Sunday, 01 April 2007

Q: Why do we have two different insurance systems? Is the new vehicle insurance going to be better than the old drivers insurance?

-- Kamal Bahthaila, car rentals manager 

A: It would make life easier when we look at them as options. We currently have the commercially-based insurance option that is no different from any other form of business where profit-making is the objective. On the other hand, we have the so-called "Takaful" (literally meaning joint-responsibility), which also operates in the insurance field but takes on different gyrations. 

Takaful insurance finds its roots in a religious belief that "risk" should not before business because the contracting parties (the insurer and the insured) are not comparably situated with respect to information about damage (called in Shariah terminology: gharar).

An insurer is presumed capable of striking fear in the heart of a potential buyer as to lure him/her to buy what he/she may not truly need, or in excess of what is habitually required.

Takaful is closer to operating a cooperative; a policy-holder who pays premiums (called: subscriptions) is perceived as "contributor-subscriber" to a common good. The alleviation of financial losses when an injury or damage strikes a person with whom he/she has a common faith. If it so happens in any given year that premiums exceed claims the excess cash is to be equally distributed among the subscribers-contributors after, of course, deducting management fees and administrative expenses. And vice versa when premiums fall short of claims members are supposed to add more money to the pot. And just like commercial insurance, Takaful is prevalent in all areas of insurance (except life-insurance where it is forbidden).

Which is better? It is hard to say, but in Saudi Arabia only Takaful is permissible. Now that does not preclude the presence of commercial insurance businesses as branches or outlets for some big international names, but I guess you would have a hard time prosecuting your profit -minded insurer, if he violates the policy terms, in a court of law here. The judge would not even throw a glance at you.

On the other hand, even a non-profit-oriented insurance joint has to follow sound business practices. What good is Takaful to the public welfare if the management has no statistical record of the frequency of occurrences of the injurious events, estimates of past actual value of damages, their distributions among the various groups of the populace and assesses the price accordingly, for instance? Why should I, perceiving myself risk-avert when it comes to driving, be allocated "protection" burden equal to a teenager whom daddy bought a Ferrari on passing his SAT text? Aside from this minuscule "burning" I would say let the two fight it out and may the premiums drop like a dead-weight.

Now, effective March 31 your old drivers insurance became void and the new vehicle insurance took place. Why the new one? Well, it is the same old story of the "moral hazard" theme pertinent to all kinds of insurance and Takaful is not immune. A study commissioned by Taa'wunia (the National Company of Co-operative Insurance--NCCI) in 2006 shows auto insurers compiled more than SR 5 billion in traffic claims. Hundreds of cases were documented that showed a good number of the populace used auto insurance to profiteer or extend favors.

We misused it by exchanging insurance cards with friends and relatives in a mutual helping-each -other-out type of spirit, traffic police supposedly gave guilty verdicts to those who had insurance because auto insurance companies are filthy rich anyway and repair-shop owners did not help matters when they inflated the final repair bills by add-ons.

To make a long story meaningful, the auto insurers put pressures on the right spots and got themselves protected. Now almost every vehicle (tractors, heavy construction machineries, fire-engines, sewage-carriers and ambulances are excluded) would have to be insured separately.

By Omar S Bagour

© The Saudi Gazette 2007