Do you know the serious shortcomings of Insurance in economics? (God’s proposed structure – part 15)
Lets work through an example:
1. In the shipping trade the Insurance contract was created to guarantee loan repayment in case of shipping failure (sinking etc.).
2. This led to the Moral hazard (change of behaviour towards more risk taking and misuse of Insurance benefits) of overloading ships to maximise profits of lenders and ship owners; as now they knew loan repayment was guaranteed and wanted to recover the Insurance costs plus there was no incentive for investment in ship safety.
3. Adverse selection (more of the risk takers apply for insurance) meant more of those ship owners that took the Insurance had the intention to get excess profits through overloading.
4. Result was disastrous with an increase in ship sinking and loss of many innocent sailors lives.
5. Without sailors there would be no trade and economy! Result was parliament created legislation and regulation (Unseaworthy Ships Bill of 1876), with lines (Plimsoll/Load Line) of maximum ship loads on the outside of ships that are still in use today.
6. The Insurance economic models (like banking) are not self correcting, rather they promote profit maximisation through revenue maximisation (not cost efficiency or rationalisation) and hence lead to catastrophic, continuous spiralling of inflation (general increase in prices).
7. The inflation effect can be seen in (1) the continually rising insurance premiums (e.g. healthcare). (2) The dual prices of Insured versus Uninsured fees for example the doctor and laboratory fees, and (3) the significant jump in fees once an Insurance is made mandatory in an economic sector (e.g. doctor’s fees once health insurance is mandated by law).
So while Insurance is “marketed” as a social safety net, it actually has the opposite effect. How does God propose this social safety net be structured? How should the economy and finance on the whole be structured?
Do you want to know more of what is allowed and what is forbidden ? How should the economy and finance on the whole be structured?
The book “Islamic Finance and Trade: God’s Economic System”, is the culmination of over 25 years of research, to present the answer to the above question. You are kindly invited to Read, Review and Recommend the book. It is available at https://a.co/d/f1jTXvP and on all Amazon sites.
