1.1 General overview of Takaful
Islamic insurance or Takaful is an insurance product which is based on Shari’ah compliance. Takaful has a different concept from conventional insurance which is prohibited by the Shari’ah due to the elements of uncertainty (gharar), interest (riba) and gambling (maysir). There is the uncertainty of what the insurance policyholder is “buying” or paying for if no loss occurs where policyholder receives nothing. If any loss occurs, policyholders get compensation in varying amounts. The second element in conventional insurance is gambling (maysir) and the third, element of riba where insurance funds are commonly invested in interest – bearing securities. Consequently, Takaful is regarded as an alternative to conventional insurance which presents itself as a form of mutual help (taawun) in furthering good virtue by helping others who are in need or in hardship(Daud 2009).
Takaful is derived from its Arabic root word kafala which literally means “to guarantee”. In terms of usage and implication, the term kafala certainly denotes the agreement by one party to indemnify another for any liability that has been pre-agreed upon. Since Islamic banking is developed into a system that carries the principle of Shari’ah, which prohibits the payment or acceptance of interest fees for lending and accepting of money respectively. In addition, Islam prohibited any kind of investment in business that involve interest (riba), or goods and services that considered contrary to Islamic principles. Takaful is an Islamic substitute to conventional insurance based on the theory of trusteeship, brotherhood and cooperation encouraged by the beliefs of Islam. The majority of Muslims across the world is practicing Takaful as their own way of sharing financial losses to assist each other. This paper describes the concept of Takaful in Islam and its implementation in the Islamic insurance industry in Malaysia, specifically in the establishment of Syarikat Takaful Malaysia Berhad (TMB), the first Takaful operator in Malaysia(Daud,2009).
1.2 Overview of general takaful operator in Malaysia
An operator act on behalf of all capital provider. The contribution make to indemnify, providing backup against unexpected peril respective to the takaful policy. In general takaful operator must;(1)an individual, company or a cooperative society willing and having contractual eligibility to operate takaful activities.(2)An individual, a company or a cooperative society willing and get registered before starts their operation. (3)An operator must not affected by economic uncertainty and manage to maintain the sound financial position(assets surplus over liabilities) and (4)an operator must obtaining a licence by making a deposit which is a security against unexpected bankcruptcy(Salmy Edawaty,2014).
To enhance and empower takaful operator the Islamic Finance Service Act(IFSA 2013) was gazetted on 22 March 2013 and come into effect on 31 June 2013. The act was provided to supervise and regulate Islamic financial institutions, payment systems and monitor other associated entities beside overviewing Islam money market and foreign exchange. Another goal is for stability, strenghten Shariah governance, protect consumers’ financial services and product. IFSA 2013 has become a comprehensive reference for takaful operator in takaful business field; fully consistent with Shariah compliance and governance, designation of payment system, prudential requirement, auditing, appointed actuaries, disclosure,etc(Asmak A.R,2015).
IFSA 2013 replaced Islamic Banking Act 1983(BAFIA) and Takaful Act 1984(TA) which is repealed to combine Islamic financial and takaful service under a same roof. Bank Negara Malaysia has become an authorized body regulates and supervises power under IFSA 2013.
IFSA required ;(1)Takaful operator with a composite licence separating it’s family and general business takaful business within 5 year from it’s effective date. The aim was to expand the growth pf general takaful business since composite takaful operator previously focusing more on family takaful business. (2)Operator establishes as public companies/wholly commercial venture.(3)Stricter Shariah requirement and (4)new prudential requirement such as Qard compulsory in case of deficit in the risk fund(Ismail,2015).
1.3 Overview of takaful model in Malaysia
Malaysia applies Mudharabah and Wakalah business model primarily since 1984 by Syarikat Takaful Malaysia. Mudharabah basically works on a manner where policyholders act as the capital provider to the takaful fund meanwhile the shareholder are a entrepreneur operate the takaful fund. The surplus generated from underwriting of risk and assets investment is shared over pre agreed upon profit portion percentage. However the deficit accrued/obligue merely to policyholders. Another opt for takaful model is wakala model. According to wakala model, the operator considering premium rate as the fee. The fee then deposited to the Takaful fund which is claim are made. In return, the management and distribution costs fulfilled by shareholders fund. Underwriting surplus and deficit both addressed to the policyholders. However some takaful operator taking underwriting surplus as an incentive and not bear any losses(Zainal Abidin 2014). Mudharabah model mainly used for an investment portion of operation while Wakala model preferrably used for Family takaful busines. Another model also available was the hybrid model, composition of mudharabah and wakalah(Oliver Wyman,2014).
The above given background potrayed that this study would focusing mainly on takaful operator and model in Malaysia.