An Overview of How Takaful Insurance Works

What is Takaful?

Takaful is an alternative to conventional insurance. It is a major Islamic insurance type where participants put their money into a pool system to mutually help each other in the period of any loss or disaster. Takaful Insurance works rely on the principle of cooperation (Ta’awun). In essence, every participant of the fund is cooperating and protecting each other through their contributions. Takaful fixes the issues related to conventional insurance by creating a risk shared fund that invests in only Shariah-compliant investments.

In conventional insurance, everybody does not share risk properly and they invest premiums (put into the insurance) into impure investments. Different from conventional insurance, takaful policies do not deal with sale or exchange that includes the objectionable aspects of gharar (uncertainty), maysir (gambling), and riba (interest). Takaful insurance has been built on Islamic laws and it covers health, life, and general insurance needs.

Contracts Involved In Takaful

1. Tabarru’ – The most popular model in takaful which means donation and gift. The percentage amount given by customers is considered as a gift.

2. Mudharabah – Profit loss sharing between operator and participants. The operator is the Mudharib and the participant is the Rab Mal.

3. Wakalah – Wakalah means agency. The operator will act as a wakeel to the participants.

Meanwhile, in the conventional insurance market, members tend to pay some amount of money to protect themselves against any loss or damage. As long as the loss occurs, the insurance company may protect members according to their insurance type. However, if the loss does not occur, the members just lose their insurance fee to the insurance company.

In contrast, according to takaful insurance, it is an agreement among policyholders (members) to guarantee each other financial protection in the case of loss. Policyholders provide financial help to the members of the fund when any of them suffer from damage. In this case, the takaful operator can distribute all the surplus to policyholders not leaving any amount to the insurance company. Therefore, the Takaful managers control the fund for the benefit of the members.

Current Takaful Market

Last but not least, according to the recent research analysis by Research and Markets, the global takaful market is growing rapidly. Whilst the market value of takaful was approximately $19 billion USD by the end of 2017, experts predict that it can reach almost $40 billion by 2023.

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