Insurance Risk and Risk Transfer Mechanisms in the Modern Financial System: A Theoretical Review of Conventional and Islamic Insurance
Main Article Content
Meli Diana Fitri
Novrivul
This study aims to analyze insurance risk and risk management mechanisms within the modern financial system through a literature review of conventional and Islamic insurance. The study focuses on the development of insurance risk concepts, the role of insurance in supporting financial stability, and the differences in risk management mechanisms implemented in conventional and Islamic insurance systems. A qualitative approach with a library research method was employed by reviewing relevant academic journals, books, insurance regulations, and previous studies. The findings indicate that insurance risk has become increasingly complex due to technological advancements, economic globalization, and the emergence of new risks such as cyber risk, pandemics, and climate change. Insurance serves as an essential risk mitigation instrument by providing financial protection for individuals, financial institutions, and businesses, while simultaneously contributing to financial system stability and economic growth. The study further reveals that conventional insurance applies a risk transfer mechanism, whereby risks are transferred to the insurance company, whereas Islamic insurance (takaful) adopts a risk sharing mechanism through a tabarru' fund managed based on the principle of ta'awun (mutual assistance). The effectiveness of risk management is influenced by several factors, including underwriting quality, capital adequacy, corporate governance, and the effectiveness of regulatory and supervisory frameworks. Therefore, strengthening risk management practices, promoting technological innovation, and enhancing corporate governance are essential to ensuring the sustainability of the insurance industry amid the growing complexity of the modern financial system.
Keywords: Insurance Risk, Risk Management, Modern Financial System, Conventional Insurance, Islamic Insurance.
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