From the onset Takaful insurance is like mutual insurance, the only difference is that there is investment condition and Shariah compliance in Takaful operation whereas there is none in mutual insurance. The whole idea of Takaful operation is borne out of the objective of Shariah (Maqasid al Shariah) which suggest that a Takaful participant is consciously fulfilling a moral obligation for the betterment of the society in order to achieve public good (Maslaha) regardless of the religious backgrounds of participants in the scheme. This idea also means that Takaful operation has some basic attributes that are at variance with conventional insurance practice. Therefore, the main differences between conventional insurance and Takaful practice are described as follows: (1) Contract difference: Takaful operation is based on mutual assistance agreement and a combination of donation (Tabarru), agency (Wakala) and or profit sharing (Mudaraba) contract between the operator and participants which is unlike the conventional insurance operation that is entirely based on sale and purchase contract between the insurer and the insured. However, a typical Takaful contract is determined by the chosen business model as described below. (2) Mutual Contribution and Donation (Tabarru): Takaful is also a contract based on mutual contribution by the participants rather than the conventional idea of sale or purchase contract between policyholders and insurers. The aspect of donation is treated in the Takaful contract agreement where each participant willfully relinquishes a certain proportion of his contribution to assist others in the scheme. (3) Ownership of Contribution by the Participants: Takaful operators make use of participants contribution only for the intended purpose of “joint guarantee” while in conventional insurance the operator use the premium paid by policyholders in investments in order to suit his shareholders needs. (4) Share in Profit and Surplus: Takaful participants have a share in the surplus and profits of the risk and investment funds respectively based on a pre agreed ratio between the operator and the participants while in conventional insurance policyholders have no share in the business of the company. (5) Moral obligation to the society: Takaful participants contribute to the scheme as part of fulfilling or adhering to the injunctions drawn from the Qur’an that says “Help one another in goodness and piety but help not in sin and transgression” (Holy Quran 5:2) while in conventional insurance the insurer is driven by the desire to make profit for his company without any moral restrictions. (6) Investment of Funds: Takaful operator is strictly guided to invest his funds in accordance with the provisions of Shariah and that of prudential requirements whereas the conventional insurance operator is guided by prudential requirements only. This further indicates the existence of multiple regulatory layers. Hence, a Takaful Operator is both regulated by the appropriate government authority in the country of its operation in terms of technical soundness and also the advisory council of experts (ACE) to ensure or guide its operation towards adhering to the business ethics of Islamic law (Shariah), while a conventional insurer is only regulated by the laws of the country of its operation without adhering to any divine laws. (7) Treatment of Risk: Risk is always shared by the participants of Takaful contract as opposed to the idea of risk transfer practiced by the conventional insurance. This makes it even difficult to differentiate between an insurer and the insured in Takaful scheme since the risk fund is owned by the participants whereas the operator is only a fund manager and not a risk bearer. (8) Classification of Business: The classification of Takaful business is on Family and General rather than Life and General Businesses as practiced in the conventional type. The idea of applying the concept of Family class of Takaful business as opposed to the Life business is to inculcate family solidarity investment strictly in line with the Shariah provisions on inheritance. Therefore, the beneficiaries of family Takaful scheme should only be the rightful inheritors of the participant in accordance with Islamic law. This rule is only applied to Muslim participants whereas non Muslim participants are free to appoint their chosen recipient(s).
Takaful Business Models
It is interesting to note that this year marks the 30th anniversary of the advent of the pioneering Malaysian Takaful Act which gave credence to the emergence of the first full pledged Takaful operator Syarikat Takaful Malaysia (STMB) in 1984. Since then Takaful is increasingly taking the center stage of the interdependency circle of global financial market players. It is on record that by the end of 2013, the global Takaful market players have rapidly grown to constitute more than 200 operators.
Takaful operations are widely centered on four business models as follows: (1) Mudharaba Model (Profit sharing business): According to Maulana Taqi Usmani “Mudaraba is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise. The investment comes from the first partner who is called Rabb-ul-mal (owner of fund or asset) while the management and work is an inclusive responsibility of the other, who is called Mudarib (fund or asset manager)” However, in Takaful business operation, the entire investment is provided by the participants as contribution from the owners of fund (Rabb-ul-mal), while the Takaful operator manages the investment as fund managers (Mudarib) in a Shariah complaint manner. In this model profit is shared among the two partners (both Takaful contributor and operator) while loss is only borne by the contributors alone. If there is deficit in the risk fund, the Takaful operator is expected to inject money through an interest free loan (Qard Hasan) arrangement to settle claims. (2) Wakala Model (fee based agency): This model is somewhat similar with Mudaraba only that in wakala the investor (Rab-ul-mal) pays a performance fee to the Takaful operator without sharing in profit nor loss in the Takaful business. This means that the operator is only acting as agent to the contributors for a fixed fee. Similarly, in Wakala model the operator also provides interest free (Qard Hasan) loan to the deficit in the participants fund but only receives administrative charges for the loan (3) Wakala-Mudharaba Model (Hybrid Takaful business): This is also referred to as the mixed model where the operator receives a moderately low agency fee from contributors for managing underwriting operations and also acts as the fund manager for investing participants Takaful Fund where he shares in the profit gained from the investment. (4) Waqf Model (Endowment trust business):
This is a type of model where both the operators and the contributors are totally not expecting any profit because the idea of Waqf is same with public foundation directed and targeted for a particular purpose or segment of the society. However, the participants in the endowment have to employ the expertise of the operator for a fee on the basis of agency (Wakala). The participants in this type of model are entitled to share in the surplus from the risk fund and the profits derived from the investment fund. However, this is depended upon the initial agreement reached between the operator and the participants. It is worthy to note that the hybrid (Mudaraba-Wakala) type of model is the most preferred because it encourages the operator to exert all his energy in executing his role for the betterment of all participants and the investments of the business.
It also encourages participants from contributing to the business, unlike in Wakala where the operator knows exactly what he earns whether the investment yields profit or not or in pure Mudaraba where the operators sees the other contributors as “sleeping partners” in the business. But in the hybrid model because of the double role of the operator and of course double share in terms of receiving agency fee and sharing in the profit gained from the investment fund. Naturally, this arrangement gives encouragement for the Takaful operator to put his best into action in order to protect and safeguard the business interest of all participants.