TAKAFUL AND RETAKAFUL
TAKAFUL (ISLAMIC INSURANCE)
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. It is also a generally accepted view that Islamic insurance was first established in the early second century of the Islamic era. This was the time when Muslim Arabs started to expand their trade to India, Malay Archipelago and other countries in Asia. Due to long journeys/voyages, they often had to incur huge losses because of mishaps and misfortunes or robberies along the way. Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, they got together and mutually agreed to contribute to a fund before they started their long journey. The fund was used to compensate anyone in the group who suffered losses through any mishap. In fact the Europeans copied this, which was later known as marine insurance. Takaful, means "guaranteeing each other", is the same as insurance. It represents the concept of insurance based on mutual co-operation and solidarity of people by participating in a takaful scheme. Takaful (which is based on the concept of social solidarity, co-operation and mutual indemnification) satisfies the need for insurers that now need to provide Shariah compliant insurance services as an alternative to the conventional insurance. Takaful products are based on two main business models: 1. The Mudaraba model : is essentially a basis for sharing profit and loss between the takaful operator and the policyholders. The takaful operator manages the operation in return for a share of the surplus on underwriting and a share of profit from investment. This is commonly used in Malaysia. The Wakala model : is a contract of agency, which replaces surplus sharing with a performance fee. The takaful operator in this case acts as an agent (Wakeel) for participants and manages the takaful/retakaful fund in return for a defined fee. This model is used more in the Middle East region.
Under the Al-Mudharabah principle, the profit as universally defined by conventional insurance companies, which in the case of general business is taken to mean returns on investment plus underwriting surplus, is then shared according to a mutually agreed ratio between the participants and the operators. Management
The distinction between the conventional insurance and Takaful business is more visible with respect to investment of funds. Accordingly. In order to give incentive for good governance. under the Al-Wakalah principle.
Takaful contracts may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment. Takaful companies undertake only Shariah compliant business and the
. there is a distinct separation between Takaful funds and shareholders' fund. shall be borne by the shareholders' fund and not from the takaful funds. donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. However. Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators. The fundamental principles of takaful contracts are: • • 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. the surplus of policyholders’ funds investments (net of the management fee or expenses) goes to the policyholders. the paid-up capital is contributed as donation by the shareholders. On a strict interpretation of the Wakalah Model. The fee rate is fixed annually in advance in consultation with Shari’ah board of the company. Takaful companies normally divide the contributions into two parts. it is understood this standpoint has changed in view of opinion expressed by certain scholars that the shareholders (operators) in their capacity as managers should also be entitled to share the profit arising from the takaful business. 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. Whereas. The shareholders charge Wakalah fee from contributions that covers most of the expenses of business.expenses of the operator including agency remuneration. management fee is related to the level of performance TAKAFUL CONTRACT The theory of a takaful contract is based contracts amongst a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them. (a) (b) The protection aspect of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally. Hence. 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.e. Tabarru’ (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty. Therefore. The takaful contract will usually involves the concepts of Mudarabah. if required.. i. While insurance companies invest their funds in interest-based avenues and without any regard for the concept of Halal-oHaram. out of the fund they donate collectively. under this principle the shareholders do not expect and probably do not mind for not receiving any returns on the capital donated. the clause of Tabarru’ is incorporated in the contract. if any.
Mudarabah Model and the combination of agency and Mudarabah models. Insurance shifts the impact of that risk to someone else and relieves the person of risk. Very commonly it can occur through applying interest or usury (extortionately high rates of interest) in his/her transactions. gambling (almaisir) and uncertainty (al-gharar). in carrying out its business in all classes of insurance or in any other related financial field. Based on the nature of relationship there are various models like Wakalah (agency) Model. Education/Medical Takaful. Riba refers to a creditor exploiting a transaction for unfair gain. It is imperative that the Retakaful or Takaful company will conduct all its affairs in a manner that meets the Islamic Shari’ah Principles whether it is to do with investing its funds. This is expressly forbidden in Islam. from which mere chance is eliminated. Riba is the main point of distinction between Islamic and non-Islamic financial means.profits are distributed in accordance with the pre-agreed ratios in the Takaful Agreements. FAMILY TAKAFUL The terms “Family Takaful”. The two main principles are the prohibition of Riba and Gharar. In insurance. comments on Sura Al-Baqara. in his translation of Holy Quran. it is possible to win or lose by creating that risk. Allama Yusuf Ali. Most of the expenses are charged to the shareholders. protection and mutual responsibility and will avoid acts of interest (riba). It is therefore important to distinguish insurance from gambling. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged. Gharar is the selling of items which have an uncertain existence or uncertain characteristics making the transaction risky and similar to gambling. paying too little for an item or repaying significantly less of a loan than its original value. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the company. the risk is already there and the aim is to try to minimise the financial effects of that risk. The insurers charge premium in proportion to the risks. etc. ADHERENCE TO ISLAMIC PRINCIPLES A Takaful or Retakaful company must strictly adhere to principles of co-operation. The Shariah committee approves the sharing ratio for each year in advance. exactly and scientifically calculated". In gambling. Likewise they share in any surplus or loss from the pool collectively. the surplus would normally go back to the participants in proportion to their contributions. “Takaful Ta’awani” or just “Takaful” are generally used for family solidarity in place of conventional life insurances. ayat 219 "Insurance is not gambling. when conducted on business principles. for example. Other products available in various countries are General Takaful.
. In Mudarabah model the policyholders get profit on their part of funds only if takaful company earns profit. Here the basis for calculation is statistics on a large scale.
Therefore a large proportion of risk is placed with international reinsurance companies that operate on conventional basis. Reinsurance is a form of insurance whereby an insurance company or a Lloyd’s syndicate can transfer to another insurer (the reinsurer) all or part of its liabilities in respect of claims arising under the contracts of insurance that it writes. Whilst the contract must ensure that the policy is for the purpose of sharing responsibility to provide some material
. The main problem worldwide is the lack of retakaful companies that are capitalised to the levels required by insurers and more particularly the lack of ‘A’ rated retakaful companies. A number of large conventional reinsurance companies from Muslim countries take on retrocession. The retrocession from takaful companies ranges from some 10% in the Far East where Takaful companies have relatively smaller commercial risks (so far). Retakaful companies need to ensure that they are capitalised sufficiently to enable them to: • protect the financial stability of takaful companies from adverse underwriting results • stabilise claims ratios from one year to the next • minimise claims accumulation from losses within and between different classes • geographically spread risk • increase capacity • increase the profitability of insurers through permitting greater flexibility in the size and type of risks accepted • secure technical support and help RETAKAFUL CONTRACT Even though a typical reinsurance transaction is generally based on the principles of al-‘Aqd (contract). or even cause it to be insolvent. to the Middle East where up to 80% of risk is reinsured on conventional basis. the nature of this transaction is quite different from other forms of commercial contracts in conventional reinsurance. This has resulted in takaful companies having to reinsure on a conventional basis. The Shari’ah scholars have allowed dispensation to takaful companies to reinsure on conventional basis so long as there are no retakaful alternatives available. out of the fund that is collectively contributed to. uncertainty and gambling is eliminated or minimized from them. Takaful companies therefore actively promote co-insurance.All operations and contracts are set-up to ensure that any element of speculation. This is the essence of the concept of social solidarity. cooperation and mutual indemnification of losses of members whereby there is joint indemnification of the loss or damage that may occur. RE-TAKAFUL (REINSURANCE) Reinsurance of takaful business on Islamic principles is known as retakaful. contrary to the preferred option of seeking cover on Islamic principles. This enables the an insurance company (reinsured or direct insurer) to protect itself against the risk that its total claims costs in any one year maybe so large wiping out its profits.
Reinsurance contracts must essentially be financial transactions that bind both the reinsurance company and the insurance company on the general principles of al‘Aqad..security against unpredicted loss or damage resulting from unexpected risks on both life and property it must also comply with Sharia’ah principles.