TAKAFUL INSURANCE

Eid Mubarak Friends of Mad Over Insurance across the world.

Eid ul Fitr marks the end of the holy month of Ramadan. Good occasion to celebrate as well as understand about Takaful Insurance.

Takaful means “cooperation amongst a group of people”. Takaful insurance is based on Islamic or Sharia law. Sharia law has restrictions related to interest, gambling, and uncertainty. Hence, traditional insurance is believed to be against the Sharia law. Hence, the Takaful Insurance which is based on Sharia law.

Sharia law allows a pooling system. Hence, Takaful Insurance works on the basis of members (policyholders) contributing money into a pooling system. Policyholders in Takaful Insurance are called as participants. Contribution to the pool is treated as a donation. Members of this pool guarantee each other against loss or damage. Any member who suffers loss or damage is compensated from the pool. Money in the pool is called as “Takaful Fund”.

How much does each member of the pool contribute? The contribution is based on the type of coverage required by each member of the pool, the nature of risk the member (or the member’s assets) carries, and the period for which the coverage is required.

How are claims paid? Claims are paid out of the Takaful fund.

How are management expenses accounted for? Again these are paid out of the Takaful Fund. Normally, the Takaful fund is managed by a Takaful Operator. The operator is paid fees to cover its costs.

After making provisions for claims and claim reserves and expenses, the surplus belongs to the participants. This surplus is distributed to the participants. Alternately, renewal contributions are adjusted with this surplus.

It is estimated that the Takaful insurance market will be around USD 100 billion by the year 2030.

Re-takaful is also growing. Re-takaful is takaful for takaful companies. All major reinsurers in the world have Re-takaful companies based in Middle East Asia and South East Asia.

Compliance with Sharia law is the key factor for Takaful Insurance and Reinsurance. Sharia Supervisory Board and even Sharia Auditors are appointed by most Takaful & Re-Takaful companies in order to ensure compliance with the Sharia law.

Blog written by: Atmaram Cheruvu