Takaful (Islamic insurance)

Takaful is an Arabic word mean "guaranteeing each other’s". The central idea of Takaful (Islamic insurance) contract is that it is a financial transaction of a mutual co-operation between two parties to protect one of them from unexpected future material risk. In a Takaful transaction, the party called the participant (insured) pays a particular amount of money known as the contribution (premium) to the another known as Takaful operator (insurer) with a mutual agreement that the insurer is under a legal responsibility to provide the participant with a financial protection against unexpected loss, should it happens within the agreed period. However, in a case whereby the loss does not occur against t the insured within the specified period, the insured is entitled for the whole amount of paid-premiums together with the Share of profits made out of the cumulated paid-premiums based on the principle of al Mudharabah financing technique. In such a Tran’s action, both the insurer and the insured are mutually helping each other for financial protection. The concept introduced by Takaful is similar that of conventional insurance. Both of them are financial instruments that assist the unfortunate groups who are confronted with financial predicaments. These instruments are modern methods of shifting risks with a reward awarded to the parties that are willing to accept the exchange in these risks. The insurance concept, of "The fortunate many helping the unfortunate few" is a concept recognized by Islam. The surah Al-Maidah from the 2nd verse in the Al-Quran states:
"Help ye one another in righteousness and piety, but help ye not one another in sin and rancor" is regarded as the main source of how this concept of helping one another is inculcated by Islam.
It is the characteristics that demarcate Takaful from Conventional Insurance? In June 15 1972 Malaysian National Fatwa Committee conducted a research on the conventional insurance contract. The Malaysian National Fatwa Committee in its fifth conference decided that life insurance implemented by the current insurance companies as a muamalah is fasid (illegal/damaged) and is not in compliance with the Islamic principles under the 'aqd aspect because it contains elements of gharar (uncertainty), maisir ( gambling), and riba'.
Insurance is not a new concept within Islam. The principle of a person protecting himself against loss or misfortune is even described in the Qur'an through stories of some of the prophets (pbut). In Arabic this concept is known as "takaful". It is acknowledged that the foundation of shared responsibility or Takaful was laid down in the system of "Aaqilah", which was an arrangement of mutual help or indemnification In case of any natural calamity, every body used to contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe distributed the financial burden among the entire tribe. Islam accepted this principle of reciprocal compensation and joint responsibility.

Principles of  insurance:

(1)Utmost good faith

As a client it is your duty to disclose all material facts to the risk being covered.  A material fact is a fact which would influence the mind of a prudent underwriter in deciding whether to accept a risk for insurance and on what terms. The duty to disclose operates at the time of inception, at renewal and at any point midterm.

Indemnity

On the happening of an event insured against, the Insured will be placed in the same monetary position that he/she occupied immediately before the event taking place.  In the event of a claim the insured must:

 Prove that the event occurred

 Prove that a monetary loss has occurred

 Transfer any rights which he/she may have for recovery from another source to the Insurer, if he/she has been fully indemnified.

(2)Subrogation

The right of an insurer which has paid a claim under a policy to step into the shoes of the insured so as to exercise in his name all rights he might have with regard to the recovery of the loss which was the subject of the relevant claim paid under the policy up to the amount of that paid claim. The insurer’s subrogation rights may be qualified in the policy.

In the context of insurance subrogation is a feature of the principle of indemnity and therefore only applies to contracts of indemnity so that it does not apply to life assurance or personal accident policies. It is intended to prevent an insured recovering more than the indemnity he receives under his insurance (where that represents the full amount of his loss) and enables his insurer to recover or reduce its loss.  

(3)Contribution

The right of an insurer to call on other insurers similarly, but not necessarily equally, liable to the same insured to share the loss of an indemnity payment i.e. a travel policy may have overlapping cover with the contents section of a household policy.  The principle of contribution allows the insured to make a claim against one insurer who then has the right to call on any other insurers liable for the loss to share the claim payment.

(4)Insurable Interest

If an insured wishes to enforce a contract of insurance before the Courts he must have an insurable interest in the subject matter of the insurance, which is to say that he stands to benefit from its preservation and will suffer from its loss. 

In non-marine insurances, the insured must have insurable interest when the policy is taken out and also at the date of loss giving rise to a claim under the policy.

(5)Proximate Cause

An insurer will only be liable to pay a claim under an insurance contract if the loss that gives rise to the claim was proximately caused by an insured peril. This means that the loss must be directly attributed to an insured peril without any break in the chain of causation

Principles of Islamic insurance:

First of all, the operations of Takaful must be in line with the Shari’ah principles. A Takaful operation may be held void as initio if any aspect of its operation is proven to be contrary to the Shari’ah principles. 

The operation of Takaful is generally based on the governing principles of al-Mudharaba, profits and loss sharing financing technique, which is an alternative to the interest (riba), based financing technique as adopted by the conventional insurance practices. 

The operation of Takaful practices is generally supervised by an independent body called the Shari’ah Supervisory Council.7 It is the duty of the council to advise the Takaful operator in any given organization on their operations for the purpose of ensuring that no aspect of the company operations involves any element which is not approved by the Shari’ah principles. In other words, the establishment of a Shari’ah Supervisory Council for every individual Takaful operator is a prerequisite prior to the commencement of the Takaful operation. 

It is also within the fundamental principles of Takaful operation to maintain utmost good faith in Takaful operations. This is because a Takaful policy can at any time be called in question should either party (operator or participant) be able to prove the counter’s breach of good faith in the material matters or facts of each respective policy. Therefore, the duty to disclose material facts or matters is not imposed only on the operator and also the participant equally. 

The policyholders (takaful partners) pay premium to assist and indemnify each other and share the profits earned from business conducted by the Company with the funds.

Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru is incorporated in the contract.

As to how much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements. Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators.

Takaful contracts may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment.

1. The protection aspect of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally.

2. The savings aspect ensures that individual rights are protected under Mudarabah principle and the contributions along with profit (net of expenses) are paid to the policyholders at the end of policy term or before, if required.

Differentiate between Islamic insurance and insurance:

The fundamental difference lies in the fact that in the Takaful concept, the premium is paid on the basis of tabarru’. This changes the contract because with tabarru', it is the participants themselves who are carrying the risk and not the insurance company. The Takaful operator is clearly not the owner of the fund but truly its custodian. As such, the Takaful operator cannot use the contributions except as intended by the donors i.e. for mutual help. By including the concept of tabarru’, the element of gharar would be eliminated, which consequently eradicate maisir from the transaction. This is because with tabarru’, the contract is no longer that of exchange, thus eliminating the problem of deliverability. In addition, the tabarru' factor also inculcates the spirit of solidarity, brotherhood and mutual help. Takaful companies invest their funds in financial instruments, which are not forbidden by Islam. General Takaful companies maintain two separate and distinct accounts - one known as the Participants Fund and other Shareholders Fund. Takaful companies must have Shariah Supervisory Council to monitor their operation to make sure they do not engage in forbidden practices such riba;