What are the Differences between Conventional Insurance and Sharia Insurance

Here are some differences between conventional and Islamic insurance:

• Sharia insurance is based on the principle of cooperation and mutual help, where the insurer will jointly collect grant funds (tabarru) to help each other with other insurance participants in need (sharing of risk).  Whereas conventional insurance applies a transfer of risk system, in which the risk will be transferred/charged by the insured (insurance participant) to the insurance company acting as the insurer in the insurance agreement.

• The management of funds carried out in sharia insurance is transparent and will be used as much as possible to bring benefits to the insurance policy holders themselves.  Whereas in conventional insurance, the insurance company will determine the amount of premium and various other costs aimed at generating the maximum income and profit for the company itself.

• In sharia insurance only a grant contract (tabarru) is used which is based on the sharia system and is confirmed to be halal.  Whereas in conventional insurance, the contracts carried out tend to be buying and selling

• In sharia insurance, insurance funds are shared property (all insurance participants), where the insurance company only acts as a fund manager.  Whereas in conventional insurance the premium paid belongs to the insurance company and the insurance company has full authority to manage and allocate the insurance funds

• In sharia insurance, all profits obtained by the company related to insurance funds will be distributed to all participants.  As for conventional insurance, all profits will be the right of the insurance company

• Islamic insurance companies have an obligation for participants to pay zakat, the amount of which will be adjusted to the amount of profit earned by the company.  Of course this does not apply in conventional insurance

• In sharia insurance, supervision is carried out strictly and carried out by the National Sharia Council (DSN) which was formed directly by the Indonesian Ulema Council (MUI) and was given the task of supervising all forms of implementation of sharia economic principles in Indonesia, including issuing fatwas or laws governing them.  Where in every Islamic financial institution, there must be a Sharia Supervisory Board (DPS) which serves as a supervisor.  Whereas in conventional insurance, the origin of the object being insured is not a problem, because what the company sees is the value and premium to be determined in the insurance agreement.

• In some types of insurance issued by conventional insurance companies, there is a term called “scorched funds” which occurs in unclaimed insurance (eg life insurance where the policyholder does not die until the coverage period ends).  But this of course does not apply in sharia insurance, because funds can still be taken even though there is a small portion that is admitted as tabarru funds.