Takaful is a unique implementation of insurance tailored to adhere to Islamic law or sharia. It operates under a collective system in which members jointly safeguard against loss and damage by contributing to a common pool. This Shari'a-compliant insurance method strikes a balance between cooperation and protection, offering coverage for health, life, and various other insurance necessities.
The establishment of Takaful insurance firms arose in response to the broader commercial insurance industry, which has been viewed in some quarters as clashing with certain key Islamic prohibitions against principles such as riba (interest), al-maisir (gambling), and al-gharar (uncertainty)-all of which are considered illicit under sharia law.
Each party in a Takaful plan agrees to mutually guarantee one another by making contributions to a shared fund rather than paying premiums. This collective pool of contributions forms the Takaful fund, with each individual's input calculated based on their specific coverage needs and personal circumstances. Comparable to standard insurance policies, a Takaful contract outlines the nature of the risk coverage and its duration.
The Takaful fund gets efficiently managed by a Takaful operator on the participant's behalf, who levies a pre-agreed fee to meet expenses like sales, marketing, underwriting, and claims management-akin to traditional insurance firms.
Participants' claims get paid by the Takaful fund, and any remaining funds, post provisioning for potential future claims and other necessary reserves, are the property of the fund participants- not the Takaful operator. These funds can potentially be used to provide cash dividends or distributions or alternatively, reduce future contributions for the participants.
Nevertheless, an Islamic insurance company operating a Takaful fund has to function within certain governing principles.
Despite the regulations, the Takaful insurance market has shown significant growth potential, with Allied Market Research valuing it at $24.85 billion in 2020 with strong predictions to reach a whopping $97.17 billion by 2030. This reflects an annual compounded growth rate of 14.6% between 2021 and 2030.
This opportunity stems from the fact that over half of the global Muslim population is made up of those under 25 years old. As their wealth increases with time, this demographic has the potential to represent a sizeable customer base.
According to a report by Research and Markets, some of the most prominent players in the Takaful market include:
Many Islamic legal scholars argue against conventional insurance as it fails to comply with sharia requirements due to the following reasons: