Insurance and Takaful by Atiquzzafar
Insurance and Takaful
By
Atiquzzafar Khan
May 12, 2007
Training Workshop on Takaful
by
Al-Huda CIBE, LAHORE
INSURANCE & TAKAFUL
Main Topics
• Introduction of Modern Insurance
• Evaluation of Insurance Business
from Islamic Point of View
• Islamic Alternative: (Review of
Existing Experiences of Takaful)
Risk and Insurance:
Risk and uncertainty are fundamental
facts of life. All human activities are
subject to risk, which may lead to
financial or physical losses to him.
Insurance is a device to cover the
losses arise due to occurrence of some
undesired event.
Methods of Handling the Risk
1. Risk Avoidance
2. Risk Retention
3. Risk Reduction
4. Risk Transfer
5. Risk Sharing
Definition of Insurance
Insurance is an economic device
whereby the individual substitutes
a small certain cost (premium) for
a large uncertain financial loss
(the contingency insured against)
that would exist if it were not for
the insurance.
CLASSIFICATION OF
INSURANCE BUSINESS
By Type of Products
i) Life insurance
ii) General insurance
iii) Liability insurance
Advantages of Insurance
Safeguard against sudden losses and
assurance of smooth functioning of
business activities
Improvement in the saving habits in the
society and making funds available for
productive investments
Help of individuals in case of unforeseen
financial Loss
Shariah Position of Insurance
Opinion of Shariah scholars is divided on
insurance. We can classify them into three
major groups.
Those who consider both the concept and
practice of commercial insurance un-Islamic.
Those who are in agreement with the present
insurance and find nothing wrong in it.
Those who accept the concept of insurance,
but find prohibited elements in its present
practice.
Major Arguments Against Insurance
Element of Riba (Interest)
Element of Qimar (Gambling)
Element of Gharar (Uncertainty, Doubt, Risk)
Unlawful appropriation of others’ property
Violation of law of inheritance in case of life
insurance.
Arguments in support of Insurance
Insurance contract is similar to Mudaraba
It is based on Mutual help and cooperation
It is a new institution and Ijtihad is needed to
determine its Shariah status
It is unavoidable in a modern economy
Rulings of Collective Fiqhi
Bodies about Insurance
Islamic Research Institute of Al-Azhar Uni.
Council of Grand Ulama of Saudi Arabia
Majlis Tahqiqat-e-Shari'yah Lucknow, India
Islamic Fiqh Academy of Rabita al-Aa'lam-e-Islami
Al Majma’ Al-Fiqhi Al- Islami of OIC
Council of Islamic Ideology, Pakistan
Establishments of Islamic Insurance
(Takaful) Companies
In 1979, the first Islamic Insurance Company
was established in Sudan – the Islamic
Insurance company of Sudan. After that many
Islamic Insurance companies started business
under the title of Takaful.
There are about 85 companies presently
undertaking Takaful business in 25 countries of
the world. A broad estimate of the total
Takaful industry in 2005 is approximately
US$3 billions for both life and non-life
business.
Definition of Takaful
The word Takaful means joint guarantee. The objective
of Takaful is cooperation and mutual help among the
members of a defined group.
In a practical sense Takaful can be visualized as a
method of joint guarantee among a group of members or
participants against loss or damage that may inflict upon
any of them. The members of the group agree to
guarantee jointly that should any of them suffer a
catastrophe or disaster, he would receive certain sum of
money to meet the loss or damage. All members of the
group pool together their efforts to support the needy.
WORKING OF THE TAKAFUL
BUSINESS: The Malaysian Case
Takaful Business is based on the concepts of
Mudarabah and Tabarru. Involvement of
these two Islamic forms of business eliminate
the elements of Riba and Gharar from the
insurance contract
In Family Takaful each Takaful installment is
divided and credited into two separate
Accounts namely, the Participants'
Account(PA) and the Participants’ Special
Account(PSA). A substantial proportion of the
installments is credited into the PA solely for
the purpose of savings and investment.
The balance of the installments is credited into the
PSA as `tabarru' for Sharikah Takaful Malaysia to
pay the Takaful benefits to the heir(s) of any
participant who may die before the maturity of the
contract.
The amount accumulated in the PA is invested in
various business according to Islamic financing
techniques, and the resultant profits are divided
between the company and the participants according
to the agreed upon ratio, e.g., 30-70.
The participant's share is calculated according to
their individual share in the PA, and credited into
their respective accounts, the PA and the PSA.
Mudarabah Model
PROFITS
ATTRIBUTABLE TO
SHAREHOLDERS
COMPANY
COMPANY'S
ADMINISTRATION &
MANAGEMENT
EXPENSES
TAKAFUL CONTRACT PROFITS
INVESTMENT BY
BASED ON PRINCIPLE OF FROM
COMPANY
AL-MUDHARABAH INVESTMENT
OPERATIONAL SHARE OF
COST OF SURPLUS FOR
TAKAFUL THE COMPANY
TAKAFUL
GENERAL GENERAL 40% (Example Only)
PARTICIPANT CONTRIBUTI OPERATIONAL SURPLUS
TAKAFUL TAKAFUL
ON PAID BY COST OF TAKAFUL (PROFIT)
FUND FUND 60% (Example Only)
PARTICIPANT
OPERATIONAL SHARE OF
COST OF SURPLUS FOR THE
TAKAFUL PARTICIPANT
Wakalah Model
COMPANY MANAGEMENT PROFIT / LOSS
TAKAFUL ADMIN & MARKETING SHARE OF PROFIT
EXPENSES OF ATTRIBUTABLE TO
EXPENSES 25% TO 35% FOR THE COMPANY
COMPANY SHAREHOLDERS
40%
TAKAFUL
CONTRACT BASED INVESTMENT PROFITS FROM
ON PRINCIPLE OF BY FUND INVESTMENT
AL-WAKALAH
60%
OPERATIONAL COST
OF TAKAFUL /
RETAKAFUL
TAKAFUL GENERAL
PARTICIPANT GENERAL SHARE OF
CONTRIBUTIO TAKAFUL OPERATIONAL COST SURPLUS
TAKAFUL SURPLUS FOR
N PAID BY FUND OF TAKAFUL (PROFIT)
FUND THE PARTICIPANT
PARTICIPANT 65% TO 75%
OPERATIONAL COST
100%
OF TAKAFUL
Waqf Model
COMPANY TAKAFUL OPERATOR FEES FOR MANAGEMENT PROFIT / LOSS
SHARE OF PROFIT
ADMIN & MARKETING EXPENSES EXPENSES OF ATTRIBUTABLE TO
FOR THE COMPANY
25% TO 35% COMPANY SHAREHOLDERS
40%
PROFIT SHARING ON
INITIAL DONATION BY MUDARABHA BASES
SHAREHOLDERS TO
CREATE WAQF FUND
Waqf Waqf INVESTMENT PROFITS FROM
BY FUND INVESTMENT
TAKAFUL 60%
CONTRACT BASED
ON PRINCIPLE OF
AL-WAKALAH OPERATIONAL COST OF
TAKAFUL /RETAKAFUL
TAKAFUL
SHARE OF
PARTICIPANT CONTRIBUTION WAQF FUND SURPLUS
WAQF FUND OPERATIONAL COST OF SURPLUS FOR
PAID BY 65% TO 75% TAKAFUL (PROFIT)
THE PARTICIPANT
PARTICIPANT
OPERATIONAL COST OF 100%
TAKAFUL
Payment of claims
Should the Participant die or suffer Permanent and Total
Disability in the fifth year of participation, Takaful
benefit will be paid in the following manner:-
i. From Participant's Account = RM 4,890
(RM978 x 5)
profit if any, say RM 400
ii. From Participants Special RM 5,000
Accounts (RM1000 x 5)
Total Takaful Benefit Payable RM 10,290
In case the Partcipant survived
Should the Participant survive until the maturity of his
FTPFile Transfer Protocol, payment of Takaful benefit will be made to him
as follows:-
i. From his Participant's Account = RM 9,780
(RM978 x 10)
profit from investment RM 1,800
ii. From Participants Special RM XXXX
Account
Total Takaful Benefit = RM11,580 +
surplus determined
by SharikatTakaful.
THANK YOU
