What Is Takaful?
Takaful is a type of Islamic insurance wherein members contribute money into a poolsystem to guarantee each other against loss or damage. Takaful-branded insurance is based on sharia or Islamic religious law, which explains how individuals are responsible to cooperate and protect one another. Takaful policies cover health, life, and general insurance needs.
Takaful insurance companies were introduced as an alternative to those in the commercial insurance industry, which are believed to go against Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty) principles—all of which are outlawed in sharia.
Key Takeaways
- Takaful is a type of Islamic insurance wherein members contribute money into a poolsystem to guarantee each other.
- Takaful-branded insurance is based on sharia or Islamic religious law and covers health, life, and general insurance needs.
- Any claims made by participants are paid out of the takaful fund.
Understanding Takaful
All partiesor policyholders in a takafularrangementagree to guarantee each other and make contributions to a pool or mutual fund instead of paying premiums. The pool of collected contributions creates the takaful fund.Each participant's contributionis based on the type of coverage they require andtheir personal circ*mstances. A takaful contractspecifies the nature of the risk and the length of the coverage, similar to that of a conventional insurance policy.
The takaful fund is managed and administered on behalf of the participants by a takaful operator, who charges an agreed-uponfee to cover costs. Much like a conventional insurance company,costs include sales and marketing, underwriting, and claims management.
Any claims made by participants are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the takafuloperator. Those fundsmay be distributed to the participants as cash dividends or distributions, or viaareduction in future contributions.
An Islamic insurance company operating a takafulfundmust operate under the following principles:
- 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 separatefunds: 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 projected to reach $97.17 billion by 2030, growing at a CAGR of 14.6% from 2021 to 2030.
Since 60% of the global Muslim population is comprised of young Muslims—less than 25 years of age—this demographic can represent a sizeable customer base as their wealth grows over time.
Some of the largest names in the takaful market, according to a Research and Markets report, were believed to be the following:
- 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 conclude that conventional insuranceis unacceptable inIslam because it does not conform with sharia for the following reasons:
- Conventional insuranceincludes an element of al-gharar or uncertainty.
- Conventional insurance isbased on the conceptand practice of charginginterest.Islamic insurance, on the other hand,is based on tabarru, where a portionof the contributions made by participants istreated as a donation. This is why policyholders in takaful are usually referred to as participants.
- Conventional insuranceis considered a form of gambling.
