Abstract
This article provides evidence on the gift exchange anomaly using standard field data on the performance of Islamic insurance (takaful) operators (TOs). Takaful is a type of mutual insurance where policyholders insure each other and hire an operator to manage operations against a hybrid of financial incentives. These incentives include an upfront agency fee, which is found to have an inverted U-shaped relationship with performance of TOs. We use our results to identify an optimal hybrid contract for TO and find optimal agency fee as a percentage of net earned premium.
Notes
1 The relationship is usually modelled as x = e + ϵ, where ϵ is normally distributed with zero mean and constant variance.
2 See Charness and Kuhn (Citation2011) for a detailed discussion on external validity of laboratory outcomes and related issues.
3 Islam prohibits risk transfer against a premium and allows cooperative risk sharing. Islamic insurance therefore is somewhat similar to cooperative insurance.
4 The higher the premium, the higher is the total wage bill (as TOs receive a fixed percentage of premiums raised), which encourages poor underwriting.