Takaful

Chapter 5
Introduction
 Tragedy and mishaps to the individual and
family members can happen unexpectedly such
as accidents, untimely death or disability
 it is important to be aware and understand the
types of protection or coverage required to
minimize or to transfer risk
 for Muslim their life and properties are to be
protected by a shariah-compliant protection tool
called Takaful
Resolution of Scholars
a)National Fatwa Committee of Malaysia, 1972
b)Resolution of Fiqh Academy (Majmak Fiqh) OIC,
1985
 Extract of the Minutes of The National Fatwa Committee
For Islamic Affairs Malaysia -15 June 1972
“Life insurance transacted by present-day life
insurance companies is a transaction containing
the elements of al-Gharar, al-Maisir and al-Riba
and as a consequence its contract is void;
therefore HARAM”
Concept of Takaful
 Takaful Act 1984, Section 2 defines takaful as:
‘A scheme based on brotherhood, solidarity and
mutual assistance which provides for mutual
financial aids and assistance to the participants
in case of need whereby the participants
mutually agree to contribute for that purpose’
 Basic aim is to provide mutual financial aid to
participants
…continue
 Participant contributed funds to a common
pool called ‘Takaful Fund’
 Participants mutually guaranteeing each
other
 Those suffer losses can claim financial aid
from Takaful Fund
 Conceptually, participants are insurer and
insured parties
…continue
 Takaful in Arabic means Joint Guarantee
 An agreement among members/participants to
jointly guarantee among themselves against loss
or damage
 In essence  objective is to pay for a defined
loss from a defined fund; members pools effort
to support the needy
 Not based on buy-sell transaction; but a concept
of joint indemnity
Tabaru’
 Important element that differentiates
takaful from insurance
 The participants:

- agree to donate contributions/returns

to help the needy
- carry the risk, not takaful operator
Benefits of Takaful
 Provide peace of mind to individuals as
compensation and/or outstanding liabilities will be
covered upon untimely death or total disability
 Security of inheriting properties by the dependents
or heirs
 Free of liability by the guarantor on any outstanding
credit facility or financing/loan
 Entitlement to share profit or surplus of operations
based on profit sharing principle of al-mudharabah
 Rewarded in the hereafter
Takaful Operators in Malaysia:
 CIMB Aviva Takaful Berhad
 Etiqa Takaful Berhad
 Hong Leong Tokio Marine Takaful Berhad
 HSBC Amanah Takaful (Malaysia) Sdn Bhd
 Zurich Takaful Berhad
 Prudential BSN Takaful Berhad
 Syarikat Takaful Malaysia Berhad
 Takaful Ikhlas Sdn. Bhd.
Takaful products
2 categories  (A) Family takaful
(B) General takaful
 Family Takaful:
- to compensate members if inflicted by a tragedy
paid from the Family Takaful Fund
- protection against health and medical expenses
- long-term based on mudharabah principle
- for individuals and corporate
- a long term savings and investment plan
- for anyone between the ages of 18 to 55 years
- for corporate, offer family takaful and group
medical takaful
Examples of Family Takaful Products
(sample):
 Family Takaful Plan
 Family Takaful Plan for Education
 Mortgage Takaful Plan
 Takaful Rawat
 ‘Siswa’ Takaful Plan
 Group Family Takaful Plan
 Group Family Takaful Plan for Hospital and
Surgical Benefits
 General Takaful:
- short term mudharabah basis
- for material loss, damage or destruction
suffered from catastrophe, disaster or
misfortune inflicted upon properties or
belongings
Examples of General Takaful
Products:
 Fire Takaful Schemes
 Motor Takaful Schemes
 Accident Takaful Schemes
 Liability takaful Schemes
 Burglary/theft
 Householder scheme
 Houseowner scheme
 Engineering Takaful Schemes
 Marine Takaful
 Takaful for School Students
 Group Takaful for Pilgrims
 Foreign workers compensation scheme
Example 1: Takaful Mortgage Plan
 Proceeds from plan would be used to redeem
mortgage in the event of untimely death or
permanent disablement
 Covers outstanding house finance or loan facility
with fin. inst., employer, cooperative society
 Entitle to share profits of operations upon
maturity of plan
 Operationally: based on al-takaful (guaranteeing
each other) and al-mudharabah (profit sharing)
..continue
 Scope of cover: death and permanent total
disability
 Eligibility: individual age between 18 – 55
years
 Contribution: one lump sum based on
amount of financing, repayment period,
age, rate of profit
 Payment of benefits: upon death or
permanent total disability
Example 2: Houseowner’s and
householder’s Takaful Scheme
 Coverage: against loss or damage of
buildings/house; against loss or damage of
household contents
 Scope: against fire, lightning, thunder, explosion,
aircraft damage, impact damage, bursts or
overflow of water tanks, pipes, theft, tidal waves,
hurricane, thunderstorm, heavy rain,
earthquake, volcanic explosion, flood, liability to
public, loss of rent
 Eligibility: individuals owning the house
 Operational system: based al-takaful and al-
mudharabah
Takaful Industry performance
 Market penetration  increased to 5.6% in 2005
from 5.1% in 2004
 Combined family and general takaful net
contributions grew by 18.8% to RM1.3 billion
from RM 1.1 in 2004, thereby increasing its
share to 5.4% (2004:5.1%) of the combined net
contributions in the insurance sector.
 Total assets  increased by 16.9% to RM5.9
billion in 2005 (2004:RM5 billion), accounting for
5.7% (2004:5.6%) of the total assets in the
insurance sector
Takaful operation in practice
 BNM allows Takaful Fund to be managed by
takaful operators to ensure a sound and prudent
commercial basis
 Operators need to have sufficient capital  to
ensure solvency and compensations can be
paid as needed by participants
 If insufficient operators must provide an interest
free loan (Qard hassan) to cover the deficiency
 Future surplus will repay the loan
 Difference between Takaful and
insurance
 takaful is based on joint
indemnity or guaranteeing each
other
 members of takaful are both
insurer and insured parties
 takaful is NOT purchased but
participated and become
members (participant)
 Takaful has fund known as
Takaful fund to pay
compensation
 Insurance business has
elements of gharar, maisir
and riba
 Insurance company is the
insurer & customers are
insured parties
 Insurance is purchased by
customers (insured party or
buyer)
 insurance do not have
equivalent special fund
….continue
 Takaful operators have the  insurance do not have
concept of tabarru’ - contribution concept
members contribute or
donate (tabarru’) into a
special fund
 Shariah-compliant investment  Any investment
 Takaful members received (including non-shariah
profits through mudharabah compliant)
concept  Received dividend (%)
 Takaful members received
rewards in the hereafter
How to participate?
 Identify own needs – family or general?
 Visit takaful operator or call representatives
 Understand the terms or type of protection –
protection only or protection and investment
 Participation amount (payment) based on
affordability (payment can be
monthly/quarterly/6-monthly or yearly basis)
(as additional information only; students will not be
tested)

Business Model/Concept used by operators:

Model approved by scholars:
 Mudharabah
 al-Wakalah
 Mudharabah + al-Wakalah (hybrid)

 Tabarru’ applicable under all

 Profit sharing element present
Mudharabah model
 Management expenses not charged on Takaful
Funds but borne by Shareholders’ Fund
 Only actual profit realized is shared
 Tabarru’ rates small just to cover expected
liability / mortality only
 Based on the premise of capital provider-
entrepreneur relationship
 Business oriented; need technical skills; high
expectations on ROI
Wakalah Model
 Management Expenses charged on Takaful Funds
 Tabarru’ rates big/substantial to take into account for
expenses charged
 Whatever profit declared is shared
 Based on the premise operator is also the agent of
participants, hence, agency fees can be charged on
contributions paid by participants
 Non-business oriented; ROI main objective;
investment returns on contributions shared
between participants and operator after certain
management fees charged by operator