Basic Concepts of Takaful

1. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful • Takaful - Arabic word originating from the root verb kafalah –to guarantee, to secure or to be responsible for others • Literally, takaful means joint responsibility or guarantee based on mutual agreement • Three basic concepts of mutuality are embodied in the takaful model of insurance: - Mutual help - Mutual responsibility - Mutual protection

2. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Figure 8.1: Triangular Relationship of the Major Aspects of Takaful

3. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful • Takaful:Islamic alternative to conventional insurance where members contribute financial resources into a pool based on principles of: - ta’awun (mutual assistance) - tabarru’ (donation) where the group undertakes to share the mutual risk together An appropriate Sharī‘ah-compliant framework effectively manages risks in commercial activities as well as other civil engagements - following the hadith ‘Tie your camel first’ • All prohibitive elements in Islamic commercial transactions are prohibited in the design of takaful models

4. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Main Features of Takaful 1. Cooperative Risk Sharing 2. Clear Financial Segregation 3. Sharī‘ah-compliant Policies and Strategies

5. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Main Features of Takaful 1. Cooperative Risk Sharing • Cooperative risk sharing through the use of donation was designed to: - eliminate riba and ghrar elements in takaful- address issues of social responsibility, solidarity and the innate need to care for others • Donations adopted/merged with other frameworks of Islamic commercial transactions to replace premiums • Premiums paid by policyholders are considered donations to assist members who suffer any loss

6. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Main Features of Takaful 2. Clear Financial Segregation • In Islamic law: - Clear segregation between participants and operators - The role of the insurance company is restricted to an operator managing the portfolio and investing insurance contribution on behalf of participants • In the conventional practiceof insurance business:- - The insurance company is a profit-making entity which agrees to bear the financial burden and losses of its policyholders • The shareholders are entitled to receive profit and bear the burden of any deficit at the end of the financial year

7. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Main Features of Takaful 3.Sharī‘ah-compliant Policies and Strategies • Investment of insurance funds should be made on ethical businesses that cause no harm to people or the environment • Ethical considerations in takaful extends to investment in businesses or products that do not contradict Sharī‘ah. Both the process and the end-product must be Sharī‘ah-compliant • Takaful operators are required to put in place a standard Sharī‘ah governance system to ensure absolute compliance with the Sharī‘ah

8. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful TakafulCore Principles • Ta’awun (mutual assistance) • Tabarru’ (donation) • prohibition of riba, gharar and maysir

9. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Major Differences Between Takaful and Conventional Insurance The major differences between the two frameworks are: • Parties to the contract • Payment of premiums • Investment of insurance funds

10. Learning Objective 1.1 Understand the meaning and basic concepts of takaful as an alternative to conventional insurance with an insight into its historical development Basic Concepts of Takaful Historical Development of Takaful • The Prophet (PBUH) upheld and preserved insurance protection practices carried out by ancient Arab traders. • A classical precedent of takaful among the Muslims was displayed during the incidence of migration of the Prophet (PBUH) from Mecca to Medina • The companions of the Prophet promoted mutual assistance and shared responsibility under the close supervision of the Prophet (PBUH)

11. Learning Objective 1.2 Describe the innovative Sharī‘ah-approved models and structures of takaful Models of Takaful The main two parties involved in the implementation of the takaful system regardless of the takaful model being used are: • Takaful operator:the party who manages and administer the takaful fund • Participants: the owners of the takaful fund, participants and policyholders

12. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Main Takaful Products Available products in the takaful industry: - General Takaful: is a Sharī‘ah-compliant alternative to the general insurance - Family Takaful: is a Sharī‘ah-compliant alternatives to the life insurance

13. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Main Takaful Products General Takaful • General takaful: a short-term policy renewable periodically; covers assets and other proprietary belongings of participants from foreseeable material loss or any form of damage • General takaful fund established through participants’ contributions. Funds invested in Sharī‘ah-compliant investments • Proceeds accrue from such investment will be returned to the fund for indemnifying the takaful participants • Underwriting surpluses of the takaful funds are distributed to the participants annually

14. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products General Takaful Covers(list is not exhaustive) - Motor Takaful - Fire Takaful - Employer Liability Takaful - Fire consequential Loss Takaful - Burglary Takaful - Workmen Compensation Takaful - Machinery Breakdown Takaful - Health Takaful • Available takaful covers are categorised into motor takafuland non-motor takaful

15. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Family Takaful • Family takaful is a long-term policy (may span between 10 to 30 years) where people come together to mutually indemnify one another against disasters that may occur such as sudden death or permanent disability • Examples of family takaful include - accidental death - savings and education plans for one’s dependants - retirement plans - disability plans - waaqf plans

16. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Types of Family Takaful • Ordinary collaboration • Collaboration with savings • Collaboration based on specific groups

17. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Three Types of Family Takaful First: Ordinary Collaboration • The participants mutually agree to contribute to a common pool of funds through donations (concept of tabarru’) • Premiums used for underwriting activities in case of calamity or disaster for any of the members of the group • Payment made directly to participant or his/her beneficiaries in accordance with the underlying takaful contract

18. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Second: Collaboration with Savings • The parties contribute through donations into a common pool of funds from which the underwriting activities are carried out • The second pool of funds constitutes savings of individual participants which may be demanded by respective owners at maturity of certain period of time • The two pools of funds are strategically segregated • The participants benefit individually as well as collectively form the collaboration with savings

19. Learning Objective 1.3 Describe the main takaful productsand their expansion into the global insurance market Main Takaful Products Third: Collaboration Based on Specific Groups • Type of family plan usually structured reflecting communal, ethnic, or organisational needs • Participants from the same community, district or social group come together to establish a common pool of funds for a specific purpose • Membership to collaboration is limited to those who come from the same group • Contributions to the fund may be made jointly or severally by the organisation and the participants • Benefits from the common pool of funds can only be enjoyed by the participants or their beneficiaries

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