When we talk about the role of underwriters in insurance industry, the essences of this is to manage pool of premium as effectively and profitably as they can. In this way we could say that they have to :
- assess the risk which people bring to the pool.
- decide whether accept the risk or how much to accept.
- determine the terms, conditions and scopes of cover to be offered.
- calculate suitable premium.
Then, what are the differences between conventional general insurance and Islamic general insurance underwriter? There is a fundamental role between them, i.e. in assessing risks, underwriter in Islamic general insurance (sharia underwriter) has to make sure that the risks to be covered must meet sharia compliance. Therefore, the sharia underwriters are responsible to assess and decide the acceptance or declination of risks with considering not only technically but also the first and the most important thing is meeting sharia compliance.
Sharia compliance means that the insurance object is not used for activities and/or transport for the illicit commodities including but not limited to :
- transaction that contains of gambling (maysir).
- transaction that contains of immoral acts such as pornography, porn acts and the like.
- illicit commodities (haram) such as narcotic, pork, dog, liquor, alcoholic drinks and descendant products.
- fictitious transaction (gharar).
- transaction that contains of injustice/exploitation (zulum).
- transaction that contains of interest (riba).
- transaction that contains of bribe (risywah).
as well as all activities related to, including process of business acquisition within internal of sharia general insurance company which must always keep sharia compliance.
Risk Assessment in Sharia Underwriting
- transaction that contains of gambling (maysir).
- transaction that contains of immoral acts such as pornography, porn acts and the like.
- illicit commodities (haram) such as narcotic, pork, dog, liquor, alcoholic drinks and descendant products.
- fictitious transaction (gharar).
- transaction that contains of injustice/exploitation (zulum).
- transaction that contains of interest (riba).
- transaction that contains of bribe (risywah).
as well as all activities related to, including process of business acquisition within internal of sharia general insurance company which must always keep sharia compliance.
Risk Assessment in Sharia Underwriting
In technical consideration, the sharia underwriter is similarly doing assessment of risk as in conventional. The essence of the task is that the underwriter has to evaluate the hazard associated with the risk which is being proposed. In this stage, sometimes risk surveyor is needed to eventually prepare a report for underwriter and in the case of many property risks will also draw a plan. The survey report will cover a number of features as the following :
- A full description of the risk; building construction, premises, details of insured, etc.
- An assessment of the level of the risk; hazards factors, idea of degree of risk, surrounding properties or activities which may have an impact on the level of risk.
- A measure of the MPL or EML.
- A full description of the risk; building construction, premises, details of insured, etc.
- An assessment of the level of the risk; hazards factors, idea of degree of risk, surrounding properties or activities which may have an impact on the level of risk.
- A measure of the MPL or EML.
In general, there is no difference between conventional and Islamic general insurance in technical underwriting process. While in complying with sharia aspects, it is not sometimes so simple. The risk which physically is looks previously, complying sharia will become not complying when any change of usage during insurance period.
For example:
- Since inception date, a billboard contains telecommunication provider advertisement insured. Of course it doesn’t matter with sharia point of view. But during the insurance period, the advertiser changes theme with a picture of a girl using bikini or lingerie.
- A building categorized as a consumer goods shop is insured. Seasonally, the owner supplies stock of beers.
- A project of warehouse building construction is insured under CAR policy. Without any clear disclosure when making contract, apparently, the warehouse is used and planned indeed for storing cigarettes, beers or other illicit commodities.
So, it is not so simple indeed to make a restriction of something allowed, considerable, and absolutely prohibited, from sharia point of view. Even, it is still any differences of perception/fatwa among Sharia Supervisory Council (DPS) in one company with others toward some issues, for example tobacco, sculpture, etc. So that, the definition of something allowed, considerable, prohibited must be clearly stated in the insurance policy and explained before entering contract in order to make sure there is no sharia violations.
For example:
- Since inception date, a billboard contains telecommunication provider advertisement insured. Of course it doesn’t matter with sharia point of view. But during the insurance period, the advertiser changes theme with a picture of a girl using bikini or lingerie.
- A building categorized as a consumer goods shop is insured. Seasonally, the owner supplies stock of beers.
- A project of warehouse building construction is insured under CAR policy. Without any clear disclosure when making contract, apparently, the warehouse is used and planned indeed for storing cigarettes, beers or other illicit commodities.
So, it is not so simple indeed to make a restriction of something allowed, considerable, and absolutely prohibited, from sharia point of view. Even, it is still any differences of perception/fatwa among Sharia Supervisory Council (DPS) in one company with others toward some issues, for example tobacco, sculpture, etc. So that, the definition of something allowed, considerable, prohibited must be clearly stated in the insurance policy and explained before entering contract in order to make sure there is no sharia violations.
Moreover, when commodity categorized as illicit (haram) then all processes, activities, involved i.e. supply of raw materials, production, distribution, selling and others are prohibited (haram).
Premium Pricing in Sharia General Insurance
Premium Pricing in Sharia General Insurance
Generally, premium for both conventional and sharia general insurance in technical aspects must be sufficient to :
- Cover the expected claims ; estimation of the level of claims which it expects. It is not possible to say exactly how much is to be paid out but because of the large numbers involved the insurer can make reasonably accurate assessment of the likely loss costs. (based on statistics data)
- Create an estimate for outstanding claims ; not all claims will be settled during the year for which the premium has been paid and hence the premium must take into account those claims still to be settled.
- Provide a reserve ; the insurer must also take into account the fact that there can be contingencies, beyond their control, which may involve a liability to meet claims at some time in the future.
- Meet all expenses ; salaries of staff, office costs, advertising, commission.
- Provide a profit/margin ; ensure that there is a provision for a reasonable profit/margin.
- Cover the expected claims ; estimation of the level of claims which it expects. It is not possible to say exactly how much is to be paid out but because of the large numbers involved the insurer can make reasonably accurate assessment of the likely loss costs. (based on statistics data)
- Create an estimate for outstanding claims ; not all claims will be settled during the year for which the premium has been paid and hence the premium must take into account those claims still to be settled.
- Provide a reserve ; the insurer must also take into account the fact that there can be contingencies, beyond their control, which may involve a liability to meet claims at some time in the future.
- Meet all expenses ; salaries of staff, office costs, advertising, commission.
- Provide a profit/margin ; ensure that there is a provision for a reasonable profit/margin.
It is not simply a matter of calculating the correct premium by mathematical formula. A number of important commercial must be borne in mind; inflation, interest rate/rate of profit sharing, exchange rates, competition.
However, in sharia general insurance practices, some considerations must be borne in mind due to from the beginning of the contract premium must be clearly separated between Ujrah and Tabarru’ :
- Operator’s Ujrah is allocated in the operator’s fund account and used for management/operational expenses in maintaining tabarru’ funds, acquisition costs, and margin expected which are the same with factors of “meet all expenses” and “provide a profit/margin” above.
- Operator’s Tabarru’ funds pooled is used by the operator to cover all expenses as follows :
a) Claims
b) Outstanding claims estimated
c) Reserves
Some important points must be borne in mind those are (in Indonesian practices) :
1) Retakaful’s ujrah must also be taken from total ujrah (portion of contribution) has been agreed between operator and participant.
2) Management expenses must only be taken from operator’s ujrah
3) Acquisition costs (commission to agents, brokers, other intermediary, etc) must only be taken from operator’s ujrah
4) Retakaful’s tabarru’ must also be taken from total tabarru’ (portion of contribution) has been agreed between operator and participant.
- Operator’s Ujrah is allocated in the operator’s fund account and used for management/operational expenses in maintaining tabarru’ funds, acquisition costs, and margin expected which are the same with factors of “meet all expenses” and “provide a profit/margin” above.
- Operator’s Tabarru’ funds pooled is used by the operator to cover all expenses as follows :
a) Claims
b) Outstanding claims estimated
c) Reserves
Some important points must be borne in mind those are (in Indonesian practices) :
1) Retakaful’s ujrah must also be taken from total ujrah (portion of contribution) has been agreed between operator and participant.
2) Management expenses must only be taken from operator’s ujrah
3) Acquisition costs (commission to agents, brokers, other intermediary, etc) must only be taken from operator’s ujrah
4) Retakaful’s tabarru’ must also be taken from total tabarru’ (portion of contribution) has been agreed between operator and participant.
Due to these very tight restrictions, where in the beginning of the contract, portion for ujrah and tabarru’ is strictly-separated, therefore, sharia operator must really pay attention in some important features :
- efficiency of operating expenses ;
- tightening acquisition costs ; with reasonable and marketable costs of acquisition.
- avoiding price war ; unreasonable price which tends to gambling.
- efficiency of operating expenses ;
- tightening acquisition costs ; with reasonable and marketable costs of acquisition.
- avoiding price war ; unreasonable price which tends to gambling.
(source)
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