Takaful

What is Takaful?

Takaful is a form of Islamic insurance based on cooperative principles and sharia (Islamic law). Instead of buying coverage from a commercial insurer, participants contribute to a common pool to guarantee one another against specified losses. Takaful products cover life, health, and general insurance needs and are structured to avoid interest (riba), gambling (al-maisir), and excessive uncertainty (al-gharar).

How it works

• Participants make contributions (rather than paying premiums) to a shared takaful fund. A portion of contributions may be designated as tabarru (a donation) to cover claims.
• The takaful fund is used to pay valid claims. Remaining surpluses—after reserves for future claims—belong to participants and can be returned as dividends or reflected as lower future contributions.
• A takaful operator manages the fund on behalf of participants and charges an agreed fee to cover administration, underwriting, sales, and claims processing.
• Contracts specify the nature of the risk covered and the term of coverage, similar to conventional insurance policies.

Key principles and governance

Islamic insurance companies operating takaful arrangements typically follow these rules:

• Operate according to Islamic cooperative principles focused on mutual assistance.
• Maintain two separate funds: a participant/policyholder fund (for contributions and claims) and a shareholder fund (for the operator’s fees and profit-sharing where applicable).
• Deal with reinsurance (retakaful) only through Sharia-compliant insurers; commissions and payments should be between Islamic entities.
• Ensure transparency in surplus allocation and reserve setting so participants—not the operator—retain the remaining surplus.

Differences from conventional insurance

Conventional insurance is often considered incompatible with sharia because of:

• Gharar (uncertainty): Conventional insurance can involve ambiguous or speculative elements that are unacceptable under Islamic law.
• Riba (interest): Traditional insurance models and some financial instruments used in them may involve interest.
• Al-maisir (gambling): The transfer-based nature of risk and contingent payouts in some insurance contracts can be viewed as gambling.

Takaful addresses these concerns by framing contributions as mutual help (tabarru) and structuring contracts and investments to comply with sharia guidelines. Policyholders in takaful are typically referred to as participants to reflect the cooperative nature of the arrangement.

Market outlook and considerations

• Global takaful market size (estimated): US$31.7 billion in 2022.
• Projected growth: to about US$126.8 billion by 2032, implying a compound annual growth rate (CAGR) of roughly 15.2% (2023–2032).
• Demographics: A large portion of the global Muslim population is young; as wealth grows in these cohorts, demand for sharia-compliant financial services—including takaful—is expected to rise.

Common takaful product types

• Family takaful (life and savings-oriented plans)
• Health takaful
• General takaful (property, motor, liability)

Key takeaways

• Takaful is a cooperative, sharia-compliant alternative to conventional insurance where participants mutually guarantee each other.
• Contributions go into a common fund used to pay claims; surpluses belong to participants.
• Governance, fund segregation, and use of sharia-compliant reinsurance distinguish takaful from conventional insurance.
• The takaful market is growing rapidly, driven by demographic trends and rising demand for Islamic financial products.

Sources: Institute of Islamic Banking and Insurance; Allied Market Research (Takaful Insurance Market Research, 2032); Research and Markets (Takaful market reports).