Deciding on the right insurance policy whether on a personal or a business level can be confusing and misleading in the absence of basic understanding of Takaful, its definition, business model, special offerings and purpose. In this article, OSAMA ABDEEN would like to touch on a very important aspect concerning the misconceptions of the Takaful business model not only by the masses, but also by specialists in insurance and financial sectors.
Takaful is not a charity nor an investment fund
The Takaful business model is often mistakenly looked at by many as a charity or non-governmental organization model. Others perceive Takaful as an investment fund with expected returns overlooking the aspect of protection against unforeseen events. Therefore, the general perception of Takaful has been negative for it is being built on false expectations and perceptions where the real purpose of Takaful is not rightly described.
In this regard, it is important to identify the core principles of the Takaful concept:
• It is a business model which strives to generate maximum returns on investment or equity (ROI/ROE) like any other business.
• Its framework and operating model and investments are in line with Shariah principles.
• It is based on solidarity where the policyholders, when united, will be able to deal with misfortunes or losses sustained by the few in a collaborative form.
• This model is supported by a guarantee of the shareholders to support that (fund) which consists of the contributions paid by each policyholder in cases of deficit to give Qard Hasan with no interest as per Shariah principles.
There are more details on the Takaful principles; however, for the purpose of this article, it is to be noted that the main purpose of Takaful is to provide insurance solutions/protection to policyholders against unforeseen losses like any other insurance operator, but in line with Shariah principles.
Furthermore, the surplus is not one of the main pillars for Takaful, but rather a promise of a possible return and should be considered as an added value of the Takaful business model.
The Takaful business model also seeks profitability
Takaful, like any other business model, needs to attract investors by showing ethical value and attractive ROE/ROI. In this model, the revenue for the shareholders is derived from, namely:
• Wakalah fees charged as a percentage of the gross premium for managing the Takaful fund
• Investment returns on the capital raised, and
• Returns as a share of the profits on the investment made on the contributions on behalf of policyholders based on the Mudarabah principle.
It is also worth noting that the entire general operating expenses such as payment of salaries, rent, equipment, etc, are solely borne by shareholders and not policyholders. In return, the policyholders should be provided with protection against any misfortune covered under the terms and conditions of the Takaful insurance contract. In the event the Takaful fund (policyholders’ fund) generates a surplus after deducting from it Wakalah fees, incurred claims, cost of reinsurance and any necessary reserves, that balance would be distributed back to policyholders as an added value in the form of a Takaful surplus.
In this balanced relationship, shareholders are keen on generating maximum ROE by building a Shariah compliant business model with the ethical part to offer protection and good service to policyholders (customers). Therefore, shareholders have a vested interest in creating a profitable Takaful fund (underwriting profit) as they are obliged to offer financial support to that fund in case of its deficit.
Moreover, shareholders have a duty of care to run a successful operation and spend wisely. This balanced approach, if done effectively, will definitely serve the interests of both shareholders and policyholders. Accordingly, for the Takaful participants, the main reason of their participation is to seek protection and security and not for investing in a financial fund for returns although ultimately, the possible returns will be achieved as an added value if the Takaful model achieves a surplus.
Osama Abdeen is CEO of the Abu Dhabi National Takaful Company. He can be contacted at [email protected]takaful.ae.