In the first chapter of this research study, an introduction on insurance will be presented. While, on the other hand, there will be a highlight on the differences between conventional and Islamic insurance. Following this, will be the problem discussion and the objectives of this study. Finally, there will be the justification and significance, following by organization of the study.
What Exactly Is Insurance Means
Buying insurance has become a trend in this twentieth century. According to The Star daily(2007), in the first half of year 2007, the combined premium income for insurance industry increase 9.8 percent compared to the same period for year 2006. The industry is further expanded in line with the favorable economics performance. People bought the insurance for their car, family, and business. People spend a lot of money on paying the insurance premium annually. While, do they actually clear on what kind of plan they had bought and what had they insured for their life, property and so on? Do they really distinct on the concept of the insurance that they had disbursed so much?
According to Bank Negara Malaysia, insurance is the transfer of risk by an individual, such as yourself or an organization, such as your business to an insurance company. You or your organization will then be known as policy holder or insured while the insurance company is the insurer. The insurance company receives the payment in the form of premium. Then the insurance company utilized the premium collect from their policy holder to make some investment for their company. They will compensate their policy holder in the event of losses or damages which is sustained by the premium paid.
In other word, insurance is a form of risk management primarily used to hedge against the risk of a contingent loss by paying an amount of premium. It is an effective risk transfer mechanism for insured to exchange their uncertainty financial loss with the certain amount of premium (Ahmad Ali Khan, 2003). This kind of insurance we titled as conventional insurance which is the ordinary type of insurance that accepted by the society in general.
While, other than the conventional insurance which we normally approached to, there are another type of insurance which we called as Islamic insurance. The Islamic insurance was step into Malaysia insurance market since November of year 1984 (Renat Bekkin, 2008). The first Islamic insurance company established in Malaysia was Takaful Malaysia Berhad. Early than that, Islamic insurance has stepping into the market of Sudan and Arab.
What is Islamic insurance
Islamic insurance is a mode of financial management which compliance to Shariah law. Islamic insurance is provided under a principle called Takaful. According to Islamic Banking, the term “Takaful” is derived from the Arabic word “Kafaala” meaning guaranteeing. Takaful means “guaranteeing each other” and refer to the concept of permissible Islamic insurance or Halal insurance. While by referring to Takaful Act 1984, Article 2, Takaful means a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose. Literally, Takaful defines responsibility, shared guarantee, collective assurance and mutual undertakings. (Ma’sum Billah, 2007)
Some Muslims believe insurance is unnecessary, as society should helps its victims. Muslims can no longer ignore the fact that they live, they trade and communicate with open global systems, and they can no longer ignore the need for banking and insurance (Dr Aly Khorshid, 2004). In the eyes of Muslims, the concepts used by conventional insurance are against the law of Shariah. This is because conventional insurance is based on a contract of exchange (sale) between the insurance company and the covered person. This contract is void because it has the elements which are not permissible from Shariah’s perspective.
The elements are Gharar which means uncertainty. Conventional insurance has an element of Gharar due to the promise to pay a sum of money upon the occurrence of unsuspected events. The other elements are Maysir which refer to gambling. Existence of Gharar (uncertainties) leads to Maysir (gambling) in conventional insurance. The insured may either lose the entire premium he has paid or be compensated for the losses he incurs for the insured event. Riba was also one of the not permissible elements in the law of Shariah. Riba means interest. The investment of insurance funds in interest bearing securities such bonds and stocks, which do not comply with the Shariah principles, pose a major Muslims who purchase the conventional insurance (Alburn Mountain, 2008).
In conventional insurance, vendors, the insurance company, sells their insurance plans to their clients, which we called as policy holder in the other way and invest the premium paid for the profit of its shareholder. Then, the policy holders do enjoy the risk transference that they are receiving the compensation if they face the financial loss on the events they insured. According to Islamic Banking, Takaful was grant as Islamic insurance because of the apparent similarity between the contract of “kafaala” and insurance.
Takaful is an Islamic concept which grounded in Islamic “Mualamat” which define as banking transaction (SP Media, 2009). This concept already practices in diverse form over 1400 years long (Salam, 2008). Generally, Takaful is an insurance plan which based on Shariah principles. The members are to contribute a certain amount of money to a common pool which is Takaful fund in the form of participative contribution that also called as Tabarru. Tabarru means a donation, charity or gift which cannot be taken back (Dr Qaradawi, 2002). In general Takaful, a percentage of the participants’ contribution is considered as Tabarru, thus it cannot be taken back by the participants as it is the joint guarantee principle to help other participants. A portion of a participants’ contribution will be allocate through Tabarru principle to help participants from a sudden but defined risks. After contributing the money into Takaful mutual fund, they will undertake a contract which called as Aqad in Islam, to become one of the participants by agreeing to mutually help each other, should any of the participants suffer a defined loss (Arshad Shaikh, 2007).
In Islamic insurance, participants (policyholders) are co-operating among themselves for their common goods. Every participants are to pay a part of the contribution (premium) as a donation to help those need assistance. Other than that, in Takaful system, losses are divided and liabilities spread according to the community pooling system. In order to eliminate the element of uncertainty in Takaful contract, the concept of Tabarru is incorporated. This is to enable the participant to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.
In conventional insurance, policy holder can buy more than one policy or plan to hedge the particular risk in the event of loss or damage. By this, the policy holders are lessening the claims of the insurance company because the same amount of compensation has now burden by two companies. This is called reinsurance which an insurance company can transfer to another insurer, the reinsurer all or part of its liabilities in respect of claims arising under the contracts of insurance. This is to protect itself against the risk that its total claims costs in any year may wiping out of its profits and cause it to insolvent. As same in Islamic insurance, participants can buy more than one plan from other licensed Takaful operator. This is called as Retakaful in Islamic insurance (Bahrain, 2005).
Why Takaful Insurance instead of Conventional Insurance
In Islamic view, the concept used in conventional insurance is in conflict with the injunction of Islam (Ahmad Ali Khan, 2003). The conflicts were not against the concepts used by conventional insurance that trades and contracts were appeared in the concept. While the struggling are the weaknesses and the imperfect phrase which existed in the insurance contract.
The objections are actually against the phrase of Gharar which means uncertainty, Maisir refers to gambling and the word Riba which point to the interest. The criticism was the word of Gharar is happened in the contract of insurance. Other than that, the phrase of gambling is presenting in its extreme form. What’s more is the element of interest is existed in the contract. These three phrases were the points appeared in the contract of conventional insurance that prohibited in Islamic view. Thus, they lead to the contradiction between conventional insurance and Islamic view (Ahmad Ali Khan, 2003).
While, there are the person who does not agree the above matters. According to Dr Yusof al-Qaradawi (2002), he does not think that the concept used in conventional insurance is conflict with Islamic law, but he agrees that the conventional insurance is in need of some improvement to move in line with Islamic teachings.
People are following the track of buying insurance nowadays. People buy insurance when there is a new born baby. They buy insurance during their travelling. Insurance also bought when people purchase a residential property. People also buy insurance for the sake of retiring. People buy insurance whenever they think there was an unseen risk hidden, but do they really know what is about insurance and what type of insurance is available in the market?
Throughout a number of searching by using the Google search engine and the library in campus, which was found that there are the surveys doing on Islamic Banking which may mentioned in various perspectives for instances the growth of Islamic banking in the world. Like what mentioning by Radio Australia, Islamic banking was one of the fastest growing sectors in the finance world which reveals by the value of the industry which worth of USD 1 Trillion in the year 2008. An addition, according to the bankers “Top 500 Islamic Financial Institution” survey, assets held by Islamic bank in year 2009 rose by 28.6 percent to 822 billion dollar from 639 billion dollar in year 2008. It posted a double-digit growth in the year 2009 despite of the economic slowdown occurred in the earlier year (Soren Billing, 2009).
Other than that, what was found is there are quite a number of researches which study on the topic related to insurance. There are talked about the insurance expansion in the industry, growth of the insurance industry, the rate of market penetration. According to KCLAU (2007), the market penetration of life insurance as measured in terms of the total number of policies in force to total population, grew to 39.3 percent as at end of June 2007.
While, besides the conventional which is generally accepted by the society, there are another type of risk transfer mechanism which is Islamic insurance was emerged in the other part of the globe. Islamic insurance was first widely spread over the Islamic country like Sudan, Arabic, India, South East Asia, and some other place in the world. The Islamic insurance also practiced in the region which is non Islamic country like European country and United of State.
Since the growing of Islamic insurance throughout the world is in such a fast track, while, the doubt appeared was, it was hard to find the study on Islamic insurance rather than the conventional insurance. Another doubt was appeared that what is the reason to separate insurance into Islamic and conventional? What is the different perspective between Islamic insurance and conventional insurance? While, the most is, do people aware of the existence of Islamic insurance in the insurance industry which they approached ordinarily? Following by this, is the discussion on conventional and Islamic insurance.
The general objective of this study is to clarify the different perspectives between conventional and Islamic insurance. While the other specific objectives as stated below which I am to study in this research.
The specific objectives:
- To investigate the different perception of Muslim and Non Muslim towards conventional and Islamic insurance
- To investigate the determinants of demand for insurance in Malaysians
- To determine the level of awareness on Islamic insurance in the region of Malaysia
Significance of Study
This study may help the Malaysian Islamic Finance market to move a step up due to the hike up of the level of awareness on the conventional and Islamic insurance. Other than that, the study also provides the Muslim and Non Muslim within Malaysia to walk out of the religious teachings and some other factors in order to know more about the issues of insurance. Therefrom, Malaysia’s Islamic finance market may improve follow by the fast track in other country like what happened to the “Top 500 Islamic Financial Institution”, that assets held by Islamic bank in year 2009 rose by 28.6 percent to 822 billion dollar from 639 billion dollar in year 2008. It posted a double-digit growth in the year 2009 despite of the economic slowdown occurred in the earlier year (Soren Billing, 2009).
Other than impacts on the country income and economic condition, this study also might helpful to the family or person who thinks of purchase insurance. By gone through this study, they are able to better analyze the product available in the market whether from the conventional insurance company or the Takaful operator which offer the Shariah compliance products and services. Then they are able to choose the best product which suit to them in terms of their needs, budget and also the religious teachings.
Other than this, the study also may help the insurance company or the operators to determine the consumer’s intention of buying on their product. They may use the useful information to improve their products in order to enhance or even develop a better market position for their company.
The growing in the insurance market plays an important role in the economic growth of the country. The growing may bring the country to a higher position in the world financial sector. Thus, Malaysia will stand still on the top of the world in the financial sector which playing the role of developing the conventional and Islamic insurance to the various country on the globe.
Organization of Study
This research report comprises of five chapters. The first chapter serves the introduction on insurance. It consists of the detail for conventional insurance and Islamic insurance. Problem statement and research objective is also discussed. Following the significance of study is presented. Lastly, the chapter one will end by the organization of study which show the flow out of the whole research project.
Basically, chapter two will present the literature review which forms the foundation of this study. It consists of the related empirical study which done by other researchers previously. There are few factors which impact on the demand of insurance and influential to customers’ perception are included in this chapter.
In chapter three, the research methodology of the study will be discussed. The research framework will be shown together with the hypothesis developed link together the variables in the study. Other than that, the sample planning, sources of data and data collection will also be carried out. Questionnaire design will also be laid out in this chapter following by the data analysis method which is the last part of this chapter.
Following by this is chapter four which describe the results and discussion. Hence, the graph and table will be widely used to better interpret the findings and result of the study.
Finally, chapter five will be the conclusion and the recommendation of this research. The level of awareness among Malaysian towards Islamic insurance will finally be presented and end this study.
Continue with the first chapter presented previously, this study is to observe the perception of Malaysia towards conventional insurance and Islamic insurance. For the sake of gaining a clearer view on this, exploring to the related literature is a must. Following, the overview of insurance and takaful will be presented. In 2.2, the discussion about the determinants impact on demand for insurance will be presented. Then, the study will indicate the perception of consumers towards conventional and Islamic methods of finance in few factors like the service quality, accessibility, convenience and status of the organizations. Lastly in 2.4, the awareness among Malaysian towards Islamic insurance will be discussed.
Overview of Insurance and Islamic Insurance
Insurance is a form of risk-management which transfer the possible risks like accident, theft, natural disaster and illness of one’s or a group to the more financially sound entity, insurers in exchange with a small amount of payment which we called as premium. The meaning of insurance is essentially to understand for everybody who is considering of purchase an insurance policy or to understand the basics of what if finance. This instrument is used in hedging risk precautionary against the future contingent losses (Stanley St Labs, n.d).
While, according to Insurance Info, insurance is being categorized two main categories which are life insurance and general insurance. The risks that covered by life insurance including premature death, income during retirement and illness. While the main products in life insurance are Whole life, Endowment, Term, Investment-linked, Life annuity plan, Medical and health.
For general insurance, it is basically a policy that protects you from losses and damages which other than those covered by life insurance, for instance, property loss like stolen car and burnt house. Other than that, liability arising from damage caused by oneself to a third party, accidental death or injury also covered by the general insurance. The products offered under general insurance are Motor insurance, Fire/House owner/Householder insurance, Personal accident insurance, Medical and health insurance and Travel insurance.
While for Islamic insurance, takaful, is a protection plan based on Shariah principles compliance. By contributing a sum of money to a common takaful fund in the form of participative contribution (tabarru), the person is undertaking a contract (aqad) to become one of the participants which agree to mutually help each other if any of the participants suffer a defined loss.
Both takaul and insurance have similar basic principles where the insured must have a legitimate financial interest in the risk you are insuring, which means the insured must suffer a financial loss when the insured event occurred. In takaful, the life insurance is granted as family takaful. The products offered under family takaful are Family Takaful, Investment linked takaful, Child education takaful, Medical and health takaful. While for general takaful, there are Home takaful, Motor takaful and Personal accidents takaful.
Perception towards Conventional and Islamic
Perception, as defined by Stephen P. Robbins (2005) is a process by which individuals organize and interpret their sensory impressions in order to give meaning to their environment. Perception is important in decision making process. An individual must fully understand the decision must make along with all of the facts and information involved. If an individual has a bad perception of the situation and do not consider all of the facts that are involved like the external factors which anyone else have no control over the individual may lead to a wrong decision. In turn, this will cause negative consequences for the organization and the individual. In order to have a good perception on any given situation, an individual must analyze all of the significant information involved in a timely manner, without making a hasty decision (Wally Sparks, 2007).
According to Shahril Bin Shafie (2003), quality is sought by all organizations, especially in the service sector. Service quality is commonly noted as a critical prerequisite for establishing and sustaining satisfying relationships between organization and the customers (Lassar et al., 2000). According to Yap, S.F., and Kew, M.L., there are many researchers who have defined service quality in different ways. Among them, Bitner, Booms and Mohr (1994) define service quality as the consumer’s overall impression of the relative inferiority or superiority of the organization and its services. While, other researchers like Cronin and Taylor (1994), view service quality as a form of attitude representing a long run overall evaluation. Service quality has determining the repeated purchase and customer loyalty to an organization. When a customer choose a provider that provides service quality that meets or exceeds his or her expectations, then the customer is more likely to choose the same provider again.
According to Erol and El-Bdour (1989), Erol, Kaynak, and El-Bdour (1990) and Haron, Ahmad and Planisek (1994) observed that Islamic bank consumers rated the speed and efficiency of services near their top selection criterion on finance service provider. By referring to a study conduct by Erdener Kaynak and Talha D. Harcar (2005) is found that, the service quality provide by conventional banking system is excellent than the others. The study indicated that the customer maintain a higher level of confidence in conventional bank rather than Islamic bank. In this study, the service being tested including the swiftness in correcting errors, fast and efficient service, and consumer complains handling and the courtesy personnel.
While according to Hendrik, L., Hirun, A., Razli, C.R., Halim, M.L., Khairul, A. A., and Darwina, A.A. (n.d), indicate that customer satisfaction on Islamic banking products and services is different across the cities. The service quality is satisfied within Johor Bahru, Kuala Lumpur and Penang because these cities are bigger which also contains more populations, and are more economically developed. Due to these reasons, the service provided is more satisfactory because of the customers characteristics which different from income level, gender and also educational level.Erol and El-Bdour (1989), Erol, Kaynak, and El-Bdour (1990) and Haron, Ahmad and Planisek (1994) observed that Islamic bank consumers rated the speed and efficiency of services near their top selection criterion on finance service provider.
The emergence of the Internet provides an opportunity for organizations to conduct business in cyberspace. Steven et al (2002), Soliman (2003), Wirtz (2001), Coltman (2001) had studied that Internet adoption and factors influencing the propensity and pattern of adoption among different sectors and sizes of organizations worldwide and in Malaysia, empirical data on online insurance has been limited (Fatimah et al, 2000; Yusserie at el, 2002). One of the reasons may be because the insurance industry has been slow to respond to the usage of Internet for business,, as compared to the other financial service (Esters, 1997). In 1999, recognizing the potential of the Internet, Bank Negara Malaysia allowed a group of insurers to establish the industry first interactive insurance website, which enabled policy owners to transact on the line for renewal of policy and also premium payment(BNM 2000).
Internet via individual company’s website allows customers to gain more information about the product and services offered by the companies (Ruquet, 2001). While, not all the business organizations are adopting Internet in their business due to various reasons like customer readiness, cost and the risks involved. Zinkewicz (2000) said that business do not use the Internet for business because customers do not trust the process involved, instead, they prefer human interactions (Ainin and Jaafar, 2003).
Accessibility is a general term used to describe the degree to which a product or service is accessible by as many people as possible. It also viewed as the ability to access the functionality and possible benefits of some system or entity like information of the particular products and services (Wikipedia, 2009).
In Malaysia, there are total up 1,752 numbers of registered insurance agencies distributed throughout the thirteen states and two federal territories. Among of all, there are agencies which offer both life insurance and also general insurance business like American International Assurance Bhd, Etiqa Insurance Berhad, Hong Leong Assurance Berhad and so on (BNM, 2008).
Other than that, there are only eight licensed Takaful operator in Malaysia which are CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad,Syarikat Takaful Malaysia Berhad and also Takaful Ikhlas Sdn Bhd (BNM, 2008).
Convenience is composed of number factors including the availability of parking space, location of branches, long operation hours. (Jasmi Al-Ajmi, Hameeda Abo Hussain and Nadhem Al-Saleh, 2009). Customers will always prefer the products and services are available near to their working place or house area for the convenience of visiting. The sufficient parking space and long operation hours is for the convenience when visiting to the branch.
Internet adoption is a type of convenience which offered by the insurance companies to their consumers, where consumers can get the products and services information through the website (Ainin and Jaafar, 2003). Other than that, interior comfort and external design also included affect the consumers’ perception on the convenience of selecting financial products.
Status of an organization show measured through the strength of financial position, reputation and also the risk. As Islamic finance continue to expand. Islamic principles strong emphasis on the economic, ethical, moral and social dimensions, to enhance equality and fairness for the good of society as a whole should also have appeal for the ethnically minded (Jasmi Al-Ajmi, Hameeda Abo Hussain and Nadhem Al-Saleh, 2009). Study which conducted by Ahasanul Haque, Jamil Osman and Ahmad Zaki (2009) also revealed that bank’s name and reputation is a strong effect on selecting a bank.
In order to penetrate the youth market, Takaful Malaysia announced on 11th November, that RM 15 million has been pumped into the company’s rebranding exercise. After twenty-five years of leading in Islamic insurance company in the country, Takaful Malaysia is setting on conquering the insurance industry by transforming itself into a more youthful outfit. Reflective of its tagline of modern, young and energetic, the company will unveils its new fresh-looking logo, a color fusion of apple green and olive green, described by Takaful Malaysia group director Datuk Hassan Kamil as vibrant and energetic. Takaful Malaysia believes that its latest approach will enhance its image and make it more appealing to the younger age-group which Hassan deems as a highly potential market segment (Joseph Kaos JR, 2009).
Other than the above criteria, according to a study conducted in Jordan indicated that profit motivated criteria was an important factor to choose a bank service. However, other findings are that peer group influence plays an important role in selecting Islamic banks as depository institution. Other than that, politeness and friendliness of the personnel will also impact on the customers’ perception towards the financial institutions (Ahasanul Haque, Jamil Osman and Ahmad Zaki, 2009).
Determinants of demand for insurance
Insurance has become an important part of a financial sector over the past forty years. It provides a range of investments product for consumers. It also becomes the major source of investment in the capital market. Yet, the reasons for consumption of insurance are various across the countries. Demographic factors were amongst (Thorsten Beck, 2003; Ian Webb, 2003, Yvette Reisinger, 2009). While according to the study conducted by Truett et al. (1990), the consumption of insurance is depend on the price of insurance, income level of individual, and also the demographic factors such as age of individual insured and also the educational level.
The majority women of American have health insurance through either employer or through a public program. There are 66.67 percents of all women aged from 18 to 64 owned insurance through their employer, while another 16 percents through public program in year 2007. In contrast, there is 7 percents of nonelderly women in year 2007 purchase health coverage directly from insurance companies which we known as the individual market. Yet, the National Women’s Law Centre (NWLC) investigated two phenomena, the gender gap which refers to the difference in premium charged to female and male applicants of the same age and health status. Another phenomenon is the availability and affordability of coverage for maternity care across the country.
Based on the research, NWLC (2008) found that the individual market is a place which is very hard for women to purchase the health coverage. This is because insurance companies can refuse to sell women coverage due to the historic data that women have a higher percentage compared to men in suffering from a chronic condition which requiring ongoing treatment for instances asthma or arthritis. In addition, if the insurers discovered that an applicant underwent a Caesarean Section (C-Section) during the medical underwriting process, the company may charge a higher premium, or impose an exclusionary period which it refuses to cover another C-Section or pregnancy. New reports also revealed that women are more likely than men in taking prescription medication on a regular basis. In these conditions, the insurance company may reject the applications.
On the other hand, it is difficult and costly for women to find health insurance that cover maternity care. A limited number of insurers offered this in separately for an additional fees which known as rider. Yet, this supplemental coverage is often far higher than ordinary plan. So typically, women have no other choice to select more or less comprehensive rider policy (NWLC, 2008).
According to Tienyu Hwang (2003) and Simon Gao (2003), the level of education plays a very important role in affecting the demand of insurance. It has been shown that the increasing of the educated population in a country, the recognition of the availability of insurance products will also be increased. Thus, the demand for insurance will also be growing in the country. Despite the education level in China is relatively low (Truett and monitor, 1996; World Bank, 1998), the increase in the education level will lead to a large number of people being realizing and able to recognize the essentiality of insurance. Therefore, it is likely to create a demand to purchase insurance.
On the other hand, although the level of education in China remains low, china has made a great progress in improving the education system since the economic reform. This has increase the education level which leads to a greater awareness and understanding on the role of insurance. Hence, the level of education and demand for insurance is positively correlated. However, Szpiro and Outreville (198) proved that higher education leads to lower risk aversion, and that, in turn, leads to more risk taking by skilled and well educated people. While accor