TAKAFULWhat is Takaful

And how does it differ from conventional insurance

By Team 3

Team 3 : Takaful 2

Content

Takaful’s Standing in the World What is Takaful and Why does it exist? Takaful Models How Takaful differs from Conventional

Insurance? Summary Q & A

Team 3 : Takaful 3

Resource: Global Takaful Insight 2014, Ernst & Young Ltd.

Takaful’s Standing in the World

2010 2011 2012 2013 2014f 2015f 2016f0

2,500

5,000

7,500

10,000

12,500

15,000

17,500

20,000

8,4269,645

10,77512,268

14,02916,108

18,561

Global Takaful Contributions Forecast 2010 - 2016

Contribution ($ Million)

Year

Note: “ f ” means forecast

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Foreign mergers and acquisitions in Malaysia (in 2013)

• Khazanah Nasional Ltd. (Malaysia) & Sun Life Financial Ltd. (Canada)

• American International Assurance Ltd. (USA)

Regulatory improvements in Islamic countries

• Malaysia• Indonesia • Turkey• Oman

Takaful’s Standing in the World

• Saudi• Bahrain• UAE (United Arab Emirates)

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Development of sukuk (Islamic bond) tax framework (Hong Kong)

Sharia-compliant platform launched in Cobalt Ltd. (London)

Takaful’s Standing in the World

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What is Takaful? Concept derived from the Arabic word “Kafala” Embraces the element of mutual protection

and shared responsibility Takaful is a joint guarantee A group of participants agree to mutually

guarantee each other against a defined loss

ContributionsTabarru (donations)

Provide mutual indemnityParticipants

Takaful Fund Takaful Operator

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Why Takaful Exists?Quran

The Holy Book

SunnahThe way of

life

TakafulInsurance System

Prohibits:• Gharar (Uncertainty)• Maysir (Gambling)• Riba (Interest, Usury)

ShariaIslamic

Religion Law

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Gharar, Maysir and Riba

Gharar(Uncertainty)• Uncertainty regarding

transparency of transactions

• The amount to be paid is uncertain

• The occurance of the insured event is unknown

Maysir(Gambling)• Speculative risk – Insurer

Profit: claims < premiumsLoss: claims > premiums

Riba(Interest, Usury)• Sharia Law prohibits

interest-based debt financing such as bonds and stocks

Tabaru (Donations)•Gharar is difficult to be

avoided•But can be forgiven on

the grounds of cooperation and tabaru

Risk Sharing•Speculative risk can be

eliminated•Risk transferred and

shared by participants

Sharia-compliant Assets•Sukuk (Islamic bond)

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Takaful Models

Pure Wakalah

Pure Mudarabah

10

Pure Wakalah

PTC1 S/Hs2

Takaful Fund

Claims Expenses(not mgt. exp.)

Mgt. Expenses

Reserves

Investment Return

Contribution

Agent FeeSurplus S/HsSurplus

Qard (Interest-free loan)

to cover the deficit

S/Hs Fund

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Note: 1. “PTC” is the abbreviation for participant 2. “S/Hs” means shareholders

11

Takaful Fund

Claims Expenses(not mgt. exp.)

Mgt. Expenses

Reserves

X%

1-X%

ContributionY% 1-Y%Surplus S/Hs

Surplus

Qard (Interest-free loan)

to cover the deficit

Investment Return S/Hs Fund

Pure Mudarabah

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PTC1 S/Hs2

Note: 1. “PTC” is the abbreviation for participant 2. “S/Hs” means shareholders

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How Takaful differs from Conventional Insurance?

Differences

Risk

Principle

Investment

Retakaful

Surplus

Deficit

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DifferencesTakaful Conventional

Risk Share with participants Transfer to insurer

Principle

Mutual Assistance for Participants

Transparency Sharia board in Management

team (sharia-compliant)• No interest/ uncertainty/ gambling• Avoid prohibitive dealings

Maximize Profit for Shareholders

Investment Non Interest-bearing

• Property, Islamic Banks, sharia-compliant stocks

Interest-bearing securities and equities

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Takaful Conventional

Retakaful(reinsurance

)

Takaful fund

Sharia-compliant

Company

Not Sharia-compliant

Surplus

Takaful fund: sharing among participants

Investment profits: • Participants (Wakalah)• Participants and shareholders

(Mudarabah)

Shareholders

Deficit Qard (Interest-free loan) from

shareholders’ fund Company cover the

risks

Differences

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Summary Takaful promotes the spirit of mutual assistance and

tabarru (donation) between its participants guided by the sharia law.

Element of Gharar (Uncertainty), Maysir (Gambling) and Riba (Interest).

Takaful ≈ quasi-mutual insurance but fixes a service entity (the Takaful Operator) at its helm.

ModelWakalah Principal–

Service Agent

Mudarabah Profit sharing

16

SummaryAsset Investment

Strategy

= Takaful

Commitment

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Social Responsible Investing

Thank you! Any Questions?

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References

EYhttp://www.ey.com/Publication/vwLUAssets/EY_Global_Takaful_Insights_2014/$FILE/EY-global-takaful-insights-2014.pdf Research and Markethttp://www.researchandmarkets.com/research/bgm67s/market King Abdulaziz Universityhttp://www.kau.edu.sa/Files/320/Researches/54999_25350.pdf Institute of Islamic Banking and Insurance

http://www.islamic-banking.com/takaful_insurance.aspx International Cooperative and Mutual Insurance Federation

http://www.takaful.coop/index.php?option=com_content&view=article&id=7%3Awhy-is-conventional-insurance-not-permissible-in-islam&catid=44%3Afaq&Itemid=113