What Is Takaful Insurance | How It Works

What Is Takaful?

Takaful is a sort of Islamic insurance in which members donate money to a pool system to protect each other from loss or injury. Takaful-branded insurance is based on Sharia, or Islamic religious law, which describes how individuals are obligated to cooperate and protect one another. Takaful policies address health, life, and general insurance needs.

Understanding Takaful

In a takaful arrangement, all parties or policyholders agree to guarantee one another and contribute to a pool or mutual fund rather than pay premiums. The takaful fund is created by pooling the collected contributions. Each participant’s contribution is determined by the level of coverage they require and their individual circumstances. A takaful contract, like a traditional insurance policy, outlines the type of the risk as well as the term of coverage.

A takaful operator manages and administers the takaful fund on behalf of the participants for a fee that is agreed upon to cover costs. Sales and marketing, underwriting, and claims handling are typical costs for a traditional insurance company.

Any claims made by participants are paid from the takaful fund, and any residual surpluses, after accounting for the expected cost of future claims and other reserves, belong to the fund’s participants rather than the takaful operator. These funds may be paid to participants as cash dividends or distributions, or by reducing future contributions.

An Islamic insurance firm operating a takaful fund has to conform to the following requirements.

• It must operate according to Islamic cooperative principles.
• A reinsurance commission may only be received from or paid out to Islamic insurance and reinsurance companies.
• The insurance company must maintain two separate funds: a participant and policyholder fund, and a shareholder fund.

Special Considerations

According to Allied Market Research, the global takaful insurance market was valued at $24.85 billion in 2020 and is expected to reach $97.17 billion by 2030, with a CAGR of 14.6% between 2021 and 2030.

Important: Because young Muslim those under the age of 25 make up 60% of the global Muslim population, this demographic has the potential to be a significant client base as their wealth develops.

An Islamic insurance firm operating a takaful fund has to conform to the following requirements.

• Islamic Insurance Company
• JamaPunji
• AMAN
• Salama
• Standard Chartered
• Takaful Brunei Darussalam Sdn Bhd
• Allianz
• Prudential BSN Takaful Berhad
• Zurich Malaysia
• Takaful Malaysia
• Qatar Islamic Insurance Company.

Takaful vs. Conventional Insurance

Most Islamic jurists consider that traditional insurance is unacceptable in Islam because it does not correspond to Sharia for the reasons listed below:

• Conventional insurance includes an element of al-gharar or uncertainty.
• Conventional insurance is based on the concept and practice of charging interest. Islamic insurance, on the other hand, is based on tabarru, where a portion of the contributions made by participants is treated as a donation. This is why policyholders in takaful are usually referred to as participants.
• Conventional insurance is considered a form of gambling.