As the essence of insurance could be seen as a system of mutual help in relation to the custom of blood money under the Arab tribal custom, Muslim jurists generally accept that the concept of insurance does not contradict the Shariah. In fact, the principle of compensation and group responsibility was accepted by Islam and the Holy Prophet. Muslim jurists acknowledged that the basis of shared responsibility in the system. of ‘aqila’, as practiced between Muslims of Makkah (muhajirin) and Medinah (ansar) laid the foundation of mutual insurance.

In view of this as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and co-operation. On the basis of these principles, the Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists, this concept       of insurance is acceptable in Islam because:

The policyholders would co-operate among themselves for their common good;

Every policyholder would pay his subscription in order to assist those of them who need assistance;

It falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;

The element of uncertainty will be eliminated as far as subscription and compensation are concerned;

It does not aim at deriving advantage at the cost of other individuals.

Thus in consonance with the above basic characteristics, the jurists resolved that the system of insurance which falls within the confine of the Islamic framework should be founded on the concept of ‘al-takaful’.

Takaful in Arabic, means joint guarantee. Thus it can be visualized as a pact among a group of members or participants who agree to jointly guarantee among themselves, against loss or damage that may be inflicted upon any of them as defined in the pact. Should any member or participant suffer a catastrophe or disaster he would receive a certain sum of money or financial benefit from a fund, to help him meet the loss or damage. In other words, the basic objective of takaful is to pay for a defined loss from a defined fund, each member of the group pools effort to support the needy. It means mutual help among the group.

As an insurance system, we are to confine the operation of takaful within the ‘Tijari’ (commercial) sector. Thus the transactional aspect of the commercial activity of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with the Shariah.

As an insurance system, we are to confine the operation of takaful within the ‘Tijari’ (commercial) sector. Thus the transactional aspect of the commercial activity of Takaful must be subject to the Islamic contractual laws in order to ensure its compliance with the Shariah. Within this fundamental framework, the contract of ‘tijari’ takaful is therefore based on the Islamic commercial profit-sharing principle of ‘al-Mudaraba’.

By this principle, the entrepreneur or al-Mudarib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra’s-ul-Mal from investors or providers of capital or fund (takaful participants) acting as ‘Sahib-ul-Mal’. The contract specifies how the profit (surplus) from the operations of takaful managed by the takaful operator is to be shared, in accordance with the principle of al-Mudaraba, between the participants as the providers of capital and the takaful operator as the entrepreneur. The sharing of such profit (surplus) may be in a ratio 5:5, 6:4, 7:3, etc as mutually agreed between the contracting parties.

In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru’ (to donate, to contribute, and to give away) is incorporated in it. In relation to this, a participant shall agree to relinquish as tabarru, a certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay, thus enabling him to fulfill his obligation of mutual help and joint guarantee should any of his fellow participants suffer a defined loss.

In essence, tabarru would enable the participants to perform their deeds in sincerely assisting fellow participants who might suffer a loss due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of takaful is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care, whilst simultaneously striving prudently to ensure the funds are sufficiently protected, against undue over-exposure.

In essence therefore, the provision of insurance cover as a form of business in conformity with the Shariah is based on the Islamic principles of al Takaful and al-Mudaraba. Al-Takaful is the pact among a group of participants, reciprocally guaranteeing each other; whilst al-Mudaraba is the commercial profit-sharing contract between the provider(s) of funds for a business venture and the entrepreneur who actually conducts the business.

The operation of takaful may thus be envisaged as the profit-sharing venture between the takaful operator and the individual members, of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.

Thus it is necessary to emphasize at the outset that the takaful business as practiced in Malaysia is of the kind of co-operative takaful (al-takaful al taawuni) participated by a group of members of the public for their own cause within the domain of the private sector.

The commercial activity of takaful is reflected in two basic types of business that it undertakes. Depending on the legal structure and statutory provision, both types of business may either be transacted under a common entity (composite basis) or one entity for each type of business. As a composite company, Syarikat Takaful Malaysia for example, as prescribed in the Takaful Act 1984, transacts both types of takaful business.

The types of business are as follows:

Family Takaful Business (Islamic life insurance)

General Takaful Business (Islamic general insurance)

The fundamental objective and basic working operation differ between these two types of business.

Under the Family Takaful Business, Syarikat Malaysia provides various types of Family Takaful Plan which generally, are long-term Murabaha contracts. Basically, a Family Plan provides cover of mutual aid among its members or participants expressed in the form of financial benefits paid from a defined fund should any of its members be inflicted by a tragedy.

For the General Takaful Business, Syarikat Takaful Malaysia manages various types of General Takaful Schemes, usually on a short-term basis. The schemes provide protection in the form of mutual financial help to compensate its members or participants for any material loss, damage or destruction that any of them might suffer arising from a catastrophe, disaster or misfortune that might inflict upon his properties or belongings.

Family Takaful Plans are designed to serve the requirements of both individual and corporate sectors. A Family Takaful Plan for the individual sector is a long-term saving and investment programme. Apart from the chance of enjoying investment financial assistance among its participants. Thus the Family Takaful plans would enable any individual to participate in a takaful business with the following objectives: 

To save regularly for a fixed period with a view of creating a kind of retirement or long-term contingency fund;

To invest with a view of earning profits in a manner acceptable to Shariah which in turn would lead to further accumulation of savings as above;

To avail of cover in the form of mutual financial aid from payment of takaful benefits to heir(s) should a participant die before the maturity of his Takaful Plan.               

Any individual be the ages of 18 to 55 years who wishes to participate in the Family Takaful Business may choose any one of the types of Family Plan designed by Syarikat Takaful Malaysia. These Plans have a defined period of maturity.

A supplementary contract based on the Islamic principle of hibah (gift) can be endorsed to these fixed-period Family Takaful Plans as a way to create a kind of an endowment or scholarship fund which can be used to support the financing of a participant’s I child(ren)’s future higher education.

Additional subcontracts can be attached to a Family Takaful Plan to provide mutual benefits among participants covering wide ranging events of tragedy and misfortune. Thus by incorporating a supplementary agreement these additional mutual benefits can be provided by the plan in cases of hospitalization, accident or disablement. The arrangement demonstrates that the Family Takaful Plan is a financial programme that pools efforts to help the needy in times of need, not only in the event of untimely death but also other mishaps resulting in personal injury or disablement.

In essence, tabarru would enable the participants to   perform their deeds in sincerely assisting fellow participants who might suffer a loss due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of  takaful, is made only after the obligation of assisting the fellow participants has been fulfilled.

 In consideration for participation in the various Takaful Plans, participants are required to pay Syarikat Takaful Malaysia regularly the takaful installments which are then credited into a defined fund known as the ‘Family Takaful’ under the Family Business. The amount of takaful installments to be paid during the term of the plan is determined by participants themselves. Such an amount, however, should be within the financial means of the participant. It shall also be subject to the minimum sum as may be fixed by Syarikat Takaful Malaysia.

Each takaful installment paid by the participant, and credited into the Family Takaful Fund shall in turn be divided and credited into two separate accounts, namely, the Participant’s Account (PA) and the Participant’s Special Account (PSA). A substantial proportion of the installments are credited into the PA solely for the purpose of savings and investment. The balance of the installments are credited into the PSA as tabarru for Syarikat Takaful Malaysia to pay the takaful benefits to the heir(s) of any participant who may die before the maturity of his Family Takaful Plan. Within this context it is not too difficult to see that PA serves to accumulate savings whilst the PSA creates a form of mutual fund payable on death. The proportions of the takaful installment to be relinquished as tabarru and in turn allocated into the PSA is computed with the guidance of the actual principle.

In the event that a participant should die before the maturity of his Takaful Plan, Syarikat Takaful Malaysia shall arrange the payment of takaful benefits to the participant’s heir(s) as follows:

From his/her PA; the total amount of the takaful installments paid by the deceased participant from the date of inception of his Takaful Plan to the due date of payment of the installment prior to his death, and his share of profits from the investment of installments which have been credited into his PA.

From his/her PSA; the outstanding takaful installments which would have been paid by the deceased participant should he survive the period of the Plan, calculated from the date of death to the date of maturity of his            Takaful Plan.

If a participant should live until the date of maturity of his Takaful Plan, the takaful benefits shall be paid to him in the following manner:

From his/her PA; the total amount of Takaful installments paid by the participant during the tenure of his participation and his share of the profits from the investment of takaful installments credited into his PA.

From his/her PSA; the net surplus allocated to the participant as shown from the last valuation of the PSA.

In case a participant is compelled to surrender or cancel his participation before the maturity date of his Family Takaful Plan, he shall be entitled to receive the surrender benefits.

These plans are agreements of co-operation and mutuality based on al-Mudaraba principle among a group of participants to jointly provide cover    among themselves, usually on an annual basis, under a single master takaful con tract. As in other plans, mutual financial benefits under the Group Plans would be payable in the event of death, bodily injury or hospitalization of any of the persons covered.

The surrender benefits shall be the amount of balance shown in his PA. The proportion of his takaful installments which had been credited into the PSA as tabarru shall not be refunded to him. In addition, there is a facility for the participant to part withdraw his PA.

Other forms of cover for the individual sector would be introduced from time to time. However, this must be done without resulting in undue strain to the Family Takaful Fund. For example, by the experience of Syarikat Takaful Malaysia, Family Takaful Mortgage Plan was launched to complement the ‘house-financing facility’ provided by Bank Islam Malaysia Berhad based along the principle of al-Bai Bithamin Ajil. The Takaful Mortgage with features like the reducing term cover in conventional insurance, may be participated in by any individual to cover the outstanding amount of his house-financing facility, in case he does not survive the term of the facility.

                The participant of this plan will pay the takaful contribution as tabarru’ which will then be credited into the PSA of the Family Takaful Fund. In the event of his untimely death, the  takaful benefits payable will be used as proceeds to settle the outstanding amount of his financing facility. Should he survive the term of                the facility and the Plan matures, he would be entitled to the share of surplus, if any, out of the valuation on the PSA.      

As for the corporate sector,Syarikat Takaful Malaysia offers Group Family Plan and Group Family Takaful Hospitalization and Surgical Plan. These plans are agreements of co-operation and mutuality based on al-Mudaraba principle among a group of participants to jointly provide cover among themselves, usually on an annual basis, under a single master takaful contract. As in other plans, mutual financial benefits under the Group Plans would be payable in the event of death, bodily injury or hospitalization of any of the persons covered.

The various types of Family Takaful Plan for both individual and corporate sectors are as follows:

i) Takaful Plans with a  maturity period of ten years,15years,20years,25years,30years,35years and 40years.

ii) Supplementary contracts in the form of hospitalization, accident and permanent disability which may be incorporated into the aforementioned Family Takaful Plans.

iii) Supplementary contracts in the form of “family rider” which may also be attached to the Family Takaful Plan.

iv) Takaful Mortgage Plans.

v)Takaful Plans for Education.

vi) Group Takaful Plan.

The Concept and Operational System of Takaful Business

In the second and concluding part of this article, Mohammed Fadzli Yusof describes the issues relating to General Takaful Business and the various types of Takaful schemes available. He also briefly highlights the uses of underwriting in Islamic insurance.

General Takaful Schemes are basically contracts of joint guarantee, on a short –term basis, based on the principle of al-Mudaraba, between a group of participants to provide mutual compensation in the event of a defined loss. The Schemes are designed to meet the needs for both individuals and corporate bodies in relation to material loss or damage consequent upon a catastrophe or disaster inflicted upon properties, assets or other belongings of its participants.

In consideration for participating in the various schemes, participants agree or undertake to pay Takaful contributions as tabarru for the purpose of creating a defined asset as illustrated in the General Takaful Fund. It is from this Fund that mutual compensation would be paid to any participant who suffers a defined loss or damage arising from a catastrophe or disaster affecting his property or belonging.

As the al-Mudarib, Syarikat Takaful Malaysia will invest the Fund .All returns on the investment will be pooled back to the Fund .In line with the virtues of mutual help, shared responsibility and joint guarantee as embodied in the concept of Takaful, compensation or indemnity will be paid to any participant who suffers a defined loss or damage consequent upon the occurrence of a catastrophe or disaster. Other operational costs for managing the General Takaful Business such as the cost for arranging Retakaful programme and setting-up of reserve shall also be deducted from the Fund.

A participant who wishes to participate in a General Takaful Scheme such as Motor Takaful to cover his motor vehicle, Fire Takaful to cover his house from loss or damage against fire or Public Liability Takaful to cover against his third party liability shall pay a certain sum of money called Takaful contributions. The amount of Takaful contributions will vary according to the value of property or asset to be covered under the Scheme.

If no claims are made or incurred and after deducting all the operational costs as outlined above, the Fund registers a surplus to be shared between the participants and Syarikat Takaful Malaysia. The sharing of such surplus will be at an agreed ratio as expressed in the principle of al-Mudaraba such as 6:4,5:5,etc.Profits attribute to the participants are paid on expiry of their respective General Takaful Schemes provided they have not received or incurred claims during the period of participation.

If it is revealed from the underwriting that a participant would pose an undue strain to the Takaful fund due to his poor health, or his property is relatively hazardous than his fellow participant’s, then he may have to agree to increasing his tabarru

The various types of General Takaful Scheme for both individual and corporate sectors provided by Syarikat Takaful Malaysia are shown as follows:

i)Fire Takaful Scheme

-Basic Fire

-House owners

-Householders

-Industrial all risks

ii)Motor Takaful Scheme

-Motor car

-Motor cycle

iii)Accident/Miscellaneous Takaful Scheme

-Personal accident/group personal accident

-Personal accident for pilgrims

-All risks

-Workmen’s compensation

-Public liability

-Money

-Equipment all risks

-Employers’ liability

-Plate glass

-Fidelity Takaful

-Sprinkler leakage

IV) Marine Takaful Scheme

-Cargo

V) Engineering Takaful Scheme

-Machinery breakdown

-Erection all risks

-Boiler

-Pressure vessel

-Contractors all risk

-Bonds

Underwriting

When one is operating an insurance business, it is crucial for one to be able to underwrite any risks proposed, so that the risks could be evenly spread. In this respect, underwriting is a management process to ensure that the principle of equity is being applied and upheld. As the concept of al-Takaful also embodies the principle of partnership, it is therefore essential for the participants to be seen as “equal” at the point of entry.

Towards this end, underwriting as a management tool is applicable under the Takaful Business. Among others, its application is for the purpose of ascertaining and safeguarding the equity of tabarru. On the contrary it might be viewed as ‘un-Islamic’ practice, if in a partnership undertaking one of the parties to the contract has to be burdened unfavorably with the risks of the other party with out a fair and just contribution by the latter.

In view of the above, underwriting would help to determine a fair system of tabarru or contribution by the participants. If it is revealed from the underwriting that a participant would pose an undue strain to the Takaful fund due to his poor health, or his property is relatively hazar- dous than his fellow participant’s, then he may have to agree to increasing his tabarru to the level assumed to be fairly adequate in corresponding with the risk exposure covered by the Takaful Fund.

Certainly, the process of underwriting is not to discriminate, or out rightly reject, the proposal of any participant. Above all, it is crucial for all participants to protect the Takaful Fund for their mutual and common benefits .In the same manner, as manager and trustees Syarikat Malaysia must, at all times safeguard the Fund from any undue strain.

Marketing

The system of agency, as a form of marketing outlet, universally practiced by conventional insurers, in its present structure cannot be applied to Takaful. This is based on the fact that such practice would not be in line with the contract of Takaful. As outlined earlier, Takaful is based on the Islamic commercial transaction of profit-loss-sharing under the principle of al-Mudaraba.

Under the convention of an agency system, a certain proportion will be deducted from the Takaful contribution (premium) as remuneration to agent. On the contrary, under the contract of Takaful, the gross Takaful contribution paid by the Participant shall be the amount stated in the agreement (Takaful Certificate), which shall be the basis of the profit-sharing contract. Therefore , should this system be adopted for Takaful, the actual amount of Takaful contribution received by the Takaful company or operator would in fact be less from the figure stated in the agreement ,as a certain sum from the gross amount has been deducted to remunerate the agent.

According to the “Encyclopedia on the Theory and Practice of Islamic Banking (al-Mausu’ah al –Ilmiyah Wal-Amaliyah Lil-Bunuk al-Islamiyah)” published by the International Association of Islamic Banks, it is prohibited to deduct management expenses from the al-Mudaraba capital or its realized profit. The Shafaites view that covering such expenses from the al-Mudaraba capital or its realized profit will lead to the element of gharar (uncertainty) and the presence of gharar makes the contract void.

If profit of the Takaful business has to be shared with participants, how would the company or Takaful operator make money? After all, in business a company is expected to make profit. What are the sources of income to the company under Takaful?

Under the Takaful contract, the Takaful contribution is the al-Mudaraba capital provide by the Participant .This capital or its investment profit cannot therefore be used to pay for financing the agency system in view of the fact that agency cost is a component of the management expenses which should be borne by the operator.

Sources of Income to the Company

If profit of the Takaful business has to be shared with Participants, how would the company or Takaful operator make money? After all, in business, a company is expected to make profit .What are the sources of income to the company under Takaful? The principal activities of Syarikat Takaful Malaysia are the provision and management of Family Takaful Business and General Takaful Business.

As Takaful is a commercial activity, the company must be able to generate income from these businesses. If not, it cannot pay its operating expenses. More importantly, these businesses must be viable and profitable. Without profit the company cannot grow and thus efforts to expand Takaful services to all people, in particular the Muslim, in all parts of the contrary, would be hampered.

As already explained there are two Takaful funds administered by Syarikat Takaful Malaysia. The funds are: Family Takaful Fund under the Family Business and General Takaful Fund under the General Business.

In addition, the company has its own fund as reflected in the Shareholders’ Fund which was originally funded wholly by the paid-up capital.

Income of Syarikat Takaful Malaysia is derived from the following sources: