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Insurance Vs Takaful

June 2016

By WM in the Classroom

June 16, 2016 | 13:00 | Dubai

In an article around Retakaful, Yet to make its mark, for our print edition last month, we briefly highlighted the rapid growth witnessed in the field of Islamic Insurance, also known as Takaful. In this weeks WM in the Classroom session, we outline the basics around Takaful and how it is distinct from the field of insurance.

Insurance, in its conventional sense, is a contract between 2 parties. One party agrees to undertake the risk of another in exchange for a payment, known as premium. In the event of a contingency (accident, damage due to fire, etc. based on the contract), the insurer promises to pay a fixed sum of money to the other party (insured) to compensate for damages/ losses. Thus, it is a formal contract which assumes the element of uncertainty – in the case of the event not occurring, the premium that has been paid is retained by the insurer.

Takaful, on the other hand, reflects ‘Guaranteeing each other.’ It is based on the Shariah principles of Taawun (mutual assistance) and Tabarru (donation). Here, the risk is shared collectively by the group voluntarily. This is a pact among a group members (referred to as Participants) who agree to jointly guarantee among themselves against loss or damage to any of them as defined in the pact.

Outlined below is a representative working for the same,


Thus, evident is the basic principle of Risk Sharing amongst participants, which acts as the underlying distinguishing factor vis-à-vis, Conventional Insurance.

Some of the vital concepts include:

Contributions: Conventionally referred to as premium, this is paid by participants as a donation to a shared Takaful fund. It provides protection for each member against combined risks.

Surplus: Refers to the excess of the contributions & earned income from investments, which is distributed back to members (as a renewal discount) after having accounted for the administrators fees, profit sharing and claims made.

Investment profits: Are distributed among both participants and shareholders on the basis of the applicable model, which maybe Mudaraba or Wakala models (most common) or combined ones.

If there is a deficit in any Participants Fund, an interest-free loan (Qard Hasan) may be made to the Participants.

Common distinctions between the 2 include




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