Posted on: 06-09-2017 in Insurance
Takaful, Islamic life insurance, is available to non-Muslims (so that means us expats in the UAE) and can often offer better deals than conventional insurance – as well as more rigorous ethical values. But how does it work?
Takaful has been winning over people internationally for taking a different approach to providing compensation in the face of unfortunate circumstances.
While ‘Ta’mein’ is the rough equivalent of ‘insurance’, ‘Takaful’ roughly means ‘solidarity’ – and this goes some way to conveying its underlying ethos. The earliest Middle Eastern insurance developed more than 800 years ago and was marine insurance, with traders forming what could be called a mutual society and a common pot from which members could be compensated in the case of calamity on the high seas.
Communities also pooled their contributions to help members financially when they fall on hard times. This is where the ‘solidarity’ comes in: help thy neighbour, just as you’ll be helped. This semi-formal insurance arrangement still happens informally today, such as in Yemen.
But insurance doesn’t just compensate for catastrophe – it mitigates risks. Today, Takaful as an industry is as much a scaled version of mutual help as prudent management of the funds.
Conventional insurance sees policyholders pay a premium in exchange for payout to a beneficiary in case of the policyholder’s death. Term insurance covers a certain time period and, in the absence of a claim during this period, the premiums remain with the insurer. A whole-of-life policy has a monetary value since the bulk of the premiums cash is invested and can see some of this investment drawn down within certain parameters.
It is useful to understand how Shari’ah finance views this conventional structure and the relevant terms, before then diving into the Ins and Outs of the Shari’ah Takaful:
With conventional insurance, the investment agent is paid out of the premiums received. In the Takaful structure, the agent works for the company itself, and so is paid by the company.
Takaful providers insist that the overall cost of a life policy under this structure is cheaper than conventional insurance. A counter-argument is that there is less flexibility on the underlying investment portion since the funds invested in must be compliant too, narrowing the usual fund platform of options to which insurers have access.
While the most common Takaful life cover structure is called Wakalah, which we’ll describe here, Takaful itself is distinct due to how the incoming cash is treated.
Premiums received by the insurer are split three ways:
Beyond claims, policyholders get a kind of windfall from their participation in two ways:
The Wakalah model is more common in the Middle East than the Mudarabah model practised more in Asia (which has a different structure in the relationship between manager and policyholders).
As an expat in the UAE looking at life insurance options, Takaful is definitely worth discussing with your IFA. It does work differently to conventional insurance in many ways, but the basic idea that you make payments and then receive payment when in need is central to both. Takaful definitely offers a clearer ethical perspective than normal insurance – as well as potentially saving clients money.