WSEAS Transactions on Business and Economics
Print ISSN: 1109-9526, E-ISSN: 2224-2899
Volume 14, 2017
Pricing Model in the Concept and Practice of Conventional and Takaful Life Insurance
Authors: , ,
Abstract: The goal of insurance is to uphold a sense of solidarity among the parties involved, shared responsibility in protecting the individual against unexpected risk. Insurance is tools to minimize or transfer risk that has existed on individuals to the insurance company for future loss faced. The Islamic insurance (Takaful) based on the concept of Ta’awun that means mutual help to eliminate forbidden elements in the practice of insurance such as interest (riba), uncertainty (gharar), and speculation (maysir). In the setting rate of insurance pricing risk is very important and crucial role in life insurance policy. The aims of this paper are to identify and investigate the distinction of setting rates for a model of insurance pricing which applied by conventional and Islamic insurance (Takaful). This paper applied net single and annual level premium formula and performed the analysis with a numerical simulation using MATLAB. We found that between conventional and Takaful insurance systems utilize similar methods in the calculation of insurance premium whereas for both are consider pure risk would be faced by the insurance participant. It means that conventional and Islamic insurance utilizing historical data through mortality rate, expected return rate, expected costs and expected amount of claims in the future. Even for both look like applying a similar approach but in the practice of conventional insurance, the premium calculated to mitigate or minimize the risk of the insurance company against an amount of claim faced in the future such as premature death or the maturity contract. In simple terms, it can be called to avoid insolvency of the insurance company. Meanwhile, Takaful insurance is intended to share fair value among participant in determining benevolence through tabarru fund. This means that every participant must pay a premium tabarru to support one another that contributed sufficient amount to cover unexpected claims among them and to uphold mutual fund as evidence the sense of mutual co-operation and brotherhoods among participants.
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Keywords: Conventional and Takaful insurance, pricing model, premium, rate making, risk and tabarru fund
Pages: 436-445
WSEAS Transactions on Business and Economics, ISSN / E-ISSN: 1109-9526 / 2224-2899, Volume 14, 2017, Art. #45