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Takaful—Here’s What You Need to Know

Berkah • 05 September 2020

Risks are looming around you, starting from the probability of you accidentally dropping your phone to as serious as being exposed to a cancerous disease. Perhaps you would not know the time that you would experience those things, but you know one thing for sure—the aftermath is going to be immensely expensive. That is why you decide to transfer the chance of having to incur a huge amount of costs by having insurance. But then you realize that when you have insurance, you are paying for something that is uncertain—just like gambling which is prohibited under Sharia jurisprudence.

Then, what’re you going to do?

This is where Takaful comes to save the day. Perhaps you have never heard of it, but let me introduce it to you. Takaful is actually a sharia-version of the conventional insurance, maybe you are more familiar by the name Sharia Insurance. Takaful is actually a form of insurance which is based on participation in risk sharing by members on cooperative principles to guarantee each other against loss or damage.

Takaful uses the concept of ‘donations’ from a group of policyholders to make a risk-sharing pool fund (Tabarru). As the operator who manages the pool fund, the insurer will receive a fee (ujrah under wakalah contract), and/or a profit-sharing contract (under mudharabah). Under wakalah contract, a portion of the premium (or contribution) will be used as ujrah (fee for the insurer) while the rest will be accumulated into the Tabarru fund.

From the insurer's perspective, ujrah is allocated to their expense, commission, and profit. Benefit-related payment to policyholders will then be deducted from the Tabarru which is separated from insurer’s liability. Thus, there is no direct insurance risk for the insurer, but as long as the Tabarru is enough to pay the benefits for policyholders. As regulated, if the Tabarru is insufficient to pay the policyholder’s benefit, the insurer must provide an interest-free loan to the Tabarru (qardh).

As the policyholder’s benefit payment will be taken from the Tabarru, the insurer needs to set an insurance reserve on the Tabarru to set aside for expected future benefit payment. The insurer must also maintain the solvency level of the Tabarru.

Now that you have seen how Takaful works, you can see it as an alternative to conventional insurance. But, the great thing is, Takaful is free from riba, maisir, and gharar. Riba refers to interests related to the investments placed by the insurer. Also, takaful insurance can only invest in halal businesses. Then, maisir refers to gambling elements where situation and outcome can be uncertain, as previously mentioned. And lastly, gharar is defined as the unpredictable condition that is beyond the control of someone. The gharar and maisir concepts are interrelated as they correspond to anything that leads to uncertainty and inability to define terms of its dealings clearly.

The bottom line is, getting conventional insurance is a great way to provide additional protection to yourself. Nevertheless, if you’re looking to protect yourself against the looming risks while still complying to the Sharia Principles, Takaful is definitely the answer

Sources: PWC, Ringgitplus, Investopedia


Aurelius Sugianto
05 September 2020