Advancing Sharia Insurance Product for Natural Disaster Risks: A Collective Risk Model Approach

Abstract

Sharia insurance (takaful) serves as a means to promote solidarity and shared responsibility, helping protect individuals from unexpected risks by transferring or minimizing these risks through coverage provided by insurance companies. Sharia insurance is grounded in the concept of ta’awun which leads to mutual assistance and aims to eliminate forbidden elements in conventional insurance practices such as interest (riba), uncertainty (gharar), and gambling (maysir). Although interest rates are not used to calculate the present value of benefits, sharia insurance products can be improved through actuarial modelling based on expected risk levels and historical data. This paper creates a sharia insurance model for natural disasters of floods and earthquakes using the Collective Risk Model (CRM), with natural disaster frequency data distributed Poisson and natural disaster loss amounts distributed Weibull 3-Parameters. The result reflects the contribution value calculated using the expectation principle and standard deviation of total natural disaster losses. This study also provides a mathematical table as a model for applying the CRM’s contribution value to sharia insurance for natural disasters of floods and earthquakes. This table will detail how funds contributed by policyholders are managed, including the percentages allocated to personal accounts, the tabarru’ (donation) account, and ujrah (management fees), as well as the amounts of profit and benefits accrued to policyholders. This breakdown aims to promote transparency and fairness in shariah-compliant insurance for companies and policyholders, ensuring that fund contributions are managed equitably.