Takaful vs. Conventional Insurance
| Takaful | Conventional Insurance |
Purpose/Intention | Mutual aid and risk sharing | Risk transfer |
Operator/Company | The Takaful operator manages the funds on behalf of the participants as a group and is paid an operating fee and some incentive on investment returns (if any) | The relationship between the insurance company and policyholders is on a one-to-one basis. Policyholders are customers. Premiums are revenue for the company |
Insurer v. Insured | The participants are both the insurer and the insured and bear the risk and reward from insurance activities | The insurance company is the insurer and bears all the risk and reward from insurance activities. The customer is the insured. |
Payment of Contributions/Premium | Contributions are paid as partial or full donations | Premiums are paid as an expense and cost of purchasing an insurance policy |
Ownership of Contributions/Premiums | Contributions are owned by the participants as a group | Premiums are owned by the insurance company |
Use of Contributions/Premiums | Contributions are used to pay claims, direct expenses of the fund, takaful operator fees, and invested for returns | Premiums are revenue for the insurance company, they are used to pay claims, operating costs and invested for returns |
Treasury Management | Invests in shariah compliant investment vehicles only | No restriction on types of investments |
Underwriting Surplus/Loss | Belongs to the participants | Belongs to the insurance company |
Investment Returns/Losses | Belongs to the participants | Belongs to the insurance company |
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