2. ● Takaful started some 30 years ago in the Middle East with the launching of two
companies in 1979:
○ The Islamic Arab Insurance Co. (IAIC) in the UAE and
○ The Islamic Insurance Co. of Sudan
● But it took some time for the movement to take shape.
● Later in 1984, Malaysia played a pioneering role in setting the first Legal framework
specific to Takaful (Takaful Act Malaysia).
● This was instrumental in the successful launching of the Takaful movement in Malaysia
and in other countries of South East Asia.
1. Ottoman Empire- First introduce western concept of insurance- Maritime Code 1863.
2. Ottoman Law of Insurance 1874-only life insurance is haram or unlawful.
3. Since then, western concept of insurance is practiced almost in all countries in the world
HISTORICAL BACKGROUND OF
WESTERN CONCEPT OF INSURANCE
3. • Risk and uncertainty are fundamental facts of
life. All human activities are subject to risk, which
may lead to financial or physical losses to him.
Insurance is a device to cover the losses arise due to
occurrence of some undesired event.
Risk And Insurance:
4. Insurance is an economic device
whereby the individual substitutes a small
certain cost (premium) for a large uncertain
financial loss (the contingency insured against)
that would exist if it were not for the insurance.
Definition of Insurance
5. By Type of Products
i) Life insurance
ii) General insurance
iii) Liability insurance
CLASSIFICATION OF INSURANCE
BUSINESS
6. Nature of Insurance Contract
• Aleatory Contract
• Unilateral Contract
• Conditional Contract
• Contract of Adhesion
7. Definition of Tkawful
DEFINITION
Takaful, also called Islamic insurance, is a system of cooperative insurance for
followers of Islam. Members of a tkawful contract contribute to a pool of money that’s
used to financially support a member when they experience a covered loss.
The concept of tkawful originates from the beginning of Islam. Community members
used social insurance practices to pool resources and help cover losses.
The takawful system is based on Sharia, or Islamic religious law, which is the code of
conduct and religious guidelines for Muslims. Specifically, takaful follows Islamic
principles including welfare, shared responsibility, and cooperation.
Alternate name: Islamic insurance
8. Unlike conventional insurance, participants in a takaful contract are both the
insurers and the insured. Each member of the takaful group agrees to make
regular contributions or premiums. The money is put into individual
accounts and invested in Sharia-compliant investments. Part of joining the
takaful contract is agreeing to donate a portion of the funds from your
account if another member faces a loss. Likewise, your co-members agree
to help cover you if you face losses.1
In practice, takaful can look a lot like conventional insurance. For example,
say you protect your home with property takaful. A storm causes damage
to your home and leaves it uninhabitable.
How Does Takaful Work?
9. It may seem like takaful is the same as conventional insurance, such as car
insurance or homeowners coverage. However, a takaful agreement is Sharia-compliant, while
conventional insurance is not. Conventional insurance violates three specific concepts in
Sharia: gharar, maysir, and riba.
Gharar: This is the concept of uncertainty, risk, or fraud in financial and business transactions.
Under conventional insurance, you pay premiums for the promise that you’re covered if you
experience a specific loss. However, you may never experience a loss or need to file a claim.
Gharar is violated because both parties are uncertain whether you’ll use your insurance product
or not.
Maysir (Maisir): Maysir, or gambling, is prohibited in Islam as wealth should derive from
productive work rather than winnings from games of chance or luck. Conventional insurance is
often considered a type of gambling in Islam because of the uncertain risk and reward of a
policy. For example, a person could only have insurance for a few months before experiencing
a loss and getting the full value of the policy. On the other hand, someone may never need to
use their policy and pay premiums for years without a benefit.
Riba: Meaning “interest” or “usury,” riba is prohibited in contracts by Islamic religious law.
Many conventional insurance companies invest premiums into bonds and funds that bear
interest, which violates guidelines against riba.
10. Conventional insurance policies consist of policyholders and the
insurance company. The policyholders pay the insurance company to
insure them against risk. In takaful, however, the contract participants are
both the insurer and the insured. To manage the takaful contract and
coverage, several models of contracts are used:
1. Wakalah (agency)
2. Mudharabah (profit-sharing)
3. Hybrid Model
Types of Takaful
11. Types of Takaful Explanation
Wakalah
This model works by the Islamic insurance company, or takaful operator, becoming an agent for the takaful contract.
The agent manages the funds for participants. Participants pay the agent a fee for their services.
Mudharabah
While wakalah contracts are fee-based, mudharabah contracts are a profit-sharing venture between takaful participants
and the contract manager. The takaful participants provide capital in the form of their premium payments. The
manager of the contract provides expertise and managerial skills to invest the participants’ money into Sharia-
compliant investments.
Profit made by the investments is shared among the participants and the manager at an agreed-upon rate. The shared
profit pays for the manager’s time and experience rather than a straight fee. The manager doesn’t receive
compensation if the investments don’t make a profit.
Hybrid Model
The mixed, or hybrid, model of takaful combines elements of both wakalah and mudharabah. In this model, the takaful
manager receives a set wakalah fee as well as a portion of any profits from takaful fund investments.
12. Takaful vs. Conventional Insurance
Takaful Conventional Insurance
• Risk is shared between participants. • Risk is transferred to the insurance company.
• Any investments must be compliant with Sharia law. • Investments do not need to meet religious standards.
• Profits from fund investments are returned to takaful
participants.
• Profits of the insurance company may be distributed
to third-party shareholders, who may or may not be
policyholders.
13. Models Of Tkawful
Mudarabah Model, Family Takaful
Company’s Admin
& Manag. Expenses
Profit Attributed
To Shareholders
PA
PSA
FTF
Investment Profit
PA
PSA
Company
Takaful Contract
based on Mudarabah
30%
70%
Payment from
PA
Payment from
PSA
16. ● The participants’ risk fund’s financial outturn from the risk element of its
business, being the balance after deducting expenses and claims (including
any movement in provisions for outstanding claims) from the contribution
income and adding the investment return (income and gains on investment
assets).
● AAOIFI (2010), in its Financial Accounting Standards No. 13 on Disclosure
of Bases for Determining and Allocating Surplus or Deficit in Islamic
Insurance Companies made reference to underwriting surplus as: The excess
of the total contributions paid by policyholders during a financial period
over the total indemnities paid in respect of claims incurred during the
period, net of reinsurance and after deducting expenses and charges in
technical provision.
ISLAMIC INSURANCE (TAKAFUL): UNDERWRITING
SURPLUS (DEFICIT) OF TABARRU’ FUND IN INDONESIA
17. ● In this paper, the author choose gross contribution, reinsurance, claims payment and
net investment income as factors that influence underwriting surplus. Contribution
(premium) is participant’s liability to provide some funds to insurance company based
on agreement in the contract.
● So gross contribution means pure contribution paid by the participant before
deducting expenses. In takaful, contribution is made in the spirit of tabarru (donation),
with the condition that the participant agrees that his contribution can be used to help
each other participant within the takaful program.
● Reinsurance is insurance for insurer. It is a form of insurance whereby a risk that
already insured is insured again by the insurance company (Hansell, 1999).
Reinsurance of takaful business under Islamic principle is known as retakaful.
● As the connection to underwriting surplus, Sula (2004: 265) stated that reinsurance
can enhance the underwriting result and financial condition of the insurance company.
So reinsurance positively influence underwriting surplus.
Underwriting Surplus’ Factors and their Connection
18. ● Reinsurance is also known as insurance for insurers or stop-loss insurance. Reinsurance is the
practice whereby insurers transfer portions of their risk portfolios to other parties by some
form of agreement to reduce the likelihood of paying a large obligation resulting from
an insurance claim.
● The party that diversifies its insurance portfolio is known as the ceding party. The party that
accepts a portion of the potential obligation in exchange for a share of the insurance premium
is known as the reinsurer.
● How Reinsurance Works
● Reinsurance allows insurers to remain solvent by recovering some or all amounts paid to
claimants. Reinsurance reduces the net liability on individual risks and catastrophe protection
from large or multiple losses. The practice also provides ceding companies, those that seek
reinsurance, the capacity to increase their underwriting capabilities in terms of the number
and size of risks.
● According to the Insurance Information Institute, Hurricane Andrew caused $15.5 billion in
damage in Florida in 1992, causing seven U.S. insurance companies to become insolvent.
What Is Reinsurance?
19. • Reports that the term “retakaful” was coined by the takaful and insurance fraternity in
their efforts to Islamicise or Arabicise terminology for components of the industry’s
sharia-compliant supply chain. Just as reinsurance refers to the concept of “insurance for
insurance companies,” retakaful refers to “takaful for takaful companies.”
Elements of sharia compliance are the main factors differentiating between a retakaful
and a conventional reinsurance operation, because sharia advocacy should remain
paramount among industry stakeholders ahead of commercial returns. Islamic financial
institutions must seek to enhance knowledge of Islamic finance so as to stimulate a
proper approach to the enhancement and development of products and services.
A lack of such knowledge stunts the intellectual and operational development of the
industry, as some sharia issues could be side-stepped, leading practitioners to fall back to
conventional practices detrimental to the future of retakaful or Islamic finance and
economics.
Reference: Mahbob, I. (2012). Retakaful. In Takaful and Mutual Insurance (pp. 175-
190). The World Bank. https://doi.org/doi:10.1596/9780821397244_CH12
10.1596/9780821397244_CH12
Retkaful