Principle of profit sharing

QUESTION FROM JOURNALIST

Why do you need to charge higher premiums for takaful-based motor insurance?

ANSWER:

In a conventional product (ie profit not shared with policyholders), the shareholders take the entire risk. All profit or loss is borne entirely by the shareholders.

In a profit-sharing product, such as takaful insurance, a major portion of the profits goes to the participants. It is necessary to increase the premium rate by about 10% to 20%, to reduce the risk of loss (in case of bad claims). As the shareholders take only a modest portion of the profit, it is fair that they should bear a smaller risk of loss.

It is likely that the rebate (or share of profit) will be more than the additional premium, so that the net cost (after the rebate) will be attractive to the policyholder.

The profit sharing will also encourage the policyholders to work in cooperation to minimise the loss, as they can benefit from the share of profit. This will be good for the policyholders in the long run.