Takaful and Retakaful

Takaful is Verily, selling the asset on condition that its transfer of ownership to the buyer will not be done until after its (asset) value was paid in order to be the purpose from that is to not endorse transfer of ownership to the buyer until after the payment of the value, so this is permissible and there is nothing wrong in that (from the Shariah point of view). It is also Mutual guaranteeing through mutual support and shared responsibility whereby a group of people agree to jointly guarantee one another against a defined loss. Takaful is an alternative to contemporary insurance. Re-takaful is an agreement among takaful operators to contribute into a larger fund (re-takaful fund) which assumes the task of covering part of the risks encountered by the participating takaful operators.

Development


Types of Takaful Entity

A cooperative is defined as an "autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations, through a jointly-owned and democratically controlled enterprise" - International Cooperative Alliance. Under a cooperative model, contributions are collected and pooled into the participants' fund (takaful fund), whilst claims and management expenses are met from the takaful fund. People are employed to collect contributions, manage and administer the scheme and make claims and benefit payments to members. For further details see: TAKAFUL: Realities and Challenges.

قرار رقم: 200 (6/21) بشأن: الأحكام والضوابط الشرعية لأُسس التأمين التعاوني
قرار رقم : 215 (11/22) بشأن استكمال بحث قضايا التأمين التعاوني ودراستها
قرار 187 (2/20) بشأن التأمين التعاوني: الأحكام والضوابط الشرعية
Fatwa On Co-operative Insurance: The Decision Of The Council Of Head Of Scholars Of Saudi Arabia (No. 51)
Resolution No. 9 (9/2): Concerning Insurance And Reinsurance

Stakeholders

The takaful operator simply functions as administrator of the takaful fund and whose responsibility includes managing and investing the fund according to the Shari’ah principles. For further details see: ISRA, Islamic Financial System; Principles and Operations.

The participant pays regular contributions to the takaful operator for the purpose of future security of the subject matter at risk. Theoretically, everybody, regardless of age, class, religion, sex or any form of identification, has a natural right to buy a policy for the material security of property, life or business ventures. But in practice, the right of mutual cooperation may not be rendered to some people in society because of some reasons which do not permit them to exercise the equal right of mutual cooperation. For further details see: Islamic Financial System; Principles and Operations.

Under Islamic law, the beneficiary in a takaful policy cannot be determined based on a nomination clause. A beneficiary must have an insurable interest in the policy and simultaneously be nominated by the participant in the policy. The current practice seems to recognise those who are entitled to the deceased’s estate as having a legitimate insurable interest, although this point is not clearly expressed in any regulation or guidelines. Therefore, a beneficiary who has an insurable interest but is not nominated, may be disqualified from receiving any benefits from the policy as he is not considered as a legal beneficiary. For further details see: Islamic Financial System; Principles and Operations.

التعامل مع شركات التأمين التقليدي
Transferring the Right to Benefit from Insurance to a Purchase Undertaker after the Sale

The nominee is a trustee and the governing principles of nominee under Islamic law could be derived from the doctrine of al-amanah. The word al-amanah means reliability, trustworthiness, good faith, honesty, and fidelity. For further details see: Islamic Financial System; Principles and Operations.


Types of Takaful Product


Types of Retakaful Product

Facultative method is a type of re-takaful for individual policy or risk. This arrangement can be on a proportional basis, which is the original form, or non-proportional basis. Facultative means “optional”, i.e., the power to act according to a free choice. So, the facultative underwriter of a re-takaful operator is free to accept or decline any offer from a takaful operator that wants to cede its risk to such re-takaful operator. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Comprehensive method (re-takaful agreement/treaty): the re-takaful operator assumes the commitment to accept all the risks which fall within the scope of the agreement signed with the takaful operator. For further details see: ISRA, Islamic Financial System; Principles and Operations.


Takaful Models

According to the principle of mudarabah, the takaful operator who acts as an entrepreneur, or mudarib, will accept payment of the takaful contributions (premium) termed as ra’sul mal from takaful participants acting as rabbul mal. For further details see: Islamic Financial System; Principles and Operations.

Based on this principle, participants remain the actual owners of the takaful fund and the takaful operator acts as an agent (for the participants) who manages the fund for a defined fee. As an agent, the operator is entitled to agency fee (remuneration) and performance fee (as commission). The surplus of the participants’ investment funds goes to the participants. The agency fee rate is fixed annually in advance in consultation with the Shari’ah committee of the company. Performance fee, which is related to the level of performance, is given as an incentive for good administration and governance of the participants’ fund. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Waqf means a unilateral contract to relinquish a right over property and allocate it for general enjoyment of the usufruct by the specified beneficiaries. It can be made applicable in the treatment of a takaful fund, while management and operational aspects of the takaful fund may still use wakalah and mudarabah contracts. Participants will give contributions into a waqf fund, and thus completely lose the right over their contributions. The takaful operator acts as a trustee to the waqf fund. For further details see: Islamic Financial System; Principles and Operations.

قرار رقم : 215 (11/22) بشأن استكمال بحث قضايا التأمين التعاوني ودراستها

Some takaful operators adopt a hybrid model either combining mudarabah and wakalah or wakalah with waqf model or even mudarabah and waqf. For further details see: Islamic Financial System; Principles and Operations.

Wadiah literally means a trust for safekeeping. Different schools of thought have provided various technical definitions of wadiah. The Hanafi and Maliki schools defined wadiah as property given to another party for safekeeping. The Shafi school defined it as property that is turned over to another party for safekeeping on the owner’s behalf, but they focused further definition on the nature of the property, allowing wadiah whether the property is recognized by the Shariah or not, as long as it can be used and is a person’s exclusive right; for example, a useful impure substance. The Hanbalis defined wadiah as property given to a person for safekeeping without any consideration. For further details see: ISRA Research Paper No: 35/2012


Issues and Challenges

The terms capital adequacy ratio and solvency ratio are often used interchangeably. Solvency or capital adequacy ratio is a form of prudential regulation aimed at ensuring that regulated entities operate safely and soundly. The essence of the solvency test is a comparison between an institution’s capital (the excess of its assets over liabilities) and a required minimum amount. Regulators want to ensure that takaful operators are able to meet their liabilities. In doing so, there should be regular assessment of their risk profile. The assets and liabilities are measured according to a prescribed valuation, which may differ depending on accounting rules. This determines the extent of solvency. For further details see: Islamic Financial System; Principles and Operations.

Underwriting is a fundamental aspect of covering risk. It is a process that enables an insurance company or takaful operator to choose whether to cover a specifi c risk or not. Underwriting helps to create a portfolio, the takaful operator generates charges, it
helps in selecting which risk to take on board and it also ensures Shari’ah compliance with regard to the risk taken and also protecting the takaful fund. Takaful underwriting aims to provide equitable and fair risk-sharing schemes amongst participants that are relatively homogenous in nature. For further details see: ISRA, Islamic Financial System; Principles and Operations.

If the Bank Drops the Outstanding Balance Due on a Car Destroyed in a Traffic Accident, Does the Buyer Have a Right to Ask for the Insurance Compensation?
If the Value of Insured Property Fluctuates, What Should the Insured Value Be?
Islamic Financing Insured By Conventional Insurance

The different models of takaful influence the investment policy of takaful operators. The point remains that investment of the contributions can be broadly categorised into two main streams: those meant for covering individuals and those meant to build up the
fund. Not many halal avenues exist for investing the contributions. The main ones are stocks, sukuk and infrastructure financing. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Leasing Fund: Calculating Zakah
How Does the Bank Record the Profits of a Delayed-Payment Murabahah Sale?
إضافة الاستثمارات إلى الاحتياطي الأساسي
Fatwa On Co-operative Insurance: The Decision Of The Council Of Head Of Scholars Of Saudi Arabia (No. 51)
Insurance against Investment Risks

A person has an insurable interest in something when a loss or damage would cause that person to specifically suffer a financial loss or certain other kinds of loss. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Resolution No. 175: The impermissibility of the Corporation issuing the International Traveller Card (Iyābā)
التأمين على الديون والحياة
Insurance of a Debt
Insuring Valued Possessions against Fire, Theft, Etc.

Under Islamic law, the beneficiary in a takaful policy cannot be determined based on a nomination clause. A beneficiary must have an insurable interest in the policy and simultaneously be nominated by the participant in the policy. The current practice seems to recognise those who are entitled to the deceased’s estate as having a legitimate insurable interest, although this point is not clearly expressed in any regulation or guidelines. For further details see: ISRA, Islamic Financial System; Principles and Operations.

Hibah In The Takaful Industry

Under the general principle of Shari’ah, it is unfair to seek from the counter-party an indemnity for loss or damage, especially if it is not caused by him. Hence, for instance, in an ijarah contract the bank as lessor is not supposed to seek from the customer (lessee) an indemnity. This is in contrast to conventional financing where the desire is to simply allocate risk. For further details see: ISRA, Islamic Financial System; Principles and Operations.

تعويض العميل من قيمة البضاعة التالفة قبل تسلمه إياها
قيام البنك عند تلف البضاعة المستوردة باستيفاء مبلغ من شركة التأمين يزيد عن المبلغ الذي دفعه البنك

The takaful fund’s financial outturn from the risk elements of its business, being the balance after deducting expenses and claims (including any movement in provision for outstanding claims) from the  contribution income and adding the investment returns (income and gains on investment assets). For further details see: ISRA, Islamic Financial System; Principles and Operations.

قرار رقم: 200 (6/21) بشأن: الأحكام والضوابط الشرعية لأُسس التأمين التعاوني
قرار رقم : 215 (11/22) بشأن استكمال بحث قضايا التأمين التعاوني ودراستها
Do Subcontractors Who Contribute to Insurance Premiums Have a Right to a Refund Paid to the Main Contractor?

Co-mingling of participants' pool between general and family takaful should not be done as each possess different risk levels, claims ratios and employ different apportionment ratio surpluses. For further details see: TAKAFUL: Realities and Challenges.

The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 162nd Meeting
إضافة الاستثمارات إلى الاحتياطي الأساسي

The takaful industry has seen double-digit growth in recent years but the desired level of penetration has yet to be achieved. This could be due to the fact that potential consumers tend to downplay the importance of takaful as they view takaful as a disguised form of conventional insurance that will enable conventional insurers to gain access to the large Muslim market. For further details see: TAKAFUL: Realities and Challenges.


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