Two Funds, Two Entities

A key differentiator between TAKADAO and traditional takaful operators is that there are two independent entities to consider. In the case of traditional takaful operators, there is only one entity, the takaful operator, who represents both themselves and the participants of the takaful risk fund. The traditional takaful operator owns and manages all the monies from contributions and participants have no legal authority to take part in the management of the takaful risk fund.

In the case of Takasure, the DAO fund is an independent entity that is owned and managed by the participants. The TAKADAO is a takaful operator and a separate entity that works for the DAO entity as a service provider. Equity in the DAO fund is based on token ownership. If an individual owns tokens of the DAO, then he is part owner of the DAO. In the same way, if an individual owns shares in a company, he is part owner of the company.

To represent their interests, the DAO elects a board of directors from among its members. DAO members cast votes with each token representing one vote. The DAO directors are responsible for screening proposals that are subsequently put to a vote by the DAO members. In case there are insufficient votes to reach quorum, then the DAO directors may vote on behalf of the DAO members.

The monies generated by token sales are owned by the DAO entity and held in the name of the DAO entity. This means the DAO entity is legally the owner of these monies. The DAO entity may then appoint the takaful operator to manage the monies on their behalf. By the same token, the DAO entity may fire the takaful operator in case of non-performance or some other breach of contract.

By extension, the underwriting surplus, which is the monies left over in the fund after claims are paid and investment returns realized, is owned by the DAO entity. DAO members have a legal right to these monies which they can claim according to predefined rules agreed upon by the DAO.

Because the DAO entity bears all the risk and reward of insurance activities, it is considered a risk-sharing arrangement. As such, it is not regulated as a traditional insurance company as insurance contracts are defined as risk-transfer contracts. Instead, the DAO entity is regulated as a non-profit organization or reciprocal “self-insurance” company where such legal structures exist. Recall that as per shariah requirements, the contributions are considered donations for a specific purpose. In addition, the nature of insurance means that claims will always outpace investment returns, so participants of the DAO fund cannot reasonably expect a profit. Hence the use case perfectly fits that of a non-profit organization.

On the other hand, the takaful operator is a for-profit entity that acts as a service provider to the DAO fund. The takaful operator is engaged by the DAO fund and manages the underwriting and technology functions on behalf of the DAO fund. The takaful operator serves at the pleasure of the DAO fund.