General Takaful Operations

General Takaful provides protection for non-life matters such as fire, home, automobile, liability, marine, crops, and various business matters. General Takaful contracts are usually one year short term contracts. The Takaful operator collects the contributions and manages the Takaful risk. The operator also acts a trustee to manage the funds and receives remuneration for services as specified in the agreement. The Takaful contract specifies the rights and obligation of participants and the operator. The operator is also responsible for investing the funds in Shari’ah compliant securities and projects.

All the contributions are treated as Tabarru and help in a General Takaful Fund. Internally, the funds could be allocated into different categories for operation of the business. These may include management cost for operations, risk management contributions for Retakaful, unrecorded liabilities, claims reserves, unearned contributions, and protection fund against bankruptcy.

The Takaful operator may act as a Wakeel (agent) and get paid a fee for underwriting operations or a Mudarib (manager) and share the income generated from Shari’ah compliant investments. General Takaful Fund gets funded through contributions, investment gains, reimbursement of claims on Retakaful, and Retakaful commissions.

General Takaful schemes are built on mutual cooperation to help those participants who suffer an unexpected loss. The participants agree that the operator will use the General Takaful fund to compensate or indemnify fellow participants who might have suffered loss within the coverage limits of the policy. The funds are also used to cover operational expenses, fees, profit shares, Retakaful expenses, and to setup contingency or reserves funds.

A General Takaful fund surplus results from the balance of contribution collections and investment income minus claims paid, Retakaful fees, profit shares, provision of reserves, and other expenses. If the participant has not had a claim, the surplus is shared with the participant in proportion to his contribution. The overall amount of surplus available for distribution to participants is based on the agreement with the operator. If the agreement is based on Mudarabah, the operator can keep certain percentage of the surplus for his services and distribute the rest. The surplus is normally paid out at the end the period of each policy. However, if the Takaful funds experience a deficit, which is net of contributions plus investment income minus the claims, operational expenses, provision for reserves, the participants may be asked to pay additional contribution to keep the fund solvent.

Since all contributions to the General Takaful Fund are based on Tabarru, any pay back of surplus may be considered Riba. The operators may choose to allow an indirect benefit to the participants by reducing their renewal contribution by the surplus amount. This is a widely used practice of General Takaful operators.

The main difference between General Takaful and Family Takaful is related to what is to be protected. The former is concerned with protection of non-life material things where the latter is associated with life and livelihood. General Takaful contracts are usually of short-term renewable contracts for the protection against fire, theft, and accidents. These contracts are periodically renewable. The usual policy period is annual. The protection follows Takaful concept of mutual financial assistance to relieve a participant in case of material loss, damage or destruction of property due to a catastrophe, disaster or misfortune. In contrast, the Family Takaful contracts are usually for longer term to provide various types of protection plans related to loss of life or livelihood. The cover is provided through mutual cooperation in the form of financial benefits in case of a tragedy afflicting a participant.

An individual may participate in a General Takaful scheme to protect against damage to home or vehicle, burglary, or accidents resulting in death, disability, or medical expenses. A business might seek coverage for the above as well as for machinery, workmen compensation, professional indemnity, transportation through sea, air, or land, employee fidelity, or public liability. The causes of claim could be any loss suffered due to fire, lightning, malicious intent, accidents, employee or public claims.

All contributions for the General Takaful are treated as Tabarru (donation). As opposed to Family Takaful, there is no separate investment or savings account. The funds may be invested for profit and the operator may get reimbursed on a fixed sum for underwriting or act as a Mudarib and charge a percentage of the investment income as management fee.

The Family Takaful is centered on life and livelihood for individuals, groups of individuals and their families. The purpose of Family Takaful is to provide protection to widows, orphans and other dependents of the participant against unexpected loss of life or livelihood. The participant accumulates savings through contributions and investments which could help the participant himself or his dependents in case of an accident, disability, or loss of life.

The contributions to Family Takaful are divided into a Tabarru (donation) and investment. The donation portion is a pool for contributors’ funds in the cooperative spirit and is used to help those who might suffer a loss. The contributors do not have the right of pay back from this fund besides through a claim. The rest of the contribution is used for investment. If no claim is made during the policy period, the participant can claim from this fund. This is different from General Takaful where all the contributions are treated as Tabarru.