Takaful - Islamic Insurance

Takaful, often referred to as 'Islamic insurance', is a way for businesses to mitigate the financial risk of unforeseen events. Takaful is based on social solidarity and cooperation, it is a pact among a group of people who agree to jointly indemnify loss or damage from a fund they donate to collectively.

Howden provides Takaful (Islamic insurance) through its sister company, Howden Takaful Brokers (formerly known as Malene Insurance Brokers).

A Takaful specialist since the beginning in 1980, Malene has accumulated a wealth of experience servicing a spectrum of clients ranging from power and utility, aviation, oil and gas, port liability, marine, financial and special risks sectors.

Shari'ah compliant risk management options

Unlike conventional insurance, in which risk is transferred from the insured to the insurer, with Takaful insurance, the mutual risk is shared amongst the participants. Each participant makes a donation to a Takaful fund. In the event of a loss, the participant will receive the amount of its claim, subject to the Takaful terms and conditions.

Takaful has its roots in “Kafalah” (guaranteeing each other). Kafalah has been going on for more than 1000 years.

Takaful provides access to a co-operative of like-minded people who need to protect against risk. The system is based on mutual collaboration and sharing responsibility, with the aim of helping each other bear the burden of misfortune.

Important facts about Takaful insurance

1. Takaful does not enable gaining a financial advantage at the cost of others' expense
2. Members contribute a sum of money as a donation to a shared pool
3. Contribution to the Takaful fund is based on the terms of the coverage each member requires, what is being covered and for how long. Each contribution also accounts for that member businesses’ own situation and risk profile 
4. Losses are divided according to an agreed community pooling system
5. Any surplus in the Takaful fund is owned by the policyholders (it does not become a profit to the fund).

How it works

All investments managed by the Takaful operator are made in accordance with Shari'ah law. These funds are managed by the Takaful operator on behalf of the participants.

Unlike conventional insurance, the participants retain an ownership interest in the Takaful fund. Contributions from the participants are later invested into halal, Shari'ah compliant funds to derive investment income. Should the fund generate a surplus, it is then shared amongst the participants (and, in some cases with the Takaful operator). This creates a ‘win-win’ situation for all participants.

Losses and surpluses from these funds are shared amongst the policyholders. For example, if there is a year without claims, the “profits” are shared out. 

Each Takaful fund has a Shari'ah committee overseeing it. The committee approves the sharing ratio for each year.

The Takaful pools we access use the Mudarabah model, the most widely practised mode in the Asia Pacific region. In the Mudarabah model, the fund manager is entitled to a share of the surplus but does not get a salary or fee for services rendered.

Howden is not the Takaful pool manager, but takes a set fee for consulting and arranging the fund.

Why insurance is haram

Conceptually, isurance is allowed under Shari'ah law, but conventional modern-day insurance features several aspects that are most certainly haram.

Gharar – It is normal in insurance that one party acquires profit and the other not. For example, when there is a claim, the insured will profit, the insurer won’t. In a year without claims, the insurance company will profit from collecting premiums, but the insured won’t get anything back.

Maysir – Interrelated to the above, an insurance premium is theoretically gambling. The insured pays a small sum in the hope of one day getting a large sum back should a specified indemnifiable event results.

Riba – The pool of money that insurance companies use to pay claims is tainted by Riba, as insurers commonly take premiums and invest them in debt instruments, such as bonds, which pay interest.

The Takaful industry will tremendously expand in the future. Through proper planning and effective strategies, Malene Insyaallah will be at the forefront of the Takaful broking industry.