takaful final

7/30/2019 Takaful Final

1/21

Presented By: Huma AyubAssistant Professor

Bahria University, Islamabad.

Takaful

Week # 16

Alternative to Conventional Insurance


2/21

Introduction

Takaful implies an agreement among a group ofmembers, known as participants, who collectivelyagree to guarantee each member against

potential loss or damage. The nature of such potential loss or damage is

clearly defined in the agreement.

Under the arrangement, any participant who

suffers such loss is compensated in the form offinancial assistance from a common fundestablished for this purpose.


3/21

Introduction

The fund is created with contributions fromparticipants that are invested in Islamic allyacceptable avenues. When invested prudently

and profitably, the fund generates income andgrows.

There are different structures depending uponwho promotes and manages the fund andwhat constitutes income for various partiesinvolved in the process.


4/21

What is Takaful

The concept oftakaful is based on the notion

of mutual help and socialsolidarity.

As such, takaful is originally seen as a non-

profit activity.

However, there is no reason why takaful

cannot be undertaken as a commercial

venture.


5/21

What is Takaful

There are two major groups of stakeholders involved ina takaful venture.

Firstis the group of policyholders or participants.

In the context of non-profit takaful, this group is

primarily responsible for organizing the venture. Such ventures are often in the nature of small self-help

groups who may seek the help of a professionalmanager to oversee day-to-day operations of the

venture. If organized on a larger scale, however, takaful needs

entrepreneurial inputs andneeds to be undertaken as acommercial venture.


6/21

What is Takaful

In the changed scenario, the initiative fororganizing a takaful venture is now taken by atakaful companyknown as takaful operator.

Such a company, of course, is usually owned by agroup of shareholders who invest in the companyand seek a fair return on their investment.

From the way takaful is being practiced currently,

one can observe and delineate several alternativemodels and financial structures. These arediscussed in the next slides.


7/21

Tabarru-Based Takaful

The first financial structure or model oftakaful assumes anon-profitnature oftakaful business.

Originally used in Sudan, this is also called the tabarrumodel of takaful.

Under this model, there are no returns for the promoters,and for the policyholders.

The initial contribution to organize the venture may comefrom the promoters as qard-hasan.

Participants make donation or tabarru to the takaful fund,

which is used to extend financialassistance to any memberin the manner defined in the agreement.

Temporary shortfalls are also met through qard hasan loansfrom promoters.


8/21


In this arrangement policyholders are the managers of thefund and the ones with ultimate control.

It may be noted that such an arrangement is closer to theideal as compared to profit-oriented takaful business.

However, this also precludes large-scale expansion oftakaful business.

In practice, such model can be seen in operation in socialand government-owned enterprises and programsoperated on a non-profit basis.

The programs utilize a contribution that is 100% tabarru ordonation from participants who willingly give to the lessfortunate members of their community.


9/21


All the following takaful models view takaful as aprofit-orientedcommercial venture.

However, at the same time, a clear demarcation ismaintained between policyholders fund and the

shareholders fund in all these models.

Profits flow and expenses are charged to the two fundsrepresenting two parties the policyholders and thetakaful operator (or shareholders of the takaful

company) according to set principles.

Let us now discuss two such models that are based on:mudaraba and wakala.


10/21

Mudaraba-Based Takaful

In this model, a clear distinction is made between thebusiness oftakaful or insurance and the business ofinvesting funds mobilized from policyholders and/or theshareholders.

The takaful operator seeks no returns from managing thetakaful business in line with the spirit of takaful.

It seeks returns from the business of investing the takafulfunds under a mudaraba agreement with the policyholdersfor managing their funds.

The policyholders assume the role of fund provider or rabb-al-maal.

As a mudarib the takafulcompany receives its share ofprofits generated on investments


11/21

Mudarabah based Takaful Model


12/21

The Major Steps in Mudaraba-Based

Takaful1. Policyholders pay premium that is credited to a policyholders fund.

2. The takaful operator companys shareholders contribute to a fundcalled

shareholders fund that is distinct from the policyholders fund. Thisactivity is the same as formation of a takaful company.

3. The takaful operator invests the policyholders fund in Shariahcompatible assets and investments in its capacity as mudarib.

4. Profits generated from investing the policyholders fund are sharedbetween the policyholders (rabb-al-maal) and the operator(mudarib) in an agreed ratio.

The policyholders fund and the shareholders fund are creditedwith their respective profit shares from investments. Losses if any,are charged to the policyholders fund.


13/21

The Major Steps in Mudaraba-Based

Takaful5. In line with the rules ofmudaraba, operational expenses relating to theinvestments are charged to the mudarib, the takaful operator company,

and hence to the shareholders fund.

The expenses charged are the general and administrative expenses of theinvestment department only, as distinct from general and administrativeexpenses for the entire business.

6. General and administrative expenses in managing the operations otherthan relating to investments are charged to the policyholders fund.

7. Takaful benefits are paid to beneficiaries as and when valid claims are made

depending upon occurrence of actual losses and damages.

8. At periodic intervals, the net insurance or takaful surplus, that is thedifference between premium received and claims paid is computed;policyholders receive full refund of insurance surplus if any; and arerequired to make additional payment of deficit if any.


14/21

Wakala-Based Takaful

In the wakala-based model, the takaful

operator acts as the wakil oragent of the

policyholders.

As such it is entitled to a known remuneration.

It incurs all the operational expenses on behalf

of its principal.


15/21

Wakala Based Takaful Model


16/21

The Major Steps in Wakala-Based

Takaful1. Policyholders pay premium that is credited to a policyholders fund.

2. The takaful operator company assumes the role of an agent or wakil ofthepolicyholders; its shareholders contribute to a fund called shareholdersfund that is maintained separately from the policyholders fund.

3. The takaful operator invests the policyholders fund in Shariah compatibleassets and investments in its capacity as agent or wakil. Profits generatedfrom investing add to the policyholders fund.

4. All operational general and administrative expenses are charged to the

policyholders fund, since the takaful operator incurs the expenditure onbehalf of the policyholders in its capacity as agent or wakil;


17/21

The Major Steps in Wakala-Based

Takaful5. The takaful operator receives a known remuneration that may be an

absolute amount or a percentage of the gross premium received.

6. Takaful benefits are paid to beneficiaries as and when valid claimsare made depending upon occurrence of actual losses and

damages.

7. At periodic intervals, the insurance or takaful surplus, that is the

difference between premium received and claims paid is computed;

policyholders receive full refund of insurance surplus if any; and are

required to make additional payment of deficit if any.


18/21

Issues in Product Management

1. Profits vs. Surplus

2. Sharing of Expenses

3. Sharing of Surplus4. Commingling of Funds

5. Policyholders as owners

6. Combination of Mudarabah and Wakala7. Reinsurance


19/21

Areas of Application

Family Takaful Products

Individual Plans

Group Plans

Mortgage Plans

Credit Plans


20/21

Areas of Application

General Takaful Products

Motor Takaful

Fire Takaful

Fire consequential loss takaful

Burglary takaful

Workmen compensation takaful

Personal accident takaful:

Fidelity guarantee takaful:

Money takaful: Plate glass takaful:

Public liability takaful:


21/21

Thank you

takaful final

Documents