21 Feb

Insurance in Islamic thought: The Family Takaful Model

By Rizwan Ahmed Farid

(An extract from a series of articles on Insurance in Islamic thought by Rizwan Ahmed Farid, from his upcoming book on Challenges of Life Insurance Marketing)


The Family Takaful Model, prescribed by the Takaful Rules, 2005, can easily be grasped by studying the enclosed Flow Chart of the Operational Model for financial transactions.


Mortality and Morbidity Tables


Mortality tables are used by insurance companies to determine the amount of contributions for mortality and other risk elements to be charged for those in the respective age groups. Basically two types of mortality tables are important for a general readers’ understanding:

1. Those based on the experience of the general population.

2. Those based on the experience of the insured lives.

Muslehuddin raised questions in his writings,

“The measurement of risk becomes possible if large numbers of risks or the past occurrences are grouped together and their general average taken. In other words, the probability of many phenomena becomes predictable in groups of sufficient size. Hence large numbers and probability are said to be the basis of risk theory. But how far does it hold good? What is the limit of the large numbers and how extensive should be the size of groups to predict the regularity and probability of the phenomena?”

Mortality Tables data base contains more than one thousand mortality, longevity, sickness, morbidity, annuitants, male or female, and other types of tables constructed and published globally for the last two centuries by insurance and other organizations and countries, such as, the USA, UK, Canada, European Countries, Australia, New Zealand, Pakistan, India, China, Malaysia, Egypt, Indonesia, etc.

The Northhampton Table was constructed on an unsound method by Dr. Price in 1783 from the deaths in the Parish of all Saints, Northhampton, during the years 1735-1780. Joshoua Milne in 1815 constructed on sound lines The Carlesli Table based on the deaths for the years 1779-1787, and two censuses taken on 1780 and 1787, of the two parishes in the City of Carlisle. Realizing the tremendous importance and benefits of such tables not only for insurance but for country’s economic planning, mortality and other tables were regularly constructed and validated from time to time in U.K. and thereafter globally. Few random examples are tabulated as follows:


Period Investigated





Both Sexes, published in 1780



Both Sexes, published in 1815

English Life # 3


Male Lives

English Life # 4



English Life # 6



English Life # 9



English Life # 10



English Life # 11





Eastern Federal Union Insurance Co. Ltd.




India LIC


Male + Female

India LIC


Male + Female












Statutory Valuation Mortality Table







United States



England and Wales






New Zealand


European population



Takaful operational model:

The principal operational model for insurance risk management and the investment component, under Rule.8 (1) of the Takaful Rules 2005, shall be based on the Islamic concept of wakala and modarba, respectively. Accordingly, there are seven elements that must co-exist to establish a proper framework for a Takaful Operational Model:

  1. Takaful operator – The Rules defines “Takaful operator”
    as a person who is permitted by the Security Exchange Commission of Pakistan (SECP) to carry on the Takaful business. The Takaful Operator is a corporate body formed under Companies Ordinance, 1984, and which is eligible to transact insurance business in Pakistan under Section 5 of the Insurance Ordinance 2000. Further, it has also been granted, under Section 6 of the Insurance Ordinance 2000, a certificate of registration by the SECP to carry on insurance business in Pakistan.

  2. The Shari’ah Board – Each Takaful operator shall appoint a Shariah Board (SB) of not less than three members, under Rule. 34(1) of the Takaful Rules 2005, which shall be responsible for the approval of products, documentation as well as approval of all operational practices and investment of funds
  3. Management of the Takaful Fund – Management is by the Takaful Operator who, depending on the adopted model, utilizes either of the two Shari’ah compliance contracts, namely wakala or mudaraba or a combination of both.
  4. Mutual Guarantee – The basic objective of Takaful is to pay a defined loss from a defined fund. The loss is borne by a fund, PTF, created by the contributions (premium) of policyholders. The liability is spread amongst the policyholders and all losses divided among them. In effect, the policyholders are both the insurer and the insured. Rule 9(1) states that at the initial stages of the set-up of the PTF the Takaful operator and any of its shareholders may at their discretion make an initial donation or qard-e-hasana to the PTF. The objective of the PTF shall be to provide relief to the participants against defined losses as per PTF rules and the Participants Membership Document. Under Rule. 9(3)(g) any donation made by the shareholders shall be the income of the PTF.
  5. Elimination of Uncertainty – Contributions to the PTF are for the purpose of pooling of the risks amongst participants to provide relief to them against defined losses as per PTF rules and PMD. As such, participants (policyholders) are the owners of the fund and entitled to its surplus (profits), if any.
  6. Investment Conditions: – Rule 8(4) of the Takaful Rules 2005 prescribes ….Investment of funds may be made in consonance with the Islamic concept of the mudaraba, wakala or a combination of mudaraba and wakala at the option of the Takaful operator (or its Appointed Actuary in case of Family Takaful) and the Shari’ah Board as clearly spelled out in the participants’ membership documents (PMD).

    Rule27(3)(c) of the Takaful Rules 2005 states that … investments in non-Shari’ah compliance preferred stocks, debentures and interest based redeemable capital securities are not allowed. Further , by Rule 27(3)(c)(i): It is not permissible to acquire the shares, debentures or certificates of the companies providing financial services like conventional banks or the companies involved in business prohibited by Shari’ah like alcohol production, gambling or night club activities, etc.

  7. Integration of Shari’ah principles — In particular, , avoidance of ribā, gambling, and al Gharar, and inclusion of the al Mudharabah (profit sharing arrangements) and/or Wakalah (Agency) principles for management practices.

Ownership of Funds and participation in the Management – The Federal Government’s prescribed structure, under the Takaful Rules 2005, is not at all based on cooperative or mutual modes as strongly recommended by the Council of Islamic Ideology and Saudi Arabia’s Majlis-e-Hayat-i-Kibar-ul-Ulamā (The Constituent Assembly of Most Eminent Religious Scholars). Further, there is no provision for the participants in the management or affairs of the Takaful operator (corporate body) by its policyholders. Instead of implied ownership, the Takaful Rules, 2005, should clearly spell out that the Participants Takaful Fund, Participants Investment Fund and all types of Reserves generated through these funds are wholly and solely owned by the participants.


Ayub, Muhammad, the State Bank of Pakistan’s former Senior Joint Director of Islamic Banking Department, has traced various Takaful operator structures in vogue in various countries as follows:


“Al-Takaful is the pact among a group of people, called participants, reciprocally guaranteeing each other; while Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business. The operation of takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.


“Based on the nature of relationship between the company and the participants, there are various models like Wakalah (agency) Model, Mudarabah Model and the combination of agency and Mudarabah models. In the Sudanese Takaful Model that is preferable to majority of the contemporary Shariah experts, every policyholder is also the shareholder of the Takaful Company. There is a Board that runs the business on behalf of all the participants and there is no separate entity managing the business. The legal framework in other Islamic countries normally does not allow this arrangement and Takaful companies work as separate entities on the basis of Mudarabah (as in Malaysia) and on the basis of Wakalah (as in the Middle East region). In Mudarabah model that is practised mainly in the Asia Pacific region, the policyholders get profit on their part of funds only if Takaful Company earns profit. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the Company. The Shariah committee approves the sharing ratio for each year in advance. Most of the expenses are charged to the shareholders.


“In Wakalah Model, the surplus of policyholders’ funds investments – net of the

management fee or expenses – goes to the policyholders. The shareholders charge

Wakalah fee from contributions that covers most of the expenses of business. The losses, if any, are first absorbed by reserves known as Participants Equity, then from interest free loans from shareholders of Takaful Company and then by a general increase in pricing by the Company. rate is fixed annually in advance in consultation with Shariah committee of the company. In order to give incentive for good governance, management fee is related to the level of performance.

Ernst & Young’s inaugural World Takaful Report 2008, launched at the Annual World Takaful Conference 2008, shows that 59 of the 133 Takaful operators worldwide are within the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.