Conventional Insurance

The Definition of Conventional Insurance

Terminologically, insurance is contract made by a company or society, or by a state, to provide a guarantee of compensation for loss, damage, sickness, death, etc in return for regular payment[1].  

According to Fuad Mohd Fachruddin the commercial insurance is a contract between two parties, insured and insurer, with the policy, the insurer receives the premium; it’s one of the regular sum of paid, in cash or credit, from the insured and the insurer promises to indemnify all of losses may be suffered him[2].

Afzalur Rahman provided the similar definition with Fuad Mohd Fakhruddin;he defined the insurance as a contract whereby one person, called the insurer, undertakes, in return for agreed consideration, called the premium to pay to another person, called the insured, a sum of money, or its equivalent, on the happening of a specified event[3]. The specified event must have some element of uncertainty about it; the uncertainty may be either as the case of life insurance, in the fact that, although the event is bound to happen in the ordinary course of nature, the time of its happening is uncertain, or in the fact that the happening of the event depends upon accidental causes, and the event, therefore, may never happen at all. 

Willet, Kulp, Riegel, Miller and Peffer, all provide similar definition that insurance is the concept of risk pooling-of group sharing of losses. That is, persons exposed to loss from a particular source combine their risk and agree to share losses on some equitable basis[4].

Thus, in very simple word, a contract of insurance is a contract between two parties, the insurer and the insured, the former promises to compensate the latter on the happening of a definite event in return for his contribution.

Based on some ideas of economic experts toward the definition of insurance above, it can be concluded that an insurance agreement involves five essential conditions:

a.       There must be a contract of insurance between the parties,

b.      The event should involve some amount of uncertainty,

c.       There must be contract for the payment of some amount of money, or some benefit which becomes payable to the insured person on the happening of an event,

d.      Compensation is promised by the insurer in return for the payment of contributions of premiums by the insured,

e.       The event must be against the interest of the insured.

The History of Conventional Insurance Development

The concept of insurance is closely related to group life. It originated from the human need to find safeguards against the problem risks to himself and his property, but when, how and by what people it was started is shrouded in mystery and obscurity.  

All historians agreed that the concept of insurance didn’t appear in primitive era yet. With assumption, in primitive society, people lived together in families or tribe in which their needs fully met and protected through cooperation and mutual. They, therefore, did not feel the need for insurance because they were fully protected against all sorts of risks by community.    

The appearance of insurance is closely related to human civilization. The historians have marked Egypt and Mesopotamia as the oldest centers of civilization[5], with its fertile valleys of Nile, the Euphrates and the Tigris, where men would cease to wander and settle down almost unawares, forgetting all about their nomadic group life[6]. Traders in that territory used the basic of insurance concept since around 4.000 years B.C. They implemented this concept because they felt uncertain accidents would against their security and safety in trading, cause of nature or non-nature factors[7].     

Yet, however the written insurance concept regulation just comes to be known at era of Hammurabi, the fourth king of Babylon[8] (1782-1682 B.C), with archaeological discoveries which shown a law book[9] contained 300 sections. One of these sections contained one of insurance principles; it was “One for all”[10]. The contract found in this book, was the embryo of a concept later to be known the whole world over as the contract of Bottomry or Respondentia. Bottomry is, or rather was, a commercial contract whereby money (or goods) was advanced for trade purposes either as:

a.       True loans at a certain fixed rate of interest, under which the lender had no right to any share in the proceeding of the trading venture,

b.      Mixed loans and partnerships which, in addition to the payment of a fixed rate of interest to the lender irrespective of the result of the trading, entitled him to receive a share of the profits, if such profits exceeded a certain sum[11].     

The next stage in the evolution of Bottomry was its development by the Greeks during the ninth and tenth centuries B.C., it was not merely adopted, it was also adapted and perfected. Romans, whose adopted business concepts from Babylon, Phoenicia[12] and Greek, developed these concepts to be insurance form.  

But the economists are sharply divided on the concept of bottomry; did it can be called as insurance concept. Anyhow, the though kernel of Bottomry was the beginning of modern insurance development.

Any early signs of modern insurance in scientific form and on premium basis seemed to appear in the European countries in the middle of the thirteenth century[13]. This insurance was known as marine insurance. This form was undoubtedly associated with the merchants of the cities of Lombardy and notably Florence in Italy, 1250. Dinsadle said that in the Middle Ages, trade was mainly centered in the Mediterranean, with well-known trade routes to the East; Constantinople and India, and to the North; Florence, Genoa, Palermo and Venice which became the centers for banking, commerce and insurance at that time[14].

From Italy, then marine insurance spread to Spain, France, England and other countries of Europe. The intensive trading by Barcelona since the end of fourteenth century caused marine insurance to flourish early in Spain. The earliest agreement known bears the date of the April 12^th 1428. On November 21^st 1435, by the insurance Ordinance of the Magistrates of Barcelona, Marine Insurance was for the first time, regulated by legal confirmation of existing practice[15]. Marine insurance was practiced in London, England and Le Rochele and Merseilles, France on the beginning of fifteenth century. They practiced the same style with the insurance in Italy.

At the sixteenth century, marine insurance contract grew up steadier than before. At that time, the insurance contract has used the printed policies[16]. Those policies were still written in Italian language, cause of Italian traders' domination. In this century, the practice of marine insurance resembled the practice of modern insurance that applied nowadays. Beside policies, they also used the insurance covering system which done collectively. And this collective covering system dominated entire practices of sea transportation insurance during ten years, up to the beginning of nineteenth century.

Specifically, the insurance companies appeared since eighteenth century. And on nineteenth century they developed rapidly in Europe, for instance in France with “Compagnie d’Assurances Generales” on 1753, and in England with “The Sun Fire” on 1710. Meanwhile in USA, were established “Mutual Relief Association” on 1752 and “Insurance Corporation” on 1772 as the first insurance company in Philadelphia[17].

The insurance arrived in Indonesia far before independent day, brought by Dutch who more than 350 years colonized this country. With proof, on 1845 was established a life insurance “N.V. Levens Verzekering Maatschappy van de Nederlande van” and fire insurance “Bataviasche See”[18]. But, formally, the insurance and its institution be included in agenda of Indonesia law on 1848, herewith the legalization of Dutch Trading Laws in Indonesia.

Furthermore, in the second decade of the beginning of twentieth century, were established many indigene insurance companies, one of the oldest was “Onderlinge Levernverzekering Maatschappy Bumi Putra” established on February 2^nd 1912 in Magelang, Central Java. Four years later, the group of Chinese ethnic in Semarang established also a loss insurance company, named by “NV. Indische Llyod, Algemene Verzekering Maatschappy”[19].

After the independent day on 1945, up toward 1950, the political situation in Indonesia did not give opportunity for insurance to develop. On 1950, Indonesian Government Banking established the insurance company, named by “Maskapai Asuransi Indonesia”, and on the years later came afterward many insurance companies in Indonesia[20]. Up to now, on 2003, hundred insurance companies were established in Indonesia, for only life insurance companies found more that 53 companies. One of them was PT. Asuransi Takaful Keluarga, the only one of life insurance company based on Islamic law[21].

The Principles of Conventional Insurance

As the other many profit oriented businesses, insurance has principles, they are:

a.       Principle of Indemnity[22]

Except life and personal accident insurance, every contract of insurance is normally a contract of indemnity because it insures compensation for loss to the insured. The insurance company agrees to recover this loss as the change of the receipt premium. The purpose of this agreement is to shift the burden of the probable risk from the insured on to the shoulders of insurance company[23].

The maximum limit of the insurer obligation is to take the insured on to his economic position as well as before the loss happening[24]. According to this principle, the insured is indemnified according to the limit of his loss and no more. He cannot receive any sum of money from insurer more than the value of his loss under any circumstances. In this matter, the insured is not allowed to make a profit.

b.      Principle of insurable interest

The insured must has an insurable interest; where a man is so circumstanced with respect to matter exposed to certain risks or damages, or to have a moral certainly of advantage or benefit, but for those risks or dangers, he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction[25]. 

In his book, T.J. Dorhout Mess explained that the definition of interest is a pure economic factor, so it is absolutely difficult to give its law limitation[26]. A man can has the insurable interest because of value decreasing of own subjective due. A burning house, for instance. This burning cause the house’s owner loses the interest that he has before the happening. Also, the man may have the interest because of his missing hope to gain something. Based on some cases above, it can be concluded that the definition of insurable interest, normally, is the risk.

The principle of insurable interest is important for policyholder because it can decide whether the insured is able to propose the claim. Therefore, the insured must know exactly the sources of insurable interest, whether it has the quality of article or the quality of due. 

c.       Utmost Good Faith Principle

The insured is required to state all facts accurately and in good faith. He must not make any misrepresentation with regard any facts. Any facts known to him must be disclosed, and he cannot escape the consequences of not revealing them by saying that he did not know. Failure to do so will render the contract voidable[27]. And finally, the insured cannot claim the insurer to fulfill the contract, and to compensate the loss, because the happening risk is different with the assured risk in the previous agreement.

---

[1]AS. Hornby, loc. cit.

[2]Fuad  Mohd Fachruddin, loc.Cit.

[3]Afzalur Rahman, op.Cit, p. 18.

[4]Ibid. 

[5]Morris, Civilization: An Historical Review of its Elements, Vol. I, p. 21, quoted by Dr. Mohammad Muslehuddin, MA, P.Hd., Insurance and Islamic Law, (Lahore: Islamic Publications Limited, 1978), Second Edition, p. 9.

[6]Wells, The Outline of History, p. 160-161, quoted by Dr. Mohammad Muslehuddin, MA, P.Hd, Ibid, p. 10.

[7]Dr. Sri Rejeki Hartono, S.H., Hukum Asuransi dan Perusahaan Asuransi, (Jakarta: Sinar Grafika, 2001), fourth edition, p. 32.

[8]Babylonia (Babylonian Bābili,”gate of God”; Old Persian Babirush), ancient country of Mesopotamia, known originally as Sumer and later as Sumer and Akkad, lying between the Tigris and Euphrates rivers, south of modern Baghdād, Iraq. (See in Microsoft Encarta Encyclopedia 2004 © 1993-2003 Microsoft Corporation. All rights reserved).

[9]This law book known as Code of Hammurabi, it is collection of the laws and edicts of the Babylonian king Hammurabi, and the earliest legal code known in its entirety. (See in Microsoft Encarta Encyclopedia 2004, ibid). 

[10]Drs. Supardjono, Peransuransian di Indonesia, (Jakarta: Departemen Pendidikan dan Kebudayaan, 1999), first edition, p. 1. 

[11]Afzalur Rahman, op. cit, p. 20.

[12]Phoenicia is ancient designation of a narrow strip of territory on the eastern coast of the Mediterranean Sea, now largely in modern Lebanon. (See in Microsoft Encarta Encyclopedia 2004, loc. cit.).

[13]Afzalur Rahman, op. cit, p. 25.

[14]Dinsdale, W.A., Elements of Insurance, London, 1965, p. 17, quoted by Afzalur Rahman, ibid.

[15]Afzalur Rahman, Ibid, p. 26.

[16]Dr. Sri Rejeki Hartono, S.H., op. cit, p. 37. 

[17]Ibid, p. 39.

[18]Drs. Supardjono, op. cit, p. 4.

[19]Dr. Sri Rejeki Hartono, S.H., op. cit, p. 52.

[20]Ibid.

[21]Ir. Agus Haryadi, Prospek Bisnis: Asuransi Syariah Takaful, www.tazkia.com, Tuesday, April 24^th 2001.

[22]Indemnity, in law, is an undertaking to compensate another for damage, loss, trouble, or expenses, or the money paid by way of such compensation. (See A.S. Hornby, op. cit, p. 633 and see also Microsoft Encarta Encyclopedia 2004, loc. cit)

[23]Supardjono, op. cit, p. 9.

[24] KUHD (Kitab Undang-Undang Hukum Dagang) section 253 verse: 1, see in Dr. Sri Rejeki Hartono, S.H., op. cit, p. 99.  Dinsdale, W.A., Principles and Practices of Accident Insurance (London: 1969), p. 46, quoted by Afzalur Rahman, op. cit, p. 91.

[25]Afzalur Rahman, op. cit, p. 82

[26]Dr. Sri Rejeki Hartono, S.H., op. cit, p.13  who excerpted the same matter from T.J. Dorbout Mees,  Schadeverzekeringsrecht, p. 108

[27]KUHD, section: 1338, verse: 3 and section: 251, quoted by Supardjono, op. cit, p. 13.