
• The way conventional insurance fund management works is that the funds or premiums paid by the customer will be managed in accordance with the agreement between the customer and the insurance company.

5. Fund Supervision

• For sharia insurance, fund supervision involves a third party as supervisor of insurance activities, namely the Sharia Supervisory Board (DPS). The DPS is responsible to the Indonesian Ulema Council (MUI) to oversee the transaction process to ensure that transactions occur based on sharia principles.
• For conventional insurance, there is no special oversight body for the company's transaction activities with customers. However, all legal and registered insurance companies operate under the regulations of the Financial Services Authority

6. Scorched Funds

• In sharia insurance, forfeited funds are not enforced, so that customers can fully retrieve the funds paid.
• In conventional insurance, forfeited funds apply when the policy period ends or the customer cannot pay premiums or other provisions.

7. Surplus Underwriting

• Surplus underwiring is funds given to customers if there is excess from social accounts, including from other income after deducting claims/compensation payments and debts if any.
• Surplus funds can be kept as a reserve fund and/or distributed to participants & companies as long as the participants agree.

8. Payment Of Policy Claims

• In sharia insurance, payment of customer claims will be made by disbursing joint savings funds.
• In conventional insurance, payment of customer claims will be made by using company funds in accordance with the applicable policy.

9. Police Holder

• Sharia insurance policies can be held and registered for one family, so that the whole family can benefit from the policy.
• Conventional insurance policies can only be held by one person.

Based on the article, it can be understood the difference between Islamic insurance and conventional insurance. The selection of financial instruments is chosen based on the beliefs, needs and abilities of each customer in order to achieve the objectives of the financial plan.