The Concept of Takaful
The action of taking
precautionary measures or ‘ikhtiar’ against possible danger and its
consequences are among the teachings of Islam.
As a concept, mutual insurance actually does not conflict with the
teachings of Islam, as it is a method by which funds are pooled in order to
help the needy.
However, handling risks through
risk transfer on a contract of exchange, as in conventional insurance, is not in
compliance with shariah principles according to scholars of shariah. Although conventional insurance operates on
the basis of a common pool, where the fortunate many will pay for the
unfortunate few, its transaction today is based on a contract of exchange
whereby the insured pays a premium in exchange for a promise by the insurer to
pay financial compensation should a loss as defined in the policy occurs. Through insurance, by paying certain amount
of premium, the insured is able to transfer its risk to the insurance
company. The insured replaces
uncertainty with certainty at the amount of premium paid. This is the financial security provided by
conventional insurance.
Conventional mutual insurance
is closer to the ideal of takaful, as the insureds transfer their risks to a
pool that they own, and not to a proprietary insurance company. However, in
addition to the avoidance of riba,
other modifications need to be made to the juristic basis of insurance in order
to achieve compliance with the shari’ah principles, notably the payment of
contributions on the basis of Tabarru rather
than premiums.
Transferring risk to another
party in return for a premium is challenged because it brings at least three
forbidden elements to the contract, namely gharar (uncertainty), maisir (speculation) and riba
(usury). Under Islamic law, any contract
of exchange involving gharar (al bai’ al gharar )
is prohibited. The risk, defined as uncertainty
of loss, is indeed a kind of gharar by nature.
Therefore, putting risk as the subject matter of a contract of exchange
(insurance) is prohibited. The insurance
company that receives the premium and agrees to bear the risk is regarded as basing
its fortune on good or bad luck of others, therefore falls under the definition
of maisir (speculation).
Shariah scholars view insurance
contracts as a transaction where money is being exchanged for money, as two
parties to the contract are basically exchanging the premiums for claims, both in
monetary terms. Exchanging money for
money itself is not a problem per se as
long as there is no difference in amount or time involved. However, under conventional insurance
transactions, the premiums and claims being exchanged are different and take
place at different times. This brings
about the problem of riba (usury). Furthermore,
riba in the investment activities of
the insurance companies is another element that makes conventional insurance
unacceptable from a shariah perspective.
It is furthermore important to
understand that Islam is not inherently opposed to the idea of insurance, but
most scholars are of the view that the conventional insurance contract does
suffer from certain weaknesses in implementing the basic idea. Thus, an alternative mechanism for dealing
with risk has to be developed to replace prohibited conventional insurance.
To bring insurance in line with
Islamic principles, most shariah scholars suggest the concept of Takaful (solidarity,
or guaranteeing one other). Instead of
transferring their risks to insurance companies, individuals or organisations
that carry the same or similar risks make a collective commitment to help one
other by pooling their risks. Each participant
will bring its risk into the pool and pay a certain amount commensurate to the
risk. The money payable to the pool is
not a premium in the conventional sense, as it is not a price for transferring
risk. That money is a contribution or
donation to the pool on the basis of tabarru’
(doing good deeds to one other) or takaful (guaranteeing one another). For the sake of fairness, which is one of the
most important fundamentals of Islam, the amount of contribution to the pool
must represent the quality and the quantity of the risk introduced, so that no
one commits dhulum (injustice) to
others.
Under takaful, the role of the insurance
company has principally changed from the party who bears the risk to one who merely
manages portfolios of risks. Such
companies are no longer entitled to earn all the amounts paid by the participants,
as they take no underwriting risk and retain no obligation to pay claims. In fact, the created pool now has the
liability to pay for the claim and the insurance company works on remuneration paid
by the pool. Various operational models
of takaful in the market differ fundamentally only in the manner in which the
company is being remunerated. However,
the same basic idea of tabarru’ is
adopted whatever operational model is being used. All operational models are in absolute
agreement on the relationship among the pool participants and differ only in
defining the relationship between the pool (participants) and the company.
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Adopted from Akoob, M. (2008). Reinsurance and Retakaful. In S. Archer, R. Karim, & V. Neinhaus, Takaful and Islamic Insurance: Concept and Regulatory Issues. Singapore: John Wiley & Sons (Pte) Ltd
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