Takaful Insurance is a form of Islamic insurance where members put money into a pool to help each other in case of loss or damage. It follows sharia or Islamic law, which emphasizes cooperation and protection. Takaful policies include health, life, and general insurance.
Takaful insurance companies were created to provide an option for people who want insurance without going against Islamic rules on interest, gambling, and uncertainty, which are not allowed in sharia law.
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In a takaful arrangement, all parties or policyholders promise to support each other and contribute to a shared fund instead of paying premiums. The fund is formed from these contributions. Each person’s contribution depends on the coverage they need and their individual situation. A takaful contract outlines the risk and coverage period, just like a regular insurance policy.
The takaful fund is overseen by a takaful operator who charges a fee to cover various expenses, such as sales, underwriting, and claims, on behalf of the participants.
Participants’ claims are paid from the takaful fund. Any extra money left after setting aside for future claims and reserves goes to the participants, not the takaful operator. This surplus can be given to participants as cash dividends, distributions, or used to lower future contributions.
An Islamic insurance company that manages a takaful fund must adhere to specific principles in its operations:
- It must operate according to Islamic cooperative principles.
- A reinsurance commission may only be received from or paid out to Islamic insurance and reinsurance companies.
- The insurance company must maintain two separate funds: a participant and policyholder fund, and a shareholder fund.
Considerations
Allied Market Research reported that the worldwide takaful insurance market reached $24.85 billion in 2020 and is estimated to hit $97.17 billion by 2030, with a growth rate of 14.6% from 2021 to 2030.