The risk of financial loss is what takaful products are needed for. Risk is everywhere and everyone in society, business and life is affected by it. This loss indemnification is vital and pervasive for the functioning of businesses and economy when faced with the perils of risk.

Takaful is therefore the balancing mechanism for peace of mind and because of its pervasive role in the economy, takaful (and insurance) is vested with public interest. Our economic well-being is strongly affected by how well protected we are against the financial losses and ruin. This is why, takaful products and services must be well regulated, well managed and priced fairly to make it affordable for the consumer and sustainable for the provider of products and services.

Takaful essentially is insurance, but conventional insurance is not takaful. The difference is not in what both offer as a means of financial protection, as both offer the same; the difference is in how takaful, as distinct from conventional insurance, is part of a larger financial system that operates within a framework that strictly upholds equity and stewardship in the use of money and its management for the greater collective empowerment of people, irrespective of race, colour or creed, removing exploitation and minimizing impact of income inequalities in keeping the social, economic and wealth accumulation imbalances in check.

Takaful is a co-operative system of insurance, compensating the insured for losses out of a mutual risk pool (for protection products) and returns from investment pool (for investment portion of savings products).

The system of takaful enables individuals and companies to be financially compensated for losses incurred due to insured events such as death, accidents, injuries, hazards, and catastrophes.

Takaful customers are participants of the risk and investment pools and agree to donate or contribute respectively into the relevant pool. The protection risk is mutually shared by the participants to help each other at the time of need. Both the risk and investment pools are managed on behalf of the participants by the takaful company.

The participants contributing to the pool are intrinsically owners of the pool. This system of compensation works best when the risk pool is large, and all factors of risk mitigation are properly addressed by a team of experts employed by the takaful company. Any surplus arising in the risk pool, after making sure its reserves are sound and solvent, belongs to the participants and the takaful company may or may not be entitled to a small share of this risk surplus. The reserves of the risk and investment pools, including shareholders’ own funds supporting the solvency of the company, must be invested in permitted ways that are good for society and environment and do not have any usurious returns.

The words in the above explanation in italics are some of the main differences between takaful and conventional proprietary insurance.

There are different models applied by takaful companies based on the agreed approach taken by Shariah Boards in each market.

Standard Takaful Definitions

Bank Negara Malaysia was the first to come up with a precise definition of takaful, followed by standard setting bodies as follows:

Bank Negara Malaysia

2013

Takaful is “an arrangement based on mutual assistance under which Takaful participants agree to contribute to a common fund providing for mutual financial benefits payable to the Takaful participants or their beneficiaries on the occurrence of pre-agreed events.

OIC Fiqh Academy

2016

Cooperative insurance is a process in which a group of people who face certain risk(s), agree that each of them contribute a specific amount, based on cooperation, to a non-profit fund that is to be used for compensating anyone of them for the harms he would encounter when the risk in question materializes, as per signed contracts and adopted regulatory legislations.

AAOIFI

(The Accounting and Auditing Organization for Islamic Financial)

2017

Takaful is a process of agreement among a group of persons to handle the injuries resulting from specific risks to which all of them are vulnerable.

IFSB

(Islamic Financial Services Board)

2018

Takaful is a co-operative system of insurance, compensating for losses out of a mutual pool set up and owned by the participants. The system enables individuals and companies to be financially compensated for losses incurred due to accidents, injuries, hazards and catastrophes. The participants agree to donate small regular amounts into the mutual pool which is managed on their behalf by a takaful company. The system of compensation works best when the mutual pool is large1 and all the factors for risk mitigation are properly addressed and are in place for the mutual benefit of the participants.

1 The Law of Large Numbers

Takaful Products

The World of Takaful facilitates user journey looking for takaful products that serves their need. It also enables you to know from where to get the product you need in your local regulated market.

Takaful companies may not be able to provide some of the products available in the conventional space. This is because mutual risk pools of many takaful companies are still growing and developing but may not be large enough to absorb risk shocks even when this risk is shared with a retakaful company. Furthermore, in some cases, solutions compliant with takaful principles are compromised on Dharurah or Needs basis (for example sharing the risk with reinsurance companies); this is allowed by Shariah Boards only as a temporary solution until the right takaful solution is available.

Family Takaful Products

Products For individuals For businesses Micro Takaful
Family Takaful (life cover): Sum insured is payable on death of insured or on maturity of agreed term of years. ✓ ✓ ✓
Health Takaful: Pays cost of your medical treatment, covering outpatient or inpatient or both and may include dental cover. ✓ ✓ ✓
Savings Takaful: Building a fund over a term to maturity (which can be a stated number of years or up to retirement age). A sum insured is usually payable on death before maturity. ✓ ✓
Credit Life Takaful: To protect loans remaining outstanding in case of death of insured due to natural causes or accident or permanent total disability due to accident or in case of critical illness. The cover lasts for the duration of the loan. ✓ ✓
Accident / Disability Takaful: To have financial support when unable to work due to accident, disabling illness or injury. ✓ ✓
Total permanent disability Takaful: This is an additional cover that can be added to Family Takaful, payable when unable to work due to permanent disability as a result of accident. ✓ ✓

Products For individuals For Groups Micro Takaful
Motor Takaful: This is a cover against losses for damage or theft of the car. Additional cover can be taken for injuries, loss of wages, funeral expenses, covering the driver as well as passengers ✓ ✓
Home Finance Takaful: Financing institutions cover themselves as protection against default of repayments of the amount financed to its customers. ✓
Home Takaful: This cover is protection against risks to homes such as fire, theft, weather damage etc. ✓ ✓
Travel Takaful: This cover is for certain losses incurred during travel such as medical expenses, loss of personal belongings, travel delays and personal liabilities ✓ ✓
Landlord Takaful: Landlords can protect for any damage to fixtures and fittings and the building for their rented-out properties including landlord’s liability for tenants. ✓
Tenants Takaful: This covers personal contents and assets belonging to tenants in case of fire or theft. ✓
Natural disasters Add-on: This cover can be added Home Takaful for specified expenses incurred from losses due to natural disasters rendering insured’s home uninhabitable. ✓ ✓
Livestock Takaful: This cover provides financial protection against mortality, disability or theft of the insured livestock impacted due to natural perils, fire, poisoning or disease. ✓
Crop Index or Parametric Takaful: For farmers to protect crop. This is weather index-based takaful driven by satellite technology and analytical analysis. It highlights risks of climate change, natural calamities, and pest attacks. ✓

Products For individuals For businesses
Property Takaful: This covers losses incurred due to damage from fire, theft, floods, earthquake, boiler & machinery breakdowns etc. ✓ ✓
Business Interruption Takaful: This indemnifies for loss of income and incurred expenses when a specified peril interrupts normal business operations. ✓
Public Liability Takaful: This cover is for businesses and organizations against claims where its own operations results in injuries to a member of public or damage their property in some way. ✓
Directors & Officers Takaful: This cover pays any litigation costs resulting from errors made by the directors and officers. ✓
Errors & Omissions Takaful: This protects professionals like agents, brokers, third-party administrators, architects etc for loss due to errors or omissions in a business deal or a process. ✓ ✓
Professional indemnity Takaful: Also known as Malpractice cover for professionals (doctors, engineers, actuaries, accountants etc) against claims for negligence. ✓ ✓
Trade Finance Takaful: This cover is for businesses, indemnified for losses due to debtor default. . ✓
Fidelity Bond Takaful: This cover is for businesses, indemnified for losses caused by dishonest acts of employees. ✓
Workers’ Compensation Takaful: This cover is for job-related injuries, covering lost wages and medical costs. ✓
Marine Cargo in-transit Takaful: This provides cover for losses or damages of cargo on vessels at sea or inland waterways and on-land transit. ✓ ✓
Marine Hull Takaful: This cover is for loss or damage to vessels and yachts against specified perils ✓ ✓
Builder’s Risk Takaful: Also known as Contractor’s all risk policy, this is to cover risk of physical loss or damage to property during construction, including negligence, faulty material etc. ✓
Events Takaful: This provides cover for lost revenues and incurred expenses from cancellation of events in civil or political or terror related circumstances. ✓