What is Risk & Insurance? Explain Financial Statements on Insurer’s.
In this assignment risk management will be analysed, the financial statements of the insurer’s and evaluating policies suitable for business. The course will focus upon Takaful insurance as a means of alternative to conventional insurance policy.
In conventional insurance the risk is transferred to the insurance company i.e. insurer from the policy holder i.e. insured in relation to the premium paid. It has uncertainty associated i.e. gharrar as it is impressible by Islam (Yakob et al.). The loss and compensation are uncertain here as it is a form of gambling (maisir) as insurer is paying the amount i.e. premium. The funds are invested as bonds, securities etc. attracting fixed interest. It contains usury ( riba) that is prohibited in Islam. The profit generated belongs to the shareholders and the insured is not getting the payment after the policy period expires.
Takaful is not sharing risk but, mutual cooperation is shared by individuals having same pool by having only takaful manager. The elements of gharrar, riba and maisir are eliminated by replacing it with conditional donations (tabarru) done for a good cause. The contribution is towards brotherhood in the spirit of purity (Ne’ea) and investments are made into non-interest funds. At the end the surplus generated is returned proportionality as per the contribution made at the end of the accounting period (Archer, Abdel Karim and Nienhaus).
Risk is a chosen probability action or process that leads to undesirable outcome and traditionally risk was associated with uncertainty of the events taking place in future. As stated by IFSB Chairman and Saudi Arabian Monetary Agency (SAMA) risk is not associated with religion. Risk in Islam in divided into two aspects unique and generic risk whereas, generic risk is having credit, market, oprtational and liquidity risk. Alternatively, unique risk includes shari’ah non risk, equity investment and commercial risk. In Islamic industry the most close to Takaful industry is unique risk. Risk management in insurance is used in terms of pure risks that may be only restricted to insured risks (Dionne 147-166). So, when an insurer speaks about risk management it deals with finding the ways of improving or reducing the potential loss of risk that is being invited or on the verge of invitation.
In terms of management from Islamic perspective the life of human being is organic with no differentiation in religions, secular and matters. They are guided by the principles of shari’ah as men are not responsible and accountable for their actions. The areas of Takaful insurance cover investment management, human resources and compliance. In Takaful industry it helps in identifying the Takaful operator losses and using the most appropriate for treating it effectively. They are observed by imposing conditions on them regarding outsourcing of the management funds for viewing its effectiveness by managing it effectively within risk management framework (Yusof, Lau and Osman 1). This is done along with Chief Risk Officer (CRO) liable for seeing the risks like operational risk by making it in compliance with Shari’ah. The role played by CRO is to identify the risk by taking integrated measures for it.
The risk management by Shari’ah is a system to control and monitor the assessment of Shari’ah and in order to manage the risks various objectives are guiding Takaful insurance. They are:
The risks associated with Takaful operators are of three types- financial, operational and business (Aris and Tapsir).
A financial statement is a formal record that contains the financial activities and positions in a business, entity or person. The information is presented in a systematic manner that is easy to understand thereby discussing and analyzing it effectively. The various kinds of financial statements in respect to insurer’s are:
It is also refereed as statement of financial position that contains the information about the organization liabilities, assets and owners equity at a specific time period. It represents the financial position at the end of financial quarters (Fraser and Ormiston). The advantages are:
The disadvantages are:
This is done in respect to specific time period of business that includes income and expenses with a time span. The information is generated on ROI, operating capabilities and financial flexibility. It includes two sections- non-operating and operating whereas, in operation section it contains expenses and revenues. Similarly, non-operating section has gains and revenues for non-primary business activities that consist of interest expense, finance costs and income tax expense. (Damant 10-18) The pros being:
The cons being:
It is statement that shows the operation of the organization affecting the cash in a financial year period. It contains the funds flow statement and cash statement. The advantages are:
The disadvantages are:
The policies of insurance have to be governed by insurance agreement that is inclusive of conditions, definitions and exclusions. It is a declaration that contains the information about the risk that insurance companies have to abide by (Rejda). The declaration contains the information risk that is limited to activity, insured property of the insured, name of policyholder etc. The insurance agreement covers the indemnity loss taking into account all risks and perils based name. In the first page of the insurance the terms and information included are:
The conditions contain the clauses that are specific to the condition as per set standard with some exclusion like narrowing of responsibility in case of loss. Any changing taking place in the document at original risk has can be changed i.e. delete or additions can be made further in the form of endorsements (Merkin and McGee). The validity of the contract is dependent on both parties that can be for long period, short period or one year. It includes payment terms of the policy, cancellation etc. In some cases deductibles are mentioned by paying the amount that is dependent on lower the premium amount bigger is the deduction.
The policies that govern a business are discussed below:
This provides financial compensation to the insured to be in the same place as before the loss occurred to gain the same financial position. The value of the insurance paid should be agreed beforehand as the insured does not make any profit (Gephart). The money provided is on the basis of valuation on the basis of two aspects:
In insurance term interest represents financial relationship with an individual and as per insurable interest it is forming a legal relationship. It is a matter of insurance that provides them with the right by being in the relationship legally. In this policy various terms like leased by, care, owned by, control or custody, rented by is used for the effectiveness (Mehr and Cammack). It is applicable in varied case some of them being tour operator or auto loan. This is applicable in various insurance such as:
In insurance two parties are involved in the process –insurer and insured whereas, in this the insurer is serving the right to recover the amount paid by i.e. indemnity. It includes recovering the money from third party who is involved in the damage. The process begins even before the claim is paid that is applicable only in case of a clause in being inserted (Rejda). It is done to insure one’s own benefit against the third party and action taken by the insurer’s subrogation should be performed in the name of insured.
This principle of insurance states that insurers are liable to pay the claims that is causing losses due to insured perils and not by uninsured perils or expected losses. A loss that has occurred may be due to number of causes or a combined effect taking place. In claiming the insurance one dominant cause has to reflect for paying money as all cases might not attract compensation.
When an individual is opting for the insurance policy it is the duty of the insurer to disclose all accurate and voluntary materials associated with it. It is done before signing by keeping good faith wherever needed and in order to be efficient physical risk assessment is undertaken (Merkin and McGee). This procedure appoints assessor who judge the risk better by understanding it for example- UAE motor of data sharing. The insurance contract may be breached if any misrepresentation and any non-disclosure of information take place. It includes hiding personal details like fever from childhood, intentional motive etc.
This is related to the claim that applies between the insurers of double events where two or more policies are getting affected on behalf of the insurer getting the same interest by agreeing in sums of the agreed amount that is exceeds the indemnity allowed legally. The interest of both the parties should be same having the same problem by having a loss. The policies undertaken should cover the same matter and for this as proportionate amount needs to be paid by insurer occurring at the time of loss (Gephart).
Conclusion
From the above discussion it can be concluded that insurance and contract is dependent on both the parties entering into contract. The risk of the insurance companies on Takaful insurance has to be insured in response to the market. The insurance companies have to analyse the risk in relation to Takaful by checking the financial statement of the insurer’s. The insurance contract formed has some rules and regulations upon which it is set that is profitable to business. Thus, Takaful insurance used by the people have to be within the regulatory measures.
References
Archer, Simon, Rifaat Ahmed Abdel Karim, and Volker Nienhaus. Takaful Islamic Insurance. Singapore: John Wiley & Sons (Asia) Ltd., 2009. Print.
Aris, Nooraslinda Abdul and Roszana Tapsir. “RISK AND RISK MANAGEMENT OF TAKAFUL INDUSTRY”. JOURNAL OF GLOBAL BUSINESS AND ECONOMICS 4.1 (2012): n. pag. Web. 21 May 2016.
Damant, David. “The Revolution Ahead In Financial Reporting: A New World – What The Income Statement Means To Financial Reporting”. Balance Sheet 11.4 (2003): 10-18. Web.
Dionne, Georges. “Risk Management: History, Definition, And Critique”. Risk Management and Insurance Review 16.2 (2013): 147-166. Web.
Fraser, Lyn M and Aileen Ormiston. Understanding Financial Statements. 3rd ed. Upper Saddle River, N.J.: Prentice Hall, 2004. Print.
Fridson, Martin S and Fernando Alvarez. Financial Statement Analysis. Hoboken, N.J.: Wiley, 2011. Print.
Gephart, William F. Principles Of Insurance. 3rd ed. New York: Macmillan, 2005. Print.
Guthmann, Harry G. Analysis Of Financial Statements. 3rd ed. New York: Prentice-Hall, 2005. Print.
Mehr, Robert Irwin and Emerson Cammack. Principles Of Insurance. 3rd ed. Homewood, Ill.: R.D. Irwin, 2005. Print.
Merkin, Robert M and Andrew McGee. Insurance Contract Law. 3rd ed. London: Kluwer Pub., 2005. Print.
Peterson Drake, Pamela and Frank J Fabozzi. Analysis Of Financial Statements. Hoboken, N.J.: Wiley, 2006. Print.
Rejda, G. (2006). Principles of Risk Management and Insurance (9th ed.). Dorling Kindersley, India.
Yakob, Rubayah et al. “Solvency Determinants Of Conventional Life Insurers And Takaful Operators”. Asia-Pacific Journal of Risk and Insurance 6.2 (2012): n. pag. Web.
Yusof, Aida Yuzi, Wee-Yeap Lau, and Ahmad Farid Osman. “Risk-Based Capital Framework: Conventional Vs. Takaful Operators”. jmr 7.2 (2015): 1. Web.
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