THE PROSPECT OF ISLAMIC INSURANCE BEYOND THE FUTURE

Having known the superiority of Islamic Insurance’s concept, it is the purpose of this sub chapter to dwell upon the scope and prospect of the Islamic insurance. The prospect of Islamic future may be traced back to the history of the mutual insurance. The mutual insurance has been developed by people after the industrial revolution in the western world. This revolution brought with a new type of social insecurity for which social and mutual insurance was involved as at least a partial solution.
In course of time, the mutual insurance has developed. It is now wider in scope and larger in size. In Britain the main representatives of mutual insurance are Friendly Societies. They have spread all over Europe. France has several thousands of such small association and their operations have been successful. The same may be said of Switzerland, Belgium and Holland, and particularly of Italy, where large mutual associations have been greatly favoured by governments. The measure of their success may be imagined by the fact that they are most popular in Russia while in the USA there is the leadership of giant mutuals .
By this development, it is understood that the mutual insurance which constitutes the basic thought of the Islamic insurance has the auspicious prospect in future. Admittedly, also, the Islamic insurance is likely accepted by most Islamic countries in the world, especially Middle-East and other surrounding Islamic countries, and particularly countries in where the majority of Muslims live e.g. Indonesia.
Indonesia has approximately 90% Muslim citizens, who, nowadays, seemingly realize to perform their identity on the stage of economic affairs. This forms a large captive-market along with the improvement of political and economic stability. On the other hand, most of the Muslims require the device of trade on the basis of shari'a, and this requirement gets wider all along with the development of financial service industrial affairs. Furthermore, it is required to found many Islamic insurance companies as well as interest free banks to satisfy this urgent demand .
So far, PT Asuransi Takaful Keluarga is the only one of the Islamic insurance company among 52 companies of Life Insurance in Indonesia. Apparently, it is able to eliminate 42 companies in acquiring the amount of policy-holder. See at the table below :
Rank Number Name of Company Number of Policyholder
1 Bringin Jiwa Sejahtera 6,766,345
2 AJB Bumiputera 1912 4,789,062
3 Jiwasraya 3,010,210
4 Koperasi Asuransi Indonesia 2,423,672
10 Asuransi Takaful Keluarga 150,107
Total 52 Companies 20,380,574
Source: tazkia.com 2001
The writer is in no doubt that above fantastic acquisition still can more be enhanced through many strategies. Apart from that, the growth of the Islamic insurance is enormously depending on government’s and society's response, it means that the government is expected to produce the particular regulation and law institution relating to oversee the Islamic insurance operation
Meanwhile, the society is hoped to participate actively in advancing this shari’a economy system, of course, it is neither only in insurance nor banking, but also in increasing the Islamic ummah's quality.

The Mechanism of Funds Management in Islamic Insurance

1. The Mechanism of Funds Management in Islamic Insurance
To eliminate the element of riba, the mechanism of fund management and investment in Islamic Insurance is based on mudharabah system . Mudharabah is a contract of partnership on the principle of profit lost sharing whereby one person gives his capital to another to do business and both parties share in any profit or loss according to mutually agreed terms .
A. Azhar Basyir divided the mechanism of policyholders' fund management into two models, the premium with savings account and the premium without savings account .
a. The Premium with Savings Account
In this model, the first premium installment of policyholder is divided into two accounts, Participant's Account and Participant's Special Account (charity account).
The Participant's Account contains of policyholder's savings fund and the Participant's Special Account contains of tabarru' fund, this fund is providing the intention of policyholders to reciprocally guarantee each other to cover payable claims. The latter account usually ranges from 1,25% to 17,50% of premium, depends on policyholder's age and time span of policy. The more the policyholder ages the bigger tabarru' will be. The table of tabarru' can be seen in the table below :

Age Period of Agreement
5 6 7 8 9 10 11 12
18 - 30 1.25 1.25 1.25 1.75 1.75 1.75 2.25 2.25
31 - 35 1.25 1.25 1.50 1.75 2.00 2.25 2.50 2.75
36 - 40 2.00 2.00 2.25 3.00 3.25 3.50 4.25 4.50
41 - 45 3.00 3.25 3.50 4.75 5.00 5.50 7.00 7.50
46 - 50 5.00 5.50 6.00 8.00 8.75 9.50 11.75 12.75
51 – 55 8.50 9.25 10.00 13.25 14.50 15.50 - -
56 - 60 13.25 - - - - - - -

Age Period of Agreement
13 14 15 16 17 18 19 20
18 - 30 2.25 2.50 2.75 2.75 3.25 3.50 3.75 4.25
31 - 35 3.00 3.50 4.00 4.25 5.00 5.25 5.75 6.50
36 - 40 5.00 6.00 6.50 6.75 8.00 8.50 9.25 10.75
41 - 45 8.00 9.75 10.50 11.25 13.25 14.25 15.25 17.50
46 - 50 13.75 16.25 17.50 17.00 17.75 17.25 16.75 -
Source: PT Asuransi Takaful Keluarga
Furthermore, all policyholder's fund from both accounts shall be booked into the Policyholder's Fund Collection and shall be invested prudently yet to gain an optimal profit. The yield of investment is distributed between policyholders and company (shareholders), in an agreed profit lost sharing basis, for example 60% for the policyholders
40% for the shareholders.
The policyholder's yield (60%) shall be booked into Participant's Savings Account and Participant's Special Account proportionally. The Participant's Savings Account shall be paid back to the policyholder when :
1) The agreement is over,
2) The policyholder retires in the time of agreement,
3) The policyholder passes away in the time of agreement.
And the Participant's Special Account shall be paid back to the policyholder when:
1) The policyholder passes away in the time of agreement,
2) The time agreement is over with the net surplus of tabarru'.
Meanwhile, the shareholder's yield (40%) shall be used for pre-operating expenses, initial costs, and fixed assets with the portion 10 – 15% of the yield, and the rest of the yield shall be invested in time-deposits at bank, equity on stock-market, unit trust, direct investment and others with shari’a basis. The return of investment shall be re-accumulated to the principal to cover all the overhead costs disbursed by the company .
b. The Premium without Savings Account
In this model, all policyholder's premium installment shall be booked into Participant's Special Account, then allocated into Accumulated Participant's Fund and shall be invested prudently to gain an optimal profit with shari’a basis.
Furthermore, the yield of investment is allocated into Accumulated Participant's Fund decreased by Company's Operating Expenses. And the net surplus shall be distributed between policyholders and company (shareholders), in an agreed profit-sharing basis, for example 60% for the policyholders 40% for the shareholders.

The Contract of Conventional Insurance

As stated above that the purpose of all insurances is to seek protection against all kinds of risk to which man is exposed. The purpose of insured is to prepare himself against probable hazard and loss in his life and trade. He tries to shift the burden of the probable loss on to shoulders of others, who are prepared to take the risk for some financial gains to themselves.
All insurance contracts are based on the law of large numbers and the mathematics of probability. In a large homogeneous population it is possible to estimate the normal frequency of common events, such as deaths and accidents. Losses can be predicted with reasonable accuracy, and this accuracy increases as the size of group expands .
All insurance contracts are made on the principle of uncertainty, uncertain events, which involve speculation as well as risk . Both the insurer and the insured enter into contract of mutual risk, the former risking a loss and the latter risking his premiums.
The agreements between the insurer and the insured in insurance contract are embodied in a formal document, called a policy which, afterwards, the insurer is legally bound issue to the insured on the receipt of premium and the insured is legally obligated to pay the premium monthly or annually appropriate with previous agreement between the parties.
The insurance contract is not like the contract of other service companies. It has characteristics as below:
a. Future contract, because the benefits of this contract just appear when the loss is paid in next day,
b. Contingent contract, because the loss happens uncertainly and it undertakes based on probable perils,
c. Service contract, because the insurance provides the services, benefit understanding and suggestions.
d. Risk contract, the base of insurance contract is the uncertainty with the probable loss of perils. The insurance shifts the risks of this loss on to company’s shoulder as the professional risk bearer .
a. Policy
Policy is a formal document contains the agreements between the insurer and the insured in insurance contract . The policy can be the small sheet of paper contains the concise and simple agreement, or be the long and hard document. All of both documents state dues and obligations of both parties.
The policy plays an important part in the insurance contract, whether in the beginning step, during the contract or in the covering of insurance. For the insured, the policy is the basis evidence to propose the indemnity demand when the insured hazard causes the loss. And for the insurer, the policy is the basis to know the insured’s responsibility toward the hazard .
Except life insurance policy, every policies must contains of eight main points, they are:
1. The day of the insurance covering
2. The name of the insured who agrees the insurance covering
3. The clear explanation about the assured goods
4. The amount of money for how many times the insurance is held
5. The assured perils and hazards
6. The beginning time and the end of the insurance
7. The amount of premium
8. The matters that normally must be well known by insurer, and the certain promises and clauses between the insured and the insurer .
Globally, the eight main points above are divided into four parts, they are :

1. Declaration.
The declaration is a statement made by insurance applicant, who basically furnishes all such information and documentary evidences about his identity, the value of the goods, and everything related to the covering of insurance contract as the insurer may requires. This information must be appropriated with the utmost good faith principle. The insurance applicant gives this information by filling up the application form or questionnaire, and then he signs it up.
2. Insurance clause.
The insurance clause is the main part of the policy. It contains of the provision of whatsoever risks determined in the policy, the requested requirements and the column for the insurer’s liabilities.
3. Exclusions.
In the sections of the exclusions, the policy determines whatever the excluded matters, whether disasters or hazards, subjects or losses. Hence, the insured must know and understand precisely whatever excluded in the recovering of the purposed policy.


4. Conditions.
In this part of the policy, be explained all about dues and duties of the parties, whether insurer or insured. These conditions normally contains of premium payment, risks alteration, insured’s duties toward the incidents, report of losses, indemnity, etc.
Thus, except the application form, the insurer is who makes the standardization policy. Then this policy offered to the insured in order to examine the requirements and clauses carefully. If the insured agrees all terms, the policy will be finished and signed up, and after 24 hours it will be returned back to the insured.
But, practically this short time hardly can be fulfilled, because the insurer must complete the mails and process the received data. So, before the policy can be returned to the insured, temporarily the insured will receive the “cover note” or “bider”, it is a temporary contract of insurance recovering before the policy can be returned .
b. Premium
The premium is the price at which the insurer is prepared to take risks and bear the burden of the probable loss involved in the contract of insurance. The premium is the obligation of the insured against the services of the insurer in an agreed period of time .
On the basis of law of averages, the insurer finds through experience an amount of premium with calculating the details as below:
1. The reasonable amount sufficient to cover the risks,
2. Other charges, including policy and administration expenses,
3. The tip for agents, if the insurance held through the agency,
4. The profits from the investment of accumulated funds .
The contract of insurance becomes effective only when the premium is paid by the insured and received by the insurer. If it is not so, the insurance is unavailable . Thus, the premium must be paid completely during the contract. At the sort-range insurance such as travel insurance, the premium is paid on the beginning of contract. But, at the long-range insurance, the premium can be paid monthly on the previous agreed date, started on the first month periodically. The amount of premium and its payment date are clearly embodied in the policy.
Once the premium is paid by the insured and risk assumed by the insurer, there shall be no apportionment or return of premium afterwards, even though the subject-matter of the risk may vanish before the period of cover has elapsed.

The Benefits of Conventional Insurance

Insurance benefits society by allowing individuals to share the risks faced by many people. But it also serves many other important economic and societal functions . Because insurance is available and affordable, banks can make loans with the assurance that the loan’s collateral (property that can be taken as payment if a loan goes unpaid) is covered against damage. This increased availability of credit helps people buy homes and cars. Insurance also provides the capital that communities need quickly rebuild and recover economically from natural disasters, such as tornadoes or hurricanes .

Insurance itself has become a significant economic force in most industrialized countries. Employers buy insurance to cover their employees against work-related injuries and health problems . Businesses also insure their property, including technology used in production, against damage and theft. Because it makes business operations safer, insurance encourages businesses to make economic transactions, which benefits the economies of countries . In addition, millions of people work for insurance companies and related businesses. In 1996 more than 2.4 million people worked in the insurance industry in the United States and Canada .
Insurance companies perform a type of monetary redistribution they collect premiums and eventually redistribute that money as payments. Depending on the type of insurance, redistribution can take anywhere from a few months to many decades. Because of this delay between collecting and paying out funds, insurance companies invest their funds to bring in extra revenues. Such investments help businesses and governments finance their operations, and profits from those investments support the operations of insurance companies . With these investment earnings, insurance companies can keep rates much lower than would otherwise be possible.

1. The Contract of Islamic Insurance

In the contract of Islamic Insurance, the forbidden elements of business contract are eliminated; hence, the Islamic Insurance is legal on the hand of shari'a. To eliminate those elements, there are terms in Islamic Insurance, they are:
a. The Contract ('Aqd)
The clarity of contract in mu'amalah practices is principal, it fixes the legality of trading. The insurance is likewise, the contract between two parties, insured and company, must be clear. In its contract Islamic Insurance is based on takafulli (mutual responsibility) principle with tabarru' intention , it is the mutual responsibility intention between the participants of insurance to shift the burden of others. The Islamic jurists consider al-aqd at-takafuli as the safest contract to eliminate riba, gharar, maisir and jahala.
Based on this 'aqd, the Islamic Insurance divides the first year policyholder's premium into two accounts, participant's account (saving account) and participant's special account (charity account). The first is invested in profit lost sharing system and the later is contributed as the tabarru' .
b. Tabarru'
As the result of the charity account, it is accumulated amount of worship fund which called by tabarru'. Etymologically, the word Tabarru' means contribution or donation .
Tabarru' is purposed to give the virtuous fund sincerely to help each other and every participant shall agree to give away this tabarru' a certain proportion or the full amount of his or her contribution for this purpose. And the financial assistance paid to the participant resulting from the defined loss comes from this fund.

The Aims of Conventional Insurance

The main aim of insurance is not merely safeguarding the losses; it is also decreasing the uncertain and probable risk. Normally, the aims of insurance can be distinguished into two sides based on insured and insurer parties.
a. The aims of insured party:
1) To avoid the probable wider loss,
2) To get the indemnity from insurance company when the harm disaster is happening,
3) To shift the probable risk on to shoulder of other,
4) To decrease the suffered probable loss.
b. The aims of insurer party (Insurance Company)
1) To give the safeguard toward the probable loss which suffered the insured,
2) To give the support to the more advance direction of the economic development,
3) To lose the entrepreneurs’ doubts in their trade,
4) To ensure the investment,
5) To get the profit as the service repayment .

The Principles of Islamic Insurance

The goal of Islamic Insurance is protecting all members of participants by giving sum of funds to their heirs after their death, and being the savings funds for their preparation to face any losses cause of sickness, accidents and so on.
In accordance with the goal of Islamic Insurance above, the operational framework of Islamic Insurance relied on principles, which are the foundations of its operation. Perwaatmaja said that these principles are the implementation of mutual responsibility, cooperation and protection soul in society for the prosperity reaching .
Essentially the concept of Islamic Insurance is based on solidarity, responsibility and brotherhood among members of participants who have agreed to share defined losses to be paid out of defined assets.
Hence, the basic principles of Islamic Insurance are :
a. Principle of mutual responsibility
In this principle, every participant is able to feel the brotherhood of each other, and then the mutual responsibility upon someone else appears. The Messenger of Allah -peace be upon him- exampled Islamic brotherhood as a body, if part of it suffered from illness all parts of the body would join to feel that illness by sleeplessness and fever.
مَثَلُ الْمُؤْمِنِيْنَ فِي تَوَادِّهِمْ وَتَرَاحُمِهِمْ وَتَعَاطُفِهِمْ مَثَلُ الْجَسَدِ إِذَا اشْتَكَى مِنْهُ عُضْوٌ تَدَاعَى لَهُ سَائِرُ الْجَسَدِ بِالسَّهَرِ وَالحُمَّى
“Believers in their being friend, merciful and sympathy between one each other are like a body, if part of it suffered from illness all parts of the body would join to feel that illness by sleeplessness and fever”.

b. Principle of mutual cooperation and helping
It means, every participant of insurance has to cooperate each other in lightening other's burden, hence will be created the strong brotherhood. Prophet -peace be upon him- supposed such this activity as a building, which is one part sustaining other shares, so that will be created the strong and sturdy building.
الْمُؤْمِنُ لِلْمُؤْمِنِ كَالبُنْيَانِ يَشُدُّ بَعْضُهُمْ بَعْضًا
“One believer to other believer is like a building, which is one part sustaining other shares”

Besides that, every participant also has to progressively improve his care in effort of lightening the other's burden. Prophet -peace be upon him- taught that who lightens others' life needs, Allah will lighten his life burden in the world and eternity hereafter. He said in his Hadith:
عَنْ أَبِي هُرَيْرَةَ رضي الله عنه أن رسول الله صَلَّى اللَّه عَلَيْهِ وَسَلَّمَ قَالَ: مَنْ نَفَّسَ عَنْ مُسْلِمٍ كُرْبَةً مِنْ كُرَبِ الدُّنْيَا نَفَّسَ اللَّهُ عَنْهُ كُرْبَةً مِنْ كُرَبِ يَوْمِ الْقِيَامَةِ وَمَنْ يَسَّرَ عَلَى مُعْسِرٍ يَسَّرَ اللَّهُ عَلَيْهِ فِي الدُّنْيَا وَالْآخِرَةِ وَمَنْ سَتَرَ مُسْلِما سَتَرَ اللَّهُ عَلَيْهِ فِي الدُّنْيَا وَالْآخِرَةِ وَاللَّهُ فِي عَوْنِ الْعَبْدِ مَا كَانَ الْعَبْدُ فِي عَوْنِ أَخِيهِ
From Abi Huraira -may Allah be pleased with him- verily, Prophet -peace be upon him- said: “whosoever relieved muslim’s grieves in the world, Allah would relieve his grieves in Doomsday and whosoever facilitated bother, Allah would facilitate him in the world and hereafter, and whosoever hid muslim’s disgrace, Allah would hide his disgrace in the world and hereafter. And Allah helps His servant as long as he helps his brother”.

c. Principle of mutual protecting
Where all participants have principles that someone's belief is imperfect; who can asleep with fully filled stomach soundly, meanwhile his neighbors live in hunger. It means that the commitment to gain prosperity collectively is absolutely recommended to be created through his participation in Islamic Insurance.
Those three principles above are impossible to be formulated, unless based on godly value and sturdy belief. The sincere intention to help others suffered by disaster is really the basic foundation of Islamic Insurance.

The History Of Islamic Insurance

Muslim scholars agree that the Islamic Insurance is the new study in
the shari’a discourse , but the concept of blood-money which can be considered as embryo of Islamic Insurance was practiced in the era of Jahiliyyah and Islamic caliphate.
a. The Era Before Islam
Peninsula of Arabia, where Arab’s tribes live is the large desert area and small fertile land . In olden days, the desert land of Arabia was inhabited by Bedouin tribes who often had quarrels and family feuds, sometimes lasting for years. Raids by one tribe on another were very common. Sometimes, the raiding tribe would steal camels, women and children of the other tribes, because women and children could be ransomed. The ransom money was collected from all the members of the plundered tribe and paid to the head of the raiding tribe who shared it with the rest of his tribe.
In the case of murder, blood money (monetary compensation) was paid by killer or the tribe of killer to the relative of the killed. Sometimes the individual killer could not pay the blood-money, so, to avoid blood-shed and blood-feud between the tribes, the money was collected from all the members of the tribe and paid to the relatives or the tribe of the killed. This could be called the beginning of mutual insurance which is a device to reduce the burden of any member of the tribe on the basis of mutual sharing .
In short, the object of blood-money is to secure protection against the danger to which all the members of the tribe are equally exposed, and to eliminate a common danger which may fall upon any member of the tribe at any time. Accordingly, the tribe jointly contributed to meet the loss (in blood-money) which might fall upon any of them.
The usual price paid for a killing was a hundred she-camels; for deep wound, a blow penetrating the brain or abdomen at one-third of the amount, for the loss of an eye or hand or foot at half, for a tooth or for a wound exposing the bone at five camels. When the blood-money was paid in cash, it was 1.000 dinars (gold coins) or, sometimes, 1.200 dirhems (silver coins) and the payment being spread over three or four years .
The principle of compensation in kind or cash for the death or injury to any person greatly helped to eliminate or, at least, reduce the tribal warfare and family feuds which lasted for years and caused enormous loss of life and property. This custom had four outstanding benefits for the people of Arabia:
1) It reduced blood-shed and blood-feuds in the country.
2) It replaced individual responsibility with the ultimate collective responsibility of the tribe for the action of its members, and thus helped to achieve social security for individual members of each tribe.
3) It lessened the financial burden of the individual by transferring it to the group or the tribe.
4) It developed a spirit of co-operation and brotherhood among the members as reflected in mutually to share the individual burden amongst the group .
This mutual cooperation between the members of group in amends (blood-money) to the killed family or tribe found on Arab tradition was called by 'aqila . And this concept was representing the starting points of mutual Insurance growth .
b. The Era of Islam
After the advent of Islam, the indiscriminate killing in tribal feuds which followed the murder of one member of a group in the pre-Islamic period was stopped by the commandment of the Qur’an:
يأَيُّهَا الَّذِيْنَ آمَنُوا كُتِبَ عَلَيْكُمُ القِصَاصُ فِي القَتْلَى الْحُرُّ بِالْحُرِّ وَالْعَبْدُ بِالعَبْدِ وَالأُنْثَى بِالأُنْثى، فَمَنْ عُفِيَ لَهُ مِنْ أَخِيْهِ شَيْءٌ فَاتِّبَاعٌ بِالْمَعْرُوْفِ وَأَدَاءٌ إِلَيْهِ بِإِحْسَانٍ، ذلِكَ تَخْفِيْفٌ مِنْ رَبِّكُمْ وَرَحْمَةٌ فَمَن اعْتَدَىْ بَعْدَ ذلِكَ فَلَهُ عَذَابٌ أَلِيْمٌ
“Oye who believe, the law of equality (retaliation) is prescribed to you in cases of murder: the free for the free, the slave for the slave, the woman for the woman. But if any remission is made by the brother of the slain, then grant any reasonable demand, and compensate him with this whoever exceeds the limits shall be in grave penalty”.
The word qisas in above verse rendered as retaliation, it’s derived from qassa meaning to cut or to follow someone’s tracks . Then qisas is used for the punishment for which the criminal is found guilty. This may take any of the two forms : Firstly, life for life, an eye for eye, or an ear for an ear, etc., secondly, diyah or blood-money as financial compensation for the family or relatives of the murdered or injured in case they make a remission.
Another case in which blood-money takes the place of a death sentence is that of unintentional killing. The Qur’an says:
وَمَا كَانَ لِمُؤْمِنٍ أَنْ يَقْتُلَ مُؤْمِنًا إِلاَّ خَطَأً، وَمَنْ قَتَلَ مُؤْمِنًا خَطَأً فَتَحْرِيْرُ رَقَبَةٍ مُؤْمِنَةٍ وَدِيَةٌ مُسَلَّمَةٌ إِلَى أَهْلِهِ إِلاَّ أَنْ يَصَّدَّقُوْا
“Never should a believer kill a believer; but (if it so happens) by mistake, (compensation is due); if one (so) kills a believer, it is ordained that he should free a believing slave, and pay compensation to the deceased’s family, unless they remit it freely”.
This indicates that ‘aqila system was still practiced by Islam as a part of law . In Hadith, the Holy Prophet -peace be upon him- fixed the amount of blood-money for life at one hundred camels, and fixed five camels as the price of compensation for bone-deep wounds. Prophet also fixed ten camels for the loss of every finger or toe. .
c. The Modern Era
In the end of twentieth century, the Islamic economists began to produce and renovate the concept of Islamic Economy . Insurance was one of the economic institutes which become the attention focus of all Muslim experts, so that the concept which was using the form of gambling, usury and probability of risk developed by western experts must be altered to become sharing holder system and mutual helping by motivating the exploiting of tabarru'.
Once around year 1970th, Muslim scholars whom were gathered in the Islamic Council of Jurisprudence League, Mecca, Saudi Arabia agreed the insurance concept based on mutual and cooperative system.
And finally in 1979, the Islamic concept of Islamic Insurance based on mutual and cooperative was actualized through the opening of the first company in Sudan , initiated by Faisal Islamic Bank of Sudan. The company has made many progresses within five years and has been able to found some branches in Saudi Arabia .
In the very year, it was established also Islamic Arab Insurance C. Ltd. in Saudi Arabia, then at 1983, Dar Al-Maal Al-Islami, Geneva, had an eye to broaden its operation in the field of cooperative insurance.
Since than, Islamic Insurance companies have been established in several countries , some of them thriving, especially in Malaysia, Indonesia, Saudi Arabia and other countries. In Indonesia, the Islamic Insurance (PT Asuransi Takaful Indonesia) has been established since 1994.

The History of Conventional Insurance Development

The concept of insurance is closely related to group life. It originated from the human need to find safeguards against the problem risks to himself and his property, but when, how and by what people it was started is shrouded in mystery and obscurity.
All historians agreed that the concept of insurance didn’t appear in primitive era yet. With assumption, in primitive society, people lived together in families or tribe in which their needs fully met and protected through cooperation and mutual. They, therefore, did not feel the need for insurance because they were fully protected against all sorts of risks by community.
The appearance of insurance is closely related to human civilization. The historians have marked Egypt and Mesopotamia as the oldest centers of civilization , with its fertile valleys of Nile, the Euphrates and the Tigris, where men would cease to wander and settle down almost unawares, forgetting all about their nomadic group life . Traders in that territory used the basic of insurance concept since around 4.000 years B.C. They implemented this concept because they felt uncertain accidents would against their security and safety in trading, cause of nature or non-nature factors .
Yet, however the written insurance concept regulation just comes to be known at era of Hammurabi, the fourth king of Babylon (1782-1682 B.C), with archaeological discoveries which shown a law book contained 300 sections. One of these sections contained one of insurance principles; it was “One for all” . The contract found in this book, was the embryo of a concept later to be known the whole world over as the contract of Bottomry or Respondentia. Bottomry is, or rather was, a commercial contract whereby money (or goods) was advanced for trade purposes either as:
a. True loans at a certain fixed rate of interest, under which the lender had no right to any share in the proceeding of the trading venture,
b. Mixed loans and partnerships which, in addition to the payment of a fixed rate of interest to the lender irrespective of the result of the trading, entitled him to receive a share of the profits, if such profits exceeded a certain sum .
The next stage in the evolution of Bottomry was its development by the Greeks during the ninth and tenth centuries B.C., it was not merely adopted, it was also adapted and perfected. Romans, whose adopted business concepts from Babylon, Phoenicia and Greek, developed these concepts to be insurance form.
But the economists are sharply divided on the concept of bottomry; did it can be called as insurance concept. Anyhow, the though kernel of Bottomry was the beginning of modern insurance development.
Any early signs of modern insurance in scientific form and on premium basis seemed to appear in the European countries in the middle of the thirteenth century . This insurance was known as marine insurance. This form was undoubtedly associated with the merchants of the cities of Lombardy and notably Florence in Italy, 1250. Dinsadle said that in the Middle Ages, trade was mainly centered in the Mediterranean, with well-known trade routes to the East; Constantinople and India, and to the North; Florence, Genoa, Palermo and Venice which became the centers for banking, commerce and insurance at that time .
From Italy, then marine insurance spread to Spain, France, England and other countries of Europe. The intensive trading by Barcelona since the end of fourteenth century caused marine insurance to flourish early in Spain. The earliest agreement known bears the date of the April 12th 1428. On November 21st 1435, by the insurance Ordinance of the Magistrates of Barcelona, Marine Insurance was for the first time, regulated by legal confirmation of existing practice . Marine insurance was practiced in London, England and Le Rochele and Merseilles, France on the beginning of fifteenth century. They practiced the same style with the insurance in Italy.
At the sixteenth century, marine insurance contract grew up steadier than before. At that time, the insurance contract has used the printed policies . Those policies were still written in Italian language, cause of Italian traders' domination. In this century, the practice of marine insurance resembled the practice of modern insurance that applied nowadays. Beside policies, they also used the insurance covering system which done collectively. And this collective covering system dominated entire practices of sea transportation insurance during ten years, up to the beginning of nineteenth century.
Specifically, the insurance companies appeared since eighteenth century. And on nineteenth century they developed rapidly in Europe, for instance in France with “Compagnie d’Assurances Generales” on 1753, and in England with “The Sun Fire” on 1710. Meanwhile in USA, were established “Mutual Relief Association” on 1752 and “Insurance Corporation” on 1772 as the first insurance company in Philadelphia .
The insurance arrived in Indonesia far before independent day, brought by Dutch who more than 350 years colonized this country. With proof, on 1845 was established a life insurance “N.V. Levens Verzekering Maatschappy van de Nederlande van” and fire insurance “Bataviasche See” . But, formally, the insurance and its institution be included in agenda of Indonesia law on 1848, herewith the legalization of Dutch Trading Laws in Indonesia.
Furthermore, in the second decade of the beginning of twentieth century, were established many indigene insurance companies, one of the oldest was “Onderlinge Levernverzekering Maatschappy Bumi Putra” established on February 2nd 1912 in Magelang, Central Java. Four years later, the group of Chinese ethnic in Semarang established also a loss insurance company, named by “NV. Indische Llyod, Algemene Verzekering Maatschappy” .
After the independent day on 1945, up toward 1950, the political situation in Indonesia did not give opportunity for insurance to develop. On 1950, Indonesian Government Banking established the insurance company, named by “Maskapai Asuransi Indonesia”, and on the years later came afterward many insurance companies in Indonesia . Up to now, on 2003, hundred insurance companies were established in Indonesia, for only life insurance companies found more that 53 companies. One of them was PT. Asuransi Takaful Keluarga, the only one of life insurance company based on Islamic law .

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.