THE ROLE OF INSURANCE IN RISK MANAGEMENT: MEDICAL AND HEALTH

INSURANCE AND TAKAFUL

In Malaysia, the insurance sector comprises of both conventional insurance

companies and takaful operator. Takaful also called as Islamic insurance due to the
operation of business are complied with Syariah principle. Nowadays, there are growing
concern of the need to have an insurance policy. Insurance policy is a binding contract within
two parties which are the insured and the insurer with the premium to be paid regularly to the
insurer. The concept of conventional insurance is based on the exchange of premium
payments now for future indemnities. Meanwhile takaful is a mutual insurance agreement
that comply with shariah principle. It is a risk fund that function based on mutuality among
the participant. The concept of takaful fund is participant will donate amount of money to risk
pool or takaful fund knowing that they will be compensated from the pool if specified type of
loss of occurrence happen.

Takaful is an alternative for muslims aside from conventional insurance that follows
Islamic rules and regulation. Muhammad Ayub (2009), holds the concept of an arrangement
of mutual help or indemhe whole tribe distributed the financial burden among the entire tribe.
The distinction between conventional insurance and takaful can be clearly seen in
investment fund where insurance companies invest their funds in interest-based without
concern the concept of halal or haram, takaful however complied with shariah rules and
principle where the profit distributed in accordance with pre-agreed ratio in takaful
agreement.

Muhammad khan (2010) define conventional insurance is where the insurer

undertakes to pay a policyholder a sum of money on the occurrence of specific events. The
issue is that conventional insurance has the elements of maisir, gharar and riba’. This can be
seen when the policyholder’s loss their premium paid if the loss does not occur. It also can
be the other way when the policyholder may be entitled to get more compared to premium
paid. We can conclude that the company promises to pay some money to the insured and
the insured agreed to pay some money if the risk does not happen. While takaful uses the
concept of tabarru’ which is charity. According to altuntas et al. (2011) as quoted in Syed
Ahmed salman (2014) in which since takaful is based on the concept of mutual assistance
and contribution, takaful can be alternative to insurance and it can be a business entity, not

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charity. It also can be profit oriented as well as non-profit oriented entity depends on which
type of takaful model implemented by the entities.

Although essentially both takaful and conventional life insurance serves the same
purpose of providing coverage, there are major differences between the two which are in
tern of intent, investment and returns.

Firstly, intent. In perspective on takaful, individual is entering the agreement to

contribute to a fund that can potentially help those experiencing the unfortunate situation. On
the other hand, a conventional insurance policy is purchased as a personal financial security
for an individual, and the insurance company is the risk bearer.

Next, in term of investment. The conventional investment units of insurance will

invest based on their assessment of what fits their profiles. However, takaful investments will
follow strict principles. Takaful cannot invest in anything that has elements of gambling,
uncertainty or the practice of lending money at unreasonably high-interest rates.

Finally, returns. If there is extra money because of low claim rates by insurers under
takaful, it will be distributed to participants. While the profits from investments will be
distributed to both participants and shareholders. Takaful operators make money through
performance fee or by sharing the surplus. But the total amount of payment from the surplus
that takaful operators get cannot exceed the amount that is paid to takaful participants.
However, under conventional insurance, extra money and profits belong to the shareholders
of the insurance companies.

Risk management is an emerging concept in modern business. It is the process that

identifies loss exposures faced by the organization and selects the most appropriate
techniques for treating such exposures. In other word, risk management is the practice of
identifying potential risks in advance, analysing them and taking precautionary steps. It also
the process of analysing exposure to risk and determining how to handle such exposure.

Risk management process is the best practices approach because it focuses on

understanding the key risks and managing them within acceptable levels. Risk management

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is a discipline for identifying risks and determining the ways to address the future goal or
minimizing harm and financial losses. Generally, risk is change constantly and occur anytime
to quantify the losses. Thus, risk management process is never finished because they must
be revised periodically. Therefore, insurance and takaful is one of several tools that available
to managing the risk. Basically, insurance and takaful is one risk control and risk transfer
tools which to avoid the risk entirely and reduces risk to an organization by passing the risk
along to others. It become common whenever an organisation wanted to remove the risk by
buying the insurance or takaful. Insurance and takaful is a tool in the risk management
process but doesn’t cover all the risks to which part of the organization may be exposed.
Generally, insurance is used when the potential severity of a loss is more than an
organization is willing to risk or retain on its own. Insurance and takaful is important to the
organisation in their operation. Not only to reduce or avoid the risk but provide assurance to
employees when the inevitable happens.

Medical and health insurance and takaful covers the cost of private medical
treatment, such as the cost of hospitalisation and healthcare, if you are diagnosed with
certain illnesses or have had an accident. Moreover, these kinds of policy will help you to
pay for the various hospitalisation and medical expenses that you will incur, if you become ill
or injured. These expenses will include hospital room and board, professional and surgery
fees and medical supplies and services. A medical and health insurance and policy will also
help you if you are not able to work because of illness or injury. By having medical and
health insurance or takaful for the employee that working for an organisation, these policies
will cover insurance coverage that pays for medical and surgical expenses incurred by the
insured. Medical and health insurance or takaful can reimburse the insured for expenses
incurred from illness or injury or pay the care provider directly. It is often included in
employer benefit packages as a means of enticing quality employees.

For example, if there is an accident involving an employee while performing task, or

suffer from health problem, the insurance company will pay for medical and surgical
expense’s employee involved. This will ease the burden of the employee as well as of the
organisation take care of the welfare of their employee. It also makes the employees at least
feel happy to serve the organisation.

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 There are several benefits covered under medical and health insurance and takaful.
The benefit covered under medical and health insurance and takaful consist of more than
thirty-six common critical illnesses and about nine service. For example, the common critical
illnesses that usually have been cover are heart attack, coronary artery bypass surgery,
kidney failure, major organ transplant, accidental head injury resulting in major head trauma,
paralysis (paraplegia, tetraplegia) and other serious coronary artery disease. Meanwhile, the
service covered under medical and health insurance and takaful such as hospitalisation,
intensive care unit, outpatient treatment, surgery, ambulance services and death benefits.
However, the benefits will depend on the type of plan that have been participated in.

There are several disadvantages of medical and health insurance or takaful in the
organisation. It involves the employer and employee. The disadvantage are it is a loss on
leaving organization, liability is not valid for retired employees, employer choose to
discontinue, the premium amount is same throughout the employees, and amount of
coverage may decrease.

Firstly, it is a loss on leaving organisation. The employee will not be covered under
this insurance policy if he or she wanted to leave the organization. One will not be eligible to
claim their bills and the amount paid towards the policy will be of no use. The employee only
legible for this policy till his/her last working day in the organisation. Basically, most of the
organisation does not pay once the employee left the organization.

Second, liability is not valid for retired employees. Since the employee is no more
working for the organization. One needs to invest money again to purchase a new policy to
get medical and health insurance coverage. Thus, it is not lifetime coverage and can be
considered a temporary protection.

Third, employer choose to discontinue. There is a risk involved, if by chance the

employer discontinues the policy and decides not to provide this protection to employees,
the premiums paid will be worthless and they are not covered anymore under this policy. As

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the employees decrease, the cost may increase and this will be burden to them, hence
choose to withdraw it.

Fourth, the disadvantage when an organisation provides medical and health

insurance or takaful, the premium amount is same throughout the employees. It is an
advantage for the unhealthy persons and loss for one who is not using the liability. These is
because a person who is fit and the person is have health problem will pay the same amount
of money, so the one who is at risk is benefited with less premium and major claim.

Fifth, the employees may be at risk because the employers may implement the policy
only for their benefit or for annual tax benefits. In this way the employees get trapped in
some companies and they pay for period of time, once the company drops, the coverage
and the amount paid is not useful.

Human beings, family, and the properties are always exposed to different kinds of
risks. Risk involve the losses. Insurance or takaful provides a safeguard against
uncertainties and risk. It also contributes a lot to the general economic growth of the society.
It provides stability to the functioning of the process. There are several importance of
insurance and takaful such as medical support, insurance provides security, insurance
reduces business risk or losses, insurance provides mental peace, insurance maintains your
family’s standard of living, spreading of risk, and source of collecting funds.

First, the importance of insurance and takaful is health and medical support. A
medical insurance is considered as an essential element in managing risk in health. Anyone
can be a victim of critical illness unexpectedly.

Moreover, insurance provides security. An organisation should not worry about the
losses or damages in their property if they are duly insured because insurance provides
security against death. Insurance also provides financial protection to business properties
against the risk of theft, fire accidents or any other natural disaster and insurance also
covered when the individual is unable to earn for personal accident and sickness.

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 Furthermore, insurance reduces business risk or losses. The business property may
be turned into ashes due to the slight negligence. A person may not be sure of his life and
health. He may be not able to continue the business up to the longer period to support his
dependents. Thus, with the help of insurance, he can be sure of his earning because the
insurance company will pay a fixed amount at the time of death, damage by fire, theft,
accident and other perils.

However, insurance provides mental peace. An individual can devote himself to

achieve efficiency in economic activities due to the peaceful state of mind. Insurance
removes the tensions, fears, frustrate and weakening of the human mind associated with the
future uncertainty. It provides peace of mind and stimulates more and better work
performance.

While, insurance maintains your family’s standard of living. Insurance has now
become an important instrument which provides financial protection against unexpected risk.
Insurance is a social device for spreading the chance of financial loss among many people.
The insured helps the individual to maintain his standard of living even that person is death.

Finally, spreading of risk. Insurance facilitates spreading of risk from the insured to
the insurer. The basic principle of insurance is to spread risk among many people. Many
persons get insurance policies and pay the premium to the insurer. Whenever a loss occurs,
it is compensated out of funds of the insurer.

In conclusion, there are difference between medical and health insurance and takaful
in term of principle, intent, investment and returns. However, the two policies have similar
function in risk management. Both policies cover the cost of private medical treatment, such
as the cost of hospitalisation, healthcare and help you to pay for the various expenses that
you will incur, if you become ill or injured. Furthermore, medical and health insurance and
takaful is one of the mediums in order to reduce or control the risks that change time to time.
It also provides financial protection to the organisation protection to business properties

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against the risk occurred. In addition, insurance or takaful also provides peace of mind and
stimulates more and better work performance.