Family Takaful and General Takaful
The Takaful is broadly practiced under two main areas Family Takaful and General Takaful. Family Takaful is the Islamic equivalent of conventional life insurance; it involves solidarity between a group of individuals and their families pertaining to protect widows, orphans and other dependents of the insured against an unforeseen tragedy such as accident or permanent disability. While General Takaful is about insuring anything other than human life; this may include for example property, belongings or vehicles against fire and theft. This area of insurance also works like a joint guarantee in which all participants mutually contribute their shares of premiums into a pool to indemnify any participant who suffers from an insured loss or peril.
In both areas and according to the nature of relationship between the Takaful operator and the participants, there are various models for the management and investment of funds. In Mudarabah model, Takaful operators normally divide the contributions into two parts, i.e., donations for meeting liability or losses of the fellow policyholders and the other part for investment. And as a Mudarib the Takaful Operator assumes the role of an entrepreneur to manage the business on Mudarabah profit-sharing basis; it occurs administrative expenses for the underwriting operations on behalf of the participants, while general expenses are charged to the Participant Takaful Fund; it also shares in the risk of the business and in case of loss or deficit, it does not receive any remuneration and bears losses in terms of unrewarded labour. Returns from investment of participants Takaful funds are distributed on Mudarabah principle between the participants and the Takaful operators as mutually agreed.
In the Wakalah Model, the Takaful operator plays the role of an agent; it manages the Takaful business for both the underwriting operations and the investment of the participants Takaful Fund, as such the operator earns Wakalah fee from contributions that covers most of the expenses of business; it does not share in any underwriting results as these belong to participants in form of surplus or deficit. The fee rate is fixed annually in advance in consultation with Shari’ah supervisory board of the operator. This fee may be an absolute amount, but is generally determined as a percentage of the contributions paid by the Takaful participants. Takaful operator’s operations include payments of salaries, overhead, selling commissions, sales and marketing expenses, etc; it bears expenses from investment activities and charged them to the Shareholders Fund.
In both areas and according to the nature of relationship between the Takaful operator and the participants, there are various models for the management and investment of funds. In Mudarabah model, Takaful operators normally divide the contributions into two parts, i.e., donations for meeting liability or losses of the fellow policyholders and the other part for investment. And as a Mudarib the Takaful Operator assumes the role of an entrepreneur to manage the business on Mudarabah profit-sharing basis; it occurs administrative expenses for the underwriting operations on behalf of the participants, while general expenses are charged to the Participant Takaful Fund; it also shares in the risk of the business and in case of loss or deficit, it does not receive any remuneration and bears losses in terms of unrewarded labour. Returns from investment of participants Takaful funds are distributed on Mudarabah principle between the participants and the Takaful operators as mutually agreed.
In the Wakalah Model, the Takaful operator plays the role of an agent; it manages the Takaful business for both the underwriting operations and the investment of the participants Takaful Fund, as such the operator earns Wakalah fee from contributions that covers most of the expenses of business; it does not share in any underwriting results as these belong to participants in form of surplus or deficit. The fee rate is fixed annually in advance in consultation with Shari’ah supervisory board of the operator. This fee may be an absolute amount, but is generally determined as a percentage of the contributions paid by the Takaful participants. Takaful operator’s operations include payments of salaries, overhead, selling commissions, sales and marketing expenses, etc; it bears expenses from investment activities and charged them to the Shareholders Fund.
