Takaful (Islamic Insurance) - Kickoffall Info Hub

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Tuesday, April 7, 2020

Takaful (Islamic Insurance)

Insurance is a form of risk management which protects from financial loss and is used to hedge against the risk of an uncertain loss.
Elements of Insurance:
  1. Insurer or insurance company: The entity which offers insurance.
  2. Insured or policyholder: The person or an entity who purchases insurance.
  3. Insurable interest: A guaranteed and known loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the event of a covered loss.
  4. Insurance policy: The contract which is received by the insured that includes the conditions and circumstances under which the insurer will compensate the insured.
  5. Premium: The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy.
Takaful:
Takaful is an Islamic alternative to conventional insurance. The Takaful Insurance 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.
Mechanism of Takaful
Takaful refers to the Islamic concept where the money is contributed to a Takaful fund in the form of participative contribution (Tabarru’). A contract (Aqad) is given to each contributor to becoming the participant by agreeing to help each other mutually and to suffer any form of misfortune and loss as covered under the contribution.  The Contributions collected from the policyholders are measured as donations and they constitute the Takaful fund from which all claims are reimbursed.
At the end of each financial year, after deduction of expenses, the remaining fund surplus will not be retained by the company or its shareholders but returned to the policyholders in the form of cash dividends or distributions.
How Takaful is Different:
Takaful works on the principle that the profit should be shared with both policyholders and shareholders; While in conventional insurance, the shareholders, solely benefit from the profits generated from Investment assets.
The Investment assets representing the Takaful fund that accumulates over the retained reserves, surpluses and provisions are invested by the shareholders who manage the company on behalf of the policyholders. The shareholders are rewarded with a percentage of the profit on these investments.
Takaful permits to invest the fund in Sharia-compliant products only, while the conventional insurance invests the fund in interest-based products. 

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