Open Access is an initiative that aims to make scientific research freely available to all. To date our community has made over 100 million downloads. It’s based on principles of collaboration, unobstructed discovery, and, most importantly, scientific progression. As PhD students, we found it difficult to access the research we needed, so we decided to create a new Open Access publisher that levels the playing field for scientists across the world. How? By making research easy to access, and puts the academic needs of the researchers before the business interests of publishers.
We are a community of more than 103,000 authors and editors from 3,291 institutions spanning 160 countries, including Nobel Prize winners and some of the world’s most-cited researchers. Publishing on IntechOpen allows authors to earn citations and find new collaborators, meaning more people see your work not only from your own field of study, but from other related fields too.
Implementing suitable protection systems and measures for everyone is one of the aims listed in the 2030 Agenda for Sustainable Development to achieve considerable coverage of the poor and vulnerable groups. This encompasses safeguarding different life elements, such as health, economic, and social standing. According to the Centre for Poverty and Social Policy (2023), the net safety measures that protect the majority from poverty include the security of fundamental human necessities, that is, food and property such as housing and belongings. The necessity to protect properties, particularly those belonging to impoverished people, is critical since, in the case of a disaster, this group may suffer more damage and hardship. This chapter aims to unveil the concepts of protection of properties for the poor, that is, house and home contents protection through insurance policies and its role in enabling poverty reduction in particular.
*Address all correspondence to: puteri.fauzi@northumbria.ac.uk
1. Introduction
Poverty is a significant issue today and has become one of humanity’s biggest challenges [1]. The lack of adequate shelter, food, and healthcare has a profound impact on the lives of millions of people around the world. In recent years, there has been a growing recognition that property insurance can play a crucial role in reducing poverty by protecting people’s homes and businesses from natural disasters, theft, and other risks.
Reducing poverty by protecting properties through insurance is essential to modern-day development. In today’s globalised world, insurance has become essential for mitigating financial risks that often result in poverty and inequality [2]. Protecting properties through insurance is essential to safeguarding the assets of individuals and communities. Insurance policies can help alleviate the financial burden caused by property losses due to natural and man-made disasters, enabling individuals and communities to recover faster and reducing their vulnerability to poverty [3].
In today’s increasingly unpredictable climate and economic landscape, having insurance is vital for anyone who wants to protect their homes and other valuable assets. One of the main reasons why insurance is so crucial is that it provides peace of mind to policyholders. By knowing that insurance, individuals and families cover their properties can rest assured that they have a safety net in times of crisis. This security allows policyholders to focus on rebuilding their lives instead of worrying about the financial burden of repairing or replacing their homes and belongings. As such, insurance can be particularly beneficial for those who are most vulnerable, such as the poor and needy.
For low-income people, in particular, protecting their homes and contents through insurance is critical. A natural disaster such as a flood or a fire can be devastating for anyone, but it can be even more so for those living on a tight budget. Without insurance, such events can force vulnerable individuals or families into deeper poverty, making it difficult to get back on their feet. Insurance policies can prevent this from happening by providing financial protection for homes and their contents, ensuring that those in need receive the support and assistance they require when they need it most [4].
This chapter explores various ways in which insurance policies can be utilised to protect vulnerable sections of society. Specifically, the chapter delves into the concept of property protection for the poor and the role insurance plays in facilitating poverty reduction. Moreover, studies have shown that increased access to property insurance can significantly reduce poverty. In many cases, a single event, such as a natural disaster or theft, can wipe out an entire household’s savings, sending them into a downward spiral of debt. Insurance can help to mitigate these risks and provide a safety net for families, allowing them to recover more quickly from unforeseen setbacks.
One example of how insurance can promote development is through microinsurance, which provides coverage to low-income populations and those in vulnerable communities. In many cases, these policies are tailored to meet the specific needs of the communities they serve, such as crop insurance for subsistence farmers or home insurance for those living in disaster-prone areas. By pooling resources and sharing risks, communities can better protect themselves against unforeseen events and work towards building a stronger, more resilient future.
It is also worth noting that property insurance can positively impact economic growth as a whole. By protecting individual and commercial property, insurers can help promote investment and entrepreneurship, as businesses are more likely to take risks knowing they have a safety net in place. This, in turn, can lead to job creation and increased economic activity.
Poverty is a term used to describe the financial state of individuals or families who lack the resources to afford basic necessities such as food, clothing, and housing [5]. While poverty is often associated with a lack of money, it can also refer to a lack of other resources such as education, property protection and guarantee, healthcare, and access to technology [6].
Poverty can significantly impact individuals and communities, including decreased health outcomes, limited economic opportunities, and reduced access to education. Those living in poverty often have less stability and security in their lives, and this lack of stability can lead to a range of adverse outcomes, such as homelessness, substance abuse, and mental health issues.
A range of factors contribute to poverty, including economic policies, unequal access to education and employment opportunities, and discrimination based on race, gender, and other factors. Addressing poverty requires a multifaceted approach that includes policies to reduce income inequality, provide access to education and job training programmes, and address systemic issues such as discrimination and unequal access to resources [7].
Governments and Non-Governmental Organisations (NGOs) have implemented various strategies such as microfinance, cash transfers, and public works programmes to alleviate poverty. However, poverty reduction requires a long-term approach which involves addressing the root causes, such as inequality, lack of education, and lack of access to healthcare.
2.2 Causes of poverty
Poverty is a complex issue with no single cause, and its effects can vary depending on the circumstances. It is essential to understand that poverty is not a choice but the result of various factors that can make it difficult for individuals and communities to meet their basic needs.
One of the primary causes of poverty is unemployment or underemployment [8]. Without a stable job, individuals may struggle to make ends meet and fall into a vicious cycle of poverty. Unfortunately, many jobs in impoverished areas do not pay enough to support a family, making it difficult for those employed to make a decent living.
Lack of education is another significant factor that can perpetuate poverty [4]. When individuals do not have access to quality education, they are often unable to acquire the skills needed to secure better-paying jobs. They are also more likely to suffer from health problems due to a lack of knowledge about hygiene, nutrition, and other essential practices.
Poor governance and corruption can also lead to poverty. When leaders misuse public funds or neglect to provide adequate resources and infrastructure, their citizens suffer. Corruption often results in essential services such as healthcare, education, and transportation being unavailable or too expensive for the poor.
Natural disasters, war, and conflict are also enormous contributors to poverty [9]. These situations can displace entire communities and leave them without access to basic necessities such as food, water, and shelter. Moreover, the loss of infrastructure and livelihoods can have long-lasting effects that can take years or even decades to recover from.
2.3 Effects of poverty
Rising food and energy prices have become a significant concern across the globe. These spikes in prices are attributed to various factors. For instance, the ongoing conflict in Ukraine, climate shocks, and conflict have played a significant role in the increase in prices. Unfortunately, the impacts of these increases are felt the most by people living in extreme poverty. Reports suggest that, by the end of 2022, as many as 685 million people are projected to live in extreme poverty due to these high prices [9]. The current setbacks have exacerbated the challenge of global poverty reduction efforts. The rate of poverty reduction was already slowing due to the subdued global economic growth before these recent crises. As a result, the world is now further off track from achieving the goal of ending extreme poverty by 2030.
Specifically on properties, that is, houses as shelters, poverty significantly affects access to adequate housing, resulting in housing deprivation, which can cause various negative consequences. However, there are viable solutions to combat this issue and provide affordable and adequate shelter for low-income families [10].
Housing is a fundamental human right, yet millions of people worldwide still lack adequate shelter due to poverty. Poverty is a significant barrier to affordable housing, and its effects can cause housing deprivation, resulting in various negative consequences. Poverty significantly affects access to adequate housing, especially for low-income families. These families may face severe overcrowding and live in substandard conditions, posing a threat to their health and well-being [11]. The lack of access to formal housing leaves many people with no option but to settle in informal settlements, such as slums or shantytowns, where access to basic needs, such as water and sanitation, is limited [10, 12].
The effects of poverty on housing deprivation extend beyond inadequate housing [13]. Housing deprivation can negatively impact various aspects of an individual’s life. For instance, it can result in poor health outcomes due to exposure to hazardous environments. Furthermore, insufficient housing can lead to higher rates of crime and violence, particularly in overcrowded areas.
In many developing countries, traditional forms of insurance, such as community-based insurance and Islamic microinsurance, have been utilised with the aim of providing coverage for low-income households. These forms of insurance generally have relatively lower premiums and are more readily available to low-income households, which can be an effective strategy aimed at alleviating poverty. These traditional forms of insurance typically have a higher level of trust from citizens due to the fact that they are often run by community-based organisations that have built relationships with the people they are serving. Islamic microinsurance provides an alternative to traditional insurance options through its Shariah-compliant approach that includes a risk-sharing system which differs from conventional insurance models.
It is worth noting that insurance also serves a vital role in promoting economic growth by providing a buffer against financial shocks. For instance, with insurance, farmers can protect themselves against severe crop failures, which may have devastating effects on their livelihoods. Insurance can also help farmers recover from a setback and enable them to invest further in their farms and enhance and develop their products in the long run. In addition, credit access, particularly for low-income households, can benefit from insurance utilisation. By providing a safety net against financial shocks, insurance can reduce the risks that lenders may face when providing loans to low-income households, thus improving access to credit. This can increase the investment capital available in an area, attracting investors, creating jobs, and promoting overall economic development [14]. Therefore, insurance can be a significant driver in enhancing economic well-being and reducing poverty in developing nations.
Insurance is a crucial instrument that can mitigate the vulnerability of poor households. Typically, these households are characterised by unstable and low incomes, making handling unexpected financial, political, and physical shocks challenging. An unforeseen expense or a slight change in income can significantly negatively impact their already low living standards. Poor households, especially the vulnerable sections of society, are more susceptible to experiencing incidents such as natural disasters, theft, and harsh weather conditions that could lead to a decline in their livelihoods and future income. In cases of death, disease, or accidents, these households often have difficulty coping with the loss of assets and other basic household necessities, which could result in a further downward spiral of their income.
Poor households have developed informal insurance systems to mitigate risks, such as begging for donations and help from authorities and non-government organisations (NGOs), exchanging gifts, selling assets, diversifying crops, and engaging in cash transfers. However, these strategies have not been sufficient to cater to the needs of the most vulnerable sections of society. A formal insurance system that pools the resources of many is the most effective way to guarantee protection against unexpected losses brought about by hazards such as illnesses, disabilities, and theft. Through small and affordable premiums, policyholders can replace the uncertain risk of significant losses with the security of risk mitigation.
In most developed nations, insurance is part of society, and people understand its importance in mitigating financial risks. However, in developing nations, insurance is more critical for the poorest and most vulnerable society members with limited recovery options. The formal insurance system is essential in protecting the assets and livelihoods of poor households because it provides them with a sense of security that can help them manage the risks brought about by unexpected disasters.
In developed countries, people have access to social safety nets and other public services that help cushion them from unexpected financial shocks. But in developing countries, poor households have to rely on the formal insurance system to manage the risks that come with economic, political, and physical shocks. As such, a formal insurance system is critical for promoting financial inclusion and reducing the vulnerability of poor households.
3.1 The concept of insurance
Insurance and poverty have been intertwined for centuries. People in ancient times realised the significance of pooling their resources to assist individuals facing monetary loss due to unforeseen events. From this community-based initiative, the concept of insurance evolved. This evolution took several centuries to develop into the full-fledged insurance industry we know today. The earliest modern insurance policies were developed in the seventeenth century and mainly dealt with reducing risks associated with maritime trade. Gradually, the concept expanded to include a variety of industries, such as agriculture, healthcare, and even auto insurance.
In essence, insurance aims to provide protection and guarantees for compensation of specified loss and damage that may arise due to insurable risks [15]. The primary objective of individuals seeking insurance is to safeguard themselves from the detrimental effects of any potential losses. By transferring the risk from an individual or group to an approved insurance company in exchange for payment of a premium, insurance plays a vital role in society. This premium, paid by the individual or group seeking insurance, is utilised for compensation or reimbursement.
The term “insurance” refers to a contractual agreement in which an insurer agrees to pay the insured an agreed sum of money or other form of benefits in the event of risks in exchange for a premium payment [16]. The insurance system operates based on the concept of “pooling” or collection, involving payment of the insurance premium. The insured individual or group pays the insurance premium to the insurance company for an insurance policy. The policy outlines the terms and conditions that the individual or group must adhere to. Additionally, the policy specifies the coverage types included. The Malaysian Insurance Act 1996 governs the contract of insurance in Malaysia, laying out a legal framework that regulates the insurance business in the country.
The relationship in an insurance contract is created when an insured, also known as a policyholder, agrees to and pays the premium. Once the premium has been paid, the insurer, usually an insurance company, provides the individual or group with an insurance policy outlining the terms and conditions. In the event of loss or damage to the insured individual or group, the insurer is responsible for providing compensation in accordance with the policy’s stated coverage types. It is essential to note that the burden of proof that such losses or damages have occurred rests with the insured group or individual.
3.2 Takaful as an alternative to insurance
Conventional insurance is a form of coverage that is widely known and utilised. However, in Malaysia, the extent to which conventional insurance complies with Shariah law has been cause for concern. This apprehension comes from the presence of uncertainty, gambling, and usury in conventional insurance practices. The National Fatwa Committee Malaysia deliberated over these concerns and pronounced life insurance as haram under Shariah due to the aforementioned elements [17–20]. The Islamic Fiqh Academy from the Organisation of Islamic Conference reached a similar conclusion, asserting that conventional insurance that entails a significant risk is prohibited by Shariah [21].
In spite of the negative connotations that are often associated with conventional insurance, it is not lacking in benefits. Yusuf al-Qaradhawi, a renowned Islamic scholar, has emphasised that the concept of insurance itself does not contradict Islamic teachings. Instead, Shariah is opposed to the involvement of prohibitive elements in conventional insurance practices [22].
To provide a solution, takaful was introduced as an alternative to conventional insurance. Takaful is a form of coverage that adheres to Islamic principles and eschews uncertainty, gambling, and usury. The Takaful Act 1984 regulates takaful business in Malaysia. The National Fatwa Committee Malaysia convened a meeting to discuss the implementation of the Law of Takaful in Malaysia and determined that it conforms to Islamic law. Thus, takaful is considered permissible insurance in accordance with Shariah.
Generally, individuals have the option to procure different forms of insurance, including conventional insurance and takaful. However, the involvement of Muslims in conventional insurance has raised concerns among Islamic scholars due to the presence of prohibited elements from the Shariah point of view, such as uncertainty (gharar), gambling (maisir), and usury (riba) in its operation and practice. Thus, to promote Shariah compliance, business entities are adopting the takaful concept, which is an Islamic insurance that promotes brotherhood, solidarity, and mutual assistance among its members. Takaful adheres to Shariah principles and does not involve gharar, maisir, or riba [18].
On a global scale, there are currently more than 110 takaful operators, and the industry has been growing rapidly, appealing to both Muslims and non-Muslims. It is expected to grow by 15 to 20% annually, with contributions expected to reach over USD10 billion by 2025 [14]. Takaful is essentially a cooperative system where policyholders contribute their premiums into a common pool, which the takaful operator manages, investing in sharia-compliant instruments such as sukuk, equities, and real estate. The profits generated from these investments are distributed among policyholders as surplus, and the operator is entitled to a management fee only [23].
Furthermore, takaful is an inclusive insurance system that caters to various segments of society. These include family takaful, general takaful, and microtakaful. The target market for takaful encompasses individuals, families, small and medium-sized enterprises, and large corporations. Additionally, takaful operators offer customised solutions for specific areas such as health, education, and retirement planning.
4. Protecting property through insurance as a strategy for poverty reduction
4.1 Overview of property insurance
Property insurance has a rich history dating back to the great fire of London in 1666. After this devastating incident, policies were put in place to protect homeowners from similar tragedies [24]. The evolution of property insurance has continued to provide security and support to property owners worldwide.
The seventeenth century saw coffeehouses in London as the hub of financial activity, where merchants and shipping companies met to arrange deals and discuss insurance policies to protect their businesses. With global expansion, insurance policies became integral to business transactions to mitigate risks and losses.
The first package of insurance policies for homeowners’ coverage was introduced in September 1950 [24]. The Homeowners’ policy has proliferated and now occupies a critical position in the industry. In 1960 alone, companies wrote approximately three-quarters of a billion dollars in premium countrywide. Due to its impressive growth, this policy is now an established part of the property insurance structure. It has even revolutionised the business by setting precedents currently being carried over into the commercial field. Despite the policy’s well-established status, its birth pains connected to early development are frequently overlooked. However, the policy’s extraordinary growth speaks to its importance in the industry.
Today, property insurance policies offer a wide range of coverage options to protect homeowners from various risks that they may face. These policies can cover damages caused by extreme weather events, such as hurricanes, floods, and earthquakes. Other coverage options include theft, fire, and vandalism.
In addition, other factors that can influence the cost of property insurance include the location of the property, its age, and the level of risk associated with the area, to name a few [25]. As such, it is crucial that property owners obtain the right insurance coverage to ensure that their property is protected from the risks it faces and that they are financially safeguarded in the event of any unexpected occurrences.
4.2 The need for protection of properties belonging to the needy or poor
Protection of properties, especially those belonging to and/or occupied by low-income groups, is crucial towards reducing poverty and improving the well-being of vulnerable communities. In the event of calamities such as fires, these groups are often the hardest hit and will suffer significant losses regarding their properties and assets. Without adequate protection measures such as insurance or takaful, the road to recovery after such disasters becomes an almost impossible task for them.
For instance, in Malaysia, one of the many tahfiz (Islamic religious) and pondok residential schools occupied by needy and poor students was reported to have experienced a fire in the first quarter of 2017. Unfortunately, most of these schools are not registered and do not have access to insurance or takaful for the protection of their buildings. In fact, according to the Fire and Rescue Department, over 40% of these schools in Malaysia do not even comply with safety requirements. As a result, when disasters strike, they incur significant losses and damage [26].
Also, the tragic fire at the Darul Quran Ittifaqiyah residential tahfiz school in Kuala Lumpur, where 24 lives were tragically lost along with more than RM100,000 properties, highlights the need for proper protection measures. The Urban Wellbeing, Housing and Local Government Minister reported that the school did not have valid permits from the fire and rescue department to occupy the building [27]. Furthermore, the buildings and their contents were not insured. Similarly, ten buildings at Pondok Seri Permai in Pasir Puteh, Kelantan, were destroyed by fire, causing losses estimated at RM161,000 due to the lack of protection [27].
Access to protection measures like insurance or takaful as protection for properties belonging to and/or occupied by the needy and poor is paramount in mitigating their losses in times of calamities. These measures are critical since the recovery of these groups depends heavily on philanthropies and charities, as well as the financial assistance provided by governments and organisations. The compensation provided by insurance or takaful plays a vital role in these groups’ ability to restore and repair damaged buildings or reinstate their losses. Most importantly, the compensation provided by the insurance or takaful facilitates them from further disaster and significant losses that may have led to poverty and life deprivation [28].
The significance of insurance or takaful as a tool to help reduce poverty cannot be overstated, especially for individuals who belong to the low-income category or are financially struggling. Those who find it particularly challenging to meet their basic needs are at greater risk of losing their properties to unexpected events, making it critical to have adequate protection coverage.
One of the main reasons insurance is essential for safeguarding the properties belonging to the needy is its ability to protect against unpredictable natural disasters such as earthquakes, hurricanes, floods, and other calamities [15, 25]. Such events can cause catastrophic damage to properties, making it difficult for those who cannot afford the high costs of repairs to recover. However, with insurance, individuals can file a claim and receive monetary compensation for the loss incurred.
Moreover, insurance provides a buffer against unforeseen emergencies such as fires, theft, and accidents, which can be devastating to anyone, irrespective of their financial status. For low-income earners, such occurrences can erode their financial stability and disrupt the already tenuous balance. Having insurance provides them with a sense of security, knowing that their hard-earned properties are protected, and they can withstand any unexpected financial liabilities.
Furthermore, ensuring the properties belonging to the needy provides a crucial anchor in maintaining their financial stability. Losing a property due to an unanticipated event can have far-reaching consequences, pushing the affected individuals deeper into poverty and exacerbating their already dire situation. With insurance, they can rest easy, secure in the knowledge that no matter what curveballs life throws their way, they can maintain financial equilibrium, meet their basic needs, and obtain even greater success.
Essentially, having insurance coverage is more critical than ever before, especially for those who belong to the low-income category or are financially struggling. Insurance serves as a safeguard against unexpected events, provides a sense of security, and is a crucial anchor in maintaining financial stability. With all of its benefits, obtaining insurance coverage is critical for anyone who wants to protect their assets, maintain financial equilibrium, and achieve tremendous success in life.
4.3 Property insurance coverage and its practice in protecting properties belonging to low-income groups and poor
Unfortunately, poverty has always been a significant obstacle to obtaining insurance coverage. In the past, many insurance companies refused to offer policies to individuals deemed too risky. Insurance and takaful practices have often been considered unaffordable for low-income groups and the poor, resulting in many impoverished people being unable to protect their homes and possessions against risks. As a result, this income category is left vulnerable to further decline in cases of catastrophe or crisis.
However, in Malaysia, Bank Negara Malaysia (BNM) has recognised the importance of financial inclusion and worked to ensure that all income groups have access to the same facilities [29]. Low-income groups suffer disproportionately in times of crisis, making it even more crucial that such communities receive the necessary protection. Micro-protection schemes, such as microinsurance and microtakaful, have been introduced to address this need. These schemes provide affordable protection at a fair contribution rate to meet the needs of low-income groups in the protection of lives and properties. This type of protection is crucial to ensuring that those in poverty have some means of escape from the cycle of poverty.
In Malaysia, the introduction of regulatory structures by BNM, with industry participation, led to the growth of micro-protection schemes. As a result, “Microinsurance and Microtakaful: Discussion Paper” was introduced by BNM in 2017 with the aim of further enabling market growth and innovation while preserving the quality and sustainability of the schemes [30]. This initiative has provided vital support for those in low-income communities, enabling them to protect their homes and possessions against risks.
A micro-protection plan or scheme is crucial for safeguarding low-income households and their assets in the event of natural disasters or unforeseen calamities, as they may find it difficult to recuperate without financial assistance. For instance, built houses are more likely to be extensively damaged or destroyed during fires or natural disasters, resulting in adverse living conditions for the targeted group. Therefore, a suitable protection scheme will significantly streamline the affairs of low-income groups by covering property damage and loss. Instead of the previous policy of standard fire insurance, homeowner’s property insurance covers all risks related to destruction, including fire, theft, natural disasters, and other unanticipated catastrophes.
The Malaysian insurance market has witnessed the development of micro-protection products that primarily cater to low-income groups as combined products sold through microfinance institutions. However, the market is still relatively new in Malaysia, and there is a lack of recognition and understanding by people. The Bank Negara Malaysia’s efforts towards promoting financial inclusion include developing a regulatory framework to help the micro-protection plan’s market thrive. Adequate protection is crucial for low-income housing in Malaysia to ensure that people can recover from losses in the event of a disaster, contributing to poverty reduction and economic and social well-being deprivation. In the absence of micro-protection plans or schemes, low-income groups have to rely on charity from individuals and financial assistance from the government and non-governmental organisations to restore and repair their damaged homes.
In Malaysia, the poverty rate increased by 2.8% between 2019 and 2020, with Kelantan having the highest percentage change of 8.8% in 2020. According to the DMR Handbook, Malaysia has a natural hazard and exposure risk of 3.4/10, with 67% of the population vulnerable to floods between July 2012 and January 2019. Floods have occurred almost every year in Malaysia during the monsoon season, specifically in November and December [31]. Recent heavy rainfall impacted most of Peninsular Malaysia, particularly Kedah, Malacca, Negeri Sembilan, and the Selangor States, including Kuala Lumpur, resulting in more than 260 houses and home contents being damaged or evacuated in Malacca, Selangor, Kedah, Negeri Sembilan, and 14 in Perak due to recent flooding [32]. The potential risks and losses from natural disasters may cause severe damage to many properties. Therefore, the protection of houses and home contents is vital, especially for low-income groups, to ensure they do not suffer losses and have to rely on other financial assistance.
4.3.1 Microinsurance
Microinsurance is a specialised insurance that targets low-income individuals with financial constraints who lack protection coverage due to unaffordability, specifically in paying the premium [33]. It is pervasive in developing nations where financial catastrophes such as unexpected illness, burglary, or natural disasters can jeopardise the livelihoods of families. The primary objective of microinsurance is to provide a safety net for those who need it most. Moreover, microinsurance is an affordable alternative to traditional insurance policies since it is retailed in smaller amounts.
Microinsurance policies cover the costs of healthcare, life insurance, and property damage, and some even comprise coverage for small businesses, enabling entrepreneurs to safeguard their means of sustenance. One such policy is microinsurance for properties. It provides coverage to low-income households for their homes, farms, and personal property. By doing so, microinsurance for property allows these households to secure adequate insurance coverage with low premiums and a minimum threshold, making it more affordable for low-income households.
Microinsurance for property helps not only low-income households and the poor protect their properties like homes and personal belongings but also helps reduce poverty. By reducing the economic impacts of unexpected disasters, microinsurance for property helps low-income households and the poor prioritise their finances and focus on other areas of their lives.
One of the pivotal advantages of microinsurance is its ability to help low-income individuals break away from the cycle of poverty. Access to coverage helps people better manage risks and protect their savings, leading to increased economic stability and improved quality of life. In developing countries where insurance has historically been out of reach for many people, microinsurance is essential for those with low incomes.
4.3.2 Microtakaful
Microtakaful is an alternative protection scheme designed to provide financial security for vulnerable groups facing constraints and difficulties. It is widely recognised as a protective scheme in the insurance industry aimed at low-income groups. According to the Islamic Financial Services Board (IFSB) and the International Association of Insurance Supervisors (IAIS) (2015), “low-income groups” refers to sections of the population that are usually ineligible for standard takaful schemes offered by operators. This ineligibility is often due to factors such as income irregularities, hazardous occupations, medical history, insurable interest, and other considerations that fall under the purview of prudential regulation of exclusive finance [34].
In addition to a lack of eligibility, there is a lack of awareness and understanding regarding the importance and benefits of purchasing takaful, which contributes to the unavailability of suitable protection schemes that cater specifically to low-income groups. Furthermore, a lack of expertise and social responsibility on the part of takaful operators in investing and offering products to reach these markets also aggravates the situation [34].
Given the encouragement and initiatives outlined in the Central Bank of Malaysia Financial Sector Blueprint 2012–2026 towards an inclusive and balanced financial system, microtakaful is recommended to be developed commercially and sustainably to ensure protection for low-income groups [29]. Protecting low-income groups against specific risks is critical as they are more susceptible to financial and property losses, ultimately breaking the cycle of poverty [35].
4.3.3 Comparison between microinsurance and microtakaful
Microinsurance, a form of insurance that originated in the 1970s, did not gain widespread market attention for the next three decades. However, in 2006, Nobel Prize-winning banker and economist Muhammad Yunus introduced microfinancing schemes that enabled millions of low-income people in Asia and Africa to become entrepreneurs and homeowners. According to Haroun & Effandi (2019), microinsurance was introduced as a means of reducing poverty by providing critical financial services to poor communities and offering coverage against loss [36]. This method has gained significant popularity in developing countries, particularly in Asia, Africa, and Latin America, compared to traditional insurance that offers a range of products. Homeowner’s insurance was first introduced in 1950 to offer coverage to homeowners who suffered damage or loss [24].
In contrast, microtakaful, founded in Lebanon in 1997 by the Lebanon Agricultural Mutual Fund, was established to provide affordable Shariah-based protection to the underprivileged and fulfil their financial security needs. Furthermore, Takaful Ikhlas and the Farmers Welfare Federation established microtakaful in Malaysia in April 2007, with support from the Malaysian government. Microtakaful has the same goal as takaful, which is to protect society as a whole’s welfare. However, takaful is designed to benefit standard earners and groups, while microtakaful is intended to alleviate poverty by assisting people in maintaining their financial well-being.
Microinsurance involves an agreement between the insurer and the insured, with the insurer selling the policy to the policyholder, accompanied by a contract to reimburse them for specific losses or damages sustained as a result of the agreement [37]. Microtakaful, on the other hand, is based on a combination of donations in which participants pay for membership with the aim of assisting those in need within a community. Within the group, the burden of any misfortunes faced by any of the participants is shared, and compensation is provided using funds from participants’ contributions. Table 1 highlights the most significant differences between microinsurance and microtakaful.
Concepts and Principles
Microinsurance
Microtakaful
Governance of contract
An exchange contract that is established through a sale and purchase agreement is a means of transferring risk. This process can be further refined for greater academic and practical engagement.
Risk sharing through a contract arrangement based on mutual guarantee and contributions is established without the involvement of risk transition through sales or purchases. This method of risk management promotes cooperation between parties and reduces financial risks.
Risk
The policyholder’s risk is shifted to the insured company in exchange for the payment of a premium. This transfer of risk is a fundamental aspect of insurance and highlights the important role played by insurers in mitigating risk for individuals and businesses.
There are no transfer risks for either individuals or entities, and any burdens or misfortunes faced by participants are shared among the group. This system ensures that all involved parties are accountable for their actions and can effectively manage any potential risks or challenges.
Rate
The amount of premium paid belongs to the insurer
The amount of the donation becomes the participants’ ownership
Shariah considerations
Involves the prohibitory elements under the Shariah – interest/usury (riba), uncertainty (gharar) and gambling (maysir)
Free from interest/usury (riba), uncertainty (gharar) and gambling (maysir)
5. Understanding and application of microinsurance and microtakaful specifically in protecting houses and home contents in Malaysia
In the Financial Sector Blueprint 2022–2026, Bank Negara Malaysia (BNM) underscores its dedication to elevating the monetary welfare of Malaysian households. The blueprint outlines the BNM’s strategic priorities, such as reinforcing protection for households to cultivate financial resilience. To realise these aims, the BNM is advancing public-private partnerships to guard against high-risk, large-scale events and encouraging microinsurance and microtakaful development [29]. The goal is to double the number of individuals subscribed to these kinds of financial products by 2028, thus bolstering financial safety nets, especially for the most vulnerable members of society.
One subset that necessitates extraordinary attention is the low-income and destitute sections of the population. The Perlindungan Tenang initiative was introduced in 2017 to inspire the growth of microinsurance and microtakaful products and to heighten awareness among consumers [38]. All Perlindungan Tenang schemes cover basic life and family needs, with a focus on death benefits. They have simple disclosure and claims processes, with one product allowing e-submission of claims documents through mobile applications like WhatsApp. The schemes accept substitution of proof, such as confirmation by the village head or district officer, for claims documents in case of inability of participants staying in longhouses to provide customary documents. They also accept claims documents certified by the village head, school principal, or police officer instead of in-person submission at the takaful operator’s branch via postage submission. The schemes have simple and reasonable timelines; for example, funeral benefits are available with a pay-out within 24 hours, and burial permits are acceptable as an alternative to death certificates.
Critically, while the initiative has been somewhat successful, obstacles still remain before it can achieve its full potential and cater effectively to unserved and underserved consumers. Protection schemes for low-income groups’ properties, such as land, houses, and assets, are still inadequate. Presently, Perlindungan Tenang offers only one insurance plan, which is not a takaful scheme [39]. This insurance plan provides coverage against specified perils for household and home contents. Under microtakaful, there is currently no specific coverage available for the protection of houses and their contents. It is worth highlighting that certain takaful operators previously offered two microtakaful house owner and contents schemes in the market. However, these schemes have since been discontinued. This further emphasises the lack of microtakaful schemes available for the protection of houses and their contents [39].
To address these hurdles, the BNM proposes a three-pronged approach. Firstly, the Perlindungan Tenang framework will be upgraded to grant insurers and takaful operators (ITOs) more flexibility in serving the underserved strata of society. This might involve extending diverse products, broadening distribution channels, and introducing innovation through product bundling.
Secondly, the BNM plans to give ITOs more refined demand-side intel so they can better identify coverage gaps, risks, and behaviours of the unserved and underserved. By having access to more dependable data, ITOs will be able to offer more knowledgeable and targeted policies and expand their product offerings to better meet the needs of these consumers.
Thirdly, the BNM is committed to advancing financial literacy initiatives to enhance consumer awareness and comprehension of microinsurance and microtakaful coverage, as well as the benefits of the Perlindungan Tenang initiative. The BNM will collaborate extensively with the Financial Education Network (FEN) to reach those segments of society most in need.
Although the BNM is dedicated to delivering the above strategies, private sector supply-side measures alone will not suffice. The government has a critical role to play in expanding protection coverage. For example, through the provision of purchase vouchers and stamp duty exemptions for Perlindungan Tenang products. The social safety net system must also serve as a fundamental cornerstone to safeguard target groups with economic dependencies – such as income levels, household size, and age.
5.1 Houseowners/householders and home contents protection schemes
Home protection schemes in Malaysia offer multiple options for safeguarding residential properties. Specifically, there are three basic types of protection available for homeowners. The first is the Houseowner or Homeowner scheme, which provides coverage for residential property against loss or damage caused by perils such as flood or earthquake. The second is the Householder scheme, which provides coverage for loss or damage to the content of residential property and fatal injury to participants. The third type of protection is a combination of the Houseowner and Householder schemes.
When it comes to owning residential property in Malaysia, there are two ways to achieve it. One is to purchase directly from a seller or developer, while the other is to take financing or a loan from a financial institution or bank. In the case of a direct purchase, the owner of the property is responsible for personally insuring the house and its contents [35, 40]. However, if financing is obtained to purchase a residential property, it is a requirement for the purchaser to participate in houseowner insurance or takaful. The purchaser is also required to participate in mortgage insurance or takaful. This is a family protection plan that will automatically settle the financing in the event of the purchaser’s misfortune, such as death, or permanent disability [37].
The houseowner insurance policy or takaful scheme takes into account the increase in home value based on the Consumer Price Index (CPI) and is subject to a maximum of 75% of the value of the purchased residential property. The premium or contribution made by the policy or participant is approximately 1.75% of the maximum value [37, 41].
In Malaysia, every property owner, including homeowners, is expected to ensure that their houses and properties are covered in the event of risks. For direct house purchases, the buyer is responsible for insuring the house and the contents within. However, when obtaining financing to purchase a residential property, the buyer must procure or participate in a takaful/insurance house owner scheme. Additionally, the buyer must participate in an additional protection scheme – takaful/insurance mortgage – to ensure financial security. The mortgage protection scheme is a type of family insurance that provides immediate coverage on the funding in the event of the borrower’s death or permanent disability.
For instance, Syarikat Takaful Malaysia, one of the takaful operators in Malaysia, offers a combined scheme – “Takaful myHouseowners & Householders” - that comprehensively protects homeowners’ homes, belongings, and assets [37]. The scheme combines coverage for the house structure, including the walls, roof, fixtures and fittings, garages, gates, and fences, as well as contents, such as household goods, personal effects, and other movable possessions. In addition, specifically for house tenants, the “Takaful myHome contents” scheme is available. It is a complete scheme that protects household contents against any damage or loss caused by common perils, such as fire, lightning, explosion, theft, hurricane, earthquake, flood, and bursting of water tanks/pipes. Examples of the coverage and contribution rate under a Houseowners & Householders Takaful scheme offered by one of the takaful operators in Malaysia are provided in Figure 1.
Figure 1.
Coverage and contribution rate under a Houseowners & Householders Takaful scheme [37].
The chapter focuses on the importance of insurance policies in protecting vulnerable sections of society, specifically exploring the concept of property protection for the poor. Such protection is essential for individuals and families facing significant financial losses due to disasters or thefts. These events can wipe out an entire household’s savings, pushing them into debt. Access to property insurance is a significant factor in mitigating such risks and providing a safety net for families, helping them to recover quickly from unforeseen setbacks [42].
Studies have revealed that insurance has a vital role to play in poverty reduction. In many cases, increased access to property insurance has led to a significant reduction in poverty rates. Moreover, the chapter shows how insurance policies can play a crucial role in facilitating poverty reduction through its ability to provide higher protection to individuals and businesses.
Microinsurance is one such example of insurance policies tailored to meet the needs of low-income populations and vulnerable communities. These policies address the specific needs of communities, such as crop insurance for subsistence farmers or home insurance for those living in disaster-prone areas. By pooling resources, and sharing risks, communities can better protect themselves against unforeseen events and work towards building a stronger, more resilient future.
It is important to note that property insurance can have a positive impact on economic growth. By protecting individual and commercial property, the sale of insurers’ products indirectly promotes investment, and entrepreneurship. When businesses have a safety net in place, they are more likely to take risks and ultimately contribute to economic growth. This, in turn, can lead to job creation and increased economic activity.
In conclusion, property protection, such as housing and belongings, through insurance policies, is of the utmost importance in reducing poverty, particularly for vulnerable groups. The 2030 Agenda for Sustainable Development aims to implement suitable protection systems for everyone. It is essential to safeguard food and shelter, particularly in the event of a disaster, to avoid further suffering and hardship. Effective property protection measures are crucial for achieving poverty reduction goals and overall sustainable development.
References
1.Center of Poverty & Social Policy. Anti-Poverty Policies and Programs [Internet]. Columbia University Center on Poverty and Social Policy. New York, US: Columbia University; 2023. Available from: https://www.povertycenter.columbia.edu/policies-and-programs
2.United Nations. Goal 1: End Poverty in all its Forms Everywhere [Internet]. United Nations: United Nations Sustainable Development; 2022. Available from: https://www.un.org/sustainabledevelopment/poverty/
3.Fauzi PNFNM, Akhma AIF. Protection of housing and home contents: The understanding and application of micro takaful scheme in Malaysia. AIP Conference Proceedings. 2023;2881(1):040006-1 to 040006-9. DOI: 10.1063/5.0167657
4.Fauzi PNFNM, Jahidi Z. Identification of risks exposed to the development of zakat and Wakaf housing in Malaysia. International Journal of Technology. 2022;13(4):727-739. DOI: 10.14716/ijtech.v13i4.5275
5.The World Bank. Poverty [Internet]. Washington, US: World Bank; 2022. Available from: https://www.worldbank.org/en/topic/poverty
6.Government of New Brunswick. What Is Poverty? Economic and Social Inclusion Corporation. Canada; [Internet] 2010. Available from: https://www2.gnb.ca/content/gnb/en/departments/esic/overview/content/what_is_poverty.html#:~:text=Poverty%20is%20about%20not%20having
7.The World Bank. What Are Poverty Lines? [Internet]. Washington, US: World Bank; 2017. Available from: https://www.worldbank.org/en/news/video/2017/04/14/what-are-poverty-lines#:~:text=People%20living%20below%20a%20poverty
8.Hill LE. The institutional economics of poverty: An inquiry into the causes and effects of poverty. Journal of Economic Issues. 1998;32(2):279-285
9.The World Bank. Poverty and Shared Prosperity 2022 [Internet]. Washington, US: World Bank; 2022. Available from: https://www.worldbank.org/en/publication/poverty-and-shared-prosperity
10.Aripin S, Rashid KA, Sarkawi AA, Hasan SF, Fauzi PNFNM. Zakat houses design and planning (quality and standard) from shariah perspective. Planning Malaysia. 2019;17(1):176-185. DOI: 10.21837/pmjournal.v17.i9.596
11.Tunstall R. The links between housing and poverty. JRF [Internet]. 2017. Available from: https://www.jrf.org.uk/report/links-between-housing-and-poverty
12.Rashid KA, Mohd Fauzi PNFN, Hasan SF. Meeting housing needs of the poor and needy Muslims through Zakat and Wakaf. Planning Malaysia. 2018;16(3):308-319. DOI: 10.21837/pm.v16i7.520
13.Musthafa A. Poverty main cause of housing deprivation [Internet]. 2023. Available from: https://www.thesundaily.my/local/poverty-main-cause-of-housing-deprivation-DA10761662
14.Patel S. Takaful and poverty alleviation [Internet]. International Cooperative and Mutual Insurance Federation (ICMIF); 2004. Available from: https://www.findevgateway.org/sites/default/files/publications/files/mfg-en-paper-takaful-and-poverty-alleviation-2004.pdf
15.Fauzi TSPNFNM. Introduction to takaful insurance in the Malaysian construction sector. RICS Construction Journal. 2022. Available from: https://ww3.rics.org/uk/en/journals/construction-journal/takaful-insurance-malaysian-construction-sector.html
16.Insuranceopedia. What is an Insurer? - Definition from Insuranceopedia [Internet]. 2023. Available from: https://www.insuranceopedia.com/definition/384/insurer
17.Department of Islamic Development Malaysia (JAKIM). Menyertai Polisi Insurans Konvensional: Halal Atau Haram? [Internet]. e-Muamalat: Department of Islamic Development Malaysia (JAKIM); 2018. Available from: https://e-muamalat.islam.gov.my/en/bahan-ilmiah/artikel/148-menyertai-polisi-insurans-konvensional-halal-atau-haram
18.Department of Islamic Development Malaysia (JAKIM). Insurance. 1972. Available from: http://www.e-fatwa.gov.my/fatwa-kebangsaan/insurans-0 [Accessed: October 21, 2014]
19.Department of Islamic Development Malaysia (JAKIM). On the implementation of the law of Takaful Malaysia. 2008. Available from: http://www.e-fatwa.gov.my/fatwa-kebangsaan/hukum-pelaksanaan-takaful-di-malaysia [Accessed: October 21, 2014]
20.Department of Islamic Development Malaysia (JAKIM). Conventional insurance law to promote products by Shariah perspective. 2009. Available from: http://www.e-fatwa.gov.my/fatwa-kebangsaan/hukum-mempromosikan-produk-insurans-konvensional-menurut-perspektif-syariah [Accessed: October 21, 2014]
21.Islamic Fiqh Academy. Resolutions and Recommendations of the Council of the Islamic Fiqh Academy 1985-2000. Jeddeh, Saudi Arabia: Islamic Fiqh Academy; 1985
22.Mohd Fadzli Y, Wan Zamri WI, Abdul Khudus MN. Takaful: Operation and Business Competence. Kuala Lumpur: IBFIM; 2015
23.Ahmed MH. Micro Takaful insurance as a tool to guaranteeing financing and protecting micro enterprises. Journal of Business and Financial Affairs. 2016;5(4):228
24.Insurance Information Institute (III). Brief History [Internet]. New York, US: Insurance Information Institute, Inc.; 2014. Available from: https://www.iii.org/publications/insurance-handbook/brief-history
25.Fauzi PNFM, Rashid KAR. Takaful: A review on performance, issues and challenges in Malaysia. Journal of Scientific Research and Development. 2016;3(4):71-76. Available from: http://jsrad.org/wp-content/2016/Issue 42016/12jj.pdf
26.Mohd, Fauzi PNFN, Laldin MA. Classification and types of risk for properties belonging to low-income and poor individuals in Malaysia. In: Mohd Ahnuar E, Mohd Nordin R, Yunus J, Abdul Rahman NA, editors. MATEC Web of Conferences. Vol. 266. Shah Alam, Malaysia: UITM; 2019. p. 03016
27.Awani A. Government should compel Islamic religious schools to register [Internet]. 2023. Available from: https://www.astroawani.com/berita-malaysia/government-should-compel-islamic-religious-schools-register-lam-thye-155239
28.Hasim HM. Developing a conceptual framework of Microtakaful as a strategy towards poverty alleviation. Journal of Economics and Sustainable Development [Internet]. 2014;5(28):1-8. Available from: https://www.iiste.org/Journals/index.php/JEDS/article/view/18665/19115#google_vignette
29.Bank Negara Malaysia. Financial sector blueprint 2022-2026 [Internet]. Kuala Lumpur, Malaysia: Bank Negara Malaysia; 2022. Available from: https://www.bnm.gov.my/documents/20124/5915429/fsb3_en_book.pdf
30.Bank Negara Malaysia. Microinsurance and Microtakaful Discussion Paper [Internet]. Kuala Lumpur, Malaysia: Bank Negara Malaysia; 2017. Available from: https://www.bnm.gov.my/documents/20124/761691/dp_microinsuranceandmicrotakaful_Apr2016.pdf
31.Center for Excellence in Disaster Management & Humanitarian Assistance. Hornet Avenue, Joint Base Pearl Harbor - Hickam, Hawaii; 2019
32.ECHO Daily Flash. Malaysia - Flash Floods (Media, Met Malaysia, ADINet). Malaysia [Internet]: ECHO Daily Flash; 2021. Available from: https://reliefweb.int/report/malaysia/malaysia-flash-floods-media-met-malaysia-adinet-echo-daily-flash-22-october-2021
33.Hunt J. What Is Microinsurance? [Internet]. New York, US: The Balance; 2022. Available from: https://www.thebalancemoney.com/what-is-microinsurance-4165961
34.IFSB-IAIS. Issues in Regulation and Supervision of Microtakāful (Islamic Microinsurance). Kuala Lumpur: Islamic Financial Services Board (IFSB) and International Association of Insurance Supervisors (IAIS); 2015
35.Mohd, Fauzi PNFN, Rashid KA. Protection of Wakaf-Zakat properties for the needy and poor via Takaful. In: I-Maf 2017 E-Proceedings. Selangor, Malaysia: KUIS; 2017. pp. 157-171. Available from: http://conference.kuis.edu.my/i-maf/images/eproceedings/2017/157-171-imaf-2017.pdf
36.Haroun AEH, Yusoff ME. Micro-Takaful as stimulus for financial inclusion: A key component towards sustainable development. Open International Journal of Informatics, 2019;7(2):43-55. Retrieved from: https://oiji.utm.my/index.php/oiji/article/view/63
37.Syarikat Takaful Malaysia. Takaful myHouseowners & Householders. Takaful Malaysia [Internet]: Syarikat Takaful Malaysia; 2023. Available from: https://www.takaful-malaysia.com.my/en/products/takaful-myhouseowners-householders/
38.Bank Negara Malaysia. Perlindungan Tenang [Internet]. Kuala Lumpur, Malaysia: Bank Negara Malaysia; 2021. Available from: https://www.bnm.gov.my/documents/20124/948107/PD+Perlindungan+Tenang.pdf/ba34bc32-af87-5aa7-0c19-b11c980028ba?t=1625225115430
39.Mohd Fauzi PNFN, Laldin MA. Micro-takāful scheme for the protection of houses belonging to low-income groups in Malaysia. ISRA International Journal of Islamic Finance [Internet]. 2022;14(3):303-314. Available from: https://www.emerald.com/insight/content/doi/10.1108/IJIF-05-2021-0090/full/pdf#:~:text=Micro-tak%C2%AFaful%20(micro,protection%20of%20lives%20and%20properties
40.Rashid KA, Mohd Fauzi PNFN, Hasan SF. Shariah principles in the procurement of buildings and infrastructure works. In: Paper Presented at Fourth International Conference on Masjid, Zakat and Waqf 2017. Selangor, Malaysia: KUIS; 2017. pp. 223-231. Available from: http://conference.kuis.edu.my/i-maf/images/eproceedings/2017/223-231-imaf-2017.pdf
41.Khuzhamov LT, Kozhevnikova EI, Zaitseva KA. Features of the development of microinsurance in the developing countries’ insurance markets. In: IES 2020: Economic Systems in the New Era: Stable Systems in an Unstable World [Internet]. Samara, Russia: Springer Link; 2020. pp. 398-407. DOI: 10.1007/978-3-030-60929-0_51
42.NASA. Human needs exploration: Then and now [Internet]. 2006. Available from: https://www.nasa.gov/pdf/162514main_Human_Needs.pdf
Written By
Puteri Nur Farah Naadia Mohd Fauzi
Submitted: 27 August 2024Reviewed: 13 September 2024Published: 06 November 2024
Open access peer-reviewed chapter
