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Chapter 5:

Takaful Practices: As a
Business Organization
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Outline
 Practices of Takaful In Malaysia
 Takaful Operations
 Marketing
 Takaful intermediaries and adjusters
 Sources of Income
 A Comparison of Takaful and Conventional
Insurance
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Practices of Takaful In Malaysia

A paper on Islamic economic system was presented and
debated in the Malaysian Islamic Conference in 1969
which was mainly on insurance. A few resolutions was
achieved :
 Insurance containing riba’ is unacceptable

 Although the present system is not Islamic, but it is

permitted as there were no other alternatives.

 The government was asked to study the implementation

of an Islamic insurance provider.
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Practices of Takaful In Malaysia

 The National Fatwa Committee has taken the initiative
to discuss the matter and found that the present
insurance system is unacceptable.

 The decision was brought to the attention of the

National Fatwa Council and studies were done with
cooperation from the middle east countries.

 In 1982, the Islamic Consultation Body established a

special consultation body for the purpose of creating an
Islamic insurance company in Malaysia.
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Practices of Takaful In Malaysia

o The special body proposed that an act called the
Takaful Act be enacted to control the takaful business.
Therefore, the Takaful Act 1984 was enacted, based on
the Insurance Act 1963, and modified in order to
ensure that the shariah is observed in the running of the
business.
o Syarikat Takaful Malaysia Sdn Bhd was established in
1984 followed by Takaful Nasional Sdn Bhd in 1993.
o More providers joined the takaful business, Mayban
Takaful Sdn Bhd and Takaful Ikhlas Sdn Bhd and
latest, Commerce Takaful.
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Takaful Operations
 There are two types of business :
 General takaful business (Islamic general
insurance)
 Family takaful business (Islamic life insurance)
 Underwriting
 Marketing
 Sources of Income
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General Takaful
 Usually on short term basis.
 The schemes provide protection in the form of
mutual financial assistance 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 properties or
belongings.
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Family Takaful
 Long term al-Mudharabah contracts
 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.
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General vs Family Takaful

 The main difference between the Family Takaful and General
Takaful is the way contributions are operated:
 General Takaful schemes are about risk-only joint-guarantee
agreements while family Takaful schemes are investment-
oriented agreements.
 General Takaful payments are not divided into two separate
accounts as they are treated only as Tabarru’. The Takaful
operator raises the Tabarru’ fund, and invest the remainder of
the fund after deducting the operational cost of the scheme
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General vs Family Takaful

 If any participant suffers a loss or damage, then he will be
compensated from this fund, by considering the level of
occurred losses. Any profit or return from the investment is
returned back to the fund.

 Unlike Family Takaful, net surplus in the General Takaful

Fund is shared between the participants and the Takaful
operator. In addition, the profits sharing will exclude
participants who get compensation from their claims.
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Underwriting
 In underwriting process, Takaful operators will assess the
risks involved in an application for takaful coverage.
 Based on the assessment, the takaful operator will then
decide on the appropriate contribution rate to be charged
to the participants.
 The purpose of underwriting is to control adverse
selection and ensure the solvency of the takaful fund for
claim payments.
 A proper underwriting practice would lead to the takaful
fund earning a higher underwriting profit.
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Basic Principles of Underwriting

1. Selection of participants according to the
company’s underwriting standards.

2. Equity among participants- exposures that are

similar with respect to losses and expenses should
not be charged substantially different rates.
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Underwriting Process
STAGE 1 - Gathering Information
Involves gathering adequate and relevant information concerning
the exposure.

STAGE 2 - Risk Classification

Takaful operators will assess and classify the risks involved into
the following categories:
Standard – if particular risk is considered a typical risk.
Rated – if particular risk is considered as higher-than average
risk.
Preferred – if particular risk is considered as better-than-
average risk.
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Underwriting Process
STAGE 3 - Determination of Contribution Rate
The contribution rate is based on the classification of risks, as
follows:
Standard risk – standard contribution rates will be applicable.
Rated risk – takaful operator shall impose the following:
 Loading – extra charge imposed in addition to the standard
contribution rate; or
 Excess – takaful operator shall only provide coverage of loss
exceeding a certain amount.
Preferred risk – discount on the standard rate will be applicable.
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Marketing
 Takaful operators market general takaful schemes either
directly to participants or indirect (intermediaries)
marketing through independent brokers, agents and
bancatakaful.
 Intermediaries such as agents and brokers play an
important role in the propagation and promotion of
insurance practices at the social level.
 The agents and brokers are known as al-Wakil.
 The principle of having an agent or broker is called al-
Wakalah and subject to the al-Mudharabah financing.
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Takaful intermediaries and adjusters

Provide supporting roles to the industry by complementing the
takaful operators in serving the public.
Agents
 The agent is legally representing the takaful operator and has the
authority to bind the company in which he represents, subject to
certain underwriting authority limit as may be stipulated in the
agency contract.
 The agent will receive a portion of the contribution as
remuneration from takaful operators for the services rendered.
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Takaful intermediaries and adjusters

2. Brokers
 Act on behalf of consumers to place the application for coverage with an
appropriate takaful
 Takaful brokers are independent from takaful operators as they are usually
appointed by, and act for consumers.
 Therefore, takaful brokers legally do not have the authority to bind the
takaful operator.
 Instead, the takaful brokers can accept applications for takaful coverage
and then attempt to place the coverage with an appropriate takaful
operator.
 In return, takaful brokers will receive brokerage fee from the participants.
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Takaful intermediaries and adjusters

3. Bancatakaful
 Marketing of takaful products through a bank’s established
distribution channel.
4. Adjusters
 investigate claims, evaluate losses incurred and make
recommendations on claim settlement.

In marketing general takaful products, takaful operators and

their intermediaries have a general duty of care particularly
towards individual participants to ensure that they make a well
informed decision in participating in the takaful scheme
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Industry Associations
Malaysian Takaful Improve industry self-regulation through uniformity in
Association (MTA) market practices and promoting a higher level of
cooperation among the players in developing the
industry.

Persatuan Collaborate with takaful association to promote the

Insurans Am establishment of sound insurance and takaful industry.
Malaysia (PIAM)
Insurance Brokers Elevate status, safeguard and advance the interest of
Association of brokers as well as procure their general efficiency and
Malaysia (IBAM) proper professional conduct.

Association of Promote, develop and establish a sound loss adjusting

Malaysia Loss profession in Malaysia.
Adjuster (AMLA)
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Sources of Income
 There are two takaful funds administered :
 General Takaful Fund under the general business
 Family Takaful Fund under the family business.

 The company also has its own fund, the

Shareholder’s Fund, which was originally funded
by the paid-up capital.
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Sources of Income (cont.)

 Income is derived from the following sources :
 Profits from the investment of its Shareholder’s
Fund.
 Its share of profits from the management of both the
Family takaful business and the General takaful
business in accordance with the profit-sharing
agreement of al-Mudharabah.
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Sources of Income (cont.)

 The profit sharing of 70:30 or 50:50 are
credited into the Shareholder’s Fund and
together with the Fund’s own investment
profits would be the company’s total income.
 The operating expenditure will be paid from its
income. Profits or loss will be determined from
this transaction.
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A Comparison of Takaful and Conventional

Insurance
Item Takaful Conventional Insurance
Contract Combination of a tabarru and A policy in the form of an
agency and / or profit sharing exchange contract (sale and
contract between the individual purchase) between the insured
insured and the pool of insured and the insurance company.
as represented by the takaful.

Responsibility of Participants make contribution Policy holders pay premium to

policyholders/ to the scheme. the insurer.
participants Participant mutually guarantee
each other against define loss
or damage under the scheme
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A Comparison of Takaful and Conventional Insurance

Item Takaful Conventional Insurance
Liability of The takaful operator act as the Insurer is liable to pay
insurer/ administrator of the scheme and pays insurance benefits as promised
operator the takaful benefits from the takaful from its assets (insurance and
fund. shareholders’ funds)
In the event of a deficit tin the takaful
fund, the takaful operator will
provide an interest-free loan to
rectify the deficiency.

Access to Access to share capital by takaful Access to share capital ad debt

capital operator but not to debt, except for with possible use of
interest-free loan from operator to subordinated debt.
underwriting fund.

Investment of Assets of the takaful funds are There is no restriction apart

fund invested in shariah compliant from those imposed for
instruments. prudential reasons.
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Differences Between Takaful and Conventional

Insurance: General Rulings
Item Takaful Conventional Insurance
Sources of laws and Based upon Holy Qur’an and Sate (government policy)
regulations Sunnah with adoption to man- and man-made laws.
made laws

The contractual Combination of a tabarru and In the form of an exchange

relationship agency and / or profit sharing contract (sale and purchase)
contract between the individual between the insured and the
insured and the pool of insured
insurance company.
as represented by the takaful.

Investment No involvement of contributors. Investment of premiums

treatments Different contracts with conducted by insurer.
different approaches. Investment are driven by
Investment must be guided by
profit motive, thus existence
Islamic ethics and Shari’ah
principles.
of the elements of riba and
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A Comparison of Takaful and Conventional Insurance:

Business Operations
Item Takaful Conventional Insurance
Motive of Community well-being optimizing Profit-motive ,maximizing returns to
operation operations for affordable risk protection shareholders.
as well as fair profits for the operator.

Sources of Initial capital supplied by the rabb al-mal Initial capital is supplied by
capital or paid in via contributions from shareholders.
participants.

Treatment of Losses retained within classes of Transfer of losses among insurance

investment business stated and are the sole pools and from policy holders to
obligation of participants. shareholders.

Agency status Agents are employees of the takaful and Agents and brokers are typically
any sales commission should be independent from insurer and paid
disclosed. undisclosed fees from the premium
charge.
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A Comparison of Takaful and Conventional Insurance:

Treatment of Return
Item Takaful Conventional Insurance
Return A takaful contract specifies in The returns to e returned to
specification advance how and went the return policy holders are determined by
will be distributed. managers and the board of
insurer.
Right of Right of insurable interest is Right of insurable is vested in the
insurable determined by the Islamic nominee absolutely in life
interest principles of faraid. insurance.
Dissolution Reserves and surplus could be Reserves and surplus belong to
returned to participants, although the shareholders.
there is general consensus among
slime scholars that they should be
donated to charity

Treatment of Benefits paid from contributions Benefits paid from general

benefits made by participants as mutual insurance account owned by
indemnification. insurer.
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A Comparison of Takaful and Conventional Insurance: Other

related issues

Item Takaful Conventional Insurance

Taxes and Subject to local, state and federal Subject to local, state and
zakat taxes. Also obligated to arrange federal taxes. No need to make
annual zakat, donations to charity. zakat contrbution

Accounting Accounting standards consistent Accounting standards

procedures with national standards plus consistent with national
prevailing statutory rules. Standards standards plus prevailing
used in auditing for conventional statutory rules. Auditing to
insurance are applied to takaful plus ensure uniform application of
conformance with Islamic rules accounting standard.
based on Shari’ah advisory council’s
oversight.
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Parties to contract
There are generally four parties involved in a Takaful
operation:
1. Participants, who contribute the premium to the takaful fund.
2.The takaful operator, who is a licensed body who manages the
fund according to Shariah principles.
3.The insured, it could be the participants or another party who
face the risk and are assisted by the fund.
4.The beneficiaries, who are those who benefit from the fund.
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Takaful Aqad (Contract)

 Aqad or takaful contract is an agreement that based on
Syariah.
 This agreement is between takaful participants and takaful
operators.
 In Insurance, the form of aqad is aqad Mu’awadat, which is in
the form of selling and buying.
 As there is a transfer of risk with a price (premium) in a form
of ‘selling’ the risk to Insurer.
 It is un-lawful in Islam as though an insured is selling the
uncertainty to the Insurer.
 At the same time, the Insurer is promising to pay (benefit) on
an uncertainty event in the future.