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You are here: Home / Others / Takaful Insurance Explained

Takaful Insurance Explained

December 12, 2020 by Get Insurance Today

Due to religious morals, terms like Islamic banking and Sukuk bonds have been introduced to the market. They achieve the same result as their equivalent counterpart while observing the Islamic sharia laws. On the part of insurance, Takaful insurance is what exists. This insurance aims at providing coverage for members of a certain group from a mutual fund contribution rather than outright premium payments.

History of Takaful insurance

At a religious level, the laws of Islam negates that of conventional insurance due to the existence of some factors. These include uncertainty (Gharar), gambling (Maysir), and interest (Riba). Because they are not accepted under Islam, Takaful insurance was created to allow religious individuals to benefit from the industry. The birth of Takaful insurance began with the Islamic financial system revolution in the Middle East. However, it has spread to other continents around the world, especially areas with predominant Muslim numbers.

What is Takaful insurance?

It is originated from the Arabic word Kafalah. This means an agreement of mutual assistance and peace among members of a group or community in case of damages suffered by any of the members. In simpler terms, we all contribute to a mutual fund and cover damages incurred by any of our members from that fund. This makes Takaful insurance a mutual guarantee. Therefore, Takaful insurance stands on principles that stem from the prohibition of Islamic laws on the following practices:

  • The Riba: this refers to money lending at unfavourable rates of interest.
  • Gharar: selling of non-owned properties.
  • Maysir: the game of prediction, chance, and speculation.

Abstaining from the three principles above are the basic reasons why Takaful insurance differs from conventional insurance.

The working principles of Takaful insurance

Takaful insurance operates basically on two principles. They are:

The affiliate fund: 

the Takaful system works in such a way that the insured person pays a certain contribution regularly. They call the insured person the affiliate. In return for payment, the fund members (other affiliates) accepts to provide collective financial support for the insured risk.

These contributions could be said to be premiums, and the financial compensation paid out, called claims. At the end of the year, they disburse any money left from the contribution to all affiliates or paid as Zakat to charity. Zakat is an Islamic tax and one of the five pillars of Islam.  

The fund manager: 

the fund manager is the person that contributes to the capital required for creating and running the company. Most times, he is also the one that bails out possible deficits from general operations.

For his services, the remuneration of the fund manager could be in any of the two ways:

  • The wakala: in this process, the manager receives a fixed sum in advance to run the company or fund. They deduct this from the premiums collected by the fund.
  • Moudharaba: this is an association of the fund managers. They are in charge of the fund profits.

Conclusion

Although still growing, Takaful insurance occupies a good part of the market and has a great potential for growth. Already, some European and American financial institutions are creating specific counters to it. Therefore, it exists to satisfy the insurance and religious benefits of Muslims around the world and would keep growing following its current trend.

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Filed Under: Others

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