What is Takaful?
a) What is takaful?
Takaful Insurance is generally based on the concept that the negative impact of a specific incident is distributed among a group of persons instead of making the person who experienced the loss to bear its results alone. The means to achieve this is to establish a common fund to which everyone exposed to a specific risk may contribute in such a way that indemnity will be paid from that fund. In this type of insurance, the Insured seeks guarantee from a group of persons who are participants in the insurance. At the same time he supports other members when they are faced with losses. Members who share in this Insurance insure each other's losses on the basis of legitimate cooperation and Takaful.
b) What is Retakaful?
Retakaful is the Islamic alternative to conventional reinsurance and operates on Shariah principles. Re-insurance is best thought of as “insurance for insurance companies” or can say the Retakaful is a “Takaful for Takaful operators”. It is a way for a primary insurer to protect against unforeseen or extraordinary losses.
There are two main models: Wakalah and Mudharabah
1) Wakalah Model
This is a fee based model where the takaful company acts as the agent and administrator. The fee is fixed annually and is usually a combination of an administration and investment fee. All surpluses belong to the policyholders.
2) Mudharabah Model
This model is based on community pooling/profit sharing. The company acts as the entrepreneur and the participants provide the capital. Profits and losses are shared between the takaful company and participants in a pre-agreed ratio.
3) Takaful – Hybrid Model
As the term denotes, takaful hybrid model is a combination of the two principles above. Under the model, a relationship between the operator which combines the role of entrepreneur or Mudarib as well as the agent or wakil of the participant, whilst the latter in the capacity as both provider of capital or sahibul-mal and principal to the agent. By this arrangement on the part of the operator, an agency fee can be remunerated as upfront charges from the takaful fund whilst at the same time will have the right to profit-sharing on returns on the investment of the takaful fund in accordance with the Mudarabah contract.
In this regard, the Mudarabah contract is applied on the investment activity only. Profit to the fund in this instance comprises surplus from underwriting as well as returns on the investment as a whole.