FAQ #1

It seems like Takaful is merely using different terminologies compared to insurance such as “contribution” instead of “premium” and “profit rate” instead of “interest rate”.  Most other aspects are quite similar for both takaful and conventional insurance business.  Thus, what are the key differences between Takaful and conventional insurance?

Takaful business is using a different concept compared to insurance.  When an insurance agent approaches a prospect, he will usually say for instance, “Would you like to buy a medical insurance policy?”  He is absolutely correct as the insurance contract is based on sales and purchase (S&P) agreement.  However, a takaful agent shall approach his prospect by saying for instance, “Would you like to participate in a medical takaful scheme or fund?”

Below is a detail comparison between takaful and conventional insurance:

Subject Matter	Takaful	Insurance
Fundamental Law & Contract	Source from Al-Quran & Hadith Contract is based on: ü  Tabarru’ – donation ü  Mudharabah – profit sharing ü  Wakalah – agency relationship 2 types of contracts: ü  Contract among participants – tabarru’ ü  Contract between operator & participants – wakalah/mudharabah	Source from Law & Regulation of local authority Contract is based on sales and purchase agreement (Shariah disputes on the transaction) One contract between operator & policyholder only
Basic Principles	Permissible Interest Utmost Good Faith Indemnity Subrogation Contribution Proximate Cause Tabarru’	Insurable Interest Utmost Good Faith Indemnity Subrogation Contribution Proximate Cause
Profit motive	Community well-being optimizing operations for affordable risk protection as well as fair profits for the operator	Profit-motive, maximizing returns to shareholders
Management (Good Corporate Governance)	Shariah Committee is required – looks into Shariah matters and public interest at large. SC is at least at par with BOD. GCG is based on Shariah and governing law	No Shariah council.  BOD is the highest body. GCG is based on governing law only.
Profit and bonus distribution	Takaful contract specifies in advance (pre-determined) how and when profit/surplus and/or bonus units will be distributed.	Profits and/or bonus units to be distributed to policyholders as determined by managers and BOD of insurer.
Intention/interest of parties involved	Coincidence of interests between certificate holders and operator which is  appointed by participants.	Separation of policyholder and insurer with differing interests.
Accounting system	Separation between tabarru’, participant and shareholders’ funds Zakat (tithe) is compulsory Contribution paid is clearly separated according to it’s components Income to operator (shareholders): ü  Upfront fee (ujrah) ü  Profit (investment) sharing – performance fee ü  UW Surplus sharing Normal accounting and auditing standards and conforms with Shariah guidelines and AAOIFI,  where applicable	No clear separation of funds Zakat is not compulsory Premiums is not separated Income to operator (shareholders): ü  Expense loading ü  Interest rate differential ü  Reinsurance commission ü  Mortality gain ü  Surrender gain Normal accounting and auditing standards
Operational	Product design eliminates element of gharar, maisir and riba Insurable object must be halal and acceptable to Shariah Risk management is based on sharing of risk among participants Investment only in Shariah acceptable instruments Claim is paid from tabarru’ fund which is it’s sole purpose UW Surplus belongs to participants and distributable accordingly.	Product involves gharar, maisir and riba No restriction to insurable object Risk management is based on risk transfer to operator No restriction to investment – optimize returns only Claim is paid from insurance fund UW Surplus belongs to shareholders
Treatment of losses	Losses retained within classes of business written and sole obligation of participants (Based on the concept of tabarru’). However, IFSA requires the deficit be rectified via qard from shareholders.	Transfer of losses among insurance pools  from policyholders to shareholders
Proceeds ownership	Proceed ownership  is determined by Islamic principles of Fara’id (Inheritance)	Proceed ownership in the Nominee absolutely in life insurance.
Investment of contribution/ Premiums	Takaful operator invests contributions in accordance with Islamic values and Shariah guidelines	Insurer invests premiums consistent with profit-motive with no divine guidelines; hence existence of Riba and Maisir.
In the event of dissolution	Reserves and excess/surplus could be returned to participants, although consensus opinion prefers donation to charity	Reserves and excess/surplus belong to the shareholders.