Conceptual Framework of the Islamic Insurance (Takaful)
A study of this nature is necessary to have a framework which can enable one to have proper grasp and understanding of the concept. Islamic jurists’ resolution on the system of insurance that serves as an alternative to the conventional commercial insurance is found on the concept of al-Takaful. The term is an Arabic word, an infinitive noun which is derived from the root word, Kafl or Kafala, which denotes guarantee or responsibility.
Takaful is an Islamic insurance transaction on a policy of mutual cooperation, solidarity and brotherhood against unpredicted risk or catastrophe, in which the parties involved are expected to contribute genuinely. An Islamic Insurance (Takaful) main chief characteristic is Al-Musharakah which means sharing, of responsibility, guarantee, collective assurance or mutual undertaking (Maiturare, 2009; Billah, undated(c) (e), Farooq, et al 2010 and Khan, undated).
Technically, Takaful is viewed, economically, as a mutual guarantee or assurance based on the principle of Al-Aqd (formal contract) provided by a group of people living in the same society against a defined risk or disaster befalling one’s life, property or any form of valuable thing. Hence, it is described as cooperative insurance with mutual agreement (Billah, undated: 2(e)). In the same vein, Malaysian Takaful Act (1984) defines Islamic insurance as a business of Takaful whose aim and operation do not involve any element which is not approved by the Shariah.
The concept is acceptable in Islam for the following reasons: the policy holders would cooperate among themselves for common good; every policy holder would pay his subscription in order to assist those of them who need assistance; it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system; the element of uncertainty is eliminated insofar as subscription and compensation are made as at when due; and finally, it does not aim at deriving advantage at the cost of other individuals Billah (undated:1 (c)).
The basic objective of Takaful is to pay for a defined loss from a defined fund. And this is in line with the Takaful features which are: cooperative risk sharing by using charitable donation to eliminate gharar and riba; clear financial segregation between the participant (insured) and the operator (insurance company); and Shariah – compliant underwriting policies and investment strategies (Ahmad, Masood & Khan, 2010 and Alamasi, 2010).
Many scholars agreed on what constitutes the principles of contract of Islamic insurance (Billah, undated (a); SECP, 2010). It is unanimously agreed that there are 3 principles which are: avoidance of riba (usury or interest), avoidance of maisir (gambling) and avoidance of gharar (uncertainty) in the Takaful transaction (Billah, undated (a) and SECP, 2010).
These principles are the basis upon which the OIC Fiq Academy has used to rule out that conventional insurance is forbidden to the Muslim Ummah (Alamasi, 2010). But, some scholars have added other principles such as al-jahalah (ignorance) and Haram (Forbidden thing in Shariah) (Alamasi, 2010; SECP, 2010).
Theoretically, the practice of Islamic insurance is built on the basis of contract of profit and loss sharing (Aqd al – Mudharabah) and unilateral contract of donation (Aqd al Tabarru).
Mudharabah theory states that the funds will be contributed by two or more people for the purpose of investment at which the profit or loss will be shared among the participants. But, the doctrine of tabarru, Billah (undated: 3 – (c)) said, is synonymous with the idea to the legal consequences of al-sadaqah (charity), al-Hiba (gift) and al-Khairat (donation); wherein anything once given away as donation in favor of something or someone, the donated property cannot generally be retracted. The donor automatically loses title over the donated property soon after it is made as al-Tabarru or al-Sadaqah or al-Khairat or al-Hiba.
Practically, Takaful operation as narrated by Billah (undated (e)) occurs when anybody in society who has the legal capacity may contribute a sum of money to mutual cooperation fund to ensure material security for one against a defined risk probably encountered by another’s life or property.
Thus, those who contribute to the mutual fund are known as participants while those who among the participants face the risk and are assisted by the fund known as insured. Those who actually benefit from the fund are known as the beneficiaries of the cooperative fund. The monetary contribution made by the participants to the fund is registered to the licensed body or corporation known as a Takaful operator, who bilaterally manages the fund according to Shariah principles and also provides a reasonable financial security for those genuinely deserve it against the loss or damage suffered by them resulting from a defined risk.
Furthermore, the contribution made by the participants is put into two funds: one of them is investment fund according to the principles of al-Mudharabah (profit and loss sharing) for instance, 95% of the contribution, while the remaining 5% is treated as charity according to the principles of al-Tabarru. Both funds are termed in Malaysian Takaful industry as Participant’s Account (P.A) and Participant’s Special Account (PSA) respectively.
According to Jching (undated), Takaful business is divided into two categories: Family Takaful and General Takaful. Family Takaful plan is a Shariah compliant counterpart of conventional life insurance which refers to as a combination of a mutual financial indemnity scheme and an investment scheme. In the plan, the participant’s contribution is apportioned into a donation account representing a financial indemnity (tabarru) with the balance into another account for the purpose of the participant’s saving and long-term investment.
Example of Takaful plan include: individual family Takaful plan, mortgage Takaful, education Takaful plan and health Takaful. In contrast, the second type is a general Takaful plan which is solely provided on a short term mutual indemnity basis and is usually one year, without the saving aspect. Should there be a net surplus in the general Takaful fund, it shall be shared between the participants and the operator.
Example of general Takaful scheme are: fire Takaful plan, motor Takaful, Marine, aviation and transport Takaful, engineering Takaful and accident Takaful plan (Maiturare (2009), Billah (undated (e)) and Ado (2010)).
Therefore, to ensure its flexibility and suitability to the different socio-cultural and economic background of Muslim population, three (3) different operating models are developed to serve as a basis for building structure of a Takaful scheme. These models are made up of the Mudharabah model, the wakala model and the waqf model.
Recent findings in the Takaful industries have provided many variations developed by practitioners to address the limitations of these three models. The variant Takaful models are: Wakala- Mudharabah model, Wakala with incentive fee model, Wakala Mudharabah model (hybrid) and Wakala with Waqf model (Jaffer, 2010 et al). Billah (undated (b)) also argued that Tijari model (Business/commercial) is operational in Malaysia. This model is divided into family Takaful and general Takaful (Onogun, 2011).
In all these models, however, the operators are free to choose the model depending on many factors such as the target population, regional acceptance, Shari’ah board views, regulatory framework, product design, marketing and pricing technique.
The most common models are Mudharabah and Wakala model or a hybrid of both. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) endorsed the hybrid version of the Wakala model (Jaffer et al 2010).