5 Most Fundamental Differences between Sharia and Conventional Insurance

Sharia insurance is increasingly being offered by well-known companies in Indonesia. This is the right choice when people want to prepare themselves to face dangerous risks and according to Islamic religious law. Some of you must not really understand sharia insurance products. To make it clearer, see the brief description below about the differences between Islamic and conventional insurance.

Conventional insurance is a protection service that uses the principle of buying and selling risks. Meanwhile, the notion of sharia insurance is a protection service that divides the risk among customers.

Do you still not understand? Calm down, this is the difference between Islamic and conventional insurance in full.

Differences between Sharia and Conventional Insurance

Agreement

Sharia insurance uses the basis of a takaful contract which means helping each other. When one of the customers experiences a disaster, other participants will help the problem with social funds (tabarru' funds).

Conventional insurance uses the basis of the tabaduli contract which means buying and selling. During the contract there must be clarity such as seller, buyer, price, object being traded and consent qabul. The customer and the insurance company must mutually agree and understand the transactions that occur.

Basic principles

Sharia insurance applies the concept of risk coverage between participants and insurance companies (risk sharing). Customers help each other and help each other. Fundraising is managed by dividing the risks that occur between the insurance participants themselves and the company.

Conventional insurance applies the concept of fully transferring the risk from the participant to the insurance company (risk transfer). That means, insurance will bear all risks on behalf of the insured, starting from health, assets and life. Of course there are terms and conditions that apply between the two parties.

Fund Control

The next difference between sharia and conventional insurance is in terms of fund supervision.

During the contract, sharia insurance involves a third party called the Sharia Supervisory Board (DPS). The DPS task is to oversee the company's transaction process and ensure that it adheres to sharia principles. The DPS has responsibility to the MUI (Indonesian Ulema Council).

On the other hand, conventional insurance carries out company transactions without a special supervisory body. However, that does not mean they are free to do anything. Every insurance company that is registered and has official status is required to comply with OJK (Financial Services Authority) regulations.

Management and Ownership of Funds

The sharia insurance company acts as a fund manager and has no rights at all. Funds are owned by all insurance participants with the principle of helping each other when a customer experiences a risk of loss.

These funds are managed in such a way and as transparently as possible for the benefit of all insurance participants or customers.

During fund management, it is definitely not permissible to use objects that contain ambiguity/obscurity (syubhat). Both in nature, law and facts. Investment instruments are selected according to Islamic law and must be halal.

Conventional insurance companies implement a system for customers to pay premiums the same as buying and selling contracts in general. The funds will be managed in accordance with the agreement. For example, partially diverted to investment and costs.

It can also, according to other considerations, adjust the type of insurance product chosen by the customer in order to obtain maximum benefits.

Scorched Fund

Forfeited funds are the terms used when the insurance period has ended and the customer does not claim. For example, property insurance funds are forfeited when the policy period ends.

Sharia insurance does not apply forfeited funds to customers. The funds can still be taken by each participant, although there is a small portion of the funds that is given as tabarru. If someone is no longer able to continue sharia insurance, then the funds can be fully withdrawn according to what they have paid to the company.

Meanwhile, in conventional insurance, customers who are unable to pay ongoing premiums, the policy period ends and several other provisions cause the funds to be forfeited.

Those are the five differences between Islamic and conventional insurance. Hope this helps you understand a little more.