Takaful and Retakaful: Products and Processes
TAKAFUL AND RETAKAFUL: PRODUCTS AND PROCESSES
NOTES
Table of Contents
1. Risk and Uncertainty
2. Role of Takaful
3. Takaful vs Conventional Insurance
4. Issues with conventional insurance and solution by Takaful
5. Basic principles of Takaful
6. Business Models of Takaful
7. General vs Family Takaful
8. General Takaful Products
9. Family Takaful Products
10. Underwriting Process
11. Roles of Retakaful
12. Issues and Future of Takaful
1. Risk and Uncertainty
Terminology | Description |
Risk |
|
Uncertainty |
|
Peril |
|
Hazard |
|
Pure risk is when there is no prospect of gain, and only loss or status quo.
Speculative risk is when there is possibility of either to gain or loss.
These are risks that can be covered by Takaful:
- Large number of similar objects,
- Accidental and unintentional loss,
- Determinable and measurable loss,
- Loss not subject to catastrophic hazard,
- Probability of loss must not be too high,
- Risk and loss permissible by the Shari’ah.
2. Role of Takaful
- In general:
- Peace of mind,
- Assurance,
- Cost stabilization,
- Loss reduction,
- Means of saving,
- Shariah compliance,
- Social and mutual obligation,
- Ukhuwwah (brotherhood).
- In terms of application in the society:
- Building a comprehensive Islamic economic system,
- Mobilization of funds in accordance with Shariah,
- Development and growth of Islamic Capital Market,
- Facilitating trade and international business,
- Eradicating poverty and outreaching the non-insured market,
- Creating employment and business opportunities,
- Mitigating social expenditure.
3. Takaful vs Conventional Insurance
- Takaful is a contract between a group of persons and the manager of the risk pool (Takaful Company) wherein they pay a certain amount of money as a contribution or donation for the purpose of assisting each other in times of adversity.
- Conventional Insurance is a contract between the Insurance Company and the Insured members whereby the Insurance Company is obliged to pay monetary compensation to the insured member or beneficiary in the event of misfortune.
# | Aspect | Takaful | Conventional Insurance |
1 | Law and Regulatory Framework | Sources of laws are based upon Divine Revelations (al-Qur’an and Sunnah), Shariah-justified statutory provisions and juristic opinions (fatwas) and local laws. | Sources of law and regulations are set by state and man-made Statutes, legal literature and customs. |
2 | Moral Guidelines | Takaful invests premiums in accordance with Islamic values and Shariah guidelines. | Insurer invests premiums consistent with profit-motive with few moral guidelines; hence co-existence of Riba and Maysir. |
3 | Nature of the Contract | Aiming to achieve brotherhood, solidarity, protection and mutual cooperation, the contract ties between many interests of the same nature, hence there’s not conflict of interests. | Aiming at commercial gain, the contract ties between many interests, which are of different nature, hence a conflict of interest may occur. |
4 | Contracting Parties | The participants are the insurers as well as the insured members. | The Insurance Company and the insured members. |
5 | Company Aim | Community well-being; optimizing operations for affordable risk protection as well as fair profits for the operator. | Profit-making; maximizing returns to shareholders. |
6 | Concern of the Insurer | The participants gain more affordable benefits and stability through large memberships. | The main concern of the Insurance Company is to gain maximum profit through large memberships. |
7 | Premium | Considered as donation or contribution from participants, as a means of mutual assistance among participants. Minimum premiums paid by policyholders can be the same for all participants or risk adjusted. | A consideration for the payment of claims, as a means of protection given to the insured members. Premiums paid by Policyholders are various and depend on the age of policyholder. |
8 | Ownership of Insurance Premium | Belongs to the participants or Waqf. | Belongs to the Insurance Company. |
9 | Investment of Premium | Investments must be according to Shariah for benefits of participants. | Deposit in bank to earn interest for the Insurance Company plus other securities prohibited by the Shariah rules. |
10 | Interest Element | Interest is not included in the computation of the contribution. | Interest is included in the computation of the premium, whether Riba Nasi’ah or Riba Fadhl, as profit element. |
11 | Doubtful Element | Well-defined and specified contract. | Certain unspecified elements exist in the contract. |
12 | Benefits | Paid from defined funds under joint indemnity by participants. | Paid from all the funds legally owned by the company. |
13 | Claims | Paid from the participants’ fund. | Paid by the Insurance Company. |
14 | Responsibility for Claims | The participants themselves are responsible for any claims incurred | The Insurance Company should be responsible for any claims incurred. |
15 | Profit/Surplus | Profit is not the objective of the participants. However, if surplus is made, it may be distributed to the entitled participants. | Profit/Surplus is attributable to the Insurance Company alone. |
16 | Losses | Losses are retained within classes of business written and charged to participants. | Losses are charged to the Insurance Company. |
17 | Taxes | Subject to local taxes and (if any) zakah. | Subject to local taxes. |
18 | Dissolution | Reserves and excess/surplus could be returned to participants, although consensus opinion prefers donation to charity/Waqf. | Reserves and excess/surplus belong to the shareholders. |