What Is Takaful

Takaful Islamic insurance is a concept whereby a group of participants mutually guarantee each other against loss or damage. Each participant fulfils his/her obligation by contributing a certain amount of donation (or tabarru) into a fund, which managed by a third party

Takaful is a Shariah-compliant insurance.
Takaful is a viable alternative to conventional insurance.

The term takaful is an infinitive noun (masdar) which is derived from the root word “kafl”, which means guarantee or responsibility. The chief characteristic of the word takaful is al-musharakah (sharing). Thus, the word takaful means shared responsibility, sharedguarantee, collective assurance and mutual undertakings. 

How Takaful Insurance Works

TAKAFUL OPERATION

• Participants contribute a sum of money into a common fund, which will be used to mutually assist the members against a defined loss or damage. 
• A takaful operator is entrusted to manage the fund, who runs the operation commercially as a business venture for profit. Sources of income for the operator are from:- 
• profit from the investment of its shareholders’ Fund 
• agency/wakallah fee; 
• share of investment profit of takaful funds; 
• surplus of the takaful funds.

Tabarru'

• Tabarru’ means donation, gift or contribution. Participant in a takaful scheme agrees to relinquish, as a donation, a certain proportion of the contribution into a takaful fund to assist other participants faced with difficulties. 
• It embraces the elements of shared responsibility, joint indemnity and mutual protection .
• It is the core of the takaful system that makes the uncertainty element allowable under the takaful contract .

OPERATIONAL MODELS

The takaful operator is the administrator of the fund and manages the fund in trust on behalf of the participants. The contract between the participants and the operator can be a contract of mudharabah (profit-sharing) or wakalah (agency) .

Operational Flow of Short-term General Takaful Products

1. Participants pays contribution.
2. Contribution will be devided into:
   
   
   • Wakalah Fee (applicable for wakalah model); and
   • Group/General Takaful Fund.
   The allocation between WF and GTF is based on the pre-agreed ratio between participant and takaful operator as specified in the contract and depending on the type of product. 
3. WF that consist of commission and management expenses will be paid to shareholders' fund.
4. Excess in GTF [ after deducting operating expenses (applicable for mudharabah model) ] will be invested and invesment income will be ploughed back to the fund. Takaful operator will receive an agreed portion of the invesment income as performance fee.
5. Surplus at the end of the year (afterdeducting claims, retakaful and reserves) will be distributed to the takaful operator and participants based on the pre-agreed ratio as stipulated in the contract.
6. Shareholders will use the WF and invesment profit (for mudharabah model) to pay for the operating expenses.