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Takaful vs Conventional Insurance: What’s the Difference?

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There is a prevailing misconception about how takaful is simply the Islamic version of conventional insurance, and is therefore only available for Muslims. This is, however, inaccurate.

Takaful provides similar protection products as conventional insurance, and is open to anyone regardless of religion or creed.

What is Takaful?

takaful insurance

Takaful is essentially a Shariah-compliant insurance option that is grounded in Islamic Muamalat (Islamic transaction) principles, and share the same objective of providing protection against financial loss in the event of misfortune that occur from an accident, loss or damage to property, hospitalisation, critical illness, disablement or even death.

The term ‘takaful’ is derived from the Arabic word ‘kafala’ which simply means “to guarantee; to help; to take care of one’s needs”. The term also refers to the concept of Islamic insurance that is based on the Islamic principles of mutual assistance (ta’awun) and donation (tabarru’), where the takaful participants donate their money into a takaful fund that will be used to provide mutual financial benefits.

Similar to conventional insurance, there is an array of Shariah-compliant products under takaful which includes life, health, motor, home and travel insurance as well as many other types of protections.

While there are many similarities between Takaful and conventional insurance, a takaful company ensures that its products and operations are in accordance to Shariah principles. The key difference is in fact the underlying contractual relationship between the takaful operator and the customer.

An insurance contract mainly involves the purchase of a product or a service from the insurance company where the insurance risk is transferred to the insurance company.

Under a takaful contract, on the other hand, the customer undertakes a contract (aqad) to become one of the participants by agreeing to make a donation (tabarru’) to participate in the takaful risk pool fund for claims payment should any of the participants suffer from a defined loss, and appoints the takaful operator to manage the takaful fund.

An important feature of takaful is that the takaful risk fund is owned by participants, and therefore, the risk is shared among them and any surplus will also be retained within the fund or in some cases, distributed back to participants. The takaful operator, too, may be entitled to a share in the risk fund surplus.

The takaful operator is mainly remunerated based on wakalah (agency) fee. The tabarru’ amount and the wakalah fees are stipulated in the certificate contract, which promotes transparency to the customers.

As such, takaful funds are managed in accordance to Shariah, and invested in Shariah compliant assets, while the Shariah committee oversees the activities of the takaful operator to ensure that they are Shariah-compliant.

Takaful in Malaysia

Taking into account the current low penetration rate, rising standards of living, escalating medical costs and ageing population in addition to the robust growth in the Islamic banking and finance sectors, the long-term outlook for the takaful sector in Malaysia remains positive.

The development of the takaful industry is set to remain on a positive note in tandem with the government’s ongoing initiatives to spur the demand for protection among consumers.

The key component in driving growth in a competitive environment especially during the pandemic situation, is digitalisation. As such, takaful operators will continue to incorporate digital capabilities into their business models and marketing approaches to stay competitive in the market.

Within the Malaysian takaful industry sphere, the takaful operators continue with concerted efforts in enhancing awareness on takaful and in providing protection plans suitable for every segment of the society to increase the takaful penetration rate.

These initiatives include strengthening the professionalism of takaful agents, intensifying awareness and interactive programmes for the consumers as well as the introduction as well as the introduction of value propositions by embracing the concept of value-based intermediation.

Despite the cautious business sentiment, the Malaysian takaful industry is expected to remain resilient. The regulatory body, along with the takaful industry players, will continue to introduce and implement various initiatives to further promote the development of the takaful sector.

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