Takaful Insurance

As it is in Western Culture, insurance coverage in the non-western world has roots in its cultural and economic history. That is certainly the case with takaful insurance which, in various forms, is used in a number of countries that follow Islamic (or Shari’ah) law.

Conventional Insurance vs. Takaful

Conventional insurance coverage, while still offering the basic option of mutual protection from pooled funds from contributors, most commonly exists in an expanded form that seeks to maximize financial benefits. Rather than restrict its goal to protecting against eligible losses, conventional insurance often maximizes its income potential by aggressively seeking opportunities via activities such as the following:

  • use of selection and pricing practices to create underwriting profit
  • redeploying collected premium into various investments
  • recovering funds it has paid in losses from other parties that bear legal responsibility for such losses (subrogation)

Transversely, takaful arrangements reflect a desire to provide pure protection against certain forms of accidental loss. Due to the requirement of Shari’ah, it is forbidden to pursue certain financial activity that is commonplace in Non-Islamic countries. Islamic financial practices are indivisible from religious practice, so they share the following objections concerning conventional insurance:

  • Maeser – Gambling
  • Gharar – High Uncertainty
  • Riba - Interest

Therefore, takaful coverage must avoid any elements of speculation (gambling) or profit-taking, so the focus is upon achieving a fund pooling arrangement that focuses on providing mutual protection and maintaining that pure level of protection.

Takaful Operator Models

Islamic practices and interpretations of law and permitted activities can vary significantly among countries. Therefore, there are different models of takaful operations. The main ones are:

  • Mudaraba (Partnership with Profit Sharing)
  • Wakala (Agency with Fees)
  • Hybrid (Profitsharing/Fees)

Takaful Market

While there is significant growth in the global takaful market, the current level of coverage it provides as a percent of the total insurance market is still negligible. That was the case in countries that, currently, comprise the largest markets for takaful coverage. Specifically, the following:

  • Bahrain
  • Indonesia
  • Malaysia
  • Pakistan
  • Saudi Arabia
  • United Arab Emirates

One recent study by a conventional global insurer which has also entered the takaful market found that there are significant issues with takaful operations and product availability among the countries that provide takaful coverage. One issue is that there is a lack of product diversity and too little development has occurred on the commercial and retakaful market. The study suggests that these factors are a cause of the low level of market penetration common to all of the countries studied. Some greater market impact may come from Africa which, particularly via Kenya, Nigeria and Tunisia, is becoming an important emerging area in traditional insurance, microinsurance and, now takaful coverage. Another area of development is the interest of consumers who operate in traditional insurance markets. Some commercial operations have an increasing concern over transparency, sustainable coverage and social consciousness and there is interest in using takaful coverage as a way to avoid possible entanglements with how corporate funds are used. There is some belief that conventional problems could be avoided if a more straightforward form of insurance coverage, such as takaful, is used.

Involvement of Traditional Insurers

Much of the drive for takaful growth, ironically, is coming from traditional insurers. Global insurance growth is assisted by achieving greater development and penetration of global markets. Some of the world’s largest insurers have begun embracing less traditional activities in order to reach out to underserved insurance markets, which are in parts of Asia, the Middle East and Africa. Services that have a more realistic chance for growth are microinsurance, takaful and retakaful (Islamic version of reinsurance).


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