Shariah Compliant Health Takaful

In this write-up, we will try and understand how a takaful works and the top takaful companies in the UAE. 

Conceptual Framework of a Takaful

Takaful is a term that encompasses the idea of Islamic insurance, which operates on the principle of mutual cooperation. In this system, both the insured individuals and the insurer share risks and funds.

The concept of Takaful involves the formation of a mutual assistance fund called Tabarru', where financial support is provided by a collective contribution from a group of individuals who opt for Takaful coverage. 

It is important to note that Takaful coverage is accessible to everyone regardless of religious affiliation, and even non-Muslims can obtain Takaful coverage or work as Takaful agents.

The foundation of Takaful revolves around the following principles - 

• Participants collaborate for their mutual benefit.
• Each participant contributes to support those in need of assistance.
• The Takaful contract serves as a donation agreement, dividing losses and distributing liability through a community pooling system.
• Uncertainty is eliminated by clearly defining contributions and compensation.
• It does not seek to gain an advantage at the expense of others.

Here are the key features of a takaful plan -

• No claim cashback policy - If you fail to make any claims during the coverage tenure, you will receive a certain amount as cashback from the Takaful company on selected products. This amount is decided solely by the Takaful company, i.e., there is no fixed amount. 

• Shariah-compliant - A takaful plan adheres to Shariah principles and does not involve elements that are considered “haram”. 

Difference Between Conventional Insurance and Takaful

Check out the table below for the key differences between conventional insurance and Takaful -

How Does Takaful Work?

Sharia-compliant insurance is as straightforward as conventional insurance, if not simpler. In fact, the former boasts remarkable transparency. The only notable distinction lies in the management and perception of funds. Sharia-compliant insurance policies adhere to the principles of purity, certainty, and mutuality, in addition to the concepts of community and charity.

To uphold purity, Sharia premium donations are segregated from non-Sharia premiums. Moreover, Sharia funds are held separately from the insurer's capital funds. This ensures that Sharia clients' contributions are not used for interest-generating activities such as lending, nor are they utilised for any business endeavours that violate the Sharia principles of community and purity (such as alcohol sales).

Certainty is provided to Sharia clients through explicit disclosure of precise amounts related to charges, reductions, commissions, profits, and expenses for all involved parties: the cover holder, insurer, and policyholder. This allows all transactions to be traced back and compared to the original policy. 

Apart from these specific figures, which may not be fully documented in conventional insurance policies, the wording of Sharia-compliant policies is identical to standard policies.

Regarding the management of Sharia-compliant funds, insurance providers adhere to the principles of mutuality and certainty, benefiting both policyholders and insurers. The community fund is always maintained without depletion. 

In cases where losses (claims) temporarily surpass the sum of donations (premiums) in the fund, the insurer provides an interest-free loan to restore the balance to zero. Once sufficient donations have been collected by the insurer - resulting in a surplus (profit) for the fund - the loan is repaid.

Determining the actuarial ‘certainty’ of an underwriting year for a policy is solely at the discretion of the insurer. After the policy term concludes, the insurer awaits the collection of all donations and the compensation of losses to determine if there is a surplus. The original policy stipulates the percentage of the surplus that the insurer retains as profit. Following that, the insurer determines whether to redistribute the remaining profit into the fund to minimise future losses or distribute it among policyholders based on the amount of their donations.

Top Takaful Companies in the UAE

Listed below are the top Takaful providers in the UAE -

• Watania
• Noor Takaful
• Islamic Arab Insurance Company (SALAMA)
• Dar Al Takaful
• Takaful Emarat
• Methaq Takaful Insurance
• Abu Dhabi National Takaful Company 

Takaful in a Crux 

In traditional insurance, the insured individual transfers the risk to the insurance company. However, Takaful operates on the principle of shared risk. Each participant contributes to a Takaful fund - if a loss occurs, the participant receives the corresponding claim amount.

Additionally, unlike conventional insurance, participants in Takaful maintain an ownership stake in the fund. The contributions made by participants are subsequently invested in "halal" or Sharia-compliant funds to generate investment income. If the fund generates a surplus, it is distributed among the participants and, in some cases, shared with the Takaful operator. 

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