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
 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) 60% (Example Only)
FUND FUND
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