Takaful – Islamic Insurance

Essentials of Islamic Banking

and Finance
SIR ATTAULLAH KHAN
 Contents
Introduction;
Explanation;
Concept of Takaful – Islamic insurance;
Contract of Takaful;
Types of Takaful;
Different operating modes;
Difference between Takaful and conventional
insurance;
Application;
 Concept of Takaful – Islamic insurance
 Since Gharar is not allowed in compensatory contracts, the basis of any
arrangement of risk mitigation may be accepted on voluntary bases;
 The voluntary basis of risk mitigation means joint pooling by a group of people of
amounts or valuables for meeting any unexpected events for any member of the
group;
 Takaful – which literally means “assuring each other” or “guaranteeing each
other”;
 This system is based on the principle of TA-AWUN (mutual assistance) and Tabarru
(Voluntarism);
 Taburro' ‫( ﺗﺮﺒﻉ‬contributions) from the participants (policy holders) to create a fund
which will provide financial help at the occurrence of certain losses;
 The principle of “fortunate many helping the unfortunate few” is a concept
recognized by Islam;
− The Quran states in Surah Al-Maidah verse # 2: <“And help one another in
righteousness and piety, but help not one another in sin and rancor”>;
 Contract of Takaful
Key features of Takaful:
− Partnership among the participants;
− Appointment of an operator of the fund collected;
− The management contract between the participants and the operator;
− Investments in Shari'ah compliant modes;
The Practice of Takaful
− Takaful The contract of Takaful:
► Partiesto the contract;
► The subject matter;

► Contribution;

► Remuneration for the operator;

► Compensation;

► Re Takaful;

► Underwriting profit or loss;

 Types of Takaful
General Takaful:
− Creation of fund;
− The operator will charge an upfront fee;
− Segregation between the fund and the sponsors’
capital;
− The investment will be done on the Mudarabah bases;
the profits after deducting the operator’s portion will be
pooled again in the fund;
− Different reserves;
− Surplus distribution;
 Types of Takaful
Family Takaful:
− Mudarabah (for long term investment) PA;
− Tabarru (a small portion for providing Takaful cover) PSA;
− Management expenses are deducted from PA;
− Operational cost is
► One who dies before maturity;
► The total amount of installments and profit;
► The outstanding installments that would be paid, if he survived till
the end will be given to the heirs;
− One who lives until the maturity;
► He will be paid (1) his outstanding amount in PA (2) the
net surplus allocated allocated to him;
− One who cancels before maturity:
► He will receive the balance shown in PA;
► The installments credited into PSA shall not be refunded;
 Different Models
 Many models of Takaful are practiced the world over;
− Pure Mudarabah model:
► The participant and the operator enter into a Mudarabah contract
from the beginning of the relation, for indemnification and share of
the underwriting results;
− Wakalah Model (hybrid of Wakalah & Mudarabah):
► An agency agreement is made between an individual willing to
participate in the fund and the operator working as the manager of
the fund;
► The operator earns an upfront deductible fee and shares the profit
of investments, it does not share the results of underwriting;
− Wakalah based on Waqf (trust):
► The share-holders create a Waqf fund to extend the help to those
who want cover against financial losses;
► The participants donate to the fund and the operator manages the
fund. All underwriting results belong to the fund which itself has
a legal entity;
 Takaful Vs Conventional insurance
Takaful – 6 Key Differences:
− Voluntary Contributions :
► Premiums are voluntary contributions (Tabarru) to collectively
insure the participants;
− Defined Rights (minimizing speculation):
► Policyholders collectively own the pool to cover losses. The
Company manages the pool according to certain takaful model
and receive fees;
− Eliminating Uncertainty:
► Payment of premiums to pool are voluntary for mutual
assistance without individual monetary gain;
Takaful Vs Conventional insurance
− Eliminating the Interest:
► Investments are directed towards acceptable businesses /
industries and returns are Riba free;
− Equity and fairness:
► Policyholders are owners of the Pool and entitled to its profits.
Different Models treat this aspect with some variations;
− Social Goodness:
► Risk mitigation is based on mutual faithfulness with each other;
 How does it Function? Waqf Pool

Surplus
Wakalah Fee, Claims, Re-Takaful
Participant

Waqf Pool
Takaful Wakalah
Wakalah
Wakalah Wakalah
WakalahWakalah Risk sharing
Operator
Between
Participants
(MUDHARABAH)

Participant

Investment Participant
How does it Function? Family Takaful
1
Contributions Participant
Participant’s
Investment 4
Profits from Investment
Account (PIA) Wakalee Fee(s) for
Investment

5 Management

Contributions for
Takaful Benefit

3 2
Payment of Claims

6
Surplus Distribution Waqf Fund Wakala Fee for Operator / Wakeel
Operating Waqf
7 (if any)
Fund
 Key Points on Takaful Process

• Contributions are paid on the basis of Taburru. In Shariah

such a contract is called Aqd Taburru
• Contributions are credited to the Waqf Fund; Operator acts
as Wakeel
• The Waqf Fund pays the claims
• Contributions are invested only in Shari’ah Compliant
investment avenues
• An independent Shariah Board supervises business
activities for Shariah compliance
 Definition of Waqf
• Transferring the corpus (Ain) of a physical thing to Allah.
• That is ) Waqf item (asset) can’t be sold
• Waqf item (asset can’t e distributed in inheritance (meerath)
• for the usufBy using that thing, it should not be diminished/
consumed.
• ruct ((Like; well, water cooler, school, Masjid, hospital etc.)
Manfa’at
 Application
 Every policy holder would pay his subscription in order to
assist those who need assistance;
 Any member or participant suffering a catastrophe or
disaster would receive a certain sum of money or financial
benefit from a fund, as also defined in the pact, to help him
meet the loss or damage;
 Operation of Takaful Fund:
− The transactional aspect of the commercial activity of Takaful
must be subject to the Islamic contractual laws in order to
ensure its compliance with the Shari'ah;
 Application

− The Company involved in Takaful business, as the operator, will

accept payment of the Takaful installments or Takaful
contributions (premium) from the participants (clients) for the
Takaful plan or Takaful scheme they wish to participate;
− For the service rendered as manager of the Takaful Operations
the company will charge a management fee.
− The Takaful Fund, consisting of the contributions paid as
Tabarru, will be further invested by the Company based on the
principle of Al –Mudarabah, through which the element of
interest (riba) will be replaced;
− All premium holders will participate in profit and loss;
− Profit will be shared on agreed ratio;