Saturday, March 29, 2008

Takaful Concept Of Risk Financing

In Takaful, risk from individuals or organizations is spread or shared with other individuals or organizations that have a relatively homogenous pattern.

Depending on which model the Takaful operator adopts, individuals or organizations pay a contribution (Mushahamah) or in the form of donation (Tabarru) with a condition that in the event a risk materializes, they will receive proceeds of Takaful funds in order to recover from their losses.

To avoid Gharar, Maisir, and Riba, the Takaful concept has a protection wall which is the contract itself. Instead of sales contract, Takaful utilizes a Mudharabah (Profit Sharing) contract or a Wakalah (Agency Contract), or other suitable contract that would fit a particular scheme.

Inside the contract, the following Takaful best practices must be followed:

  1. Proper risk identification and risk analysis
  2. Proper underwriting practice to ensure there is adequate funds to pay losses but at the same time should not be of an excessive level that would in turn become a burden to the participants
  3. Proper risk sharing and risk spreading. Operators must ensure proper and healthy risk sharing between participants; furthermore by anticipating potential losses above their capacity, operators could further spread the risks to other operators in the Takaful or Retakaful market.


Dee said...

This is really interesting. Thanks for sharing the info. :)