The Principles of Conventional Insurance

As the other many profit oriented businesses, insurance has principles, they are:
a. Principle of Indemnity
Except life and personal accident insurance, every contract of insurance is normally a contract of indemnity because it insures compensation for loss to the insured. The insurance company agrees to recover this loss as the change of the receipt premium. The purpose of this agreement is to shift the burden of the probable risk from the insured on to the shoulders of insurance company .
The maximum limit of the insurer obligation is to take the insured on to his economic position as well as before the loss happening . According to this principle, the insured is indemnified according to the limit of his loss and no more. He cannot receive any sum of money from insurer more than the value of his loss under any circumstances. In this matter, the insured is not allowed to make a profit.

b. Principle of insurable interest
The insured must has an insurable interest; where a man is so circumstanced with respect to matter exposed to certain risks or damages, or to have a moral certainly of advantage or benefit, but for those risks or dangers, he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction .
In his book, T.J. Dorhout Mess explained that the definition of interest is a pure economic factor, so it is absolutely difficult to give its law limitation . A man can has the insurable interest because of value decreasing of own subjective due. A burning house, for instance. This burning cause the house’s owner loses the interest that he has before the happening. Also, the man may have the interest because of his missing hope to gain something. Based on some cases above, it can be concluded that the definition of insurable interest, normally, is the risk.
The principle of insurable interest is important for policyholder because it can decide whether the insured is able to propose the claim. Therefore, the insured must know exactly the sources of insurable interest, whether it has the quality of article or the quality of due.
c. Utmost Good Faith Principle
The insured is required to state all facts accurately and in good faith. He must not make any misrepresentation with regard any facts. Any facts known to him must be disclosed, and he cannot escape the consequences of not revealing them by saying that he did not know. Failure to do so will render the contract voidable . And finally, the insured cannot claim the insurer to fulfill the contract, and to compensate the loss, because the happening risk is different with the assured risk in the previous agreement.

The Definition of Conventional Insurance

Terminologically, insurance is contract made by a company or society, or by a state, to provide a guarantee of compensation for loss, damage, sickness, death, etc in return for regular payment .
According to Fuad Mohd Fachruddin the commercial insurance is a contract between two parties, insured and insurer, with the policy, the insurer receives the premium; it’s one of the regular sum of paid, in cash or credit, from the insured and the insurer promises to indemnify all of losses may be suffered him .
Afzalur Rahman provided the similar definition with Fuad Mohd Fakhruddin; he defined the insurance as a contract whereby one person, called the insurer, undertakes, in return for agreed consideration, called the premium to pay to another person, called the insured, a sum of money, or its equivalent, on the happening of a specified event . The specified event must have some element of uncertainty about it; the uncertainty may be either as the case of life insurance, in the fact that, although the event is bound to happen in the ordinary course of nature, the time of its happening is uncertain, or in the fact that the happening of the event depends upon accidental causes, and the event, therefore, may never happen at all.
Willet, Kulp, Riegel, Miller and Peffer, all provide similar definition that insurance is the concept of risk pooling-of group sharing of losses. That is, persons exposed to loss from a particular source combine their risk and agree to share losses on some equitable basis .
Thus, in very simple word, a contract of insurance is a contract between two parties, the insurer and the insured, the former promises to compensate the latter on the happening of a definite event in return for his contribution.
Based on some ideas of economic experts toward the definition of insurance above, it can be concluded that an insurance agreement involves five essential conditions:
a. There must be a contract of insurance between the parties,
b. The event should involve some amount of uncertainty,
c. There must be contract for the payment of some amount of money, or some benefit which becomes payable to the insured person on the happening of an event,
d. Compensation is promised by the insurer in return for the payment of contributions of premiums by the insured,
e. The event must be against the interest of the insured.

Definition and Basic Concept of Islamic Insurance

1.      The Definition of Islamic Insurance

Islamic Insurance is defined as a mutual guarantee of the risks among the members of insurance, with the result; everyone is being the insurer of others and vice versa. It is done, based on mutual helping of kindness, with the policy, everyone has to pay a tabarru’ (donation) for indemnifying for that risks

The other definition of Islamic Insurance is descriptive of a pact or practice among a group of members, called participants, who agree to jointly guarantee themselves against any loss or damage that may fall upon any of them as defined in the pact. In the event of any member or participant suffer a loss due to the defined mishap or disaster, he or she would receive a certain sum of money or financial benefit from tabarru’ as defined under the pact to help meet or mitigate that loss.

2.      The Basic Concept of Islamic Insurance

Based on some foregone definitions, the writer can conclude that the concept of Islamic Insurance is taken from the concept of mutual and co-operative insurance. This form of insurance is the alternative available to Muslims to replace modern commercial insurance.

In the Islamic teaching, helping the orphans, the people who suffer the disaster, death, and loss is absolutely recommended. It means that the mutual contribution to shift the burden of others in Islam is hoped, and here it is the real brotherhood called by ta’awun (mutual helping), itsar (selflessness) and ukhuwah (Islamic brotherhood). The concept of mutual helping mentioned in His verse:

وَتَعَاوَنُوا عَلَى البِرِّ وَالتَّقْوَى وَلاَ تَعَاوَنُوْا عَلَى الإِثْمِ وَالْعُدْوَانِ   

“Help you one another in Al­Birr and At­Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression”.

Intrinsically, this concept is applied by Islamic Insurance transparently, so that the deception elements must be eliminated. With consequences, every participant of insurance has to cast aside partly its money for tabarru’ with intention for mutual helping. This fund represents the mutual fund for participants, the company is only as organizer and owner of trust; it means that the function of company is performing the trust from all participants to manage their deposits according to shari’a and expected to make a profit. Whereas the fund of tabarru’ managed to overcome the possibility of everyone’s accidents humanly.