Takaful Islamic Insurance : An Overview

By :

Abdullah Aboobucker
Manager Corporate Risk Management Amana Takaful PLC.

 What is Insurance? How Insurance Operates? Why insurance is not permitted by Shariah ? What is Takaful? How Takaful operates? Comparison on Takaful Vs Insurance Takaful Basics Takaful Worldwide Question & Answer

Insurance is a way of protecting against financial losses. For a payment (premium), an insurance company will take the responsibility of compensating financial losses.

Insurance Premium
Rs.1000/each from house owner

Balance Belongs to Insurance Company

Rs. 100 Million 100,000 houses

Less Claims Paid for Losses

(eg: Rs. 30 Million)

Insurance Company
Rs. 70 Million (100-30)

Insurance Company

A Significant amount of insurance companys portfolio is by interest based investments. In life insurance, the insured, on his death or maturity of the policy, is entitled to get much more than he has paid which shall be from the interest income of the company. As the Contract is a Commercial Contract, the excess on one side in the exchange between the amount of premium and the insured sum. Insurance is the sale of money for money, of a greater or lesser amount, with a delay in one of the payments.

The insurance contract contains uncertainty due to:

whether a loss will occur or not is not known the time it will occur is not known the claim amount to be paid is not known

When a claim is not made, the insurance company may acquire all the surplus whilst the participant may not obtain any profit whatsoever.

The element of gambling exist in conventional insurance policies, wherein any of the two parties involved may win a sum of money from the other, but one of them is destined for total loss depending on the happening of an uncertain future event.

Islamic Insurance is a process of agreement among a group of persons to handle the injuries resulting from specific risks to which all of them are vulnerable. A process, thus initiated, involves payment of contributions as donations, and leads to the establishment of an insurance fund that enjoys the status of a legal entity and has independent financial liability. The resources of this fund are used to indemnify any participant who encounters injury, subject to a specific set of rules and a given process of documentation. The fund is managed by either a selected group of policyholders, or a joint stock company that manages the insurance operations and invests the assets of the fund, against a specific fee.

FROM AAOIFI (Accounting and Auditing organization of Islamic Financial Institutes)

Takaful Contribution
Rs.1000/each from house owner

Rs. 65M

Balance will be distributed as Surplus

100,000 houses

Rs. 100 Million

Less Claims Paid for Losses

eg: Rs. 40 Million

Rs. 25 Million (65-40)

(eg: 35% of Takaful Contribution)

Fee for Managing the Fund

Rs. 35 Million

Takaful Company

How

Takaful
is different from

Conventional Insurance ?

100,000 houses
Rs.1000/- each house owner

Insurance Premium
Belongs to Insurance Company

Rs. 100 Million

Insurance Company
Rs. 100 Million

100,000 houses
Rs.1000/- each house owner

Takaful Contribution

35 Million

Takaful Company

Rs. 100 Million

65 Million

Different Claims Scenarios

Income for Insurance Company after paying claims

100 M

Income for Takaful Company After paying claims

35 M 65 M

If Claims for the year is

Rs. 50 Million Rs. 30 Million

For the Insurance Company = 100M 50M = Rs.50 Million For the Insurance Company = 100M 30M = Rs.70 Million For the Insurance Company = 100M 0M = Rs.100 Million For the Insurance Company = 100M 40M = Rs.60 Million

For Takaful Company - Rs.35 Million Surplus for Participants - Rs.15 Million (65M-50M) For Takaful Company - Rs.35 Million Surplus for Participants - Rs.30 Million (65M-30M)

If Claims for the year is

If NO Claims for the year

If Claims for the year is

For Takaful Company - Rs.35 Million Surplus for Participants Rs.65 Million (65M-0M)
For Takaful Company - Rs.35 Million Surplus for Participants - Rs.25 Million (65M-40M)

Rs. 40 Million

Even though Uncertainty on Claims Amount exist in both Conventional Insurance & Takaful, it has NO big impact on the revenue of Takaful

Who owns the Investment Returns of the Insurance Fund?

Insurance Premium
Investment

Investment Profits
Belongs to Insurance Company

Insurance Company

Rs. 100 Million

Rs. 20 Million Rs. 120 Million

Investment Profits

35 Million

45 Million

Takaful Company

Investment

Investment Profits

Takaful Company

65 Million Takaful Fund Rs. 20 Million Takaful Fund

75 Million

Differences on

Technical Aspect
(Risk Pooling)
A Combination of Donation & Indemnity contract between individual policyholder & the fund, represented by the Takaful Operator

Takaful

Conventional Insurance
(Risk Trading)
A policy in the form of an exchange contract (Sale & Purchase) between insured & company; the subject matter providing indemnity by the company

Contract

Ownership of the Fund Company Role Relationship

between company & policyholder

Fund has legal Personality (on Shariah Perspective) Trustee and Entrepreneur of the fund

Shareholders

Owner of the Fund Insurer / Insured Policyholders pay premium to the insurer

Operator / Participant Participants make contributions to the scheme Will be distributed Participants among the

Consideration Surplus of the Fund

To Shareholders Account

Other Differences

In Takaful
Business is based on adl & ehsan (Justice & Goodness)
Example, takaful cover not provided for elements harming the society

Casinos

Liquor Shops / Alcohol Manufactures

Cigarettes & Manufactures

Takaful
Does not Invest on elements

prohibited by SHARIAH

Takaful World Wide

The first ever Takaful company was established in 1979
The Islamic Insurance Company of Sudan

100+ Takaful Companies in over 20 countries. Average growth rate higher than conventional insurance companies. Non-Muslims increasingly opting for Takaful products.

Essentials of Takaful
Intention (Niyyah)
Integration of Shariah Conditions Presence of moral Value and ethics No element of Prohibition (Haram)

Basics of Takaful
Donation (Tabarru)

Partnership among the participants

Need of an operator

Management contract between participant and

operator

Investment in shariah compliant modes

Key Features of Takaful Model

Cooperative risk sharing for protection

Clear segregation between Participant and Operator

Shariah compliant investment strategies Avoid Interest (Riba) and Element of Gambling(Maysir) Gharar is forgiven through Contract of Donation (Tabarru)

Shariah Advisory oversight / Directives (Fatwa)

Any Questions?

Email: abdullah@takaful.lk Contact: 077-7383443

Thank You