Takaful is basically Islamic Insurance which goes with the Shariah law in Islam. The body of Islamic Law. This particular name also known as the Arabic word “ Kafalah” which means mutual guarantee. However this Insurance is purely based on the principle of mutality, where the policy holder will own the company and share the profits in it. There are three types of Insurance, Mudharaba, wakala and a hybrid of both the takaful.
This particular policyholder pays premiums into a policyholders funds. However the administrative expenses and the reinsurance and paid from this particular fund. Any residue at the end of the financial year will be the underwriting profit. This will be allocated in a part of the policyholders reserved fund.
Islamic Law completely forbids “Interest”, usury and the exploitation of the needy. Even in good Islamic Home financing interest is prohibited. It also prohibits Risk, uncertainty, deceit and hazard. However acquisition of wealth by chance and gambling is also prohibited. However such conventional insurance works on a risk transfer where the insurance company has to accept the risk from a policy holder in exchange of a premium. Basically such companies invests these premiums on huge markets to make more profits, which is basically called as Gambling and it’s completely prohibited in Islam.
In Islamic Insurance this particular fund consists of paid-up shareholders capital and basically reserves together with the income they get. However all these incomes and investment should be according to the shariah Law, it means that these should be on a profit and loss sharing basis than the engaged in huge markets. However such shareholder are responsible for their loses of the policyholder fund. However this liability is limited to the amount of equity in the company.
This particular insurance is one of the oldest concept in Islamic finance and it is purely based in profit sharing. This kind of takaful is practiced all around in the Asia-pacific region. However the companies management is paid from the companies profit and shares in the residue and the losses the company faces.
This version of insurance is basically an arrangement where an agent will be managing the company and he will be getting a fee for his services. This particular fee is already agreed at the beginning of a financial year and can be a fixed amount or an agreed share of the profit the shareholder or the policyholder funds.
Above mention both the takafuls can be put together to produce a hybrid takaful. The managing agent of the company will receive a fixed fee from the policyholder’s fund. But from the companies profit only. The policyholder has the rights to share both the underwriting profits and the invested profits.