I’ve previously written about why I think traditional insurance is not prohibited in Islam. I received a number of comments suggesting I examine Takaful (which is understood to be an Islamic alternative to conventional insurance). The results of my examination are below:

Takaful (Arabic: التكافل) is defined by its proponents as a cooperative system of reimbursement or repayment in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on their behalf by a Takaful Operator.[1]

So far this sounds exactly like traditional insurance. With exception to the word “donate” which is erroneously used to describe Takaful premiums. A donation is defined as giving with no expectation of return whereas Takaful contributors expect some degree of protection in return for their contributions.

So from a high level, Takaful is the same as conventional insurance. Let’s explore Takaful’s nuances:

The first two columns are the words of Takaful companies I found online, the third column consists of my own words.

Takaful Companies Conventional Insurance Companies Rakaan’s Comments
It is based on mutuality; hence the risk is not transferred but shared by the participants who form a common pool. The Company acts only as the manager of the pool (Takaful Operator). It is a Risk Transfer mechanism whereby risk is transferred from the policy holder (the Insured) to the Insurance Company (the Insurer) in consideration of ‘insurance premium’ paid by the Insured. Not sure what this means.

In both conventional insurance and Takaful the money to cover a particular participant’s loss is provided from a pool of money formed from other members’ contributions.
Are those who make this distinction suggesting that Takaful companies do not have an obligation to protect their members from the risks they are paying to be insured against?
So is the fact that Takaful operators provide an inferior service compared to conventional insurers what makes them Islamic?!?

The element of ‘uncertainty’ i.e. ‘gharrar’ is brought down to acceptable levels under Shariah by making contributions as “Conditional Donations” (tabarru) for a good cause i.e. to mitigate the loss suffered by any one of the participants. It contains the element of uncertainty i.e. “gharrar” which is forbidden in Islam. There is an uncertainty as to when any loss would occur and how much compensation would be payable. This distinction directly contradicts the first one regarding risk sharing and risk transfer. One would think that if the risk is transferred altogether, as is the case with conventional insurance, then the “uncertainty” in the contract would be less not the other way around.
Again, what’s this I’m hearing about “conditional donations”? Aren’t donations by definition NOT conditional!
It’s not a donation if it entitles you to a service, it’s a payment! For the love of God, would people in Islamic finance stop with the word games already!
The participant pays the contribution (tabarru) in the spirit of Ne’ea (purity) and brotherhood; hence it obviates the element of ‘maisir’ while at the same time not losing the benefit of Takaful in the same way as conventional insurance. It contains an element of gambling i.e.”maisir” in that the insured pays an amount (premium) in the expectation of gain (compensation/payment against claim). If the anticipated loss (claim) does not occur, the insured loses the amount paid as premium. If the loss does occur, the insurer loses a far larger amount than collected as premium and the insured gains by the same. Really? I never knew if you gambled in the spirit of brotherhood that it became acceptable in Islam. This is a new concept in Islam. Someone needs to tell Vegas they can make their casinos Shari’a compliant by re-branding them as “brotherhood gatherings”.
The truth is that claiming insurance is gambling is ridiculous. People don’t get health insurance hoping that they fall sick and get rich off the insurance company’s payments. They are paying the insurance company to receive their financial protection, not to win more money. To suggest the later is simply false.
Takaful is free from interest (Riba). Conventional insurance includes elements of interest. WHY??? How is Takaful free from Riba but conventional insurance is not? This is not explained. Maybe because it’s Riba in the spirit of brotherhood.
All or part of the contribution paid by the Participant is a donation to the Takaful Fund, which helps other Participants by providing protection against potential risks. The premium is paid to conventional insurance companies and is owned by them in exchange for bearing all expected risks. Again we are twisting words. “Donations” are not given with the hope of receiving financial protection from those you are donating to. So let’s stop calling Takaful payments donations because they aren’t.
Further, where do proponents of Takaful think traditional insurance companies get the money to pay the claims of the insured? From insurance premiums of course! So how is Takaful different again?
Takaful companies are subject to the governing law as well as a Shari’a Supervisory Board. Conventional companies are only subject to the governing laws. Sure.
There is a full segregation between the Participants Takaful Fund account and the shareholders’ accounts. Premium paid by the Policyholder is considered income to the company, belonging to the shareholders. This is just patently false. Traditional insurance premiums must be set aside to cover the claims of the insured as they arise. Only a fraction of the premiums end up as income for the company. Further, Takaful fund operators are paid by those they insure just as traditional insurers are.
Moreover, why does Islam even care about this? What added fairness is this not-truly-existent difference providing?
Any surplus in the Takaful Fund is shared among Participants only, and the investment profits are distributed among Participants and shareholders on the basis of Mudaraba or Wakala models. All surpluses and profits belong to the shareholders only. Since when was earning a profit in exchange for providing a service (in the case of insurance the service is protection) something to be frowned upon in Islam? What verses of the Quran or sayings of the prophet (PBUH) are people who imply this relying upon?

Further, this distinction doesn’t make sense. If the Takaful fund is having meaningful surpluses, after the Takaful operator is paid its fee, this means it is charging its customers premiums that are too high and doing a lousy job as a Takaful operator. Anyone can be a Takaful operator if they just ask their customers to pay exorbitantly high premiums, sorry “donations”. The trick is to collect just enough to cover the members’ risks, not to have surpluses!

Remember, customers of Takaful are looking for wealth protection not wealth creation. If they were looking for wealth creation they would have put their money in an investment fund, or some other specialist in wealth creation.

Finally, I have a feeling that surpluses are usually just paid to the Takaful operator as part of their fee. Just a hunch.

In case of the deficit of a Participants’ Takaful Fund, the Takaful operator (Wakeel) provides free interest loan (QardHasan) to the Participants. In case of deficit, the conventional insurance company covers the risks. Basically this is saying that if a conventional insurance company underestimates how much it needs to collect in premiums from its members, it will absorb the loss. On the other hand, if a “Takaful Operator” underestimates the needed size of the Takaful pool, it will give the member who was depending on the Takaful company’s protection an interest-free loan rather than a check to cover their expenses! Sort of like a security guard who provides their employer with a gun (free of charge mind you) to protect themselves as soon as a robbery occurs. Thanks, I thought this was your job!
Again, providing an inferior service to Muslims.
The Plan Owners’ and shareholders’ capital is invested in investment funds that are Shari’a compliant. The capital of the premium is invested in funds and investment channels that are not necessarily Shari’a compliant. This is the only difference that makes sense.
Takaful companies have re-insurance with Re-Takaful companies or with conventional re-insurance companies that adhere to certain conditions of Shari’a. Conventional insurance companies do not necessarily have re-insurance with re-insurance companies that abide by Shari’a principles. How interesting! So Takaful companies allow themselves to use conventional re-insurance (which is just traditional insurance for insurance companies) yet their entire service is based on the premise that conventional insurance is fundamentally flawed in Islam. Hypocrisy much?

In conclusion, the only worthwhile difference between Takaful and conventional insurance is that the former invests the money of its members in Shariah-Compliant investments. The remaining differences are either superfluous to making the product Islamic or add negative value.

See: Video: Takaful: Is it really “Islamic” insurance?