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Understanding Takaful Insurance

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5 August 2022
Max Ang

What is Takaful Insurance?

Takaful, often referred to as 'Islamic insurance', is a way for businesses to mitigate the financial risk of unforeseen events and is based on values of social solidarity and cooperation.

It is an agreement to jointly indemnify loss or damage from a collectively donated fund. Compared to traditional insurance, takaful insurance are based on the principles of mutuality, whereby each participant donates to a takaful fund and with shared risk among participants. Traditional insurance typically transfer risk from the insured to the insurer.

Takaful provides protection based on Shariah principles. By contributing a sum of money to a common takaful fund as a form of donation (Tabarru), participants will undertake a contract (aqad) to become part of the agreement to mutually help each other should any of the participants suffer a defined loss. The takaful contract or insurance is a contract of good faith, whereby the participants need to disclose all required material information in the contract. The contract will be deemed invalid if there are missing information and they will not be protected against any loss or damage.

All investments are managed by the takaful operator and made in accordance with the Shariah law. Under a Wakalah contract, a person (the principal) appoints a representative (the agent) to undertake transactions on his/her behalf, and this is managed by the takaful operator on behalf of the participants. The participants retain an ownership interest in the takaful fund, and contributions are invested into ‘halal’ or Shariah compliant funds to derive investment income.

In the event of a surplus in the common pool of accumulated premiums, it will be shared among the participants. As with all Islamic finance activities, funds must not be invested in haram activities like interest-bearing instruments or enterprises involved in alcohol or pork. The takaful operator will have a Shariah’s Advisory Board who will monitor the activities of the operations to ensure that it’s Shariah-compliant.

Countries with Takaful Providers

Globally, takaful operators and contributions can be found mostly in the Middle East, North Africa (MENA), and Southeast Asia markets such as Bahrain, Brunei, Egypt, Indonesia, Malaysia, Oman, Qatar, Turkey, United Arab Emirates (UAE), and Saudi Arabia. There is potential for increased penetration with further customer education and product awareness in Islamic finance and takaful, with room for product innovation, technological infrastructure development, and marketability.

Examples of Takaful Insurers

Syarikat Takaful Malaysia Keluarga Berhad (STMKB) or Takaful Malaysia, is a Malaysian takaful company. It was the second largest takaful operator in Malaysia in 2013 for both family and general takaful, behind Etiqa. Takaful Malaysia has provided financial and risk management expertise to customers across its 24 service centers. Its portfolio includes family and general takaful businesses, with separate units for life and general insurance. This is in accordance with the Financial Services Act 2013 (FSA) and the Islamic Financial Services Act 2013 (IFSA), which requires conventional and takaful insurers to relinquish their composite licenses. Currently, Takaful Malaysia is the first and only takaful operator that rewards cash back to their general takaful customers for making no claims during the coverage period, also known as Mudharabah payment.

Etiqa is an insurer and takaful operator in the ASEAN region. As a member of the Maybank Group, it offers a full range of life and general insurance policies, as well as family, and general takaful plans. Its distribution network comprises of more than 10,000 agents, 46 branches, 17 offices, a bancassurance network comprising over 490 branches, cooperatives, brokers, and online platforms across Malaysia, Singapore, Indonesia, Philippines, and Cambodia. Etiqa is also the leading digital insurance and Takaful player in Malaysia with over 55% market share of online premiums in the past three consecutive years.

Takaful Ikhlas is another Malaysian-based takaful operator that provides financial protection services based on principles and rulings of Shariah. In accordance with the IFSA, Takaful Ikhlas Family Berhad (Takaful IKHLAS Family) manages the family takaful business while its general takaful business is being managed by a new entity, Takaful Ikhlas General Berhad (Takaful IKHLAS General). Takaful Ikhlas offers a comprehensive range of family and general takaful products. Its distribution channels comprise of more than 5,000 agents, with 13 branch offices, and around 2 million registered certificates (policy) holders.

Examples of Takaful Technology Vendors

From Celent 2021 Life Insurance Policy Administration Asia-Pacific report, we featured vendors with takaful insurance offerings. They include Aetins, now merged with KGISL, which has takaful customers from countries such as Malaysia, Saudi Arabia, UAE, Kenya, and Pakistan. Another vendor with takaful customers is Azentio, with a takaful customer from Kuwait implementing its core insurance platform and a Brunei Islamic insurer which chose Azentio’s insurance B2B portal for agents, along with customers from UAE and Egypt. And Bytesforce, which offers modular takaful product configurations with customers from Malaysia.

Takaful insurance is expected to continue its contribution to the growth of insurance, especially in the MENA and SEA regions, and will be a space with the potential for innovation.

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To learn more, Celent tracks this market and has research addressing it (list of recent reports here). If you would like to find out more, please feel free to get in touch with me.

Below are related reports contributed by Celent on this topic:

Life Insurance Policy Administration Systems Asia-Pacific Edition: 2021 Spectrum Report, Powered by VendorMatch, December 2021

Is Bancassurance Flavour of the Season?, August 2010

Policy Administration Systems for Takaful: A Global Solution Spectrum, August 2008

An Overview of Islamic Insurance: Market Trends and Technology Considerations, November 2006