It is human nature that anything new would not normally be easily and readily accepted as a matter of course. When takaful was first introduced as an alternative for Islamic insurance in the early eighties, there was strong reservation that it would not be viable, and what more profitable. In fact similar reservation was expressed on the viability of a banking operation without interests when Islamic banking was first introduced. In the same breath takaful was perceived to be a non-starter for the simple reason that its profit ought to be shared with the policyholder. The reservation probably stemmed from the general scenario on the difficulty of insurance industry as a whole at that time to make money out of the insurance operation. Most companies suffered poor underwriting results. Without the support of investment, it was likely that most of these companies would not make profit. Given such a scenario there was bound to be question on how would takaful shareholders able to reap their rewards from their financial sacrifices and faith in investing in the takaful project.
Now, the takaful system developed, and evolved to be the Malaysian model, has turned out to be viable to both participants as users or consumers, and shareholders as investors in term of the financial benefits that they have been enjoying. Right from inception, participants of all takaful products under both the Family Takaful Business and General Takaful Business have been receiving returns on their contributions or premium. In the case of General Takaful, taking the performance of Takaful Malaysia as a practical example, the rate of return for yearly renewable products such as takaful schemes for motor, fire, personal accident payable to participants is on the average has not been less than 35% p.a. In the same manner, shareholders have been enjoying dividends ever since it was first declared and paid in the fourth year of Takaful Malaysia’s operation.
As a system, takaful is steadily gaining popularity and this in fact has posed a challenge to the takaful operators. Measures have to be taken to reach out efficiently and effectively to the consumers in order to satisfy their insurance needs. In this respect, the pace of product development for takaful has been relatively fast. All in, takaful products would now be available to meet the insurance needs of all sectors of the community, both at the individual as well as the corporate levels. Perhaps taken a step further, there are takaful products designed specifically to cater for the needs of a particular sector of the community, normally considered to be of a low priority from the standpoint of conventional insurance. As an example, Takaful Malaysia provides two different products, namely Takaful Rumah Desa and Skim Takaful Baitul Saadah for the purpose of covering houses or private residences in the rural areas and including their owners. These are traditional houses usually built of wooden structure that are not normally readily accepted under the conventional insurance policy.
The diversity of takaful is further illustrated from its ability to cater for the long-term financial needs as usually provided under a life-insurance type of product. This demonstrates takaful would be able to satisfy both the financial benefit due to early death of a breadwinner as well as savings for old age. Under takaful, these are long term family products that are essentially fixed term financial planning programme. Participants of the family product shall agree to participate in a takaful plan with a fixed period of maturity of their choice. For this purpose, a participant may choose a minimum term of 5 years or a maximum of 40 years. In consideration, the participant shall also agree to pay the takaful contribution in instalment monthly, quarterly, half-yearly or yearly within the term as long as he or she is alive. To ensure that the participation shall be in force at all times and the benefits would be payable in the event of a misfortune, the contribution must be paid on time according to the schedule of payment.
As the transactional aspect of takaful is not based on the contract of buying and selling, contrary to a conventional life insurance policy, the family plan does not charge a premium. To a policyholder the price of buying a life policy would be the premium charged, usually depending upon the former’s age. The older the policyholder the higher would be the premium. This does not happen in takaful. In a sense, there is no compulsion in terms of the amount of contribution to be paid. Therefore, the question of financial capacity or affordability on the part of the participant does not arise.
Once the participant has chosen the term of the plan, the next decision he has to make would be his choice of the amount of contribution. For this purpose, for most people it should not exceed 10% of their income. The operator, however, as a matter of policy would set the minimum amount.
The contribution paid shall be credited into the Family Takaful Fund which is sub-divided into two accounts, namely Participant’s Account (PA) and Participants’ Special Accounts (PSA). A huge portion of the contribution that represents the core savings of the participant is in the PA, whilst the balance is for the PSA designed to assume the mortality liability of all participants.
How much of the contribution meant for the PSA shall be based on the mortality table and other actuarial requirements as certified by a qualified actuary in accordance with the Takaful Act 1984. This approach would not be contrary to Shariah as the assumption is merely a sound technical strategy to ensure good governance in the management of takaful operation that would create confidence among participants. In general, mortality basis is relatively low. Thus the corresponding rate of the contribution for the PSA would be relatively small. For Takaful Malaysia the rates range between 3% to 13% depending upon the age of the participant at the inception as well as the term of the family plan.
What is important from the contractual point of view is that the amount credited into the PSA is made as tabarru’ or donation by the participant. The total aggregate of the tabarru’ paid by all participants in the PSA would be the benevolent fund that provides certain benefits in the event of death of a participant. The death benefit from the PSA would be calculated from the date of death to the date of maturity of the plan based on the amount of contribution paid.
Both the PA and PSA are invested and returns thereof shall be subject to profit-sharing under the mudharabah contract between the participant and the operator. Again the sharing is at the gross profit before deducting the operator’s management expenses. The profit attributable to the participant shall be credited into the PA and PSA accordingly.
Upon expiry, the participant shall be paid the maturity benefits comprising of the total balance in his PA. In addition, he shall be paid a certain percentage of the actuarial surplus, if any, out of the PSA. It is noteworthy to mention that in contrast to the conventional system, the takaful operator shall not be entitled to share any of the actuarial surplus. In this regard, like a conventional life policy, the family plan would be able to fulfil the financial needs of the individual either for the purpose of relieving the financial burden in case of early death of a breadwinner or accumulating savings for retirement.
Should a participant have to break the contract and therefore surrender his plan, he shall be refunded of all the contributions in the PA including investment returns thereof at any time. In other words, there is no forfeiture in takaful under which a participant would loose his money if he has to cancel his policy. However the tabarru’ contribution that he has donated in the PSA shall remain in the Fund.
The thrust of marketing takaful products therefore should not be focussed solely on the issues of Shariah. Takaful operator must able to demonstrate that the respective products would be able to meet the specific needs and financial objectives of modern-day consumers. From the dearth of interests shown on the Malaysian model, both at home and abroad, takaful looks poised to steadily becoming a force within the Islamic financial sector in particular, and insurance industry in general.