Illustration of Types of Insurance (Source: sarjanaekonomi.co.id)
Insurance is one of the important financial instruments in modern life, serving to protect individuals and businesses from the risk of financial loss. However, there are two types of insurance that are often compared: Islamic insurance and conventional insurance. Each has its own fundamental principles, operational methods, and underlying values, making them different from one another.
Conventional insurance operates based on the principles of risk and risk transfer. In this model, policyholders pay premiums to the insurance company, and the company is obligated to pay claims when an insured event occurs (Hussin et al., 2024). On the other hand, Islamic insurance operates in accordance with the principles of Islamic sharia, emphasizing justice, transparency, and cooperation.
One of the main differences between the two is in the management of funds. In conventional insurance, the premiums received are used to pay claims and the operational costs of the company, and the remaining funds are managed to generate profit. Meanwhile, in Islamic insurance, the premiums paid by participants are placed into a tabarru’ fund (charitable fund), which is used to pay claims for participants who experience misfortunes. This fund is managed collectively, and participants contribute to each other’s protection (Khorshid, 2004).
Another aspect that distinguishes the two is related to investment. In conventional insurance, companies are free to invest the managed funds in financial instruments deemed profitable, including investments that may not comply with sharia principles, such as shares in companies operating in alcohol or gambling. Conversely, Islamic insurance only invests funds in instruments that comply with sharia principles, such as halal properties and businesses that do not contradict Islamic values (Hussin et al., 2024).
Additionally, conventional insurance often involves elements of riba (interest) in the management of premiums and claims, while Islamic insurance adheres to the prohibition of riba. In Islamic insurance, all transactions must be free from elements of riba, gharar (uncertainty), and maysir (gambling), thereby creating a more ethical environment that aligns with Islamic principles (Khorshid, 2004).
Although both types of insurance have the same goal of providing protection against risks, the approaches and foundational principles that underlie Islamic and conventional insurance are very different. The choice between these two types of insurance depends on individual values and religious beliefs. For those who adhere to sharia principles, Islamic insurance offers a more appropriate and ethical alternative.
With the growing awareness of the importance of financial protection that aligns with Islamic principles, Islamic insurance is increasingly developing and gaining a place in the global insurance market. Through a better understanding of the differences between Islamic and conventional insurance, individuals can make more informed decisions regarding the financial protection that best meets their needs and values.
Keywords: Islamic Insurance, Conventional Insurance, Insurance Differences, Tabarru’ Fund, Sharia Principles
References
Hussin, Mohd, Rahman, Asmak, Wan Ahmad, Wan Marhaini, Ratnasari, Ririn, & Ismail, Zuriadah. (2024). Takaful as an Islamic Alternative to Conventional Insurance: A Thematic and Bibliometric Review. International Journal of Religion, 5, 2619-2636. https://doi.org/10.61707/9hb39r85.
Khorshid, A. (2004). Islamic Insurance: A Modern Approach to Islamic Banking (1st ed.). Routledge. https://doi.org/10.4324/9780203458280.
Author: Silvina Rosita Yulianti