Takaful – Islamic insuranceIntroductionSharia perspective on conventionalinsuranceTakaful – the Islamic alternativeTakaful modelsTypes of takaful policyThe future of the takaful industryConclusionINTRODUCTIONHuman beings have long recognised the need to protectthemselves against the impact of risks they face, such as natural disasters,travel accidents, unemployment, sickness or dying at a young age and leaving avulnerable 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 andabilities bestowed on them by God to act responsibly and protect their wealthand property.In this chapter we will look at the reasons whyconventional proprietary insurance is not regarded as sharia-compliantand explore the Islamic alternative called takaful.SHARIA PERSPECTIVE ON CONVENTIONAL INSURANCEIn conventional proprietary insurance schemes, acommercial entity seeks to provide insurance cover for a particular risk bycharging an insurance premium and make a profit net of any claims and othercosts.
This model is at odds with the sharia inthree key respects:Gharar (excessiveuncertainty)Insurance aims to provide protection against an eventthat 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 insurancepremiums at a level that both compete effectively in the market and maximiseprofit for the insurance company. These attempts to model the future willinvariably be imperfect. Some uncertainty will exist in almost all commercialdealings (for example, when a consumer buys fruit, there is a chance that itwill not be ripe). This level of uncertainty is seen as natural and accepted inthe market. However, the sharia doesnot tolerate ‘excessive’ levels of uncertainty (gharar)and most scholars are of the opinion that the uncertainty found in commercialinsurance contracts falls into this category.
Maysir (betting)Related to the fact that the occurrence of certainevents is uncertain, sharia scholars are generally of the opinion that thepremium charged by commercial insurance companies is similar to placing a bet (maysir)on whether a particular event will happen. So this is another sharia objectionto conventional proprietary insurance.RibaIn conventional insurance schemes, either the policy holderwill receive more than they pay as a premium (if a successful claim is made) orthe 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 premiumpaid in money is exchanged for a potential payout in money later, and thatthese two values will invariably be different, in a commercial context thiswould amount to riba.
Riba canalso arise if the insurance company invests in interest-bearing instrumentssuch as gilts.TAKAFUL – THE ISLAMIC ALTERNATIVETakaful means mutual cooperation or joint guarantee. Itrefers to a not-for-profit set-up in which individuals club together bycontributing into a common pool.
The monies in this fund are used to pay out tomembers of the pool who have been afflicted by certain events that the membershave 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 1984defines takaful as follows:A scheme based on brotherhood,solidarity and mutual assistance, which provides for mutual financial aid andassistance to the participants in case of need whereby the participantsmutually agree to contribute for the purpose.The sharia violationsof riba, gharar and maysir thatare prevalent in conventional commercial insurance contracts do not occur insuch 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 amember is paid compensation from the pool, this payment is regarded as a formof mutual assistance rather than as a countervalue paid under a contract ofexchange. Hence the issue of riba doesnot arise in such a system.Similarly, the non-commercial nature of thearrangement means that the prohibitions of gharar and maysir donot apply. It is in a commercial context that the sharia demandsas 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 proprietaryinsurance with regard to who bears the risk. In commercial proprietaryinsurance the risk is transferred to the insurance company, which takes on therisk(s) covered in the insurance policy in exchange for the insurance premium.Under the takafulsystem, risk is not transferred to any third party butis borne by and distributed among the members of the pool.
The relationship between the pool members and the poolis framed in terms of two binding promises: the members promise to contributeto the fund, and the pool promises to pay out in the event of a claim.The takaful systemis virtually identical to the concept of mutual insurance, which is still alivetoday and has a deep heritage in the United Kingdom, rooted in localcommunities putting money into a common pool to protect members from certainmisfortunes.It is worth noting at this point that in markets suchas the United Kingdom, the provision of takafulproductsis limited. Where the law demands protection (for example, car insurance isrequired to drive a car in the United Kingdom) and there is no sharia-compliantalternative available, scholars have permitted the use of conventionalinsurance products. This is based on the fact that it is a legal requirement ofthe country and Islamically it is of paramount importance to be law abiding andmaintain social order and harmony in society. Where there is no legal imperativebut there is no sharia-compliant alternative available, scholars arereluctant to permit the use of conventional insurance products, but dependingon the circumstances of a particular case, may endorse it if it is deemed thatthe potential loss to the person/entity will be very hard to recover from.