What Is Takaful?

Takaful is a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other against loss or damage. Takaful-branded insurance is based on sharia or Islamic religious law, which explains how individuals are responsible to cooperate and protect one another. Takaful policies cover health, life, and general insurance needs.

Takaful insurance companies were introduced as an alternative to those in the commercial insurance industry, which are believed to go against Islamic restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty) principles—all of which are outlawed in sharia.

Understanding Takaful

All parties or policyholders in a takaful arrangement agree to guarantee each other and make contributions to a pool or mutual fund instead of paying premiums. The pool of collected contributions creates the takaful fund. Each participant's contribution is based on the type of coverage they require and their personal circumstances. A takaful contract specifies the nature of the risk and the length of the coverage, similar to that of a conventional insurance policy.

The takaful fund is managed and administered on behalf of the participants by a takaful operator, who charges an agreed-upon fee to cover costs. Much like a conventional insurance company, costs include sales and marketing, underwriting, and claims management.

Any claims made by participants are paid out of the takaful fund and any remaining surpluses, after making provisions for the likely cost of future claims and other reserves, belong to the participants in the fund—not the takaful operator. Those funds may be distributed to the participants as cash dividends or distributions, or via a reduction in future contributions. 

Takaful Operating Principles

An Islamic insurance company operating a takaful fund must operate under the following principles:

  • It must operate according to Islamic cooperative principles.
  • A reinsurance commission may only be received from or paid out to Islamic insurance and reinsurance companies.
  • The insurance company must maintain two separate funds: a participant and policyholder fund, and a shareholder fund.

Key Takeaways

  • Takaful is a type of Islamic insurance wherein members contribute money into a pool system to guarantee each other.
  • Takaful-branded insurance is based on sharia or Islamic religious law and covers health, life, and general insurance needs.
  • Any claims made by participants are paid out of the takaful fund.

Differences Between Takaful and Conventional Insurance 

Most Islamic jurists conclude that conventional insurance is unacceptable in Islam because it does not conform with sharia for the following reasons:

  • Conventional insurance includes an element of al-gharar or uncertainty.
  • Conventional insurance is based on the concept and practice of charging interest. Islamic insurance, on the other hand, is based on tabarru, where a portion of the contributions made by participants is treated as a donation. This is why policyholders in takaful are usually referred to as participants.
  • Conventional insurance is considered a form of gambling.

Global Takaful Market

According to a report by Research and Markets, the global takaful market is growing at a rapid pace. The market was worth roughly $19 billion USD by the end of 2017, with the largest segment being the life/family market. Takaful was expected to grow to $40 billion by 2023, according to the report, thanks in part to a large global Muslim population—especially in the Asia-Pacific region.

[Important: Young Muslims make up about 60% of the community, making the takaful market even more likely to grow in the future.]

Some of the largest names in the takaful market, according to the report, were believed to be:

  • Islamic Insurance Company
  • Standard Chartered
  • Allianz
  • Prudential BSN Takaful Berhad
  • Zurich Malaysia
  • Takaful Malaysia