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CHAPTER 3: TAKAFUL BUSINESS MODELS
This chapter examines the various Takaful business models used in the Islamic finance industry
with certain noticeable variations across different jurisdictions. It also examines the types of
Takaful structures utilized that have some implications for the way they are established,
managed and accept contributions. This is reflected in the different contractual relationships
established in the different models identified.
The discussion on the business models of Takaful involves the analysis of the existing practices
of the Takaful industry and its business models. It discusses the operational models adopted by
Takaful companies, including the various Takaful structures in the market. It also provides
diagrams and charts to analyse the structures and working mechanisms, considering the
similarities and differences of each. More importantly, it provides charts for each model, clarifies
the flow of contributions, and distinguishes between General and Family Takaful once each
Takaful structure model is reviewed.
3.1. Underlying Contracts in Takaful
One of the fundamental differences between conventional insurance and Takaful is the
underlying contract. A conventional insurance contract is a contract of exchange, whereby an
insurance company (insurer) promises to provide insurance coverage or protection against
certain losses, in consideration of the insurance premiums paid by the policyholder (insured).
Under the insurance contract, there is no element of cooperation andmutual protection between
the insurer and the insured parties collectively, because the former makes a profit by providing
insurance coverage for a predetermined premium paid by the latter.
On the other hand, in a Takaful scheme, the Takaful participants are simultaneously the insurer
and insured. They collectively contribute to a Takaful fund which will be used to pay claims to
any of them who incurs certain losses. Their contributions do not derive advantage at the cost
of others but ensure mutual financial protection or indemnity among themselves. Unlike the
conventional insurance company, a Takaful company is not an insurer which takes liability to
insure the participants in consideration of the Takaful contributions paid by the participants.
However, the former only manages and invests the Takaful funds on behalf of the latter.
Therefore, there are two types of the contractual relationship in the Takaful arrangement:
a) the contractual relationship among the group of participants, and
b) the contractual relationship between the group of participants and the TO.