Insurance

Hi,
In this blog I want to explain a new thing about insurance. That is Takaful..
You’ll think what is takaful?
It is an Islamic kind of insurance.
We can divide insurance in 2 parts
1.Islamic insurance (Takaful)
2.Conventional Insurance
1st of all I’ll explain these kinds.

What is the insurance?

What is the insurance?
1st off all we must to know that what is the insurance?
Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
Contents
1 Principles of insurance
2 Indemnification
3 Insurers' business model
3.1 Underwriting and investing
3.2 Claims
4 History of insurance
5 Types of insurance
5.1 Auto insurance
5.2 Home insurance
5.3 Health
5.4 Accident, Sickness and Unemployment Insurance
5.5 Casualty
5.6 Life
5.7 Property
5.8 Liability
5.9 Credit
5.10 Other types
5.11 Insurance financing vehicles
5.12 Closed community self-insurance
6 Insurance companies
7 Global insurance industry
8 Controversies
8.1 Insurance insulates too much
8.2 Complexity of insurance policy contracts
8.3 Redlining
8.4 Insurance patents
8.5 The insurance industry and rent seeking
9 Glossary
10 See also
11 Notes
12 Bibliography
13 External links
Principles of insurance
Commercially insurable risks typically share seven common characteristics.
A large number of homogeneous exposure units. The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004.The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, proportionally the actual results are increasingly likely to become close to expected proportions. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
Definite Loss. The event that gives rise to the loss that is subject to the insured, at least in principle, take place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements.
Accidental Loss. The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be ‘pure,’ in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks, are generally not considered insurable.
Large Loss. The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is little point in paying such costs unless the protection offered has real value to a buyer.
Affordable Premium. If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that anyone will buy insurance, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the U.S. Financial Accounting Standards Board standard number 113)
Calculable Loss. There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim.
Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5 percent. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer’s capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
Indemnification
Main article: Indemnity
The technical definition of "indemnity" means to make whole again. There are two types of insurance contracts;
an "indemnity" policy and
a "pay on behalf" or "on behalf of" policy.
The difference is significant on paper, but rarely material in practice.
An "indemnity" policy will never pay claims until the insured has paid out of pocket to some third party; for example, a visitor to your home slips on a floor that you left wet and sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified" by the insurance carrier for the out of pocket costs (the $10,000).
Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the claim and the insured (the homeowner) would not be out of pocket for anything. Most modern liability insurance is written on the basis of "pay on behalf" language.
An entity seeking to transfer risk (an individual, corporation, or association of any type, etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party, by means of a contract, called an insurance 'policy'. Generally, an insurance contract includes, at a minimum, the following elements: the parties (the insurer, the insured, the beneficiaries), the premium, the period of coverage, the particular loss event covered, the amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event of a loss), and exclusions (events not covered). An insured is thus said to be "indemnified" against the loss covered in the policy.
When insured parties experience a loss for a specified peril, the coverage entitles the policyholder to make a 'claim' against the insurer for the covered amount of loss as specified by the policy. The fee paid by the insured to the insurer for assuming the risk is called the 'premium'. Insurance premiums from many insureds are used to fund accounts reserved for later payment of claims—in theory for a relatively few claimants—and for overhead costs. So long as an insurer maintains adequate funds set aside for anticipated losses (i.e., reserves), the remaining margin is an insurer's profit.
Insurers' business model
Underwriting and investing
The business model can be reduced to a simple equation: Profit = earned premium + investment income - incurred loss - underwriting expenses.
Insurers make money in two ways:
Through underwriting, the process by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks;
By investing the premiums they collect from insured parties.
The most complicated aspect of the insurance business is the underwriting of policies. Using a wide assortment of data, insurers predict the likelihood that a claim will be made against their policies and price products accordingly. To this end, insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them. Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Actuarial science uses statistics and probability to analyze the risks associated with the range of perils covered, and these scientific principles are used to determine an insurer's overall exposure. Upon termination of a given policy, the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. Of course, from the insurer's perspective, some policies are "winners" (i.e., the insurer pays out less in claims and expenses than it receives in premiums and investment income) and some are "losers" (i.e., the insurer pays out more in claims and expenses than it receives in premiums and investment income); insurance companies essentially use actuarial science to attempt to underwrite enough "winning" policies to pay out on the "losers" while still maintaining profitability.
An insurer's underwriting performance is measured in its combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates underwriting profitability, while anything over 100 indicates an underwriting loss.
Insurance companies also earn investment profits on “float”. “Float” or available reserve is the amount of money, at hand at any given moment, that an insurer has collected in insurance premiums but has not been paid out in claims. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out. The Association of British Insurers (gathering 400 insurance companies and 94% of UK insurance services) has almost 20% of the investments in the London Stock Exchange.
In the United States, the underwriting loss of property and casualty insurance companies was $142.3 billion in the five years ending 2003. But overall profit for the same period was $68.4 billion, as the result of float. Some insurance industry insiders, most notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from float without an underwriting profit as well, but this opinion is not universally held. Naturally, the “float” method is difficult to carry out in an economically depressed period. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards. So a poor economy generally means high insurance premiums. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "underwriting" or insurance cycle.
Property and casualty insurers currently make the most money from their auto insurance line of business. Generally better statistics are available on auto losses and underwriting on this line of business has benefited greatly from advances in computing. Additionally, property losses in the United States, due to unpredictable natural catastrophes, have exacerbated this trend.
Claims
Claims and loss handling is the materialized utility of insurance; it is the actual "product" paid for, though one hopes it will never need to be used. Claims may be filed by insureds directly with the insurer or through brokers or agents. The insurer may require that the claim be filed on its own proprietary forms, or may accept claims on a standard industry form such as those produced by ACORD.
Insurance company claim departments employ a large number of claims adjusters supported by a staff of records management and data entry clerks. Incoming claims are classified based on severity and are assigned to adjusters whose settlement authority varies with their knowledge and experience. The adjuster undertakes a thorough investigation of each claim, usually in close cooperation with the insured, determines its reasonable monetary value, and authorizes payment. Adjusting liability insurance claims is particularly difficult because there is a third party involved (the plaintiff who is suing the insured) who is under no contractual obligation to cooperate with the insurer and in fact may regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that may take years to complete, and appear in person or over the telephone with settlement authority at a mandatory settlement conference when requested by the judge.
In managing the claims handling function, insurers seek to balance the elements of customer satisfaction, administrative handling expenses, and claims overpayment leakages. As part of this balancing act, fraudulent insurance practices are a major business risk that must be managed and overcome. Disputes between insurers and insureds over the validity of claims or claims handling practices occasionally escalate into litigation; see insurance bad faith.
History of insurance
Main article: History of insurance
In some sense we can say that insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbour, the other neighbours must help. Otherwise, neighbours will not receive help in the future. This type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread.
Turning to insurance in the modern sense (i.e., insurance in a modern money economy, in which insurance is part of the financial sphere), early methods of transferring or distributing risk were practised by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, respectively. Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessel's capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practised by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen or lost at sea.
Achaemenian monarchs of Ancient Persia were the first to insure their people and made it official by registering the insuring process in governmental notary offices. The insurance tradition was performed each year in Norouz (beginning of the Iranian New Year); the heads of different ethnic groups as well as others willing to take part, presented gifts to the monarch. The most important gift was presented during a special ceremony. When a gift was worth more than 10,000 Derrik (Achaemenian gold coin) the issue was registered in a special office. This was advantageous to those who presented such special gifts. For others, the presents were fairly assessed by the confidants of the court. Then the assessment was registered in special offices.
The purpose of registering was that whenever the person who presented the gift registered by the court was in trouble, the monarch and the court would help him. Jahez, a historian and writer, writes in one of his books on ancient Iran: "[W]henever the owner of the present is in trouble or wants to construct a building, set up a feast, have his children married, etc. the one in charge of this in the court would check the registration. If the registered amount exceeded 10,000 Derrik, he or she would receive an amount of twice as much."
A thousand years later, the inhabitants of Rhodes invented the concept of the 'general average'. Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.
The Greeks and Romans introduced the origins of health and life insurance c. 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Guilds in the Middle Ages served a similar purpose. The Talmud deals with several aspects of insuring goods. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies.
Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. These new insurance contracts allowed insurance to be separated from investment, a separation of roles that first proved useful in marine insurance. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.
Some forms of insurance had developed in London by the early decades of the seventeenth century. For example, the will of the English colonist Robert Hayman mentions two "policies of insurance" taken out with the diocesan Chancellor of London, Arthur Duck. Of the value of £100 each, one relates to the safe arrival of Hayman's ship in Guyana and the other is in regard to "one hundred pounds assured by the said Doctor Arthur Ducke on my life". Hayman's will was signed and sealed on 17 November 1628 but not proved until 1633. Toward the end of the seventeenth century, London's growing importance as a centre for trade increased demand for marine insurance. In the late 1680s, Edward Lloyd opened a coffee house that became a popular haunt of ship owners, merchants, and ships’ captains, and thereby a reliable source of the latest shipping news. It became the meeting place for parties wishing to insure cargoes and ships, and those willing to underwrite such ventures. Today, Lloyd's of London remains the leading market (note that it is not an insurance company) for marine and other specialist types of insurance, but it works rather differently than the more familiar kinds of insurance.
Insurance as we know it today can be traced to the Great Fire of London, which in 1666 devoured more than 13,000 houses. The devastating effects of the fire converted the development of insurance "from a matter of convenience into one of urgency, a change of opinion reflected in Sir Christopher Wren's inclusion of a site for 'the Insurance Office' in his new plan for London in 1667."[10] A number of attempted fire insurance schemes came to nothing, but in 1681 Nicholas Barbon, and eleven associates, established England's first fire insurance company, the 'Insurance Office for Houses', at the back of the Royal Exchange. Initially, 5,000 homes were insured by Barbon's Insurance Office.
The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional federal charter (OFC)) for insurance similar to that which oversees state banks and national banks.
Types of insurance
Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as "perils". An insurance policy will set out in detail which perils are covered by the policy and which are not. Below are (non-exhaustive) lists of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set out below. For example, auto insurance would typically cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident). A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of coverage for medical expenses of guests who are injured on the owner's property.
Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners insurance bundles the coverages that a homeowner needs.
Auto insurance
Main article: Vehicle insurance


A wrecked vehicle
Auto insurance protects you against financial loss if you have an accident. It is a contract between you and the insurance company. You agree to pay the premium and the insurance company agrees to pay your losses as defined in your policy. Auto insurance provides property, liability and medical coverage:
Property coverage pays for damage to or theft of your car.
Liability coverage pays for your legal responsibility to others for bodily injury or property damage.
Medical coverage pays for the cost of treating injuries, rehabilitation and sometimes lost wages and funeral expenses.
An auto insurance policy comprises six kinds of coverage. Most countries require you to buy some, but not all, of these coverages. If you're financing a car, your lender may also have requirements. Most auto policies are for six months to a year.
In the United States, your insurance company should notify you by mail when it’s time to renew the policy and to pay your premium.
Home insurance
Main article: Home insurance
Home insurance provides compensation for damage or destruction of a home from disasters. In some geographical areas, the standard insurances excludes certain types of disasters, such as flood and earthquakes, that require additional coverage. Maintenance-related problems are the homeowners' responsibility. The policy may include inventory, or this can be bought as a separate policy, especially for people who rent housing. In some countries, insurers offer a package which may include liability and legal responsibility for injuries and property damage caused by members of the household, including pets.
Health
Main articles: Health insurance and Dental insurance


NHS Facility
Health insurance policies by the National Health Service in the United Kingdom (NHS) or other publicly-funded health programs will cover the cost of medical treatments. Dental insurance, like medical insurance, is coverage for individuals to protect them against dental costs. In the U.S., dental insurance is often part of an employer's benefits package, along with health insurance.
Accident, Sickness and Unemployment Insurance
Disability insurance policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgages and credit cards.
Disability overhead insurance allows business owners to cover the overhead expenses of their business while they are unable to work.
Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance.
Workers' compensation insurance replaces all or part of a worker's wages lost and accompanying medical expenses incurred because of a job-related injury.
Casualty
Casualty insurance insures against accidents, not necessarily tied to any specific property.
Main article: Casualty insurance
Crime insurance is a form of casualty insurance that covers the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement.
Political risk insurance is a form of casualty insurance that can be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss.
Life
Main article: Life insurance
Life insurance provides a monetary benefit to a decedent's family or other designated beneficiary, and may specifically provide for income to an insured person's family, burial, funeral and other final expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity.
Annuities provide a stream of payments and are generally classified as insurance because they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that life insurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance.
Certain life insurance contracts accumulate cash values, which may be taken by the insured if the policy is surrendered or which may be borrowed against. Some policies, such as annuities and endowment policies, are financial instruments to accumulate or liquidate wealth when it is needed.
In many countries, such as the U.S. and the UK, the tax law provides that the interest on this cash value is not taxable under certain circumstances. This leads to widespread use of life insurance as a tax-efficient method of saving as well as protection in the event of early death.
In U.S., the tax on interest income on life insurance policies and annuities is generally deferred. However, in some cases the benefit derived from tax deferral may be offset by a low return. This depends upon the insuring company, the type of policy and other variables (mortality, market return, etc.). Moreover, other income tax saving vehicles (e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.
Property
Main article: Property insurance


This tornado damage to an Illinois home would be considered an "Act of God" for insurance purposes
Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance, earthquake insurance, home insurance, inland marine insurance or boiler insurance.
Automobile insurance, known in the UK as motor insurance, is probably the most common form of insurance and may cover both legal liability claims against the driver and loss of or damage to the insured's vehicle itself. Throughout the United States an auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to a no-fault system, which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Credit card companies insure against damage on rented cars.
Driving School Insurance insurance provides cover for any authorized driver whilst undergoing tuition, cover also unlike other motor policies provides cover for instructor liability where both the pupil and driving instructor are equally liable in the event of a claim.
Aviation insurance insures against hull, spares, deductibles, hull wear and liability risks.
Boiler insurance (also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to equipment or machinery.
Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typically written on an "all risk" basis covering damage due to any cause (including the negligence of the insured) not otherwise expressly excluded. Builder's risk insurance is coverage that protects a person's or organization's insurable interest in materials, fixtures and/or equipment being used in the construction or renovation of a building or structure should those items sustain physical loss or damage from a covered cause.
Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease, for instance."
Earthquake insurance is a form of property insurance that pays the policyholder in the event of an earthquake that causes damage to the property. Most ordinary homeowners insurance policies do not cover earthquake damage. Most earthquake insurance policies feature a high deductible. Rates depend on location and the probability of an earthquake, as well as the construction of the home.
A fidelity bond is a form of casualty insurance that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
Flood insurance protects against property loss due to flooding. Many insurers in the U.S. do not provide flood insurance in some portions of the country. In response to this, the federal government created the National Flood Insurance Program which serves as the insurer of last resort.
Home insurance or homeowners' insurance: See "Property insurance".
Landlord insurance is specifically designed for people who own properties which they rent out. Most house insurance cover in the U.K will not be valid if the property is rented out therefore landlords must take out this specialist form of home insurance.
Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways, and of the cargo that may be on them. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss.
Surety bond insurance is a three party insurance guaranteeing the performance of the principal.
Terrorism insurance provides protection against any loss or damage caused by terrorist activities.
Volcano insurance is an insurance that covers volcano damage in Hawaii.
Windstorm insurance is an insurance covering the damage that can be caused by hurricanes and tropical cyclones.
Liability
Main article: Liability insurance
Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner's insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property. The protection offered by a liability insurance policy is twofold: a legal defense in the event of a lawsuit commenced against the policyholder and indemnification (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the negligence of the insured, and will not apply to results of wilful or intentional acts by the insured.
Public liability insurance covers a business against claims should its operations injure a member of the public or damage their property in some way.
Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes made by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short.
Environmental liability insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of pollutants.
Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance".
Prize indemnity insurance protects the insured from giving away a large prize at a specific event. Examples would include offering prizes to contestants who can make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.
Professional liability insurance, also called professional indemnity insurance, protects insured professionals such as architectural corporation and medical practice against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate brokers, Insurance agents, home inspectors, appraisers, and website developers.
Credit
Main article: Credit insurance
Credit insurance repays some or all of a loan when certain things happen to the borrower such as unemployment, disability, or death.
Mortgage insurance insures the lender against default by the borrower. Mortgage insurance is a form of credit insurance, although the name credit insurance more often is used to refer to policies that cover other kinds of debt.
Many credit cards offer payment protection plans which are a form of credit insurance.
Other types
Collateral protection insurance or CPI, insures property (primarily vehicles) held as collateral for loans made by lending institutions.
Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilian workers hired by the government to perform contracts outside the U.S. and Canada. DBA is required for all U.S. citizens, U.S. residents, U.S. Green Card holders, and all employees or subcontractors hired on overseas government contracts. Depending on the country, Foreign Nationals must also be covered under DBA. This coverage typically includes expenses related to medical treatment and loss of wages, as well as disability and death benefits.
Expatriate insurance provides individuals and organizations operating outside of their home country with protection for automobiles, property, health, liability and business pursuits.
Financial loss insurance or Business Interruption Insurance protects individuals and companies against various financial risks. For example, a business might purchase coverage to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover the failure of a creditor to pay money it owes to the insured. This type of insurance is frequently referred to as "business interruption insurance." Fidelity bonds and surety bonds are included in this category, although these products provide a benefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fails to perform its obligations under a contract with the obligee.
Kidnap and ransom insurance
Legal Expenses Insurance covers policyholders against the potential costs of legal action against an institution or an individual.
Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and banks. It is used to protect public funds from tamper by unauthorized parties. In special cases, a government may authorize its use in protecting semi-private funds which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required.
Media Insurance is designed to cover professionals that engage in film, video and TV production.
Nuclear incident insurance covers damages resulting from an incident involving radioactive materials and is generally arranged at the national level. See the Nuclear exclusion clause and for the United States the Price-Anderson Nuclear Industries Indemnity Act)
Pet insurance insures pets against accidents and illnesses - some companies cover routine/wellness care and burial, as well.
Pollution Insurance which consists of first-party coverage for contamination of insured property either by external or on-site sources. Coverage for liability to third parties arising from contamination of air, water, or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specifically excluded.
Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties, guarantees, care plans and even mobile phone insurance. Such insurance is normally very limited in the scope of problems that are covered by the policy.
Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a real estate transaction.
Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medical expenses, loss of personal belongings, travel delay, personal liabilities, etc.
Insurance financing vehicles
Fraternal insurance is provided on a cooperative basis by fraternal benefit societies or other social organizations.
No-fault insurance is a type of insurance policy (typically automobile insurance) where insureds are indemnified by their own insurer regardless of fault in the incident.
Protected Self-Insurance is an alternative risk financing mechanism in which an organization retains the mathematically calculated cost of risk within the organization and transfers the catastrophic risk with specific and aggregate limits to an insurer so the maximum total cost of the program is known. A properly designed and underwritten Protected Self-Insurance Program reduces and stabilizes the cost of insurance and provides valuable risk management information.
Retrospectively Rated Insurance is a method of establishing a premium on large commercial accounts. The final premium is based on the insured's actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year's premium is based partially (or wholly) on the current year's losses, although the premium adjustments may take months or years beyond the current year's expiration date. The rating formula is guaranteed in the insurance contract. Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerous variations of this formula have been developed and are in use.
Formal self insurance is the deliberate decision to pay for otherwise insurable losses out of one's own money. This can be done on a formal basis by establishing a separate fund into which funds are deposited on a periodic basis, or by simply forgoing the purchase of available insurance and paying out-of-pocket. Self insurance is usually used to pay for high-frequency, low-severity losses. Such losses, if covered by conventional insurance, mean having to pay a premium that includes loadings for the company's general expenses, cost of putting the policy on the books, acquisition expenses, premium taxes, and contingencies. While this is true for all insurance, for small, frequent losses the transaction costs may exceed the benefit of volatility reduction that insurance otherwise affords.
Reinsurance is a type of insurance purchased by insurance companies or self-insured employers to protect against unexpected losses. Financial reinsurance is a form of reinsurance that is primarily used for capital management rather than to transfer insurance risk.
Social insurance can be many things to many people in many countries. But a summary of its essence is that it is a collection of insurance coverages (including components of life insurance, disability income insurance, unemployment insurance, health insurance, and others), plus retirement savings, that requires participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others):
National Insurance
Social safety net
Social security
Social Security debate (United States)
Social Security (United States)
Social welfare provision
Stop-loss insurance provides protection against catastrophic or unpredictable losses. It is purchased by organizations who do not want to assume 100% of the liability for losses arising from the plans. Under a stop-loss policy, the insurance company becomes liable for losses that exceed certain limits called deductibles.
Closed community self-insurance
Some communities prefer to create virtual insurance amongst themselves by other means than contractual risk transfer, which assigns explicit numerical values to risk. A number of religious groups, including the Amish and some Muslim groups, depend on support provided by their communities when disasters strike. The risk presented by any given person is assumed collectively by the community who all bear the cost of rebuilding lost property and supporting people whose needs are suddenly greater after a loss of some kind. In supportive communities where others can be trusted to follow community leaders, this tacit form of insurance can work. In this manner the community can even out the extreme differences in insurability that exist among its members. Some further justification is also provided by invoking the moral hazard of explicit insurance contracts.
In the United Kingdom, The Crown (which, for practical purposes, meant the Civil service) did not insure property such as government buildings. If a government building was damaged, the cost of repair would be met from public funds because, in the long run, this was cheaper than paying insurance premiums. Since many UK government buildings have been sold to property companies, and rented back, this arrangement is now less common and may have disappeared altogether.
Insurance companies
Insurance companies may be classified into two groups:
Life insurance companies, which sell life insurance, annuities and pensions products.
Non-life, General, or Property/Casualty insurance companies, which sell other types of insurance.
General insurance companies can be further divided into these sub categories.
Standard Lines
Excess Lines
In most countries, life and non-life insurers are subject to different regulatory regimes and different tax and accounting rules. The main reason for the distinction between the two types of company is that life, annuity, and pension business is very long-term in nature — coverage for life assurance or a pension can cover risks over many decades. By contrast, non-life insurance cover usually covers a shorter period, such as one year.
In the United States, standard line insurance companies are "mainstream" insurers. These are the companies that typically insure autos, homes or businesses. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Excess line insurance companies (aka Excess and Surplus) typically insure risks not covered by the standard lines market. They are broadly referred as being all insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in the states where the risks are located. These companies have more flexibility and can react faster than standard insurance companies because they are not required to file rates and forms as the "admitted" carriers do. However, they still have substantial regulatory requirements placed upon them. State laws generally require insurance placed with surplus line agents and brokers not to be available through standard licensed insurers.
Insurance companies are generally classified as either mutual or stock companies. Mutual companies are owned by the policyholders, while stockholders (who may or may not own policies) own stock insurance companies. Demutualization of mutual insurers to form stock companies, as well as the formation of a hybrid known as a mutual holding company, became common in some countries, such as the United States, in the late 20th century. Other possible forms for an insurance company include reciprocals, in which policyholders 'reciprocate' in sharing risks, and Lloyds organizations.
Insurance companies are rated by various agencies such as A. M. Best. The ratings include the company's financial strength, which measures its ability to pay claims. It also rates financial instruments issued by the insurance company, such as bonds, notes, and securitization products.
Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and product liability, professional indemnity, employee benefits, employers' liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
Captives are becoming an increasingly important component of the risk management and risk financing strategy of their parent. This can be understood against the following background:
heavy and increasing premium costs in almost every line of coverage;
difficulties in insuring certain types of fortuitous risk;
differential coverage standards in various parts of the world;
rating structures which reflect market trends rather than individual loss experience;
insufficient credit for deductibles and/or loss control efforts.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Neither insurance consultants nor insurance brokers are insurance companies and no risks are transferred to them in insurance transactions. Third party administrators are companies that perform underwriting and sometimes claims handling services for insurance companies. These companies often have special expertise that the insurance companies do not have.
The financial stability and strength of an insurance company should be a major consideration when buying an insurance contract. An insurance premium paid currently provides coverage for losses that might arise many years in the future. For that reason, the viability of the insurance carrier is very important. In recent years, a number of insurance companies have become insolvent, leaving their policyholders with no coverage (or coverage only from a government-backed insurance pool or other arrangement with less attractive payouts for losses). A number of independent rating agencies provide information and rate the financial viability of insurance companies.
Global insurance industry


Life insurance premia written in 2005


Non-life insurance premia written in 2005
Global insurance premiums grew by 11% in 2007 (or 3.3% in real terms) to reach $4.1 trillion. The macro-economic environment was characterised by slower economic growth in 2007 and rising inflation. Profitability improved in life insurance and fell slightly in the non-life sector during the year. Life insurance premiums grew by 12.6%, accelerating in the advanced economies with the exception of Japan and Continental Europe. Non-life insurance premiums grew by 7.6% during the year. Figures for premium income are not yet available for 2008, but the insurance industry is likely to see a slowdown in new business and falling investment revenue.
Advanced economies account for the bulk of global insurance. With premium income of $1,681bn, Europe was the most important region, followed by North America ($1,330bn) and Asia ($814bn). The top four countries accounted for nearly 60% of premiums in 2007. The US and UK alone accounted for 42% of world insurance, much higher than their 7% share of the global population. Emerging markets accounted for over 85% of the world’s population but generated only around 10% of premiums.
Controversies
Insurance insulates too much
By creating a "security blanket" for its insureds, an insurance company may inadvertently find that its insureds may not be as risk-averse as they might otherwise be (since, by definition, the insured has transferred the risk to the insurer,) a concept known as moral hazard. To reduce their own financial exposure, insurance companies have contractual clauses that mitigate their obligation to provide coverage if the insured engages in behavior that grossly magnifies their risk of loss or liability.[citation needed]
For example, life insurance companies may require higher premiums or deny coverage altogether to people who work in hazardous occupations or engage in dangerous sports. Liability insurance providers do not provide coverage for liability arising from intentional torts committed by the insured. Even if a provider were so irrational as to want to provide such coverage, it is against the public policy of most countries to allow such insurance to exist, and thus it is usually illegal.[citation needed]
Complexity of insurance policy contracts
Insurance policies can be complex and some policyholders may not understand all the fees and coverages included in a policy. As a result, people may buy policies on unfavorable terms. In response to these issues, many countries have enacted detailed statutory and regulatory regimes governing every aspect of the insurance business, including minimum standards for policies and the ways in which they may be advertised and sold.
For example, most insurance policies in the English language today have been carefully drafted in plain English; the industry learned the hard way that many courts will not enforce policies against insureds when the judges themselves cannot understand what the policies are saying.
Many institutional insurance purchasers buy insurance through an insurance broker. While on the surface it appears the broker represents the buyer (not the insurance company), and typically counsels the buyer on appropriate coverage and policy limitations, it should be noted that in the vast majority of cases a broker's compensation comes in the form of a commission as a percentage of the insurance premium, creating a conflict of interest in that the broker's financial interest is tilted towards encouraging an insured to purchase more insurance than might be necessary at a higher price. A broker generally holds contracts with many insurers, thereby allowing the broker to "shop" the market for the best rates and coverage possible.
Insurance may also be purchased through an agent. Unlike a broker, who represents the policyholder, an agent represents the insurance company from whom the policyholder buys. An agent can represent more than one company.
An independent insurance consultant advises insureds on a fee-for-service retainer, similar to an attorney, and thus offers completely independent advice, free of the financial conflict of interest of brokers and/or agents. However, such a consultant must still work through brokers and/or agents in order to secure coverage for their clients.
Redlining
Redlining is the practice of denying insurance coverage in specific geographic areas, supposedly because of a high likelihood of loss, while the alleged motivation is unlawful discrimination. Racial profiling or redlining has a long history in the property insurance industry in the United States. From a review of industry underwriting and marketing materials, court documents, and research by government agencies, industry and community groups, and academics, it is clear that race has long affected and continues to affect the policies and practices of the insurance industry.[19]
In July, 2007, The Federal Trade Commission released a report presenting the results of a study concerning credit-based insurance scores and automobile insurance. The study found that these scores are effective predictors of the claims that consumers will file. (http://www2.ftc.gov/os/2007/07/P044804FACTA_Report_Credit-Based_Insurance_Scores.pdf)
All states have provisions in their rate regulation laws or in their fair trade practice acts that prohibit unfair discrimination, often called redlining, in setting rates and making insurance available.
In determining premiums and premium rate structures, insurers consider quantifiable factors, including location, credit scores, gender, occupation, marital status, and education level. However, the use of such factors is often considered to be unfair or unlawfully discriminatory, and the reaction against this practice has in some instances led to political disputes about the ways in which insurers determine premiums and regulatory intervention to limit the factors used.
An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss will occur. Any factor that causes a greater likelihood of loss should theoretically be charged a higher rate. This basic principle of insurance must be followed if insurance companies are to remain solvent.[citation needed] Thus, "discrimination" against (i.e., negative differential treatment of) potential insureds in the risk evaluation and premium-setting process is a necessary by-product of the fundamentals of insurance underwriting. For instance, insurers charge older people significantly higher premiums than they charge younger people for term life insurance. Older people are thus treated differently than younger people (i.e., a distinction is made, discrimination occurs). The rationale for the differential treatment goes to the heart of the risk a life insurer takes: Old people are likely to die sooner than young people, so the risk of loss (the insured's death) is greater in any given period of time and therefore the risk premium must be higher to cover the greater risk. However, treating insureds differently when there is no actuarially sound reason for doing so is unlawful discrimination.
What is often missing from the debate is that prohibiting the use of legitimate, actuarially sound factors means that an insufficient amount is being charged for a given risk, and there is thus a deficit in the system.[citation needed] The failure to address the deficit may mean insolvency and hardship for all of a company's insureds.[citation needed] The options for addressing the deficit seem to be the following: Charge the deficit to the other policyholders or charge it to the government (i.e., externalize outside of the company to society at large).[citation needed]
Insurance patents
Further information: Insurance patent
New assurance products can now be protected from copying with a business method patent in the United States.
A recent example of a new insurance product that is patented is Usage Based auto insurance. Early versions were independently invented and patented by a major U.S. auto insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish independent inventor, Salvador Minguijon Perez (EP patent 0700009).
Many independent inventors are in favor of patenting new insurance products since it gives them protection from big companies when they bring their new insurance products to market. Independent inventors account for 70% of the new U.S. patent applications in this area.
Many insurance executives are opposed to patenting insurance products because it creates a new risk for them. The Hartford insurance company, for example, recently had to pay $80 million to an independent inventor, Bancorp Services, in order to settle a patent infringement and theft of trade secret lawsuit for a type of corporate owned life insurance product invented and patented by Bancorp.
There are currently about 150 new patent applications on insurance inventions filed per year in the United States. The rate at which patents have issued has steadily risen from 15 in 2002 to 44 in 2006.
Inventors can now have their insurance U.S. patent applications reviewed by the public in the Peer to Patent program. The first insurance patent application to be posted was US2009005522 “Risk assessment company”. It was posted on March 6, 2009. This patent application describes a method for increasing the ease of changing insurance companies.
The insurance industry and rent seeking
Certain insurance products and practices have been described as rent seeking by critics.[citation needed] That is, some insurance products or practices are useful primarily because of legal benefits, such as reducing taxes, as opposed to providing protection against risks of adverse events. Under United States tax law, for example, most owners of variable annuities and variable life insurance can invest their premium payments in the stock market and defer or eliminate paying any taxes on their investments until withdrawals are made. Sometimes this tax deferral is the only reason people use these products.[citation needed] Another example is the legal infrastructure which allows life insurance to be held in an irrevocable trust which is used to pay an estate tax while the proceeds themselves are immune from the estate tax.
Glossary
'Combined ratio' = loss ratio + expense ratio + commission ratio. Loss ratio is calculated by dividing the amount of losses (sometimes including loss adjustment expenses) by the amount of earned premium. Expense ratio is calculated by dividing the amount of operational expenses by the amount of written premium. A lower number indicates a better return on the amount of capital placed at risk by an insurer.
'SSA' = subscriber savings account.
'AIF' = attorney in fact.
'Premium" = payment to an insurance company for a service. This word is a marketing term to replace "price".
See also
Find more about Insurance on Wikipedia's sister projects:
Definitions from WiktionaryTextbooks from WikibooksQuotations from WikiquoteSource texts from WikisourceImages and media from CommonsNews stories from WikinewsLearning resources from Wikiversity
ACORD
Earthquake loss
Financial services (broader industry to which insurance belongs)
Five for One
Geneva Association, The (the International Association for the Study of Insurance Economics)
Global assets under management
Insurance Hall of Fame
Insurance law
Insurance Premium Tax (UK)
Intergovernmental Risk Pool
The Invisible Bankers: Everything the Insurance Industry Never Wanted You to Know (book)
List of finance topics
List of insurance topics
List of United States insurance companies
Social security
Uberrima fides
Universal health care
Welfare state
Country Specific Articles
· Insurance in Australia
· Insurance in India
· Insurance in the United States
Notes
^ This discussion is adapted from Mehr and Camack “Principles of Insurance”, 6th edition, 1976, pp 34 – 37.
^ "Insured cars by state". Insurance Information Institute. http://www.economicinsurancefacts.org/economics/state/insuredcars/.
^ C. Kulp & J. Hall, Casualty Insurance, Fourth Edition, 1968, page 35
^ However, bankruptcy of the insured does not relieve the insurer. Certain types of insurance, e.g., workers' compensation and personal automobile, are subject to statutory requirements that injured parties have direct access to coverage. Ibid, page 35
^ Ibid, page 35
^ http://www.abi.org.uk/About_The_ABI/role.aspx
^ Fitzpatrick, Sean, Fear is the Key: A Behavioral Guide to Underwriting Cycles, 10 Conn. Ins. L.J. 255 (2004).
^ See, e.g., Vaughan, E. J., 1997, Risk Management, New York: Wiley.
^ "And whereas I have left in the hands of Doctor Ducke Channcellor of London two pollicies of insurance the one of one hundred pounds for the safe arivall of our Shipp in Guiana which is in mine owne name, if we miscarry by the waie (which God forbid) I bequeath the advantage thereof to my said Cosin Thomas Muchell...whereas there is an other insurance of one hundred pounds assured by the said Doctor Arthur Ducke on my life for one yeare if I chance to die within that tyme I entreat the said doctor Ducke to make it over to the said Thomas Muchell his kinsman..." Will of Robert Hayman, 1628:Records of the Prerogative Court of Canterbury, Catalogue Reference PROB 11/163
^ Dickson (1960): 4
^ Dickson (1960): 7
^ Insurance Information Institute. "Business insurance information. What does a business owners policy cover?". http://www.iii.org/individuals/business/basics/bop/. Retrieved 2007-05-09.
^ Insurance Information Institute. "What is auto insurance?". http://www.iii.org/individuals/auto/a/whatis/. Retrieved 2008-11-11.
^ Insurance Information Institute. "What is homeowners insurance?". http://www.iii.org/individuals/homei/hbasics/whatis/. Retrieved 2008-11-11.
^ "Builder's Risk Insurance". Adjusters International. http://www.adjustersinternational.com/AdjustingToday/ATfullinfo.cfm?start=1&page_no=1&pdfID=4. Retrieved 2009-10-16.
^ U.S. Patent Application 20060287896 “Method for providing crop insurance for a crop associated with a defined attribute”
^ Margaret E. Lynch, Editor, "Health Insurance Terminology," Health Insurance Association of America, 1992, ISBN 1-879143-13-5
^ http://www.ifsl.org.uk/upload/Insurance%20Update%202008.pdfPDF (365 KB) page 16
^ Gregory D. Squires (2003) Racial Profiling, Insurance Style: Insurance Redlining and the Uneven Development of Metropolitan Areas Journal of Urban Affairs Volume 25 Issue 4 Page 391-410, November 2003
^ Insurance Information Institute. "Issues Update: Regulation Modernization". http://www.iii.org/media/hottopics/insurance/ratereg/. Retrieved 2008-11-11.
^ (Source: Insurance IP Bulletin, December 15, 2006)
^ Mark Nowotarski "Patent Q/A: Peer to Patent", Insurance IP Bulletin, August 15, 2008
^ Bakos, Nowotarski, “An Experiment in Better Patent Examination”, Insurance IP Bulletin, December 15, 2008
Bibliography
Dickson, P.G.M. (1960). The Sun Insurance Office 1710-1960: The History of Two and a half Centuries of British Insurance. London: Oxford University Press. pp. 324.
External links
Congressional Research Service (CRS) Reports regarding the U.S. Insurance industry
Federation of European Risk Management Associations
Insurance at the Open Directory Project
Insurance Bureau of Canada
Insurance Information Institute
Museum of Insurance - displays thousands of antique insurance policies and ephemera
National Association of Insurance Commissioners
The British Library - finding information on the insurance industry (UK bias)

History of Takaful

History
Muslim jurists acknowledge that the basis of shared responsibility in the system of "aquila" as practiced between Muslims of Mecca and Medina laid the foundation of mutual insurance. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages (marine insurance).
Takaful
Takaful is an Arabic word meaning “guaranteeing each other” or joint guarantee.
The Tabarru' system is the main core of the Takaful system making it free from uncertainty and gambling. Tabarru' means "donation; gift; contribution." Each participant that needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of Takaful is to pay a defined loss from a defined fund.
Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and cooperation. Encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.
Takaful in the Modern Day
In the modern theory of Takaful we have not deviated at all. Pak Kuwait Takaful Company Limited is the operator of the Takaful fund. The participant’s contribution is deposited in the Takaful Fund operated by Pak Kuwait Takaful Company Limited. Out of this fund all claims will be settled and investments are made in Shariah Compliant Funds which are approved by our Shariah Board. At the end of the period after careful calculations the surplus amount of the fund will be returned to the participants of the fund on proportion.

Takaful Vs Conventional Insurance

Takaful Vs Conventional Insurance

Takaful Rules 2005

pak Takaful Rules 2005

Government of Pakistan
Ministry of Commerce
Islamabad, the 3rd September 2005
NOTIFICATION
S.R.O. 905(1)/2005 – In exercise of the powers conferred by sub-section (1) of section 167 of the Insurance Ordinance, 2000 (XXXIX of 2000), read with clause(lxiv) of section 2 and the second proviso to section 120 thereof, the Federal Government, is pleased to make the following rules, the same having been previously published as required by subsection (1) of the said section 167, namely :
1. Short title and commencement.-

(1) These rules may be called the Takaful Rules, 2005.

(2) These shall come into force at once.

2. Definitions. –

(1) In these rules, unless there is anything repugnant in the subject or context,

(a) accept re-Takaful includes risks from Takaful pools or re-Takaful pools managed by other Takaful or re-Takaful operators for inclusion in Takaful pools managed by the Takaful operator;
(b) Bank means the State Bank of Pakistan;
(c) Central Shariah Board means the Central Shariah Board constituted by the Securities and Exchange Commission of Pakistan under rule 33;
(d) contribution means Takaful charge or instalment payable by a participant;
(e) Family Takaful means Takaful for the benefit of individuals, groups of individuals and their families as elaborated in the provisions of the Ordinance pertaining to life insurance business;
(f) General Takaful means Takaful other than Family Takaful;
(g) mudaraba based contract means a Takaful contract based on the principle of mudaraba;
(h) Ordinance means the Insurance Ordinance (XXXIX of 2000);
(i) participant includes, where Takaful policy has been assigned, the assignee for the time being and, where he is entitled as against to participant Takaful Fund to the benefits of the policy, the legal heirs of a deceased participant;
(j) “Participants’ Investment Account (PIA)” means the investment account of the participants under a Family Takaful plan;
(k) “Participants’ Investment Fund (PIF)” means a separate fund comprising of the underlying assets representing the units of the PIA under a Family Takaful plan;
(l) “Participants Takaful Fund (PTF)” means a separate risk pool to which the participants’ risk related contributions are paid and from which risk related benefits are paid out;

(m) “Participants’ membership documents (PMD)” means the documents detailing the benefits and obligations of a participant;

(n) Principal Officer means a person, by whatever designation called, appointed by a Takaful operator and charged with the responsibility of managing the affairs of the Takaful operator;

(o) re-Takaful means an arrangement consistent with sound Takaful principles for re-Takaful of liabilities in respect of risks accepted or to be accepted by the Takaful operator in the course of his carrying on Takaful business and includes ceding risks from Takaful pool(s) managed by the Takaful operator(s) to one or more re-Takaful pool(s) managed by any other one or more Takaful operator(s) in line with Takaful principles;
(p) Shariah Board means a Shariah Board constituted by a Takaful operator for its Takaful business under rule 34;
(q) Shariah compliant investments means investment that adhere to principles and injunctions of Islam as laid down in Shariah (i.e., the Quran, Sunnah, Ijma and Qiya) and established by practice and usage and as approved by the Shariah Board of the Takaful operator;
(r) Takaful benefit includes any benefit, whether pecuniary or not, which is secured by a Takaful policy, and the word “pay” and other expressions, where used in relation to Takaful benefit, shall be construed accordingly;
(s) “Takaful broker” means a person who is permitted by the Securities and exchange Commission to carry on Takaful business as Takaful broker;
(t) Takaful business means business of Takaful whose aims and operations do not involve any element which is not in consonance with the injunction of Islam as laid down in the Shariah;
(u) Takaful policy includes any contract of Takaful for Family Takaful business or General Takaful business whether or not embodied in or evidenced by an instrument in the form of a participants’ membership document, and references to issuing a policy shall be construed accordingly;

(v) Takaful operator means a person who is permitted by the Securities and Exchange Commission to carry on Takaful business as Takaful operator;
(w) Wakala based contract means a Takaful contract based on the principle of Wakala ; and
(x) Window Takaful Operator means a life insurer registered under the Ordinance and carrying out the business of Family Takaful under window operations within its corporate structure, and follows the rules applicable to other Takaful operators.
(2) The words and expressions used but not defined herein shall have the same meaning as are assigned to them in the Ordinance.
3. Classes of Takaful business.-

(1) For the purposes of these rules, Takaful business shall be divided into the classes as specified in section 4 of the Ordinance.
(2) A Takaful operator may underwrite any or all classes of Takaful business provided that under each of the classes of Takaful business, approval shall be obtained from the Commission as to the permissibility of underwriting that class of Takaful business and the types of risks that may be permissible within each class. The objective of this being that risks of non-permissible classes of Takaful business such as which may not be in accordance with the principles of indemnification of losses or insurance of businesses of non-permissible items as defined by the Shariah Board may not be included in the Takaful operations.
4. Composite Takaful.-

The Commission shall not grant registration to any applicant nor would it permit grant an existing insurer the permission to underwrite and to carry on the businesses both of Family Takaful and General Takaful conjointly.

5. Window products or Takaful operations by conventional insurer.-

(1) Existing life and non-life or general insurance companies carrying on conventional business shall not be permitted to underwrite Takaful business or launch such products :
Provided that in case an existing non-life or general insurer wishes to transform its business into Takaful business, it shall be given a period of not more than one year from the date it start underwrite Takaful products, after which it would be required to underwrite Takaful products only. After this period, the licence of that insurer for underwriting conventional insurance business shall stand cancelled automatically. This period shall be meant to give such insurer time to establish itself in Takaful operations.
(2) The Commission, after at least five years of the start of Takaful operations in Pakistan, may allow window Takaful operations in consultation with the Ministry of Commerce to conventional insurance companies, subject to such terms and conditions as may be recommended or specified by the Commission from time to time.
6. Requirement for carrying on business as Takaful operator.-

Subject to these rules, Takaful business shall not be carried on in Pakistan by any person as Takaful operator who is not eligible under section 5 of the Ordinance and has not been granted a certificate of registration by the Commission under section 6 of the Ordinance.

7. Use of word “Takaful”.-

No person other than a registered Takaful operator shall, without the written consent of the Commission, use the word “Takaful” or any other word implying similar meaning indicating that such person carries on Takaful business in the name, description or title under which it carries on business in Pakistan or make any representation to such effect in any bill-head, letter paper, notice or advertisement or in any other manner whatsoever .

8. Takaful operational model.-
(1) The principal operational model for insurance risk management and the investment component shall be based on the Islamic concept of wakala and modarba, respectively.

(2) All contributions received under Family Takaful contracts shall be credited to the Takaful Business Statutory Fund. All such contributions shall be divided into the following components, the determination of each component being clearly and unambiguously defined in the participants’ membership documents (PMD), namely: -

(a) Investment component;
(b) risk related component; and
(c) Takaful operator’s fees.
(3) A separate Participants Takaful Fund (PTF) shall be created within the Takaful business Statutory Fund to which the risk related component of contributions and Takaful operator’ s fees shall be credited and from which benefits shall be paid out.
(4) The investment component shall be credited to one or more Participants’ Investment Funds (PIFs) , the proportion to be credited to each PIF being defined in the PMD. Each PIF shall be divided into Participants’ Investment Accounts (PIAs), a separate account being maintained for each PIA. Investment of funds may be made in consonance with the Islamic concept of the mudaraba, wakala or a combination of mudaraba and wakala at the option of the Takaful operator (or its Appointed Actuary in case of Family Takaful) and the Shariah Board as clearly spelled out in the participants’ membership documents.
(5) All contributions received under General Takaful contracts, net of any Government levies, shall be credited to one or more Participants Takaful Funds (PTFs). A General Takaful operator may create a single PTF or separate PTFs for different classes of business.
9. Participants Takaful Fund.-

(1) A PTF shall be a separate fund the purpose of which shall be the pooling of risks amongst the participants. The role of the Takaful operator shall be the management of the PTF and related risks. At the initial stages of the set-up of the PTF the Takaful operator and any of its shareholders may at their discretion make an initial donation or qard-e-hasna to the PTF. The objectives of the PTF shall be to provide relief to participants against defined losses as per the PTF rules and the PMD.

(2) The Takaful operator shall define the PTF rules which shall be in accordance with the generally accepted principles and norms of insurance business suitably modified with guidance by the Shariah Board of the Takaful operator. Any subsequent changes to the PTF rules shall also be approved by the Shariah Board.
(3) The income of the PTF shall consist of the following, namely :- (a) Contributions received from participants (other than the portion transferred to the PIF under Family Takaful policies) including Takaful operator’ s fees which should be a part of the contributions; (b) Claims received from re-Takaful operators and re-insurers; (c) Iinvestment profits generated by the investment of funds and other reserves attributable to participants in the PTF;

(d) Salvages and recoveries; (e) Qard-e-hasna by the shareholders fund to the PTF in case of a deficit; (f) Commission received from re-Takaful operators and reinsurers; and

(g) Any donation made by the shareholders. (4) The outgo from the PTF shall consist of the following, namely:-
(a) Losses settled related to participants risks and expenses directly related to settlement of claims such as surveyors’ fees, etc, but not including any office expenses. All expenses to be charged to the PTF (other than benefit payments) shall need to be defined in the PTF rules and the PMD;

(b) Re-Takaful and reinsurance costs; (c) Takaful operator’ s fees, which shall not be determined with reference to the surplus in the PTF;

(d) A share of investment profits of the PTF as mudarib's share, or a percentage of the funds as wakala fees for investment management or any other combination thereof approved by the Appointed Actuary (in the case of Family Takaful operator) and Shariah Board of the Takaful operator;

(e) Surplus distributed to participants; and

(f) Return of qard-e-hasna to the Shareholders Fund ; (5) Subject to the provisions of the Ordinance, technical reserves required to be set up in the PTF shall consist of all of the following reserves or any one of them, or any combination of two or more of them or such other reserves as the Appointed Actuary of the Takaful operator may require to be provided, namely :-

(a) Unearned contributions reserves ;
(b) incurred but not reported reserve ;
(c) deficiency reserve ;
(d) contingency reserve ;
(e) reserve for qarde-e-hasna to be returned in future ; and
(f) surplus equalization reserve.

10. Shareholders Fund (SHF).-

(1) A Shareholders’ Fund shall be maintained for Family and General Takaful business, on similar basis, as per the requirements under the Ordinance and the Securities and Exchange Insurance Rules, 2002, for life insurers, and non-life insurers, respectively. The Shareholders Fund shall be maintained under the guidelines provided by its Shariah Board and Central Shariah Board. The SHF shall consist of the paid-up capital and undistributed profits to the Shareholders.

(2) In the case of General Takaful operator, the income of the Shareholders Fund shall consist of the following, namely: -
(a) Takaful operator’ s fees, which shall not be determined with reference to the surplus in the PTF;
(b) profit on the investment of the SHF; and
(c) proportion of the investment profit generated by the investment of the PTF or the fees for investment as per the PTF rules and the PMD.
(3) The expenses of the Shareholders Fund shall consist of all the expenses related to the Takaful operator other than those mentioned in the PTF rules and the PMD and shall include all marketing as well as administrative, investment and operational expenses, except commissions or over-riders paid to the business intermediaries, benefit payments and related expenses such as surveyors’ fees.
(4) The shareholders must undertake to discharge unconditionally all the contractual liabilities of the PTF, but their liability in this regard shall not exceed the SHF.

11. Qard-e-hasna.-

When the PTF including reserves are insufficient to meet their current payments less receipts, the deficit shall be funded by way of an interest-free loan (qard-e-hasna) from the SHF.

12. Relationships.-

(1) For the risk sharing portion the relationship of the participants and of the Takaful operator shall be directly with the PTF. The Takaful operator shall act as the wakeel of the PTF and the participants shall pay contributions to the PTF.

(2) Being members of the PTF, the participants shall be entitled to the benefits as per the PTF rules and the PMD.
(3) The shareholders shall provide an undertaking to the PTF to provide the members benefits in the event that there is a deficit in the PTF at any point by giving a Qard-e-hasna to the PTF. The shareholders shall, however, have the right to recover the Qard-e-hasna payments to the PTF from future surpluses in the PTF.
(4) The other relationship with the Takaful operator shall be that of either mudarib or wakeel or both , where in the case of the PTF, the Takaful operator shall also act either as mudarib or wakeel or both to the PTF. Further in the case of the Family Takaful plans with a savings element, the Takaful operator shall also act either as mudarib or wakeel or combination of mudarib or wakeel relating to the PIF.
13. Payment of losses.-

(1) The Takaful operator shall, on the basis of set rules and regulations to be defined for the PTF and in the PMD, pay the losses of participants of the fund from the same fund as per its rules. Besides this, all expenses that shall be incurred for providing Takaful benefits such as re-Takaful contributions shall also be met from the same fund.
(2) The PTF rules shall lay out the broad terms and conditions under which claims and other benefits shall be payable and conditions and limitations which shall be applicable. The PMD shall contain specific details related to the risks covered for a specific risk and member.
(3) The PTF as well as PMD for each class of Takaful business shall be approved by the Shariah Board of the Takaful operator and after its approval the same shall be filed with the Commission and unless objected to in writing within fifteen days of such filling by the Commission the same shall assumed to be approved and remain in force and if objected to in writing the objections shall be removed by the Takaful operator to the satisfaction of the Commission.
14. Sharing of surplus.-

(1) At the end of each financial year the Takaful operator shall evaluate the assets and liabilities of the PTF and determine whether the operation for that particular period had produced a surplus or a deficit for sharing amongst the participants.
(2) The determination of surplus in the PTF shall be done at least once each accounting year.
(3) The determination of surplus shall be done by the Appointed Actuary for a Family Takaful operator; and by the Management of General Takaful operator. Such surplus shall be determined by carrying out evaluation as at the date of such determination.
(4) Surplus at each valuation date shall be made up of technical results and investment returns related to the PTF. Surplus shall arise from the total contributions paid by the participants to the PTF less the total value of claims paid (less claims received from re-Takaful or reinsurance and recoveries made) to hem for the risks covered under the PTF, less Takaful operator’ s fees charged related to Takaful operations managed by the Takaful operator, less commission paid to the intermediaries and the change in the technical reserves.
(5) Takaful operator may hold a portion of the surplus as a contingency reserve (over and above the technical provisions). The rest of the surplus shall be distributed to participants in proportion to the contributions to the PTF net of any risk related claims, which they may have received during the intervaluation period.
(6) In the case of General Takaful business the distribution of surplus shall be after each valuation. Contracts completing their risk period in the accounting year for which the valuation is done shall be taken into account for surplus distribution based on the results of the previous valuation.
(7) In the case of Family Takaful business the surplus distribution may be done after each actuarial valuation or it may be distributed only to those participants who actually leave the risk pool by way of termination of membership which may be due to the payment of benefits as per the PMD or otherwise. The determination of surplus shall consider the method of surplus distribution.
(8) A Takaful operator may compute the distributable surpluses on the basis of the combined results of all the classes of business or calculate the surpluses separately for each class.
(9) The distribution of surpluses to participants may be carried out more frequently than yearly, depending on the administration and computer systems of the Takaful operator.
(10) The Board of Directors, with the consent of the Shariah Board of the Takaful operator shall initially set out the detailed mechanism for the distribution of such surplus, and the frequency of distributions made annually, or more frequently after the technical evaluation of assets and liabilities. The mechanism shall form a part of the PTF and shall also be mentioned in the PMD.
(11) The Takaful operator may distribute surplus either in cash or adjust against future contributions or in the case of Family Takaful contracts, credit the surplus to the PIA. However in the case that a member does not wish to continue as a participant in the PTF it shall be necessary to pay surplus to such member based on his entitlement.
(12) If a participant wishes to donate its surplus for social or charitable purposes, this shall be done by the Takaful operator.
15. Deficit .-

In case of a deficit in the PTF, the Takaful operator shall undertake to give Qard-e-Hasna to the PTF to make good of the deficit. The Qard-e-Hasna may be recovered from future surpluses without any excess on the actual amount given to the PTF.

16. Management and marketing expenses.-

(1) All the administrative and management expenses of the Takaful operator, except those enumerated under sub-rule (4) of rule 9 , shall be borne by the shareholders in consideration of receiving a stipulated proportion of the gross contributions to the PTF by way of Takaful operator fee.
(2) The shareholders shall be responsible for all expenses of management and marketing, etc. Shareholders’ income shall include the Takaful operator fee and investment management fee or share, for the PTF and the PIF and investment income on the SHF. Takaful operator fees to be charged and the investment management fee or share shall be explicitly defined in each PMD and Takaful contract.
(3) All expenses of Takaful business shall form part of the expenses of Takaful Business Statutory Fund for Family Takaful operators; and Shareholders Fund for General Takaful operators.
17. Funds.-

(1) A Takaful operator shall maintain and administer two funds, one to be known as the Participants Takaful Fund (PTF); and the other the Shareholders Fund (SHF). Further in the case of Family Takaful plans, a Participants’ Investment Fund (PIF) related to the Participants’ Investment Account (PIA) shall also be maintained;
(2) For Family Takaful business, the PTF, PIF and PIA shall be linked to the Takaful Business Statutory Fund.
18. Participants’ Investment Fund (PIF).-

(1) In the case of Family Takaful plans, a portion of the contributions each year shall be invested to build up surrender values for the participants. These shall be maintained in the form of units for each participant in a Participants’ Investment Account (PIA). The underlying assets against these units shall be maintained in a separate fund to be called the Participants’ Investment Fund.

(2) The income and expenses of the PIF shall be maintained separately and unit price shall be determined at least once every month.

19. Investment management of funds.-

Investment of participants contributions within the PTF as well as in the PIF shall be managed under a wakala contract, a mudaraba contract or a combination contract as determined to be sound and workable by the Shariah Board of the Takaful operator. The Takaful operator shall set the fee structure and the profit sharing ratio on the investment management based on the advice of the Shariah Board and the Appointed Actuary, if any.

20. Product design.-

A Takaful product shall be based on the principle of wakala or mudaraba or both. The Appointed Actuary of the Family Takaful operator shall ensure that the products are sound and workable whereas the Shariah Board of the Takaful operator shall ensure that these conform to the Islamic principles.

21. Deposits.-

(1) A Takaful operator shall at all times maintain a deposit with the State Bank of Pakistan in accordance with the provisions of section 29 of the Ordinance.

(2) Any such deposit shall be made in cash or instrument of an approved Islamic financial institution. This deposit shall be marked as a lien to the State Bank of Pakistan.

22. Shareholders funds under capital or equity raised by the sponsor or Takaful operator.-

(1) For a Takaful operator, the Shareholders funds shall be maintained only in securities or in a manner which is not against Islamic principles and shall comprise mainly of securities which are approved by the Shariah Board of the Takaful operator.
(2) All income accruing and receivable in respect of a deposit shall be payable to, and receivable by, the Takaful operator making the deposit.
(3) The Takaful operator who has made a deposit under this rule may at any time substitute assets comprising the deposit cash and securities as may be specified by the Shariah Board.
23. Books and records of Takaful business.-

(1) Every Takaful operator shall maintain proper books and records of its business. The provisions of section 45 of the Ordinance shall apply to all Takaful operators.

24. Establishment and maintenance of Participants Takaful Funds, and allocation of surplus.-

(1) Every Takaful operator shall establish and maintain a Participants Takaful
Fund in respect of the class or each of the classes of Takaful business carried on by the Takaful operator in Pakistan so far as that business relates to policies issued in Pakistan.
(2) There shall be paid into a Participants Takaful Fund all receipts of the Takaful operator properly attributable to the business to which the Participants Takaful Fund relates (including the income of the Participants Takaful Fund), and the assets comprised in the Participants Takaful Fund shall be applicable only to meet such part of the PTF’ s liabilities and expenses as is properly so attributable.
(3) In the case of a Participants Takaful Fund established in respect of Family Takaful business, no part of the Participants Takaful Fund shall be allocated by way of Takaful benefits to participants except with the approval of the Appointed Actuary and out of a surplus of assets over liabilities as shown on the last statutory valuation of the Participants Takaful Fund and on the making of any such allocation that surplus shall be treated for purposes of this rule as reduced by the amount allocated.
(4) In the event of winding up, assets comprised in the deposit made by a Takaful operator under these rules shall be treated as assets of the Participants Takaful Fund established by the Takaful operator, and sub-rule (2) shall apply to those assets accordingly. In the event of winding up and if at the same time the Participants Takaful Fund is in deficit, the deposit should first be made available to meet that deficit. Only the left over shall be reimbursed to the shareholders.
(5) A Participants Takaful Fund established by a Takaful operator for any class of business shall, notwithstanding that the Takaful operator at any time ceases to carry on that class of business in Pakistan continue to be maintained by the Takaful operator so long as the Takaful operator is required under these rules to maintain proper books and records for policies belonging to that class.
25. Requirements as to assets of PTF.-

(1) The assets of the PTF shall be kept separate from all other assets of the Takaful operator, and shall not include assets comprised in a deposit under these rules, nor any amounts on account of goodwill, the benefit of development expenditure or similar items not realizable apart from the business or part of the business of the Takaful operator.
(2) The Commission may, in respect of assets of the PTF, require a Takaful operator.-
(a) not to make investments of a specified class or description; and
(b) to realize, before the expiration of a specified period or such extended period as the Commission may allow, the whole or specified proportion of investment of a specified class or description held by the Takaful operator when the requirement is made.
26. Solvency requirement.-

For the purposes of solvency requirement, subject to sections 32 to 39 of the Ordinance, all investments out of the Takaful operator and Participants Takaful Funds shall be made in the modes and securities approved by the Shariah Board of the Takaful operator.

27. Investment guidelines.-

(1) The Takaful operator shall be required to invest his available funds in his PTF and PIF in the modes and products that adhere to principles established by the Shariah and all such modes and products shall be approved by the Shariah Board of the Takaful operator.
(2) Limitations in terms of percentage investments in different Shariah compliant investments shall be issued by the Commission from time to time as new instruments become available in the market.
(3) The following guidelines shall be followed for investments of the surplus funds in the PTF, namely:-
(a) Investment in Shariah compliant Government securities.-Any Shariah compliant Government instrument such as Islamic bonds and securities restricted to eighty per cent of the funds; and
(b) Investments in immoveable property.-The Takaful operators shall be allowed to invest in immoveable property subject to the following conditions, namely:-
(i) the use and intended use of the property should be in compliance with the Islamic principles; and
(ii) return on rented property may be in the form of fixed rent but in case of delayed payments penalty may be charged and the penalty amount shall be given to charity.
(c) Investment in Joint Stock Companies.-The Takaful operator may invest its funds in joint stock companies. However, investments in non-Shariah compliant preferred stocks, debentures and interest based redeemable capital securities are not allowed. For investments in the common stocks of joint stock companies, the following guidelines should be followed in consultation with the Shariah Board, namely:-
(i) The main business of the investee company must not violate Shariah. Therefore, it is not permissible to acquire the shares, debentures or certificates of the companies providing financial services like conventional banks or the companies involved in business prohibited by Shariah like alcohol production, gambling or night club activities, etc;-
(ii) the Shariah Board of the Takaful operator shall take into consideration factors such as the proportion of income of the investee company from interest bearing accounts or non-Shariah based activities, the debt to equity ratio and cash or cash equivalents of the investee company; and
(iii) investment decision shall be based on fundamental value of the companies instead of short-term speculations.
(d) Investments in redeemable capital.- The Takaful operator may also make its portfolio investments through various mutual funds operating under the Shariah principles and approved by the Commission. Before making any investment therein, the Takaful operator shall have the procedures and practices being followed by such funds scrutinised by its Shariah Board.
(e) Investments in redeemable capital.-The Takaful operators may invest their funds in Shariah compliant instruments like Musharika Certificates, Term Finance Certificates (TFCs), Participation Term Certificates (PTCs), etc. However, in case of investment in redeemable capital it shall be necessary that the certificates are issued in compliance with the Islamic injunctions and the scheme of their issue be examined by the Shariah Board of the Takaful operator. The basic conditions as laid down earlier for investments in the common stock of joint stock companies should also be followed.
(f) Placement of excess funds with banks and Islamic financial institutions.-
The Takaful operators may invest a portion of their funds in liquid or short notice deposits schemes of Islamic banks and their branches or other Islamic financial institutions, placements in PLS saving accounts of Islamic banks and placement in current accounts of traditional banks without any return thereon.
(g) Financing under Islamic modes through the Islamic banks and financial institutions.-The Takaful operators may make arrangements with the Islamic banks operating in Pakistan to directly finance under musharika, murabaha, ijara (lease), salam, istisna contracts approved by the Commission.
28. Re-Takaful.-

(1) The Takaful operator shall ensure that the re-Takaful and reinsurance arrangements are consistent with the sound Takaful principles and are as per the guidelines provided by its Shariah Board.
(2) The provisions of section 41 of the Ordinance and rule 15 of the Securities and Exchange Commission Insurance Rules, 2002, shall also apply to Takaful business.
(3) In the event that the capacity provided by a Shariah complaint re-Takaful operator is not sufficient to support the business strategy of the Takaful operator, the Takaful operator, under advice of its Shariah Board, may be allowed to enter into re-Takaful and reinsurance contracts with conventional reinsurance companies till such time that proper re-Takaful arrangements are available.
(4) In the case of a Takaful operator the compulsory cession to the Pakistan Reinsurance Company Limited (PRCL) shall not be applicable. Howevr, where a share is offered to a conventional reinsurance company, in such a case it shall be necessary to first offer this to PRCL as per the requirements of the Ordinance.
(5) The Takaful operator may be permitted by the Commission to share risks with other Takaful operators within and outside Pakistan.
29. Acceptance of risk by Takaful operator.-

(1) Subject to sub-rules (2) and (3), no Takaful operator shall accept any risk in respect of any general business unless and until the contribution payable is received by the Takaful operator or is guaranteed to be paid by such person.
(2) Where the contribution payable under sub-rule (1) is received by any person, including a Takaful agent or a Takaful broker, on behalf of a Takaful operator, such receipt shall be deemed to be receipt by the Takaful operator for the purposes of that sub-rule and the onus of proving that the contribution payable was received by a person, including a Takaful broker, who was not authorized to receive such contribution shall lie on the Takaful operator.
(3) Any refund of contribution, which may become due to a participant on account of the cancellation of a policy or alteration in its terms and conditions or for any other reason shall be paid by the Takaful operator, from the PTF, directly to the participant and a proper receipt shall be obtained by the Takaful operator from the participant and such refund shall under no circumstances be paid or credited to any other person, including a Takaful broker.
30. Control of forms of proposal, policies and brochures.-

(1) The Commission may by notice in writing require a Takaful operator to submit the forms of proposal and policies for the time being in use by the Takaful operator, and any brochure which is for the time being in use there by the Takful operator for describing the terms or conditions of, or the benefits to be or likely to be derived from, policies; and where the whole or part of any such forms or brochure is not in Urdu or English there shall be submitted with it a translation in the Urdu or English.
(2) A requirement under this rule, unless it is otherwise provided therein, shall apply to all such forms and brochures as aforesaid coming into use after the making of the requirement and before the Commission notifies the Takaful operator that the requirement is withdrawn.
(3) If it appears to the Commission, after affording the Takaful operator an opportunity of being heard that any such form or brochure as aforesaid contravenes or fails to comply with any provision of these rules or is in any respect likely to mislead, it may, by notice in writing, direct the Takaful operator to discontinue the use of the form or brochure either forthwith or from a date specified in the notice.
Explanation.-For the purpose of this rule, the expression “brochure” includes any leaflet, circular or similar advertising matter, whether printed or not.
31. Shariah compliance audit.-

Takaful operator shall appoint a Shariah compliance auditor who will conduct its audit for each accounting period.

32. Accounting regulations.-

The regulations and statements under section 46 of the Ordinance shall apply to Takaful business with appropriate modifications based on the advice of the Shariah Board of the Takaful operator.

33. Central Shariah Board.-

A Central Shariah Board (CSB) may be appointed by the Commission for advice on any aspect of Takaful operations.

34. Shariah Board.-

(1) Each Takaful operator shall appoint a Shariah Board (SB) of not less than three members which shall be responsible for the approval of products, documentation as well as approval of all operational practices and investment of funds which shall be filed with the Commission.
(2) Since the Shariah scholars on the religious boards carry great responsibility, the Takaful operator shall appoint only high calibre scholars who are specialized jurists in fiqh almu’ amalat (Islamic commercial jurisprudence) to such Boards. In addition, they shall have knowledge of modern financial dealings and transactions.
(3) The Takaful operator shall submit to the Commission details of the members of its Shariah Board at the time of commencing Takaful business and at later dates if there is a change in the composition of the Shariah Board. The Commission may within thirty days of such submission, based on reasonable grounds, require a Takaful operator in writing to reconstitute its Shariah Board.
35. Meeting between Central Shariah Board and Shariah Boards.-

The Central Shariah Board may hold meetings with the members of the Shariah Boards of all Takaful operators, individually or jointly, anytime it deems fit to discuss development of Takaful business and also may hold such meetings on the request of Shariah Board of the Takaful operators.

36. Agent training.-

Each Takaful operator shall include in its agent training course, a classroom course on Takaful concepts of a minimum of eight hours duration. Every agent of the Takaful operator intending to sell Takaful business shall be required to attend such course.

37. Business in rural areas.-

To ensure a steady growth of Takaful business in all parts of Pakistan, the Takaful operator shall be encouraged to market Takaful products effectively in rural areas.

38. General.-

(1) The provisions of the Ordinance, the Insurance Rules, 2002, and the Securities and Exchange Commission (Insurance) Rules, 2002, shall also be applicable in addition to these rules. (2) In case of any conflict between these rules and the Insurance Rules, 2002, and the Securities and Exchange Commission (Insurance) Rules, 2002, the provisions of these rules shall prevail.

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