FAQ #12

Where does takaful company invest the collected contribution and what is the difference compared to the insurance company?

Takaful business is unique and different from insurance where the net contribution (after deducting any charges and fees) will be deposited into two separate funds, namely Participant Risk Fund (PRF) and Participant Investment Fund (PIF) depending on the features of the takaful product.  All general takaful products offer only protection coverage thus the contribution will entirely be credited into PRF.  On the other hand, most of family takaful products offer protection coverage with savings element therefore the contribution will be segregated between PRF and PIF.

All investments must comply with Shariah requirements.  Takaful operator can invest the funds into any investment instruments similar to insurance company provided that no non-Shariah elements exist.  The type of instruments maybe in the form of cash, financing, equities, sukuk, etc.  At the moment, most takaful operators invest the funds domestically due to limitation set by the regulation and fund size. Furthermore, the high volatility in currency exchange rates nowadays had diminished the appetite of many operators to risk their money abroad.  

The management will develop an investment mandate approved by the relevant parties including Shariah committee which outline the details pertaining the investment activities to be carried out by the fund managers whether internally or externally.

In terms of investment strategy, PRF will usually focus on short to medium term investment whilst PIF will focus on medium to long term investment to generate higher returns.  This strategy is in line with the purpose of the fund itself where PRF’s main objective is to cater for claims pay out whilst PIF is mainly to accumulate as much return as possible to prepare for future needs such as retirement or child education.

Thus, the main difference between insurance and takaful investment activities lies on the acceptance of investment instruments from Shariah perspectives.