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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

FTP, 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

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