Question

The concept of conventional insurance is not accepted by Shari’ah due to present element
of riba, gharar and maysir. Therefore, the concept of Takaful is then introduced as an
Islamic alternative insurance. Identify the principle adopted for takaful system?

Answer 1

1.What is Takaful?

All human exercises are liable to hazard of misfortune from unexpected occasions. To ease this weight to people, what we presently call protection has existed since at any rate 215 BC. This idea has been drilled in different structures for more than 1400 years. It begins from the Arabic word Kafalah, which signifies "promising one another" or "joint assurance". The idea is in accordance with the standards of remuneration and shared obligations among the network.

Takaful began inside the old Arab clans as a pooled risk that obliged the individuals who submitted offenses against individuals from an alternate clan to pay to the people in question or their beneficiaries. This guideline later stretched out to numerous different backgrounds, including ocean exchange, in which members added to a reserve to cover anybody in a gathering who endured setbacks on ocean journeys.

In advanced ordinary protection, the protection merchant (the insurance agency) sells arrangements and contributes the returns for the benefit of its investors, who are not really policyholders. There is in this way an unmistakable disjunction among policyholders and investors. Payouts to policyholders may change contingent upon monetary execution, however a base positive return is in every case authoritatively ensured.

Takaful is commonly referred to as Islamic insurance; this is due to the apparent similarity between the contract of kafalah (guarantee) and that of insurance.

However, takaful 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. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and co-operation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity.

2.Prohibitions of Gharar, Maysir and Riba

a) Gharar: An insurance contract contains gharar because, when a claim is not made, one party (insurance company) may acquire all the profits (premium) gained whereas the other party (participant) may not obtain any profit whatsoever. Ibn Taimiyah, a leading Muslim scholar, further reasoned "Gharar found in the contract exists because one party acquired profit while the other party did not". The prohibition on gharar would require all investment gains and losses to eventually be apportioned in order to avoid excessive uncertainty with respect to a return on the policyholder's investment.

b) Maysir: Islamic scholars have stated that maysir (gambling) and gharar are inter-related. Where there are elements of gharar, elements of maysir is usually present. Maysir exists in an insurance contract when; the policy holder contributes a small amount of premium in the hope to gain a larger sum; the policy holder loses the money paid for the premium when the event that has been insured for does not occur; the company will be in deficit if the claims are higher that the amount contributed by the policy holders.

c) Riba: Conventional endowment insurance policies promising a contractually-guaranteed payment, hence offends the riba prohibition. The element of riba also exists in the profit of investments used for the payment of policyholders’ claims by the conventional insurance companies. This is because most of the insurance funds are invested by them in financial instruments such as bonds and stacks which may contain elements of Riba.

3. Methodology

This research delves into the conceptual understanding of the takaful industry in Malaysia since its awareness, outside of Malaysia, is not as comprehensive as it ought to be. The researchers believe that for a robust fathoming of the subject matter, the qualitative research analysis tends to be the best approach. To carve out a comprehensive structure which not only provides a detailed understanding of the concept of takaful to its audience but advertently, it also draws a baseline for the differences between the conventional and the Islamic insurance practices. This distinction is crucial for a broader audience to clarify many of the pre-existing misconceptions about takaful.

4. Gambling and Insurance

Gambling and insurance are two distinct and different operations. Gambling is speculative in its risk assessment whereas insurance is a pure risk and is non-speculative. In gambling, one may win or lose by creating that risk. In insurance, the risk is already there and one is trying to minimise the financial effects of that risk. Insurance shifts the impact of that risk to someone else and relieves the person of risk. The risk nevertheless still remains.

While gambling promotes dissension, ruin and hatred, insurance based on cooperative principles, enables the insured to lessen the financial impact without which it could drive the individual and his dependents to poverty, thereby weakening their place in the society. There is nothing in Islam that prevents individuals from making a provision for their dependents. Seen collectively for large groups of insured population, insurance strengthens the financial base of the society.

5. Basis and Principles of Takaful

Islamic insurance requires each participant to contribute into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims.

The underlying principles of Takaful may be summarised as follows:

• Policyholders co-operate among themselves for their common good.
• Every policyholder pays a part of the contribution as a donation to help those that need assistance.
• Losses are divided and liabilities spread according to the community pooling system.
• Uncertainty is eliminated in respect of subscription and compensation.
• It does not seek to derive advantage at the cost of others.

The core principles of Takaful are:

• Members cooperate among themselves for their common good.
• Every member pays a subscription to help those members that might need assistance.
• Divide losses and liabilities among the members through a pooling system.
• Eliminate uncertainty in respect of subscription and compensation since the subscription is based on donations
• Not to derive advantage at the cost of others.
• Invest in Shariah-compliant funds.

From an operation viewpoint, under Takaful, the members agree to devise schemes under which they themselves are insured and are insurers. Each member pays a premium as a contribution to a common fund referred to as the Takaful Fund. The Takaful operator, which invariably is an insurance company, manages this Takaful Fund on behalf of the members. The Takaful operator has to ensure that the member’s level of contribution commensurate with the level of risk.

The Takaful operator can apply scientific principles in the assessment calculation of contribution. The members allow the Takaful operator to take Tabarru (donation) from Takaful Fund to pay the losses suffered by other members in the pool. If there is any surplus left from the contribution after deduction of Tabarru and charges, it will be distributed amongst the members In case of deficit, Takaful Operator shall arrange for a interest free loan “Qard Hassan” to cover such deficit. Such a loan can be repaid in future from surplus (if any) generated in the following year/years .

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits but to uphold the principle of "bear ye one another's burden."

6. Why No to Conventional Insurance

In modern business, one of the ways to reduce the risk of loss due to misfortunes is through insurance. The concept of insurance where resources are pooled to help the needy does not necessarily contradict Islamic principles.
Three important differences distinguish conventional insurance from Takaful:

1. Conventional insurance involves the elements of excessive uncertainty (gharar) in the contract of insurance;
2. Gambling (maysir) as the consequences of the presence of excessive uncertainty that rely on future outcomes
3. Interest (riba) in the investment activities of the conventional insurance companies;
4. Conventional insurance companies are motivated by the desire for profit for the shareholders;
5. Conventional system of insurance can be subject to exploitation. For example, it is possible to charge high premium (especially in monopolistic situations) with the full benefit of such over-pricing going to the company.

7. How does Takaful Work

All participants (policyholders) agree to guarantee each other and, instead of paying premiums, they make contributions to a mutual fund, or pool. The pool of collected contributions creates the Takaful fund.

The amount of contribution that each participant makes is based on the type of cover they require, and on their personal circumstances. As in conventional insurance, the policy (Takaful Contract) specifies the nature of the risk and period of cover.

The Takaful fund is managed and administered on behalf of the participants by a Takaful Operator who charges an agreed fee to cover costs. These costs include the costs of sales and marketing, underwriting, and claims management.

Any claims made by participants are paid out of the Takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the participants in the fund, and not the Takaful Operator, and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.