Actuarial Notes

Takaful: An Islamic Insurance Instrument

By Nico P. Swartz and Pieter Coetzer · Academic Journals · 2010

Study guide: Exam 6I

A review article on takaful, Islamic insurance, from the Journal of Development and Agricultural Economics, Vol. 2(10), October 2010. It discusses the conventional model of insurance first, then the takaful model, and then compares the two, aiming to stress the preference for takaful above conventional insurance and that takaful is available to both Muslims and non-Muslims.

On the syllabus

  • Exam 6I — objectives A1–A2; pp. 333–339 (the whole article)

Introduction

  • The article discusses the conventional model of insurance, then the takaful model, then compares them, so the reader can choose between the two forms of insurance.
  • In Islam the basic principle of investment is that reward must be accompanied by risk, so takaful businesses cannot invest in products which are debt-based, have a guaranteed or minimum return, or are based on haram practices.

Conventional Insurance

  • Conventional insurance is defined as an agreement whereby an insurer undertakes, in return for the agreed premium, to pay a policyholder an amount of money on the occurrence of a specified event that has some element of uncertainty about it.
  • Modern conventional insurance contracts are unacceptable to Islam because they involve al-maisir (gambling), gharar (uncertainty) and riba (interest); takaful is restricted to an interest-free system.
  • Figure 1 reproduces Khan's (2008) graphical illustration of the difference between takaful and the conventional Western model.

Origin of Takaful

  • Takaful derived from the 'aqilah and diyah systems, whereby a tribe would come to the financial rescue of a member facing an unexpected liability, such as paying blood money (diyah).

Meaning of Takaful

  • Takaful is an Arabic word stemming from the verb "kafal", to take care of one another's needs or "guaranteeing each other"; it literally means "mutual guarantee".
  • It is a legally binding agreement between all the participants of the scheme to pay any member who suffers a loss as specified in the takaful policy document — a system of mutual insurance built around the concept of donation, where the insured is also the insurer.

Evolvement or Development of Takaful

  • The first modern takaful company, the Islamic Insurance Company of Sudan, was founded by the Faisal Islamic Bank in January 1979; Malaysia's Takaful Act, 1984 regulates Islamic insurance there; in 1985 the Council of Islamic Scholars in Mecca approved takaful as a Shari'ah-approved alternative to conventional insurance.
  • Modus operandi of takaful
    • Contributions are made into the risk pool, from which expenses and claims are paid; a surplus is shared amongst the participants, and a deficit is made up with additional contributions or an interest-free loan from the operator.
    • Operations are supervised by an independent Shari'ah Supervisory Board, whose establishment is a prerequisite for commencing operation.
    • Takaful contracts are based on the principles of mudarabah (profit and loss sharing); the concept of tabarru (donation) is also incorporated in a takaful life scheme.
  • Advantages of takaful
  • Uses of takaful
  • Hitches/bottlenecks in takaful operations
  • End purpose of takaful

Islamic Banking and Islamic Insurance

  • There is an intrinsic relationship between Islamic banking and Islamic insurance: the progress of Islamic insurance depends on a healthy growth of Islamic banking, and Islamic banking cannot be fully Shari'ah-based unless there are takafuls to take its insurance business.
  • Takaful products are designed to function as any typical insurance product, but are operated differently to avoid the prohibited elements of riba, gharar and maysir.

Takaful and the Global Market

  • Takaful is described as the fastest-growing area of the world insurance market, growing at 20 to 25% per annum, but the industry is small in comparison to its conventional counterpart.
  • The main difference between takaful and conventional insurance
    • Policyholders pool their contributions and share the insurance risk and the profit and loss of the business, rather than giving the risk to the company; a surplus is shared between the policyholders.
    • Assets must be invested in Shari'ah-compliant assets, and the operators are paid explicit, transparent fees, the only way the shareholders are remunerated.
    • The central idea of all Islamic insurance models is the segregation between participants' and shareholders' funds, the company ("takaful operator") only managing participants' funds on their behalf; contributions are paid on donation (tabarru) to remove gharar.

Conclusion

  • Due to its explicit ethical structure, takaful can be marketed to both Muslims and non-Muslims; awareness can be cultivated by offering a wider range of takaful products as an alternative to those of the conventional market.

Sources

  • Takaful: An Islamic insurance instrument (Swartz and Coetzer, CAS copy) — the document: title, authors, journal, volume, pages and date (Journal of Development and Agricultural Economics Vol. 2(10), pp. 333–339, October 2010, ©2010 Academic Journals), the abstract, the headings and the text of all seven pages (sha256 d18589e6797ab8bb…); the run-in sub-headings under Evolvement or Development of Takaful and Takaful and the Global Market are the article's own
  • CAS Exam 6I Content Outline, Fall 2026 — the citation, the objectives (A1–A2) and the pages assigned (pp. 333–339)