TAKAFUL

Presented by:
Tariq Mehraj
Today We expect to Answer:

•What is Takaful?
•How Takaful works ?
•What is General Model of Takaful?
•What is the relationship of Participants and Takaful
Manager?
•What are types of Takaful Model Exist?
•Comparison of different Takaful models?
Takaful: What is Takaful?
Takaful is a type of Islamic insurance, where members contribute money into

a pooling system in order to guarantee each other against loss or damage.

Takaful works on the principle of Tabarru and Ta’awun.

The word Tabarru is used to refer to a donation or a gif and the word
Ta’awun is used to refer to mutual assistance.

In Takaful, the participants make donations and assist mutually to tackle the
risk of loss due to certain events.
Takaful: How Takaful Works?
Takaful participants make contribution as donations into an insurance fund.

The resources of this fund are used to compensate any participant

encounters injury or loss and portion of the fund is invested in a Sharia

compliant profitable business.

Takaful: General Model of Takaful?
General model is based on a foundation of a “Takaful company” by a few
shareholders, which is called “Management Company”. It is based on the
following principles.

• The company creates a Waqf Pool and asks the people to make
contributions to the pool and become its member who wish to avail
Takaful facilities.

The rules of contributions are settled and these persons continue to be

the members of the Pool by make contributions and the pool then
covers up for the financial losses of its members
Takaful: General Model of Takaful?
• The company does not owns the pool. It operates only as facilitator or
operator of the pool. It keeps the records and accounts intact.

Company’s accounts and pool accounts are different from each other.
The company charges a Wakalah fee (Management Fee) against the
services provided by it.

• Companies invest the money of the Pool on its behalf on the basis of
“Mudaraba” or “Wakalah” in which the company act as “Mudharib” or
“Investment Manager” and the pool is treated as “Rab-ul-mal” or the
“Muwakkil” the Investor.
Takaful: General Model of Takaful?
• The number of Participants in the pool can increase over the period of
time and profit can also occur which causes the total sum of the pool
to increase.

Afer deducting expenses, distributing the profit share of the company

(Takaful Operator) and setting off the claims (if any) among the
members of the Pool / Participant, remaining amount in the pool (if
any) is called surplus amount In which, company has the right to keep
some funds as contingency reserves, do some charity, distribute some
amongst the participants of the Pool.
Takaful: What is the relationship of
Participants and Takaful Fund Manager?
The relationship between participants and the fund manager depends upon

the takaful model adopted.

Every takaful model is based one of the Islamic structures. The commonly

adopted models are the Mudaraba, Wakala, Waqf and Hybrid model.
Takaful: What are Takaful Models?
 In the Mudaraba model, the fund manager is entitled to a share in surplus
but not entitled to a salary or any fee.

 In the Wakala model, the fund manager is entitled to a specific fee but not
the share of the surplus.

 In the Waqf model, the fund manager is entitled to a salary.

 In a Hybrid model, the fund manager is entitled to a share in net

realization as well as a fee for his or her services to manage the
contributions and claims.
Takaful: What are Takaful Models?
In a WAKALA structure a fee is paid and in a MUDARABA structure the fund
manager share from the profit on an agreed ratio.

The other important point is that the remaining amounts in the investment
account and claims account are distributed to the participant at the end.

But in the case of Waqf model, it would be retained as a reserve and not
distributed.
Takaful: Mudaraba Model
Takaful: Wakala Model
Takaful: Waqf Fund Structure
 Takaful: Comparison of Takaful Models
Mudaraba Wakala Combined Wakala Waqf Saudi Cooperative

Share of Percentage of Percentage of Percentage of Percentage of 90% Shareholders

technical Surplus upfront upfront upfront 10% Participants
results contribution contribution but contribution but no
but no share in no share in share in surplus
surplus surplus

Share of Percentage of May be Agreed profit Agreed profit 90% Shareholders

investment Surplus sharing ratio sharing ratio 10% Participants
result

Operating Borne by Borne by Borne by Borne by Borne by the

expenses Shareholders Shareholders Shareholders Shareholders Funds particpants funds
Funds Funds Funds

Investment Shariah Compliant Shariah Shariah Shariah Compliant All

instruments Instruments Compliant Compliant Instruments
Instruments Instruments
 Takaful: Comparison of Takaful Models
Mudaraba Wakala Combined Wakala Waqf Saudi Cooperative
Deficit in the Qard Hasna to Qard Hasna to Qard Hasna to Qard Hasna to Absorbed by
participant policy holders policy holders policy holders policy holders fund shareholders
funds fund fund fund
Creation of Participant Participant Participant Participant Participant
Takaful / Contributions Contributions Contributions Contributions & Contributions &
insurance fund initial waqf by initial waqf by
shareholders shareholders
Liquidation of Accrued to Accrued to Accrued to Waqf must go to Accrues to
participant participants participants participants only another existing participants only
funds only or charity only or charity or charity waqf fund or
charity and cannot
be disbursed
amongst
participants.
Anything above the
waqf accrues to the
participants

Prevalent Partially in UK Bahrain, Pakistan Saudi Arabia

Countries Malaysia Malaysia, Sudan
Takaful: Technical Provisions

(a) Unearned contributions provision

This is an amount set aside to meet claims related to unearned

contributions which may arise in the current or future financial periods.

(b) Outstanding claims

This is an amount set aside to make provision against claims expected to be

paid in future financial periods that were incurred and reported up to the
end of the financial period.
Takaful: Technical Provisions

(c) Claims incurred but not reported

This is an amount set aside to make provision against claims that were
incurred but not reported until afer the end of the current financial
period.

This shall be measured as equal to the amount of such claims estimated,

based on the company's past experience related to the most recent
reported claims and the various statistical methods to arrive at the value
expected to be paid at the date of the statement of financial position.
Takaful: How to measure Unearned
contributions provision
• The 360 days method: This method assumption is that risk is spread
evenly over the tenure of the policy. Accordingly, this gives an accurate
unearned contribution – but this method requires sophisticated
accounting system.

• The twenty-four month method: The 24th method is based on the

assumption that on average polcies incepting in a month run from
middle of that month. Thus, contribution income is analyzed by month
of inception.

For eg at December 31: 23/24 of January Contributions would be

treated as earned and so on down to December where only 1/24 of the
contribution would be treated as earned.

• The method of 40% non-marine, 25% marine or any other percentage.

• Any other method: Disclosure of the basis / method is necessary

Takaful: Reserves
• Deficit reserve

This is an amount set aside from the surplus before it is allocated to

policyholders to provide a cushion against, any deficit which may occur in
future financial periods.

• Equalization reserve

This is an amount set aside from the surplus before allocation to

policyholders in order to mitigate the effect of exceptionally high loss
ratios which may take place in future financial periods for classes of
insurance operations displaying a high degree of claims volatility.
 Thank you.

Further Studies Recommended:

• AAOIFI – FAS 7: (Salam and Parallel Salam).

• AAOIFI - FAS 1 : General Presentation and Disclosure in IFI.
• AAOIFI – Shariah Standard 10: (Salam and Parallel Salam).
• IAS 2 – Inventories
• IAS 1 - Presentation of Financial Statements