Takaful – Islamic insurance
Sharia perspective on conventional
Takaful – the Islamic alternative
Types of takaful policy
The future of the takaful industry
Human beings have long recognised the need to protect
themselves against the impact of risks they face, such as natural disasters,
travel accidents, unemployment, sickness or dying at a young age and leaving a
vulnerable young family behind.
Islam teaches its followers to put their trust in God;
at the same time, it also encourages them to use the resources, skills and
abilities bestowed on them by God to act responsibly and protect their wealth
In this chapter we will look at the reasons why
conventional proprietary insurance is not regarded as sharia-compliant
and explore the Islamic alternative called takaful.
SHARIA PERSPECTIVE ON CONVENTIONAL INSURANCE
In conventional proprietary insurance schemes, a
commercial entity seeks to provide insurance cover for a particular risk by
charging an insurance premium and make a profit net of any claims and other
costs. This model is at odds with the sharia in
three key respects:
Insurance aims to provide protection against an event
that could happen but is uncertain in terms of if or when it might happen.
Actuaries model the probability of events occurring and seek to set insurance
premiums at a level that both compete effectively in the market and maximise
profit for the insurance company. These attempts to model the future will
invariably be imperfect. Some uncertainty will exist in almost all commercial
dealings (for example, when a consumer buys fruit, there is a chance that it
will not be ripe). This level of uncertainty is seen as natural and accepted in
the market. However, the sharia does
not tolerate ‘excessive’ levels of uncertainty (gharar)
and most scholars are of the opinion that the uncertainty found in commercial
insurance contracts falls into this category.
Related to the fact that the occurrence of certain
events is uncertain, sharia scholars are generally of the opinion that the
premium charged by commercial insurance companies is similar to placing a bet (maysir)
on whether a particular event will happen. So this is another sharia objection
to conventional proprietary insurance.
In conventional insurance schemes, either the policy holder
will receive more than they pay as a premium (if a successful claim is made) or
the insurance company will receive more in premiums than it pays out in claims.
Given that the ultimate outcome is a money-for-money exchange, i.e. a premium
paid in money is exchanged for a potential payout in money later, and that
these two values will invariably be different, in a commercial context this
would amount to riba. Riba can
also arise if the insurance company invests in interest-bearing instruments
such as gilts.
TAKAFUL – THE ISLAMIC ALTERNATIVE
Takaful means mutual cooperation or joint guarantee. It
refers to a not-for-profit set-up in which individuals club together by
contributing into a common pool. The monies in this fund are used to pay out to
members of the pool who have been afflicted by certain events that the members
have mutually agreed to cover each other for – travel accidents, for example.
The monies left in the pool after paying claims belong to the members.
The Takaful Act enacted by Malaysia in 1984
defines takaful as follows:
A scheme based on brotherhood,
solidarity and mutual assistance, which provides for mutual financial aid and
assistance to the participants in case of need whereby the participants
mutually agree to contribute for the purpose.
The sharia violations
of riba, gharar and maysir that
are prevalent in conventional commercial insurance contracts do not occur in
such a system. Instead of a premium payable in a commercial insurance contract,
pool members donate (tabarru means donation) a sum of money to the pool. If a
member is paid compensation from the pool, this payment is regarded as a form
of mutual assistance rather than as a countervalue paid under a contract of
exchange. Hence the issue of riba does
not arise in such a system.
Similarly, the non-commercial nature of the
arrangement means that the prohibitions of gharar and maysir do
not apply. It is in a commercial context that the sharia demands
as much certainty as possible in the exchange between the two parties to a transaction
(i.e. absence of gharar) and forbids gambling/betting (maysir)
by either party.
Takaful also differs from commercial proprietary
insurance with regard to who bears the risk. In commercial proprietary
insurance the risk is transferred to the insurance company, which takes on the
risk(s) covered in the insurance policy in exchange for the insurance premium.
Under the takafulsystem, risk is not transferred to any third party but
is borne by and distributed among the members of the pool.
The relationship between the pool members and the pool
is framed in terms of two binding promises: the members promise to contribute
to the fund, and the pool promises to pay out in the event of a claim.
The takaful system
is virtually identical to the concept of mutual insurance, which is still alive
today and has a deep heritage in the United Kingdom, rooted in local
communities putting money into a common pool to protect members from certain
It is worth noting at this point that in markets such
as the United Kingdom, the provision of takafulproducts
is limited. Where the law demands protection (for example, car insurance is
required to drive a car in the United Kingdom) and there is no sharia-compliant
alternative available, scholars have permitted the use of conventional
insurance products. This is based on the fact that it is a legal requirement of
the country and Islamically it is of paramount importance to be law abiding and
maintain social order and harmony in society. Where there is no legal imperative
but there is no sharia-compliant alternative available, scholars are
reluctant to permit the use of conventional insurance products, but depending
on the circumstances of a particular case, may endorse it if it is deemed that
the potential loss to the person/entity will be very hard to recover from.