Since the establishment of the first Islamic insurance company in 1979, the Takaful market, in line with other types of Shariah-compliant financial products, has experienced significant growth. Moody’s rating agency has identified that there are currently over 250 Takaful companies in existence worldwide and projections show that total Takaful premiums are likely to reach over USD 7 billion in ten years time.
Takaful models
“Wakala” and “Mudarabah” are the two main Takaful models. In each case, the operator is responsible for developing the products, underwriting the risk, collecting the contributions, investing such contributions and dealing with claims. There has also been a significant growth in the use of a “mixed” model, wh ich combines aspects of Wakala and Mudarabah. The main features of each model are set out below.
The Wakala Model
In the Wakala model, cooperative risk-shari ng occurs amon g participants who contribute to a general Takaful fund. The operator acts as the agent (or Wakeel) of the participants and is consequently entitled to a fee for the services provided. Such a fee is deducted from the general Takaful fund or the investment profits derived from investing the general Takaful fund, which may be performance related and for which the operator may charge a performance incentive fee. However, the agent does not share in any underwriting surplus or profits which will be distributed exclusively to the participants.
The Mudarabah Model
In the Mudarabah model, on the other hand, the operator is entitled to a fixed percentage of any investment profits or surplus, which will be paid i nto the participants’ Takaful fund. Generally, these risk-sharing arrangements allow the operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums. However, the operator’s fixed percentage is not guaranteed as there may be no surplus.
The Mixed Model
The mixed model is widely practiced by Takaful companies around the globe and is currently the dominant model in the Middle East. The mixed model combines elements of the Wakala and Mudarabah models and is structured so that the Takaful operator retains two funds; one for the shareholders and the other for participants. The underwriting activities are conducted by reference to the Wakala model, whereby the shareholders manage the funds as agent on behalf of the participants. In exchange for managing the funds, each participant is charged a Wakala fee, which is normally a percentage of the contribution paid by each participant. As an incentive for effective management, the operator is also entitled to earn a fee if there is a surplus in the participants’ fund. With regard to investment activities, the operator invests the surplus contributions in different Islamic compliant instruments based on the Mudarabah contract. The operator acts as the investment manager or Mudarib on behalf of the participants and the ratio of profit is fixed and agreed between the parties at the inception of the contract.
The Accounting and Auditing Organisation for Islamic Financial Institutions
recommends the adoption of the mixed model. Indeed, the Central Bank of Bahrain (formerly the Bahrain Monetary Agency) has only allowed Takaful operators in the Kingdom to adopt the Wakala and mixed models.
Takaful models
“Wakala” and “Mudarabah” are the two main Takaful models. In each case, the operator is responsible for developing the products, underwriting the risk, collecting the contributions, investing such contributions and dealing with claims. There has also been a significant growth in the use of a “mixed” model, wh ich combines aspects of Wakala and Mudarabah. The main features of each model are set out below.
The Wakala Model
In the Wakala model, cooperative risk-shari ng occurs amon g participants who contribute to a general Takaful fund. The operator acts as the agent (or Wakeel) of the participants and is consequently entitled to a fee for the services provided. Such a fee is deducted from the general Takaful fund or the investment profits derived from investing the general Takaful fund, which may be performance related and for which the operator may charge a performance incentive fee. However, the agent does not share in any underwriting surplus or profits which will be distributed exclusively to the participants.
The Mudarabah Model
In the Mudarabah model, on the other hand, the operator is entitled to a fixed percentage of any investment profits or surplus, which will be paid i nto the participants’ Takaful fund. Generally, these risk-sharing arrangements allow the operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums. However, the operator’s fixed percentage is not guaranteed as there may be no surplus.
The Mixed Model
The mixed model is widely practiced by Takaful companies around the globe and is currently the dominant model in the Middle East. The mixed model combines elements of the Wakala and Mudarabah models and is structured so that the Takaful operator retains two funds; one for the shareholders and the other for participants. The underwriting activities are conducted by reference to the Wakala model, whereby the shareholders manage the funds as agent on behalf of the participants. In exchange for managing the funds, each participant is charged a Wakala fee, which is normally a percentage of the contribution paid by each participant. As an incentive for effective management, the operator is also entitled to earn a fee if there is a surplus in the participants’ fund. With regard to investment activities, the operator invests the surplus contributions in different Islamic compliant instruments based on the Mudarabah contract. The operator acts as the investment manager or Mudarib on behalf of the participants and the ratio of profit is fixed and agreed between the parties at the inception of the contract.
The Accounting and Auditing Organisation for Islamic Financial Institutions
recommends the adoption of the mixed model. Indeed, the Central Bank of Bahrain (formerly the Bahrain Monetary Agency) has only allowed Takaful operators in the Kingdom to adopt the Wakala and mixed models.
