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Takaful Islamic Insurance


What is Takaful?
Prohibitions of Gharar, Maysir and Riba
Gambling and Insurance
Basis and Principles of Takaful
Status of Takaful
Shari'ah Rulings
Glossary of Financial Terms

How does Takaful Work

All participants (policyholders) agree to guarantee each other and, instead of paying premiums, they make contributions to a mutual fund, or pool. The pool of collected contributions creates the Takaful fund.

The amount of contribution that each participant makes is based on the type of cover they require, and on their personal circumstances. As in conventional insurance, the policy (Takaful Contract) specifies the nature of the risk and period of cover.

The Takaful fund is managed and administered on behalf of the participants by a Takaful Operator who charges an agreed fee to cover costs. These costs include the costs of sales and marketing, underwriting, and claims management.

Any claims made by participants are paid out of the Takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the participants in the fund, and not the Takaful Operator, and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.

Operating Principles

An Islamic insurance company must have the following operating principles:

a) It must operate according to Islamic co-operative principles.

b) Reinsurance commission may be paid to, or received from, only Islamic insurance and reinsurance companies.

c) The insurance company must maintain two funds: a participants/policyholders' fund and a shareholders' fund.

The Policyholders' Fund

a) The assets of the policyholders' fund consist of:
  • Insurance premiums received
  • Claims received from re-insurers
  • Such proportion of the investment profits attributable to policyholders as may be allocated to them by the Board of Directors.
  • Salvages and recoveries
  • Consultancy and other receipts.

b)  All the claims payable to the policyholders, reinsurance costs, technical reserves, administrative expenses, etc., excluding the expenses of the investment department, shall be met out of the policyholders' fund.

c) The balance standing to the credit of the policyholders' fund at the end of the year represents their surplus. The General Assembly may allocate the whole or part of the surplus to the policyholders' special reserves. If a part, the balance will be distributed among the policyholders.

d)When the policyholders' funds are insufficient to meet their expenses, the deficit is funded from the shareholders' fund.

e)The shareholders undertake to discharge all the contractual liabilities of the policyholders' fund, but this liability does not exceed their equity in the company.

The Shareholders' Fund

a) The assets of the shareholders' fund consist of:

  • Paid-up capital and reserves attributable to shareholders
  • Profit on the investment of capital and shareholders' reserves
  • Such proportion of the investment profit generated by the investment of the policyholders' fund and technical and other reserves as is attributable to them
  • Miscellaneous receipts

b) All the administrative expenses of the investment department are deducted from the Shareholders' Fund.

c) The balance of the shareholders' surplus, if any, is distributed among them.

Investment of Funds

The company may invest its funds only on a profit-and-loss-sharing basis, as approved by the Shari'ah.

Products and Services Offered by Islamic Insurance Companies

Islamic insurance companies may offer competitively priced products, without curtailing the scope and benefit of insurance coverage made traditionally available to the public by conventional insurance companies.

As regards life insurance facilities, Islamic insurance companies have developed Islamic Trust Funds for social sol idarity, mortgage protection, student protection and employers' protection.

Models of Takaful

There are various models of takaful according to the nature of the relationship between the company and the participants. There are wakalah (agency), mudarabah and a combination of the two. In the Sudanese takaful model, every policyholder is a shareholder in it. An Operator runs the business on behalf of the participants and no separate entity manages the business. Shari'ah experts consider this preferable. In other Islamic countries, the legal framework does not allow this arrangement and takaful companies work as separate entities on the basis of mudarabah (in Malaysia) and wakalah (in the Middle East).

In the mudarabah model practised mainly in the Asia Pacific region, the policyholders receive any available profit on their part of the funds only. The Shari'ah committee of a takaful company approves the sharing ratio for each year in advance, most of the expenses being charged to the shareholders.

In the wakalah model, the surplus of policyholders' investments – net of the management fee or expenses - goes to the policyholders. The shareholders charge the wakalah fee from contributions and this covers most of the expenses of the business. The fee is fixed annually in advance in consultation with the company's Shari'ah Supervisory Board. The management fee is related to performance.

Differences between Takaful and Conventional Insurance

The overwhelming majority of Islamic jurists have concluded that the conventional insurance contract is unacceptable to Islam, not being in conformity with the Shari'ah for the following main reasons:

a) it includes an element of al-gharar (uncertainty)

b) it is based on the theory and practice of interest; a conventional life insurance policy is based on interest, while an Islamic model is based on tabarru where a part of the contributions by participants are treated as donation. For this reason, policy holders in takaful are usually referred to as participants.

c) it is a form of gambling.

First and foremost, Islamic insurance, in conformance with the Islamic Shari'ah, is a form of social solidarity (takaful), based on the principles of trusteeship and co-operation.

1) In conventional insurance, the insured substitutes certainty for uncertainty. In return for a predetermined payment, the premium, he/she transfers to the insurer the possible economic losses from stipulated risks. In Islamic insurance, the participants share all risks mutually and no transfer of risk is involved.

2) Conventional insurance companies are motivated by the desire for profit, while Islamic insurance companies are non-profit making, the shareholders not being entitled to share in the profits of the business although they are entitled to charge fees for their services and share in the investment returns of funds managed by them

3) The policy-holders in a conventional insurance company have no right to vote in the elections of the directors of the company or to see the annual accounts of the company, while in Islamic companies; these facilities are available to all participants who pay a certain stipulated amount of premiums (contributions).

4) In the takaful system, if the assured dies before the policy matures, the beneficiary is entitled to the whole amount of the premiums, the bonus and dividend and a share of the profits made over the paid premiums, plus a donation from the company out of the participants/policy-holder's contributions given on the basis of tabarru. Such a transaction is seen as a mutual contribution towards the welfare of the helpless in society. Where the insured is still alive on the maturing of the policy, he/she is entitled to the whole amount of the premiums, a share of the profit made over the premiums, a bonus and dividends according to the company policy.

5) In a conventional life insurance policy, the agent's payments are paid out of the insured's paid premiums, whereas in the Islamic model, the agents work for the company and thus are paid by the company.

6) The insurable interest in the conventional system is usually paid to the policyholder, if he/she is alive at the expiry of the policy. If he/she dies before that date, the insurable interest is paid to the beneficiaries, who may include including family, servants, company, trustee, partners, mortgagor, etc. But under the Islamic model, the insurable interest goes to the assured or his/her heirs, according to the principles of Mirth or Wasiyyah.

Co-operative Insurance

The concept of co-operative insurance is acceptable in Islam because:

a) The policyholders co-operate actively for their common good;

b) Every policyholder pays his subscription in order to help those who need it;

c) It spreads liability in the community by a pooling system;

d) It does not aim at deriving undue advantage for one at the cost of other individuals;

e) The element of uncertainty is eliminated as far as determination of the premiums is

An Islamic co-operative insurance contract should embody the following conditions:

a) The company functions according to Islamic co-operative principles.

b) The policyholders have the right to participate in surplus profits and are liable to contribute additional amounts if their subscriptions are not sufficient to meet all the losses. However, it is preferable for such losses to be written off against future surpluses. Shareholders are not entitled to any of the underwriting profits generated by the insurance operations. But, as mudarib (agents), they are entitled to receive a proportion of the profits from the investment of insurance funds, plus, of course, all the profits on the investment of their own capital and any other funds and reserves attributable to them.

c) The company will strictly follow Islamic laws in the matter of investment and will not indulge
in the practice of usury.

d) Policyholders are represented on the Board of Directors and have a right to scrutinise its

Gambling and Insurance

There are three main differences between a gambling contract and an insurance contract.

a) In a gambling contract, neither party has any other interest than winning a sum of money. The gambler is not being indemnified against any loss. But, in an insurance contract, the insured's right to be paid depends on his suffering loss from the insured peril. In other words, an insurance contract is a contract of indemnity, which is non-existent in a gambling contract.

b) In the case of gambling, one party must win and the other loses. In insurance, on the other hand, the event entitling the insured to compensation may or may not happen during the period of the policy, but he pays a premium for being protected during that time.

c) If a gambler wins, he gets back not only his original stake but also an additional amount without suffering any loss, whereas an insured person never gets back his premium and is only indemnified to the extent that he has suffered damage.


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