In a country like Pakistan which even many of its own residents consider an example of poor governance and malfunction, multinational corporations are hailed for incorporating efficient systems and governance. On the other hand, one finds several example of ‘social irresponsibility’ on the part of these organisations also, casting doubt on their ethical values.
It is primarily systems that ensure smooth functioning of an organisation, be it from the government sector or a corporation. The same is true for societies. Although these systems are man-made but once in place, depending on their effectiveness, they can sustain without human ‘factor’.
Certain organisations inherit systems from their governance models, which are prone to unethical practices. One such business model is that of insurance companies. A primary service of an insurance company is to mitigate risk by compensating the insured in the event of a financial mishap. However, it is always a small percentage of clients of insurance companies that experiences their services at the time of claim.
In the current global business models of insurance, there exists a concept of underwriting profits. These underwritten profits are calculated by subtracting the amount of claims paid from the total premium collected. A major portion of earnings of successful insurance companies have been constituted from underwriting profits.
Now every claim that is being paid, which is a primary service of an insurance company, inversely affects the profits of the company. It is unlike any manufacturing company where each product sold contributes positively towards earning profits. This business model has an inherent problem of governance, due to conflict of interest.
A similar problem arises in the case of customers. Clients often lodge false claims, because they have paid the price in the form of premiums. However, they haven’t experience the service of claim. If they do not have any claim for the covered period, they will lose the amount of money paid as premium because they have no interest attached to the pool of money which is meant for paying claims.
Identifying these problems, many companies have moved to business models which avoid tend to avoid them. A prime example of such business models is the takaful model functioning in Pakistan and the Middle East.
Takaful is a form of insurance which complies with the rules of Islamic Law. In this model, the risk is shared among the clients, whereas the company works only as a manager of the pool. Takaful company charges fee for maintaining and managing the pool.
This separates the interests of company from the pool which is to cover the risk. As the amount left in the pool, after paying all the claims, does not belong to the company, in fact, it belongs to the pool itself. The company may choose to return some of the amount to its existing customers while keeping the rest as a contingency reserve for next year, as the pool’s manager.
In this specific model, which is known as Wakala-Waqf model, it is interesting to note that the money collected in the pool (also known as Waqf fund) does not remain in the ownership of the participants either.
This amount is donated to the pool as a charity and it becomes a property of the pool which has been endowed (legally it comes under the ownership of God, according to Islamic Law).
Participants of the pool have their interests attached to it because the leftover is not counted as company profit. Many companies divide their surplus amount in the Waqf pool among current participants, future participants and society members who are eligible for charity.
The writer is a social scientist who writes about issues related to governance in Pakistan