Islamic Insurance System (Takaful) And Its Development

Takaful means "solidarity" and is derived from the Arabic word "kefela". Takaful is the other name for the Islamic insurance system. Premiums paid belong to the participants, not the insurance company. Unlike traditional insurance, there is an opportunity to return premiums on the balance that will occur in the takaful pool after the damage and the funds are utilized in interest-free investment instruments. It is practiced in various countries in the Islamic world through different interpretations. While these interpretations can vary considerably from one another, they generally consist of the following principles:

• • Cooperative insurance where non-profit insured people come together.

• • Utilization of the funds accumulated by the insurance company in non-interest investment instruments.

• • A social insurance pool model in which claims and liabilities are divided according to the shares of the participants.

Takaful refers to the occasion where people come together without a legal obligation and undertake to support each other in terms of compensating for the material damage that will occur to their property and body after the risks they will encounter. Takaful is to bring together individuals in certain risk groups with organizations such as cooperatives, companies, and foundations, to minimize the damage in the face of dangers or to provide compensation for the damages by preventing individuals from turning their social lives upside down. It is an institution that provides joint financial assistance and support to participants in case they need assistance, in line with a purpose agreed upon, in order to mutually contribute to each other. It is basically an agreement that allows a group of participants to jointly insure themselves against all loss and damage mentioned earlier. Takaful is an agreement made by a group of individuals upon the creation of a non-profit fund under a separate account, in order to share the losses of possible dangers. An increase in product diversity is only possible through an increase in assurance. After the increase in the assurance, new members are recruited in the cooperatives or additional payments are requested from the members. No matter how much capital the member brings to the cooperative, s/he has a single vote in the general assembly in terms of management. For this reason, increasing the capital in cooperative insurance is not a desirable practice for the partner, as in joint-stock companies. While it may be possible for an insurance company established in the manner of a joint-stock company to go public in the future, it is not possible for cooperatives to go public. Therefore, it may be considered to carry out the incorporation procedures in the manner of a joint-stock company. We can tell that Islamic insurance companies established in the form of cooperatives or joint-stock companies provide participation insurance services as long as they comply with takaful standards. The basic principles of the participation insurance system in the takaful standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which sets the standards for institutions and organizations serving in the field of Islamic finance, are as follows:

Determination of the purpose of cooperation,

That the premium pool where the premiums are collected belongs to the policyholders and there is no ownership of the company,

Utilization of the assets belonging to the shareholders and the premiums collected from the participants, namely the insured, in non-interest market instruments (participation banks, sukuk, BIST participation index, precious metals, foreign exchange, etc.) by the Advisory Board of the company,

That no insurance coverage is provided for economic assets that are not religiously legitimate and that the people act selectively in this regard,

Receiving service from an advisory committee specialized in fiqh. Types of takaful and their functioning and today's takaful practices are based on the same principles and purposes as foundations. In other words, there were regulations and practices regarding takaful within the foundations. Accordingly, as in foundations, the aim of takaful is social responsibility, charity, mutual benefit, solidarity, and mutual cooperation and helping each other on a voluntary basis. In this context, the takaful insurance practice is different from the existing insurance practice. One of the most important differences is that a fund pool is created in takaful in order to prevent the dangers that may arise by joining together through a joint agreement against the risks. It is the equal rights of all insured persons in the remaining amount after the cost of risk is covered from this fund pool. Since voluntariness is the principle in Takaful, there is no interest applied on the unpaid premium. Because in takaful, the contribution gets paid, not the premium. In general, takaful functions with a proxy or manager based on mudarabah and proxy contracts. In addition to these, it has a mixed structure. According to these standards, a company collects the premiums paid by the participants for economic insurances that are religiously legitimate in a certain fund, uses this fund primarily for accidents and risks, and utilizes the remaining amount in line with Islamic principles. In case the fund is not enough to cover the losses and risks and the balance sheet has a deficit, this deficit will be covered by the company owners or policyholders or both, according to the system applied. The International Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) defines takaful as follows: Takaful is an agreement to assure individuals against the risks they are exposed to. In general, takaful is a kind of insurance method, which is said to be interest-free, developed by integrating it into the present age, as an alternative to the current insurance transactions, which is carried out in the form of creating a common fund pool by agreeing in advance against any loss or damage that individuals may encounter in the future, and covering the mentioned loss or damage from this fund pool. After the losses are covered from this fund pool, the remaining surpluses can be transferred in line with the Islamic principles, away from excessive uncertainty, gambling, and interest in accordance with the criterion of being "halal". All policyholders become partners in the said investment. 

History of Islamic Insurance (Takaful)

The first Takaful Insurance companies were established in 1979, namely The Islamic Insurance in Sudan, and The Islamic Arab Insurance in the United Arab Emirates. Later on, various insurance companies have been established in many Muslim/non-Muslim countries, especially in Malaysia and Saudi Arabia. In general, insurance around the world completed its development in the 18th and 19th centuries. In the Islamic segment, which kept away from the insurance system due to religious sensitivities until the 1970s, insurance activities began for the first time through the establishment of the World Islamic Union Fatwa Council and the establishment of a takaful (interest-free insurance) company in Sudan. In the 1980s, the Organization of Islamic Cooperation (OIC) approved Takaful insurance. After the 1980s, it started to be practiced by Islamic countries such as Malaysia, Bahrain, and Saudi Arabia. Takaful companies were established by the Association of Southeast Asian Nations (ASEAN) Countries in 1995, the National Shariah Advisory Committee for Islamic Banking and Takaful was established in 1997, and the Malaysia International Islamic Financial Center was established in 2006 and the takaful practices for the risk-based capital have shown development in 2014. Until today, many Islamic insurance companies and their international regulatory agencies have been established. 

The Position of Takaful Insurance in the Financial System 

Looking at the member Takaful companies of the International Cooperative and Mutual Insurance Federation, it is seen that there were organizations such as the Malaysian Insurance Institute (MII) in 1968, and after the 1970s, the Institute of Islamic Banking and Insurance (IIBI) in England, Islamic Insurance Company (IIC) in Sudan and SALAMA (Insurance Agency) in the United Arab Emirates. Since the 1980s, insurance companies established in many countries such as Egypt, Algeria, Qatar, Africa, Indonesia, and Malaysia have become members of the Federation. In this context, it can be said that takaful insurance practices have started in the 1960s and 1970s. Takaful insurance was approved by the Organization of Islamic Cooperation (OIC) in the 1970s after the establishment of the World Islamic Union Fatwa Council and the establishment of the Islamic Insurance company in Sudan. Looking at today's takaful insurance activities, it is seen that there are practices in many European and Asian countries besides Islamic countries. The place position of these activities in the interest-free financial system has improved significantly after interest-free banking activities and sukuk (interest-free bonds) issuances. According to the distribution of assets in global interest-free finance, interest-free banking has the largest share with 81%, sukuk issuance has 14%, and interest-free mutual funds have 4% of share. And the share of takaful is around 1%.

Zeynep Aslı Kekeç