An Analysis of Determination for Life Insurance Premiums: The Concept and Practice of Conventional and Islamic Life Insurance (Family Takaful)
Abstract
This paper aims to analyze the distinction of premium setting rates by taking into account the risk taken by conventional and Family Takaful. This study employed the Net Single and Annual Level Premium formula, and the data were analyzed using a numerical simulation. We found that the conventional and Takaful insurance systems utilize similar methods in the calculation of insurance premium when considering pure risk faced by the participant or insured. However, both systems have their own unique characteristics. The conventional and Family Takaful utilize historical data, such as mortality rate, expected return rate, expected costs and expected amount of claims. The conventional insurance is calculated to mitigate or minimize the risk of the insurance company against an amount of claim faced in the future as long as the insurance is enforced until the contract ends. On the other hand, the Family Takaful is intended to share fair value among participants in determining benevolence through Tabarru premium. Every participant must pay for Tabarru premium to support one another so that there is sufficient amount to cover unexpected claims among them and to uphold mutual fund as evidence for the sense of mutual co-operation and brotherhood among participants.
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Keywords: Conventional and Islamic life insurance (Family Takaful); premium; rate making; Tabarru and Mudarabah
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