Principles of Islamic banking and finance/PIBF203/Takaful/A Takaful company explains how it works
Here we reproduce the working of a Takaful company in Jordan named The Islamic Insurance Co –Jordan. On the following website, they explain how they work.[1]
The Islamic insurance Co – Jordan
How we work?
Theoretically, Takaful is perceived as cooperative or Takaful insurance, where members contribute a certain sum of money to a common pool. The purpose of this system is not profits, but to uphold the principle of cooperation. The Islamic Insurance Company work according to the following principles:-
First: It works in compliance with provisions of Islamic Share'ah in all its transactions, including: -
1- Practice Insurance operations on the basis of Islamic Takaful Insurance permitted religiously as an alternative to conventional Insurance.
2- Not to insure the religiously forbidden properties such as containers of wine or pork, as well as Companies and institutions which their work contain trading or manufacturing, or dealing with forbidden items.
3- All Reinsurance agreements must be in accordance with the directives of Share'ah Supervisory Boards.
4- Deposit Insurance funds in Islamic Banks or financial institutions.
5- Invest Insurance funds in legitimate ways, including investment of shareholders' funds available from Insurance premiums, and the balance of funds retained from the reinsurer funds under Reinsurance agreements between the parties .
6- Insurance policies shall not include any religiously invalid terms.
7-Adherence to standards issued by the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI).
8- Giving priority to arbitration over resorting to Courts in resolving any dispute, giving consideration to the arbitration clause included in Insurance policies .
9- Managing Insurance operations and Insurance funds by Takaful Companies on the basis of fixed remuneration (Wakalah Fee), and also a fixed share from investment of the Cooperative Insurance Fund (Mudharabah) .
Second: Realization of The Principle of Cooperation between Policyholders :
Realization of the principle of cooperation between policyholders through retaining all Insurance premiums collected from them in a special account called "Cooperative Insurance Fund" so as to indemnify those affected from this account.
Third: Realization of The Principle of Justice between Shareholders and Policyholders : -
The Islamic Takaful Insurance Company in its capacity as the director of Insurance operations applies the foundations and principles of accounting and Share'ah standards, that prevent the mixing of money, and stealing people's wealth unlawfully as well as overlapping financial rights and liabilities by limiting what is considered to be policyholders funds and put it in the Account of "Cooperative Insurance Fund " of the policyholders and is separated from what is regarded as funds and interests of shareholders in a separate account of shareholders funds and interests, where both accounts have their own resources, and bear their own items of expenses and costs as required by the applicable laws, regulations and instructions on those financial institutions, in addition to the accounting standards for Islamic financial institutions, Islamic advisory opinions and guidance by Share'ah Supervisory Board as follows : -
A- Shareholders' Account :
1-Shareholders offer the Company's capital to promoteit and give it legal status to engage in Insurance business.
2-All public expenditures are paid from shareholders account, such as salaries, rents, and other administrative expenses, in addition to capital expenditure, which is for fixed assets . 3- The legal financial reserveis taken out from shareholders' account according to rates set forth in The Companies act, which The Company was founded on the basis of, where it will be refunded at the end of The Company's Life .
4- Shareholders are entitled for capital investment profits in full as their ownershipright, in addition to their share of the profits available from investment of available Insurance premiums, in addition to the fixed remuneration payable against the Wakala based on which Insurance operations are managed .
5-Dividends payable are distributed to shareholders in proportion to each shareholder's quota in the total shares of The Company.
B- Policyholders' Fund Account :-
1-Policyholders' provide Insurance premiums to enablethe Company to cover the financial obligations of their account, where they are deposited in The " CooperativeInsurance Fund " .
2-Compensation for those affected policyholders from The Cooperative Insurance Fund in accordance with the terms of the documents.
3- Reinsurance Expenses are repaid, and all matters related to documentation from expenses and commissions from The Cooperative Insurance Fund.
4- Deducted from technical premiums reserves, which will be donated to charitable causes at the end of the Company's lifetime, after the Company had paid all obligations and rights payable thereon as a result of performing of Insurance operations.
5- Added to the policyholders' account their share of investment profits available from premiums in accordance with the provisions of The Mudharabah contract.
6-Added to the policyholders' account all amounts deducted from the account of the reinsurer in the form of Reinsurance acquisition costs, and returns on Reinsurance profits.
7- The balance remaining in policyholders' fund namely " Insurance Surplus" shall be distributed to policyholders as the only owners thereof in accordance with the standard applied by each Insurance Company inter alia the standards of Insurance Surplus issued by The Accounting and Auditing Organization for Islamic Financial Institutions. In The Islamic Insurance Company In Jordan,the standard which supports the inclusion of all Insurance policyholders under the Surplus without distinction between those who received compensation and those who haven't, in implementation of happen of the aforementioned Ash'aris Hadith. Policyholder shall be treated equally whether such was a natural person or legal entity, when calculating Insurance Surplus on the basis that it has single mathematical figure for the duration of his dealings with the Company, regardless of their Technical departments that deal with.
Fourth : Achieve The Principle of Solidarity (Takaful) between Shareholders and Policy Holder:-
Through exchange of good loan without assuming any responsibility by the borrower for any financial benefits. Such situation occurs with policyholders if insurance subscriptions were insufficient to cover all of their financial obligations, andthe Company did not have a reserve balance of subscription surplus.
As well as achieving the principle of Takaful between policyholders on the other hand, the Insurance amount which was paid to heirs or beneficiaries in Social Takaful Insurance (Life Insurance Risk) represents a form of solidarity among the participants in this type of Insurance exactly like sponsoring an orphan after the death of his father.
Fifth: Promote Justice and Equality between the Policyholders themselves and between them and Shareholders :-
1- Promotion of justice and equality between the policyholders themselves may be achieved through the treatment of policyholders equally in their entitlement of Insurance surplus and their eligibility to indemnification against any damages incurred from the Policyholders' account fund and the Company shall be existing to preserve their rights and money without any segregation among them. 2- Promotion of justice and equality between policyholders and shareholders can be achieved by not favoring the interests and rights of shareholders over those of the policyholders on the grounds that employees of the Company are employees of the shareholders, but the work is conducted according to requirements of obligations of each contract of Islamic Takaful Insurance to perform such obligations through the effort necessary to carry out the duties to the fullest and with the utmost honesty and transparency.
Sixth: Realization of The Principle of Solidarity (Takaful) between The Takaful Insurance Companies Internally and Externally Through:-
1- Sharing the insured risk according to the system of quotas in force in Insurance Companies , so that the risk is distributed to more than one Insurance Company due to lack of capacity in the direct Insurance company, or due to mandate of the law. This case represents a form of Solidarity among Islamic Takaful Insurance Companies in case of multiplicity within Insurance markets.
2- The Exchange of knowledge on the work of Islamic Takaful Insurance, and Cooperation to overcome the obstacles to the trajectory of Companies , and work to find an alternative to Reinsurance and other things that achieve the interests of Islamic Takaful Insurance Companies through holding conferences and seminars for Islamic Takaful Insurance and participating in them.
Seventh: Maintaining the Principle of Responsibility Integrity and Transparency of the Relationship with Reinsurance Companies:-
In order to build bonds of trust in dealing with the Islamic Takaful Insurance Companies through the following practices:
1- Comply with the reinsurance agreements concluded between the two sides in order to achieve the common interests of the two .
2- To be careful not to insure risks that do not meet the conditions required to accept Insurance thereof .
3- Safeguarding the rights of Re-insurance Companies, and funds retained in accordance with Re-Insurance agreements, and invest it in legitimate ways according to Share'ah to pertaining to holding Mudharabah.
The Surplus:
Insurance Surplus: is the remaining amount of money in the Cooperative Takaful Fund. It includes the sum of their paid premiums and their investments after deducting the payments due to them, payment of claims, Reinsurance expenses, and paying fees due to the Company as the agent running the Insurance operations as well as monitoring technical reserves. Every Subscriber' Share from The Surplus designated for distribution will be calculated according to the following Formula :
