Takaful Insurance Report

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TAKAFUL INSURANCE Submitted by: Group 8 1 2 3 4 5 6 2010033 2010035 2010061 2010047 2010148 2010085 Prasant Kumar Singh Pratish Thali Abhinit Kulkarni Sidharth Patel Mayank Gorla Kalpak Iyer What is Takaful? All human activities are subject to risk of loss from unforeseen events. To alleviate this burden to individuals, what we now call insurance has existed since at least 215 BC. This concept has been practiced in various forms for over 1400 years. It originates from the Arabic word Kafalah, w
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  TAKAFUL INSURANCE   Submitted by:Group 81 2010033 Prasant Kumar Singh2 2010035 Pratish Thali3 2010061 Abhinit Kulkarni4 2010047 Sidharth Patel5 2010148 Mayank Gorla6 2010085 Kalpak Iyer What is Takaful?   All human activities are subject to risk of loss from unforeseen events. To alleviate this burdento individuals, what we now call insurance has existed since at least 215 BC. This concept hasbeen practiced in various forms for over 1400 years. It srcinates from the Arabic word Kafalah  ,which means guaranteeing each other or joint guarantee . The concept is in line with theprinciples of compensation and shared responsibilities among the community.Takaful srcinated within the ancient Arab tribes as a pooled liability that obliged those whocommitted offences against members of a different tribe to pay compensation to the victims ortheir heirs. This principle later extended to many walks of life, including sea trade, in whichparticipants contributed to a fund to cover anyone in a group who suffered mishaps on seavoyages.In modern-day conventional insurance, the insurance vendor (the insurance company) sellspolicies and invests the proceeds for the profit of its shareholders, who are not necessarilypolicyholders. There is therefore a clear disjunction between policyholders and shareholders.Payouts to policyholders may vary depending on financial performance, but a minimum positivereturn is always contractually guaranteed.Takaful is commonly referred to as Islamic insurance; this is due to the apparent similaritybetween the contract of kafalah (guarantee) and that of insurance.However, takaful is founded on the cooperative principle and on the principle of separationbetween the funds and operations of shareholders, thus passing the ownership of the Takaful(Insurance) fund and operations to the policyholders. Muslim jurists conclude that insurance inIslam should be based on principles of mutuality and co-operation, encompassing the elementsof shared responsibility, joint indemnity, common interest and solidarity.In takaful, the policyholders are joint investors with the insurance vendor (the takaful operator),who acts as a mudarib  – a manager or an entrepreneurial agent for the policyholders. Thepolicyholders share in the investment pool's profits as well as its losses. A positive return onpolicies is not legally guaranteed, as any fixed profit guarantee would be akin to receivinginterest and offend the prohibition against riba.   For some time conventional insurance was considered to be incompatible with the Shari’ah that prohibit excessive uncertainty in dealings and investment in interest-bearing assets; both areinherent factors in conventional insurance business.However, takaful complies with the Shari’ah (which outlines the principles of compensation and shared responsibilities among the community) and has been approved by Muslim scholars.There is now general, health and family (life) takaful plans available for the Muslim communities.   Gambling and Insurance  Gambling and insurance are two distinct and different operations. Gambling is speculative in itsrisk assessment whereas insurance is a pure risk and is non-speculative. In gambling, one maywin or lose by creating that risk. In insurance, the risk is already there and one is trying tominimise the financial effects of that risk. Insurance shifts the impact of that risk to someoneelse and relieves the person of risk. The risk nevertheless still remains.While gambling promotes dissension, ruin and hatred, insurance based on cooperativeprinciples, enables the insured to lessen the financial impact without which it could drive theindividual and his dependents to poverty, thereby weakening their place in the society. There isnothing in Islam that prevents individuals from making a provision for their dependents. Seencollectively for large groups of insured population, insurance strengthens the financial base ofthe society.Islamic scholar, Yusuf Ali, in his translation of The Holy Qur’an, comments on Sura (chapter) Al -Baqara, ayat (verse) 219, Insurance is not gambling, when conducted on business principles.Here the basis for calculation is statistics on a large scale, from which mere chance iseliminated. The insurers charge premium in proportion to the risks, exactly and scientificallycalculated .   Prohibitions of Gharar, Maysir and Riba   Gharar:  An insurance contract contains gharar because, when a claim is not made, one party(insurance company) may acquire all the profits (premium) gained whereas the other party(participant) may not obtain any profit whatsoever. Ibn Taimiyah, a leading Muslim scholar,further reasoned Gharar found in the contract exists because one party acquired profit whilethe other party did not . The prohibition on gharar would require all investment gains and lossesto eventually be apportioned in order to avoid excessive uncertainty with respect to a return onthe policyholder's investment. Maysir:  Islamic scholars have stated that maysir (gambling) and gharar are inter-related. Wherethere are elements of gharar, elements of maysir is usually present. Maysir exists in aninsurance contract when; the policy holder contributes a small amount of premium in the hope togain a larger sum; the policy holder loses the money paid for the premium when the event thathas been insured for does not occur; the company will be in deficit if the claims are higher thatthe amount contributed by the policy holders. Riba:  Conventional endowment insurance policies promising a contractually-guaranteedpayment, hence offends the riba prohibition. The element of riba also exists in the profit ofinvestments used for the payment of policyholders’ claims by the conventional insurance  companies. This is because most of the insurance funds are invested by them in financialinstruments such as bonds and stacks which may contain elements of Riba.   Basis and Principles of Takaful   Islamic insurance requires each participant to contribute into a fund that is used to support oneanother with each participant contributing sufficient amounts to cover expected claims.The underlying principles of Takaful may be summarised as follows:    Policyholders co-operate among themselves for their common good.    Every policyholder pays a part of the contribution as a donation to help those that needassistance.    Losses are divided and liabilities spread according to the community pooling system.    Uncertainty is eliminated in respect of subscription and compensation.    It does not seek to derive advantage at the cost of others.Theoretically, Takaful is perceived as cooperative insurance, where members contribute acertain sum of money to a common pool. The purpose of this system is not profits but to upholdthe principle of bear ye one another's burden.   Why No to Conventional Insurance   In modern business, one of the ways to reduce the risk of loss due to misfortunes is throughinsurance. The concept of insurance where resources are pooled to help the needy does notnecessarily contradict Islamic principles.Three important differences distinguish conventional insurance from Takaful:1. Conventional insurance involves the elements of excessive uncertainty (gharar) in thecontract of insurance;2. Gambling (maysir) as the consequences of the presence of excessive uncertainty thatrely on future outcomes3. Interest (riba) in the investment activities of the conventional insurance companies;4. Conventional insurance companies are motivated by the desire for profit for theshareholders;5. Conventional system of insurance can be subject to exploitation. For example, it ispossible to charge high premium (especially in monopolistic situations) with the fullbenefit of such over-pricing going to the company.The key difference between Takaful and conventional insurance rests in the way the risk isassessed and handled, as well as how the Takaful fund is managed. Further differences are  also present in the relationship between the operator (under conventional insurance using theterm: insurer) and the participants (under conventional it is the insured or the assured). Takafulbusiness is also different from the conventional insurance in which the policyholders, rather thanthe shareholders, solely benefit from the profits generated from the Takaful and Investmentassets. How does Takaful Work   All participants (policyholders) agree to guarantee each other and, instead of paying premiums,they make contributions to a mutual fund, or pool. The pool of collected contributions createsthe Takaful fund.The amount of contribution that each participant makes is based on the type of cover theyrequire, and on their personal circumstances. As in conventional insurance, the policy (TakafulContract) specifies the nature of the risk and period of cover.The Takaful fund is managed and administered on behalf of the participants by a TakafulOperator who charges an agreed fee to cover costs. These costs include the costs of sales andmarketing, underwriting, and claims management.Any claims made by participants are paid out of the Takaful fund and any remaining surpluses,after making provisions for likely cost of future claims and other reserves, belong to theparticipants in the fund, and not the Takaful Operator, and may be distributed to the participantsin the form of cash dividends or distributions, alternatively in reduction in future contributions. Operating Principles   An Islamic insurance company must have the following operating principles:   a) It must operate according to Islamic co-operative principles.   b) Reinsurance commission may be paid to, or received from, only Islamic insurance andreinsurance companies.   c) The insurance company must maintain two funds: a participants/policyholders' fund and ashareholders' fund.   The Policyholders' Fund   a) The assets of the policyholders' fund consist of:      Insurance premiums received      Claims received from re-insurers      Such proportion of the investment profits attributable to policyholders as may beallocated to them by the Board of Directors.      Salvages and recoveries      Consultancy and other receipts.  
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