Takaful - The Role of Insurance in Trade and Commerce

Insurance plays an essential role in modern trade and commerce because many business activities involve significant financial risks. In some industries, appropriate insurance protection is a practical or contractual requirement before an activity can take place. By providing financial protection against specified losses, insurance allows businesses to conduct commercial activities with greater financial security and reduces the impact of unexpected events such as accidents, damage, fire, theft, or loss of goods.

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This is particularly important in industries such as aviation and maritime transportation, where the potential financial consequences of an accident can be extremely large. Insurance does not prevent an accident or loss from occurring. Instead, it provides financial protection by compensating for covered losses according to the terms and limits of the insurance policy. In a takaful arrangement, a similar protective function is provided through a Shari’ah-compliant risk-sharing structure.

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Insurance also has strong historical connections with trade and commerce. Early forms of organised insurance developed because merchants faced substantial risks while transporting goods over long distances. Ships could sink, cargo could be damaged or stolen, and traders could suffer major financial losses. The need to manage and share these risks contributed to the development of insurance arrangements and, eventually, the modern insurance industry.

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Example 1 – Aviation

An airline company operates aircraft to transport passengers and cargo. The airline or aircraft owner/operator obtains insurance or takaful protection because it may be financially responsible if an aircraft is damaged or if an accident causes injury or loss.

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Who is covered?

The airline, aircraft owner, or aircraft operator is generally the insured party or takaful participant. Depending on the type of coverage, protection may also relate to liabilities arising toward passengers and third parties.

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What may be covered?

Coverage may include physical loss or damage to the aircraft, liability for injury or death of passengers, damage to third-party property, and other liabilities specified in the policy or takaful certificate.

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Practical Example:

If an insured aircraft is seriously damaged during a covered landing accident, the insurance or takaful arrangement may provide compensation for the covered repair or replacement costs, subject to the terms, exclusions, deductibles, and coverage limits.

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Example 2 – Transportation of Goods by Sea

An exporter in Malaysia sells electronic equipment to a buyer overseas and ships the goods by sea. During the journey, the vessel encounters severe weather and some of the cargo is damaged by seawater.

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Who is covered?

Depending on the commercial agreement and who bears the risk during transportation, the exporter, importer, cargo owner, or another party with an insurable interest in the goods may arrange marine cargo insurance or takaful protection.

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What is covered?

The protection generally relates to the goods or cargo being transported against specified risks such as accidental physical damage, loss, fire, collision, or certain risks occurring during transit, depending on the agreed terms of cover.

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Practical Example:

If RM500,000 worth of electronic equipment is shipped and part of the cargo suffers covered seawater damage during the voyage, the insurance company or takaful fund may compensate the eligible loss according to the policy or takaful certificate.

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These examples demonstrate why insurance and takaful are important to trade and commerce. They enable businesses to manage potentially large financial losses by protecting specific persons, organisations, property, cargo, and liabilities against defined risks. In takaful, this protection is structured according to Shari’ah principles through mutual assistance and shared responsibility among participants.