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A Nontechnical Guide on Optimal Incentives for Islamic Insurance Operators

Author

Listed:
  • Hayat Khan

    (Department of Finance, College of Business, Alfaisal University, Riyadh 11533, Saudi Arabia)

Abstract
The takaful industry is searching for an optimal model for Islamic insurance operation, which has turned out to be a challenging task. This paper translates the abstract scientific knowledge accumulated in the optimal contracting literature into a simple, nontechnical, analytical framework to analyze alternative business models which could be used by regulators to align the best interest of shareholders and policyholders in the takaful industry. This paper shows that the wakalah – surplus-sharing hybrid serves as the optimal structure for takaful operation; in the presence of Akerlof’s (1982) gift-exchange, the wakalah fee reduces the adverse selection problem; and the wakalah fee could be used to protect infant takaful operators.

Suggested Citation

  • Hayat Khan, 2019. "A Nontechnical Guide on Optimal Incentives for Islamic Insurance Operators," JRFM, MDPI, vol. 12(3), pages 1-14, July.
    • Handle: RePEc:gam:jjrfmx:v:12:y:2019:i:3:p:127-:d:251516
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    References listed on IDEAS

    as
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    Cited by:

    1. Rini Cahyandari & Kalfin & Sukono & Sri Purwani & Dewi Ratnasari & Titin Herawati & Sutiono Mahdi, 2023. "The Development of Sharia Insurance and Its Future Sustainability in Risk Management: A Systematic Literature Review," Sustainability, MDPI, vol. 15(10), pages 1-23, May.
    2. Dila Puspita & Adam Kolkiewicz & Ken Seng Tan, 2020. "Discrete Time Ruin Probability for Takaful (Islamic Insurance) with Investment and Qard-Hasan (Benevolent Loan) Activities," JRFM, MDPI, vol. 13(9), pages 1-24, September.
    3. Lukman Hanif Arbi, 2021. "A Contract Theory Approach to Islamic Financial Securities with an Application to Diminishing Mushārakah," JRFM, MDPI, vol. 14(1), pages 1-12, January.

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