Insurance should be based on sharing, fairness and transparency

Takaful insurance is operated on the Islamic principles of sharing, fairness and transparency.

In my view, all insurance transactions should be operated on these principles. As a cooperative society, NTUC Income has been observing these principles for the past 36 years.

When a person buys insurance, this person is joining an insurance pool. The premium should be calculated on the total claim amount and the expenses of operating the insurance pool, and shared fairly among the participants.

The insurance operator has the responsibility to manage the insurance pool well, pay the legitimate claims, keep the expenses low and make a fair margin. In this way, the premium can be kept low for all the insured participants.

The insurance operator should not charge a high premium and make excessive profit for shareholders. This will be unfair to the participants.

Sometimes, the insurance can produce a higher profit than expected. This could arise if the claim experience is favourable, or if the investments earn a better return.

Under takaful principles, a fair portion of the profits should be shared with the insured participants. The proportion to be shared should be fair and disclosed to the participants at the start.

Similarly, if the insurance pool pays more claim than expected, it is fair that they pay a higher premium and do not expect the shareholders to bear the loss.

It is possible for takaful principles to operate on general insurance, such as motor insurance and personal accident insurance.

Under this system, the premium charged to the participant has to be slightly higher than the market rates, maybe 10 to 20 percent higher.

The insurance operator should continue to manage the claims and expenses well and produce a profit. A fair portion of the profits should be shared with the insured participants. If this profit sharing is more than 10 or 20 percent of premium, the net cost to the insured participant will actually be lower under takaful insurance.

The insured participants can help to lower the cost in the following ways:

- avoid making excessive claims, eg motor repairs or health claims
- cooperate with the insurance operator to minimise the claims
- discourage other participants from making excessive claims
- reduce the admistrative cost by staying with the insurance operator for many years

Through this cooperative effort, the total cost can be reduced. This will be good for the insurance participants (ie the policyholders) and the insurance operator (ie the insurance company). It is win-win.

NTUC Income will be studying how to apply these principles to general insurance. We may introduce this profit sharing for certain products, such as personal accident insurance and motor insurance over the next 6 to 12 months.

We need to educate the public about the principles of sharing of risks and profits, and the principle of working together in cooperation.

We will offer a choice to our policyholders:

- pay a market rate based on a commercial contract
- pay a slightly higher premium rate and enjoy a share of profits

The profit sharing concept will be made available to Muslims and non-Muslims. Muslims like this concept as it it based on Syariah principles. Non-Muslims may like it as well.