What is Takaful?
All human activities are subject to risk of loss from unforeseen events. To alleviate this burden to individuals, what we now call insurance has existed since at least 215 BC. This concept has been practiced in various forms for over 1400 years. It originates from the Arabic Kafalah word, which means “guaranteeing each other” or “joint guarantee”. The concept is in line with the principles of compensation and shared responsibilities among the community.
Takaful originated within the ancient Arab tribes as a pooled liability that obliged those who committed offences against members of a different tribe to pay compensation to the victims or their heirs. This principle later extended to many walks of life, including sea trade, in which participants contributed to a fund to cover anyone in a group who suffered mishaps on sea voyages.
Takaful is commonly referred to an Islamic insurance, this is due to the apparent similarity between the contract of kafalah (guarantee) and that of insurance.
Takaful is founded on the cooperative principle and on the principle of separation between the funds and operations of shareholders, thus passing the ownership of the Takaful (Insurance) fund and operations to the policyholders. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.
How does Takaful Work?
All participants (policyholders) agree to guarantee each other and they make contributions to a mutual fund, or pool. The pool of collected contributions creates the Takaful fund.
The amount of contribution that each participant makes is based on the type of cover they require, and on their personal circumstances. The policy (Takaful Contract) specifies the nature of the risk and period of cover.
The Takaful fund is managed and administered on behalf of the participants by a Takaful Operator or Takaful Insurance Company who charges an agreed fee to cover costs. These costs include the costs of sales and marketing, underwriting, and claims management.
Any claims made by participants are paid out of the Takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the participants in the fund, and not the Takaful Operator, and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.