Insights about Takaful

15 Aug

Everything you should know about Islamic Insurance

"How did it go so wrong?" - is the statement Hamid kept repeating on his death bed with his aged mother crying beside him. Knowing fully well, he wasn't referring to his terminating disease and deteriorating health but the financial situation he was going to leave his family and especially his mother. My curious mind couldn't help but ask him, "what are your plans for your family when you die?" Although it might be harsh, the question got him thinking for days before giving me his final advice: "Make sure you and your family are insured."

His advice kept me awake for days, researching how I could quickly get life insurance. But as a conscious Muslim, I wasn’t sure if the conventional insurance and its products are halal for me to use. So, how can I insure my property and my family so I won't be in the same situation as Hamid?

As I continued my research, I had to ask my neighborhood Imams about the basics of Takaful (Islamic Insurance), its permissibility in Islam, and its pros and cons. This research is what inspired this article as a way to share my findings about Takaful, its benefits, and why it might be the future in the insurance sector as a whole. But first, what is Takaful?

What is Takaful?

Islamic finance has developed mainly in two directions: Islamic banking and Takaful, i.e. Islamic Insurance. While information about Islamic banking is being increasingly easy to access, the features, models, and structures of Takaful are little known. This challenges me to study and do my research about the basics of Takaful products and the Islamic view on conventional Insurance.

All human beings are invariably exposed to the possibility of encountering catastrophes and disasters that can give rise to misfortunes and sufferings like loss of limbs, destruction of business or wealth, or even death. While Islam teaches the belied in destiny, it also highlights the importance to find ways and means to avoid catastrophes and disasters. That being said, when it comes to Takaful there is a common misconception that

Misunderstandings towards the teachings of Islam increases the fatalistic attitude towards disaster. Fatalistic attitude causes them to ignore measures to reduce the disaster risk. Altough the general Islamic discourses view disaster as a test from God, there is not a single verse in the Qur’an and the hadith of the Prophet Muhammad who order humans to be fatalistic in their understanding of disasters. On the contrary, Islamic teachings actually give significant attention to the people to use means such as knowledge, preventive measures in disaster risk reduction.

God will not change the fate of humans if humans do not try to change their destiny. Therefore, the use of knowledge and technology in disaster risk reduction is a form of effort that can be performed by humans to reduce the impact of disasters. To alleviate the burden of unforeseen losses on individuals, what we now call Insurance has existed for a long time. It has been practiced in different forms for centuries. One possible way to minimize these losses is to buy insurance cover over your life, properties or your kids education… with a form that is acceptable under Islamic rulings.

Takaful originates from the Arabic word Kafalah, which means "guaranteeing each other" or "joint guarantee." The concept aligns with the principles of compensation and shared responsibilities among the community.

Takaful, the Islamic alternative to conventional Insurance, is based on the idea of cooperation of like-exposed to risk people for indemnification of losses of members. It is a pact among a group of persons who agree to jointly compensate for the loss or damage that may be inflicted upon any of them from the fund they donate collectively. The Takaful contract so decided usually involves the concept of donating for the benefit of others, and mutual sharing of losses with the overall.

Unlike the conventional insurance model, whereby risks, gains, and losses are transferred from the insured (the person/people covered by the insurance policy) to the insurer (the company providing insurance policies), with Takaful Insurance, the mutual risk is shared among participants. So not only does Takaful adequately bring a better form of insurance, it also helps build communities around different Takaful systems.

While the risk is mutually shared among the members, also in a situation of fund surplus, it gets transferred to the insured- members in accordance with Takaful fund policy. In addition to the surplus that may emerge from the collective Takaful funds, the insured will receive the compensation for the loss. It is important to clarify that the goal of Takaful is community well-being and not to profit from insurance risk trading.

What makes it different from the traditional insurance we have known? The answer to this lies ahead.

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The Impermissibility of the Conventional Insurance Model in Islam

Different views have been expressed about the status of conventional Insurance from the point of view of Islam. An overwhelming majority of the Islamic scholars believe that the conventional insurance ecosystem is prohibited in Islam due to the involvement of Interest(Riba), Gambling (Maisir), and Uncertainty(Gharar).

Riba or Interest

(O you who have believed, do not consume Riba, doubled and multiplied, but fear Allah that you may be successful.) Quran 3:130

The first feature that renders conventional Insurance and also conventional banking impermissible from an Islamic point of view is interest-based dealings. The funds that the insurance company receives from the insured as premiums are generally invested in interest-bearing accounts or interest-bearing securities.Interest has been forbidden in clear terms and labeled a grave sin according to Shariah principles. However, not only with the Insurance company's investments, but the conventional insurance system also entails involvement in interest-based transactions in other ways.

Gharar or Uncertainty

(O you who have believed, do not consume one another's wealth unjustly but only [in lawful] business by mutual consent. And do not kill yourselves [or one another]. Indeed, Allah is to you ever Merciful.) Quran 4:29

Any commercial transaction in which its element remains uncertain and could thus be the cause of dispute in the future, are rendered impermissible by the Shariah. For example, if the selling price of the item being sold, or the payment/delivery dates are ambiguous, the transaction would have an element of Gharar and thus be impermissible. It is for this reason that sale transactions that are contingent on an event that is to occur in the future are prohibited.

Hence in conventional Insurance, the insured person enters into a bilateral contract with the insurance company and thus pays a monthly premium. His benefit from this premium is contingent on misfortune or loss that may or may not occur in the future. Such uncertainty in financial transactions is not allowed in the Sharia. Hence, any bilateral transaction in which the liability of a party to the transaction is uncertain or contingent on a future event is not allowed in the Sharia.

Maysir or Gambling

(O you who have believed, indeed, intoxicants, gambling, [sacrificing on] stone altars [to other than Allah], and divining arrows are but defilement from the work of Satan, so avoid it that you may be successful.) Quran 5:90

Although, insurance is not a form of gambling. However, the structures of traditional insurance policies make them akin to gambling. This is because; the insured may never have any claims and therefore never receive any "consideration" for payments made. This is akin to gambling, wherein any of the two parties involved may win a sum of money from the other, but one of them is destined for total loss depending on the happening of an uncertain future event. Hence, just as in gambling, the benefits or liabilities of either party are uncertain, or so is the case in conventional Insurance.

Cooperation in sin and aggression

(...And cooperate in righteousness and piety, but do not cooperate in sin and aggression. And fear Allah; indeed, Allah is severe in penalty.) Quran 5:2

Conventional Insurance companies insuring Haram (forbidden) business, Where the subject insured business is not Shari'ah compliant in nature, Takaful companies refrain from accepting the risk, such as Conventional banks, Music halls and production, Pork farms, Alcohol production or selling…Opinion of Major Islamic legislation councils in regards conventional insurance: The Fatwa Committee in Malaysia declared that the life insurance as practiced in the country was unlawful as it had the element of Riba,Gharar and Maisir.

The First International Conference on Islamic Economics (Mecca) resolved that:”Commercial insurance as presently practiced does not satisfy the Islamic conditions for it to become acceptable.”

Since the conventional insurance ecosystem is unlawful and impermissible for Muslims, how are Muslims going to minimize losses in a way that is not contradicting their belief ? This Muslim call for a permissible insurance system brings back the Takaful structure.

The global takaful market exhibited strong growth during 2015-2020. Looking forward, the global takaful market is expected to grow at a CAGR of around 10.5% during 2022-2027 after it reached a value of US$ 27.6 Billion in 2021. The adoption of Islamic Insurance globally is picking pace as more people get to know its structure and usage. Catalyzed by factors such as an ethical investment policy, strong growth prospects, and price competitiveness, Takaful represents a strong business proposition and has a significant share of non-Muslim customers.

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