The Islamic Principles behind Takaful
Takaful is a form of mutual insurance based on the principles of cooperative risk sharing, mutual responsibility, mutual protection, and solidarity among groups of participants. Each takaful model (structure) may combine these principles in different ways, but a takaful product always is rooted in these four.
Cooperative risk sharing
One of the main principles of takaful is cooperative risk sharing. A takaful participant contributes to the money pool and receives help from that pool (by the funds coming from other members) when a risk becomes a reality.
In conventional insurance, risk is transferred from one party to another. By taking out an insurance policy, an individual essentially is asking the insurance company to accept the complete risk (in exchange for accepting an ongoing premium from the insured).
But with takaful, the risk is shared among the members of the fund: If an event occurs that causes harm or damage to one member, all members bear the brunt of that event and contribute to overcoming it. Takaful members cooperate based on equality, solidarity, social responsibility, and honesty.
Although a conventional insurance policyholder pays ongoing premiums, a takaful participant makes ongoing contributions — considered gifts or donations for sharia purposes (for takaful contracts) — to the takaful fund pool. The amount of the contribution differs depending on the type of coverage a participant needs and how long he needs coverage.
Takaful participants are entitled to share any surplus that may exist in the pool at the end of the financial year. Similarly, the takaful participants need to make additional contributions to cover deficits in the fund (in theory, at least; takaful companies rarely ask participants to make deficit contributions).
The purpose of takaful is not (or, at least, not only) for participants to make a profit. Instead, takaful are based on mutual assistance among members; each member in the fund is responsible for alleviating the misfortunes of the other members. The member of a takaful fund shares the risks of all other members. Put another way, every member’s risks become the mutual responsibility of all other members.
For example, consider two individuals who each contribute to a property takaful product. One person may own a commercial property and need the coverage in case that building is damaged or destroyed. The other person may seek coverage for his home. When they agree to participate in the fund, both the commercial building and the residence become the mutual responsibility of both participants.
Another important principle of takaful is mutual protection among the members of the fund. Each member participates in protecting all the other members against loss or damage. This principle has been practiced at least since the time of the Prophet Muhammad (pbuh).
Solidarity among participants
Any time you willingly participate in a group, you likely experience some solidarity with the other members. People who choose to contribute to a takaful fund share common interests (the desire to protect themselves and all other members from harm deriving from loss or damages) and common responsibilities (sharing the risks involved with the fund and the responsibility of alleviating other members’ misfortunes).