Problematic of Asymmetric Information and Takaful Insurance System in the Insurance Sector

With the most basic definition, the concept of asymmetric information is the situation when one of the parties to a transaction has certain information, while the other party does not have full knowledge of this information.

Problematic of Asymmetric Information and Takaful Insurance System in the Insurance Sector

The most basic work on the topic, which is also expressed as limited information and data flow, is the analysis made by Akerlof. Having introduced the concept of asymmetric information through his article "The Market for Lemons" published in 1970, Akerlof stated that homogeneous and objective information does not exist in the ordinary course of life and that asymmetric information situation arises due to one-sided information flow on various subjects. As a result of this situation, there will be toxic risks called adverse selection and moral hazard.

There is market risk in the insurance field due to reasons such as limited foreseeability of future risks and related risk diversity. One of these problems, adverse selection, is the existence of insured individuals with a difference in the degree of risk occurrence. Some of these insured individuals may have high risk and some low risk. Due to asymmetric information flow, an adverse selection situation may arise in risk preference. 

One of the related risk factors, the concept of moral hazard, refers to the situation where the mass of the damage increases as a result of the emergence of exogenous risks that cannot be controlled by the insurance system. 

Due to the presence of such asymmetric information and derivatives, market actors will be able to take actions such as increasing the risk premium or narrowing the scope of risk coverage. In this case, since the risk appetite of the companies will decrease, insurance companies will be reluctant and the insurance market will be adversely affected.

Being the insurance systematic of Islamic economics that will solve such uncertainties, the Takaful system is a risk-sharing institution that allows transparent sharing of risk by pooling individual contributions for the benefit of all its members.

The concept of Takaful, which is derived from the Arabic word "kefâlet" (suretyship), refers to sharing responsibility and giving guarantees. Traditional insurance activities are not considered appropriate due to riba (interest) and garar (uncertainty) elements in Islamic economics. As an alternative to this system, Takaful practices are actively used in Islamic economics. 

Thanks to the structural features of the Takaful system, people in a certain risk group can be brought together on common ground, and it becomes possible to minimize the damage in the face of risks that may arise. The main purpose of the Takaful system is to ensure the risk distribution of the individuals participating in the system, rather than making a profit.

Through the Takaful system that has a common compensation mechanism created in this way, both the main problem related to the sector are minimized and the Takaful system acts as a catalyst for the development of Islamic economics. 

İbrahim Gökburun

Comments (0)
In order to comment, please login
Daily Survey All
Evaluate the 31h Issue of Katılım Finans!
Evaluate the 31h Issue of Katılım Finans!