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Takaful (Participation) Insurance Takaful (Participation) Insurance

Takaful (Participation) Insurance

Participation Insurance is an insurance model that is managed in accordance with the principles of participation finance and based on the principles of joint risk sharing and solidarity.

What is Takaful (Participation) Insurance?

Takaful literally means mutual trust and solidarity. In our language, it takes place in the form of guarantee, that is, to take responsibility for something, to be a guarantor, to be liable. Takaful, as it is called In the finance literature and in the international literature, is used to express 'Islamic Insurance'.

‘Islamic insurance is the agreement of persons who are exposed to certain risks on the compensation of losses that will arise from the realization of these risks.’ In the context of this agreement, the participants come together and collect a certain amount of money, and when one of them incurs any loss, the loss is compensated by this fund. The parts of these collected funds, which are directed to investment, should be evaluated in investment instruments in accordance with Islamic procedures.

Takaful is based on principles such as joint risk sharing, mutual responsibility, mutual protection and solidarity among members. Although these basic principles are among the most important features that distinguish takaful from conventional insurance, garar (uncertainty), gambling and interest are definitely not included in this system. One of the most important working principles of the system is the approval and supervision of business acceptance principles by the advisory committee according to the rules of Islamic law. A policy is not issued for an un-Islamic place.

In the takaful system, the volunteering of the participants is essential. For this reason, the collected contributions are not considered as premiums, but as donations. The ownership of the collected contributions belongs entirely to the participants and the parts of these funds that are directed to investment are evaluated in financial instruments in accordance with Islamic procedures. In this way, takaful emerges as a form of conventional insurance that is purged of parts that do not comply with Islamic principles.

What is its Content?

Takaful applications can be created with different structures today. These structures must be in accordance with the contract forms determined in accordance with the rules of Islamic law. Today, three types of takaful structures are commonly used. These are the mixed (hybrid) model, which consists of community of interest, power of attorney and a combination of these.

In the Power of Attorney Takaful Model,

A power of attorney contract is signed between the takaful company and the participants, and the takaful company receives its fee in return for this attorney's fee. As for the profit or loss from the funds invested, there is no reflection on the takaful company since a power of attorney contract has not been signed.

In the Community of Interest Takaful Model,

Contributions (donations) are collected from the participants and transferred to the takaful fund. After deducting expenses (personnel wages, reinsurance expenses, operational expenses, claims payments, etc.) from this collected fund, the remaining amount is directed to investment instruments in accordance with Islamic procedures. A community of interest contract is signed between the participants and the takaful company. Within the framework of the labor-capital partnership agreement, the profit/loss obtained from these funds is distributed according to the agreement made between the company and the participants and the figures whose rate is determined beforehand. In this model, a single contract covers investment and insurance activities. The application of this model is mostly seen in Malaysia.

In the Mixed Takaful Model,

Both the power of attorney contract and the community of interest contract are made. While the insurance company manages the funds in return for the attorney's fee as the representative of the owners (capitalists) of the funds, it also receives its share in return for the profit/loss (balance surplus-deficit) as per the contract made. This model is the most used model in the takaful sector, and in this structure, insurance activities are carried out with a power of attorney contract, while the profit/loss from the investment is made with the community of interest contract.

Comparison of Takaful and Conventional Insurance

Criteria Takaful Company Conventional Company
Company It acts as an intermediary on behalf of the contributors and is referred to as the operator rather than the insurer. There is a one-to-one relationship between the Insured and the Insurance Company.
Technical Risk Since the participants are also the owners of the takaful fund, they also bear the technical loss. This theoretical situation is not implemented, and in case of loss, the loss is covered with benevolent loan (interest-free debt) received from the shareholders. Technical damage is undertaken by the insurance company.
Contribution/Premium Since takaful is based on voluntariness, the collected contributions are called donations. The amount that the insurance company collects from the insured in return for the guarantee given is called the premium.
Contribution/Premium Ownership

The collected contributions are transferred to the fund in which the participants are partners and managed by the operator (company.

Ownership of paid premiums belongs to the insurance company.
Investment Takaful and the assets in the shareholders' fund are evaluated in investment instruments that comply with Islamic principles. The premiums collected and the shares of the company owners are used in investment instruments with interest.
Accounting There is a balance sheet and two income statements. The income of the company and the participants are calculated separately. The company has a balance sheet and an income statement.
Retakaful/Reinsurance Some of the collected contributions are transferred to the retakaful company. In cases where retakaful companies are insufficient, it is also possible to work with reinsurance companies, according to the opinion of some Islamic scholars. Premiums collected by the insurance company and some of the risks it has undertaken are transferred to the reinsurance company. Works are not performed with the retakaful company.
Contribution Refund In case the pool to which the collected contributions are transferred has excess balance, the company can refund the balance to the participants if it wishes. Profit/interest income from the premiums collected belongs to the insurance company and cannot be returned to the insured.

Click on the links below for the "Regulation on Working Procedures and Principles of Participation Insurance" published in the Official Gazette dated 20.09.2017 and numbered 30186, dated 19.12.2020 and numbered 31339.

In case of loss of the premium pool collected by the participation insurance company, the related loss is covered by the shareholders of the insurance company by issuing benevolent loan (interest-free debt). Then, if the pool has an excess balance, the debt is paid to the shareholders first.

Coverage, collection, damage and operation processes are the same as insurance product content. The most important difference is the financial areas where the collected premiums are evaluated. While the participation insurance company evaluates the collected premiums in participation finance products and there is a interest sensitivity, the conventional insurance company can evaluate the collected premiums in conventional finance products.

In all policies, which are the application of insurance companies and where renewal discounts are given, renewal discounts are also given by participation insurance companies on the policy.

Technically, risk acceptance criteria are similar in almost all insurance companies. In participation insurance companies, apart from these criteria, it is also checked whether the place or commodity to be insured is religiously permissible within the framework of the rules of Islamic law.

All insurance products in the insurance sector can also be arranged by participation insurance companies for all the needs of the participants.

Policy premiums are determined according to risk acceptance conditions and company policy. Participation insurance company policy premiums can be even more competitive than conventional insurance company policy premiums.

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