Takaful as a Risk Mitigation Tool

Takaful as a Risk Mitigation Technique
By: Camille Paldi

Takaful as Risk Mitigation Tool
• Takaful is a co-operative system of reimbursement in case of loss, paid to
people and companies concerned about hazards, compensated out of a fund
to which they agree to donate small regular contributions managed on behalf
by a Takaful Operator.
• This is a tool used to mitigate the risk of loss.

Takaful as a Risk Mitigation Tool
• Insurance exists as one of the important instruments in financial markets in
managing risks and uncertainties.
• Pure risk exists in a situation where there are only two possible outcomes;
loss or no loss at all.
• Speculative risk involves three possibilities: the possibility of loss, profit or
no change in value.

Managing Risks
• For managing loss, man has developed five main concepts:
1. Prevention of Risks
2. Assumption of Risks
3. Spread of Risk Mutually: One can spread the risk with a group of people sharing
the same concern.

Managing Risks
4. Transference of Risk by Insurance: To transfer the risk to someone else i.e. to create
financial security in the face of a risk is by spreading the risk among a number of persons
all exposed to the same risk and all prepared to make a relatively negligible contribution
towards neutralizing the detrimental effects of the risk, which may materialize for anyone
or more of their members.
5. Buying an Insurance Policy: Where a policyholder enters into an insurance contract
with a third party, who takes the responsibility of indemnifying him in case the risk insured
materializes, provided he pays a premium to the commercial company.

What is Takaful?
• Takaful, or Islamic insurance, is a cooperative scheme, where in which the
participants pay a premium in the form of donation or tabarru in a common
pool in return for the ability to draw upon that pool upon a valid claim.
• The word takaful originates from the Arabic world kafalah, which means
"guaranteeing each other" or "joint-guarantee."

Aaqilah
• The basis of shared responsibility is taken from the system of aaqilah, which
was an arrangement of mutual help or indemnification customary in many
tribes of the Arab world.
• Under this system, if a member of a tribe was accidentally or unjustly killed,
the murderer was obliged to pay blood money (dia) to the deceased's next of
kin as a form of life insurance for the deceased's relatives.

Conventional v Islamic Insurance
• The purpose of this Holy Book insurance system is not profits, but to uphold the
Qu’ranic, Christian, and Jewish principle of "bear ye one another's burden."
• Therefore, in contrast to conventional insurance, takaful is not a contract of buying
and selling where a party offers and sells protection and the other party accepts and
buys the service at a certain cost or price.
• Rather, it is an arrangement whereby a group of individuals each pay a fixed amount
of money and compensation for losses of members of the group is paid out of the
total sum.

• Furthermore, it is possible to make a return on funds invested by the takaful
managers in addition to the fact that the funds remaining in the takaful fund
on maturity of the policy are distributed back to the participants and
operator or participants only depending on the type of takaful management
model utilized by the fund.

• Therefore, according to Uqail (2012), in takaful, the paid contribution is
returned to the participant with the share of profits made over the paid
contributions after deduction of the charges due to the operator.
• The paid contributions are a trust (al-Amanah) to the operator, and they,
therefore, should be due only to the participant.
• This is because, under Islamic law, there is no justification for the trustee to
refuse to render the entrusted articles to their proprietor once the depositor
rightfully demands from the trustee.

• In conventional insurance, one enters a bilateral sale contract or contract of
exchange with the insurance provider and transfers risk of loss to the provider.
• The provider will bear the risk of loss in the event of an accident or harm to the
insured item or person.
• In addition, the insurance provider speculates on risk in the underwriting process.

• A conventional insurance company speculates on the risk by making an assessment
of the risk and then pre-determining profit based on the estimated payout versus
the premium.
• It is in a sense gambling (Paldi: 2014).
• In regards to transfer of loss or speculation on risk, there is neither in Takaful.

• In Islamic Insurance, the loss and risk are essentially distributed amongst the
policyholders.
• Overall, Takaful is a scheme of mutual protection that exists amongst the
participants making them both the insurer and the insured, which is a
concept promoted by all of the people of the Holy Books (Paldi: 2014).

• In conventional insurance, riba (interest) occurs as the amount of money received by
the insured, either on the occurrence of the insured event or upon maturity of the
policy may be more or less than what is actually paid by the insured.
• Furthermore, since the payments are deferred, the compensation paid, which is
greater than the instalments paid by the insured may constitute surplus riba (riba al
fadl) and credit riba (riba al-nasiah).
• Secondly, the profits of conventional insurance companies result from riba related
transactions (ISRA: 2012).

• In addition, conventional insurance contracts contain gharar (uncertainty) in
that the subject-matter of the contract is not certain until the insured event
has taken place.
• The amount being paid by the two parties is not known at the time of
execution of the contract.

• For example, an accident may occur immediately after the insured makes the
first payment requiring a payout or he or she may make all the payments
without any accidents happening, never receiving any compensation back
from the insurance company during the duration of the policy (ISRA: 2012).
• The Shari'ah requires that all the particulars relating to the contract must be
known to the parties at the time of contract, otherwise, the contract may
become invalid.

• In a conventional insurance contract, the policyholder agrees to pay a certain
premium sum in consideration for the guarantee of the insurance company
that they will pay a certain sum of compensation in the event of a valid
claim.
• However, the policyholder is not informed of how much compensation the
company will pay him or her or how the amount shall be derived (ISRA:
2012).

• Maisir or gambling means to court such risk as it involves both the hope of gain as
well as the fear of loss, which is not a necessary part of any normal activity in life.
• In conventional insurance, policyholders are gambling by betting premiums on the
condition that the insurer will make payment contingent upon the circumstance of a
specified event.
• On the other hand, the insured does not get anything from his premiums if the
insured event does not happen at all (ISRA: 2012).

Takaful Minimizes Riba and Gharar
Takaful minimizes riba (interest), gharar (uncertainty), and maisir (gambling)
through its cooperative donation scheme (tabarru) and investment in halal
activities.

General Takaful
• The general takaful contract is a short-term policy where takaful participants
pay contributions and operators undertake to manage the risk.
• According to ISRA (2012:512), the contributions paid by the participants are
credited into the general takaful fund, which is then invested and the profits
generated are paid back to the fund.
• Profit-sharing will be according to the term of contract, to be provided after
deducting operational costs and according to a ratio determined by both
parties according to al-Mudharabah i.e. 50:50, 60:40 (Al Huda CIBE).

General Takaful
• The tabarru element is more apparent in general takaful as participants will normally
undertake to regard their contributions as donations to fellow participants (ISRA,
2012:513).
• Tabarru is an agreement by a participant to relinquish, as a donation, a sum of
contribution that he or she agrees to pay with the purpose of providing mutual
indemnity to takaful participants, where the donation acts as a mutual help and joint
guarantee should any fellow participants suffer from a defined loss (ISRA, 2012:
514).

General Takaful
• Tabarra is derived from the word tabarra'a, which means contribution, gift, donation,
or charity.
• The purpose of this contract is to give a favor to the recipient without any specific
consideration in return (Al Huda CIBE).
• Essentially, tabarru is a contribution or donation, which entails no return, but rather
a reward from Allah alone.

General Takaful
• There are two important pillars of tabarru, namely the absence of counter-value
and the intention to perform tabarru.
• For example, if a donor contributes with an expectation of a counter-value
from the donation given, then the whole transaction will be perceived as an
exchange (muawadah) rather than a tabarru contract (Al Huda CIBE).

General Takaful
• Takaful, unlike its conventional counterpart, is based on the principles of
mutual cooperation (ta'awun) and donation (tabarru).
• Under the Islamic law of transactions, the existence of gharar (uncertainty)
and maisir (gambling), which normally nullifies an exchange contract
(muawadah) are tolerated in a contract of donation (tabarru).

General Takaful
• This corresponds to the Islamic legal maxim, "uncertainties are tolerable in a
gratuitous contract." (Al Hude CIBE)
• This is mainly due to the fact that parties who enter into a tabarru contract do
not aim to make profit out of the contributed sum, and hence the potential
dispute, which normally arises in a profit-making transaction is deemed to be
negligible in a gratuitous-based transaction.

General Takaful
• Furthermore, the issue of uncertainty is nullified as the contributor
voluntarily gives away his property or right to the recipient without any
consideration (Al Huda CIBE).
• In contrast, conventional insurance is based on exchange (muawadah), aims at
making profit from the insurance operations, and is not Shari'ah compliant
due to excessive gharar (uncertainty), maysir (gambling), and riba (interest).

General Takaful
• Nevertheless, it is observed that a takaful contract cannot be considered a pure
tabarru contract, but rather a qualified or conditional tabarru contract due to the
following reasons.
• (1) The contribution is made by a participant in takaful is with consideration to a
right to claim for compensation in the event of loss or damage of subject-matter.
• Thus, the tabarru is not merely for charity, but conditional upon certain
consideration, namely the right to claim takaful benefits in the event of loss. This is
a violation of the fundamental objective of tabarru.

General Takaful
• (2) Takaful participants are normally obliged to pay different amounts of
contributions depending on the different degree of risk exposure. This
implies that their participation in the fund is conditional upon a certain
amount of contribution, which deserves compensation.
• In the event that the participant disagrees with the amount, he will not be
allowed to participate or benefit from the takaful protection scheme.

General Takaful
• This is in contradiction to the principle of tabarru as the real intention of the
contracting parties is not for donation, but rather to make them eligible for
certain benefits under takaful.
• (3) Takaful includes a few controversial practices such as surrendering of
benefit, survival of benefit, or sharing of underwriting surplus among
participants of takaful although they have surrendered all of their rights over
the monies of the fund.

General Takaful
• When a participant pays a premium to the takaful operator, he has effectively
donated his contribution as tabarru, hence, relinquishing his ownership over
the object donated as prescribed by the rules of tabarru.
• Therefore, it should not return to the participants upon maturity of the
policy or liquidation of the fund (Al Huda CIBE).

General Takaful
• According to Asyraf Dusuki, many takaful products and operations are
starting to converge closely with conventional insurance.
• The fundamental structure of takaful, which is premised on the basic
concept of tabarru is questionable as many benefits are offered to the
participants in the beginning of the takaful contract in return for the
contributions paid to the tabarru pool managed by the takaful operators
(Revisit the Principle of Tabarru in Takaful Structures: 1).

General Takaful
• All contributions go to a common pool of funds, which will be used to compensate
takaful participants in the event of a loss.
• The participants carry the risk and the takaful operator is merely a custodian of the
fund.
• There are no savings and investment elements, but the takaful operator will
distribute any underwriting surplus to the participants on an annual basis. Takaful is
generally renewable on a periodic basis.

General Takaful
• General takaful is categorized into two types: motor and non-motor takaful.
• Motor takaful provides protection for private car, motorcycle, and
commercial vehicles.
• Non-motor takaful range from fire, personal accident, marine, health takaful,
etc. (ISRA, 2012:513).

Participant's Benefits
The competency of a person to enter into a takaful contract is determined by
his legal capacity to contract and his interest in the subject-matter covered.
It is the participant's pecuniary interest, which forms the subject-matter of •
the contract and not the cover afforded.

Utmost Good Faith
The takaful contract imposes a duty on the contributor to disclose all material facts
bearing on the contract.
The duty of utmost good faith applies to both the participant and the takaful operator
The contributor is expected not to withhold information vis-à-vis the takaful operator
because this leads him into a less favorable contract, which ultimately affects all
participants.

Utmost Good Faith
• When deciding which risk to be covered, the takaful operator must ensure
that the specific exception to the risk to be covered should be revealed to the
participants and the participants in return should disclose any aspect related
to the risk associated with them, which needs to be underwritten, i.e. his full
health conditions should be disclosed in the case of a medical cover.

Insurable Interest
• A person has an insurable interest in something when a loss or damage
would cause that person to specifically suffer a financial loss or certain other
kinds of loss.

Proximate Cause
• In takaful claims, the question, which is often asked is not whether an event
(consequence as defined in the contract) has occurred, but whether it was the
result of a cause as defined.
• This means that a claim will be met if the fact for which a claim is brought is
the result of the proximate cause included in the perils insured against, or
that its liability will be excluded if the proximate cause was an excluded peril.
• Usually, for a claim to succeed, the participant must show that the loss was
proximately caused by the peril covered for.

Indemnity
• The takaful contract is a contract to pay the actual loss sustained by the
participant or a contract of indemnity.
• It is a mechanism by which the takaful operator provides financial
compensation in an attempt to place the participant in the same pecuniary
position he enjoyed right before the loss.

Claims and Distribution
• When claims are paid out, especially in family takaful, the proceeds disbursed
should be distributed to the legal heirs according to Islamic law and not to
the stipulated nominee as in the case of conventional insurance.

Contribution and Subrogation
• Contribution from participants is the starting point for creating the takaful
fund, from which claims are paid.
• Once the takaful operator pays the claims from the takaful fund, the takaful
operator will have to claim this disbursement from the person who caused
the damage.

• Subrogation refers to a set of rules that facilitates the reimbursement of a takaful
operator when the operator has indemnified its participants under a contract of
indemnity from a third party.
• This occurs when a third party has caused damages to a participant and the takaful
operator indemnifies him.
• The money disbursed is claimable from the third party that has caused the damages.

• The purpose of subrogation is to provide the takaful operator with a right of
recourse.
• Both the contribution and subrogation principles are corollaries to the
principles of indemnity and equity.

Underwriting
This is a process of selection through which the takaful underwriter •
determines which of the risks offered should be accepted, and if so, on what
terms, conditions, and rates (ISRA, 2012: 512).

Banca Takaful
• Banca takaful is defined as the delivery and distribution of a suitable range
of tailored 'bankable' protection and long-term savings, education, and
retirement plans designed to meet the lifecycle needs of the consumer base
of a bank or other financial institution.
• In Banca takaful, Takaful products are distributed by a bank.

Takaful Management Models
• The contract between the participants and the licensed Takaful operator
could be based on Wakalah or Mudarabah or a hybrid of the two.
• This contract refers to a management contract between the participants and
the Takaful operator.

Mudarabah Model
• By this principle, the entrepreneur or al-Mudharib (takaful operator) will accept
payment of the takaful installments or takaful contributions (premium) termed as
Ra’s-ul-Mal from investors or providers of capital or fund (takaful participants)
acting as Sahib-ul-Mal.
• The contract specifies how the profit (surplus) from the operations of managed by
the takaful operator is to be shared, in accordance with the principle of al-
Mudharabah, between the participants as the providers of capital and the takaful
operator as the entrepreneur.

Mudharabah Model
• The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30, etc. as
mutually agreed between the contracting parties.
• Generally, the risk-sharing arrangements allow the takaful operator to share in
the favorable investment performance of both the participants account
(savings account) and the participant's special account (tabarru).

Mudharabah Model
• However, if there are losses in the participant's special account, the takaful
operator provides an interest-free loan (qard hassan) that has to be repaid
when the participant's special account returns to profitability and before any
future surplus is distributed.
• The contract is cancellable and upon cancellation, all cumulative capital plus
profit must be returned to the capital provider (participants) after deducting
administrative expenses (ISRA, 2012: 516).

Mudharabah Model
• In order to eliminate the element of uncertainty in the takaful contract, the concept
of tabarru (to donate, to contribute, to give away) is incorporated.
• In relation to this concept, a participant shall agree to relinquish as tabarru, certain
proportion of his takaful installments or takaful contributions that he agrees or
undertakes to pay should any of his fellow participants suffer a defined loss.
• This agreement enables him to fulfill his obligation of mutual help and joint
guarantee (Al Huda CIBE).

Mudharabah Model
• In essence, tabarru would enable the participants to perform their deeds in
sincerely assisting fellow participants who might suffer a loss or damage due
to a catastrophe or disaster.
• The sharing of profit or surplus that may emerge from the operations of
takaful is made only after the obligation of assisting the fellow participants
has been fulfilled.

Mudharabah Model
• It is imperative, therefore, for a takaful operator to maintain adequate assets
of the defined funds under its care whilst simultaneously striving prudently
to ensure the funds are sufficiently protected against undue over-exposure.
• Therefore, the provision of insurance cover as a form of business in
conformity with Shari'ah is based on the Islamic principles of al-Takaful and
al-Mudharabah (Al Huda CIBE).

Mudharabah Model
• Al-Hari Raya is the pact among a group of people, called participants,
reciprocally guaranteeing each other; while Al-Mudharabah is the commercial
profit-sharing contract between the provider or providers of funds for a
business venture and the entrepreneur who actually conducts the business.
• The operation of takaful may thus be envisaged as the profit-sharing business
venture between the takaful operator and the individual members of a group
of participants who desire to reciprocally guarantee each other against a
certain loss or damage that may be inflicted upon any one of them.

Wakalah Model
• Wakalah is a contract of agency, whereby participants remain the actual
owners of the takaful fund.
• In this arrangement, the principal is the participant while the agent (wakil) is
the takaful operator.
• The principal appoints or authorizes the agent to manage the takaful fund for
two main duties, namely, takaful activities and investments.
• As an agent, the operator is entitled to an agency fee and performance fee.

Wakalah Model
• In Wakalah model, the surplus of policyholders’ funds investments – net of
the management fee or expenses – goes to the policyholders.
• The shareholders charge a Wakalah fee from contributions that covers most
of the expenses of business.
• The fee rate is fixed annually in advance in consultation with the Shari'ah
committee of the company.
• In order to give incentive for good governance, the management fee is
related to the level of performance.

Wakalah Model
• The main issue in a pure wakalah model is that the management and
shareholders of a takaful operator cannot share in the profits because they
merely act as an agent to the participants.
• However, they may be entitled to a fee based on their performance in the
investment.
• Therefore, many operators attempt to adopt a combination of wakalah and
mudarabah or modified wakalah model (ISRA, 2012: 519).

Hybrid Wakalah and Mudarabah Model
• In the hybrid wakalah and mudarabah model, the wakalah principle is applied in
underwriting activities while a mudarabah contract is used in the investment
of the takaful funds.
• Thus, the takaful operator is entitled to agency fee for managing the fund as a
wakil and a share of profit for managing the investment of the fund as a
mudarib (ISRA, 2012, 521).

Hybrid Wakalah and Waqf Model
• The latest takaful model that has emerged from Pakistan was introduced by Mufti Taqi
Usmani.
• This plan enables any individual to save regularly with the aim of accumulating a fund that
can be left as a donation under the waqf system.
• In this model, the shareholders of the takaful operator will initially make a donation to
establish the waqf fund.
• The fund needs to be invested in a Shari'ah compliant investment and the returns will be
used for the benefit of the participants.

• The tabarru fund from participants' special account also becomes part of the
waqf fund.
• Therefore, a waqf fund consists of donations from shareholders and
participants seeking takaful protection.
• The combined amount will be invested and any profits earned will be
returned to the same fund.
• Based on waqf principles, the donors (shareholders and participants) would
lose ownership rights on their monetary contributions in the waqf fund.

The monies eventually become the property of the waqf fund, which can be •
used for the benefit of all participants.
The shareholders, who acts as the owners of the waqf fund, delegate •
authority to the operator to become the administrator of the fund, whose
function, among others, include paying claims from the fund.
The operator also undertakes the role of investment agent (wakalah bi •
istithmar) when it invests the waqf funds and is entitled to a certain percentage
of the investment as a performance fee.

Hybrid and Wakalah Waqf Model
• Generally, there are two types of waqf model in respect of surplus sharing:
(1) Pakistani model, in which the underwriting surplus is returned to the waqf
fund, thus not distributed to either the participants or the operator.
• (2) Commercial waqf model, in which the terms on surplus-sharing are spelt
out in the waqf deed in accordance to the intention of the contracting parties
involved in the waqf arrangement.

The sources of income for this model include the agency fee for undertaking
service as a wakil against a defined remuneration payable from the waqf fund
and the performance fee for acting as an agent for investment (ISRA, 2012: 522
– 524).

Re-Takaful
• Re-takaful is a form of mutual assistance among participating takaful
operators in which the operators pay a certain amount of contribution into
the re-takaful fund in order to share a certain defined risk in a specified
category if these exceed prudent underwriting limits (ISRA, 2012: 529).
• According to ISRA, there are only a few re-takaful operators and they only
operate at national and regional markets (2012:529).

Re-Takaful
• The process of sharing the insured risk between the takaful operator and
other conventional insurance companies is either due to lack of sufficient
insurance capacity for such risk or because of regulatory requirements of
risk-sharing with regard to the magnitude of the risk in question.
• This poses an issue that the re-insurance process as executed by conventional
re-insurance companies may not observe the Shari'ah principles of takaful
(ISRA, 2012: 529).

Re-Takaful
• Re-Takaful currently adopts two main methods, facultative and treaty: In the
facultative method, the operator presents the individual risk, which constitutes the
subject-matter of re-takaful to the re-takaful operator along with a summary of all the
information related to it, so that the re-takaful operator can study the information
and decide whether to accept the risk or not.
• The Re-Takaful operator becomes committed to what it accepts (ISRA, 2012: 530).

Re-Takaful
• The facultative method is for individual policy or risk. This arrangement can be on
a proportional basis, which is the original form, or non-proportional basis.
• Facultative means 'optional', i.e. the power to act according to a free choice.
• So, the facultative underwriter of a re-takaful operator is free to accept or decline any
offer from a takaful operator that wants to cede its risk to such re-takaful operator
(ISRA, 2012: 530).

Re-Takaful
• In the treaty method, the re-takaful operator assumes the commitment to accept all
the risks, which fall within the scope of the agreement signed with the takaful
operator.
• There are four ways to apply the treaty method.
• (1) Quota Share – When the takaful operator and re-takaful operator share each and
every risk proportionately on the original terms and conditions;

Re-Takaful
• (2) Surplus – When the takaful operator by arrangement with the re-takaful
operator cedes only that portion of each and every risk, which it does not
like to retain in its own account.
• (3) Excess of loss – When a takaful operator bears all claims arising to a
specified amount and only when this ultimate net loss (after taking into
account all recoveries) exceeds this amount, can they recover from the re-insurer
up to a specified maximum.

Re-Takaful
• In this case, there is no proportional sharing of risk between the takaful
operator and the re-takaful operator;
• (4) Stop loss: The re-takaful operator will not be responsible for any loss until
the loss ratio for the year reaches an agreed percentage of the premium
(ISRA, 2012: 531).

Re-Takaful
Item 3/2 of Shari'ah Standard No. 41, AAOIFI 2010 states that takaful •
operators are not allowed to re-insure with conventional re-insurance
companies, except when such re-insurance is sought as a transitional
arrangement stemming from public need, which amounts to necessity.
Therefore, the practice of takaful operators to re-insure with conventional re-insurers
is permissible with certain conditions (ISRA, 2012: 531).

Re-Takaful
Item 6 of Shari'ah Standard No. 41, AAOIFI 2010 states:
• Takaful operators should re-insure first with re-takaful operators, to the largest extent
possible; Takaful operators should not keep any cash reserves for ongoing risks that
belong to conventional re-insurance companies and on which interest has to be
paid.
• An agreement can be reached between the takaful operator and the conventional re-insurance
company in order to specify a certain portion of the premiums payable to
the conventional re-insurance company to be retained by the Islamic insurance
company;

Re-Takaful
• The takaful operator can invest retained funds through mudarabah or investment
proxy, where the takaful operator assumes the role of the mudarib and the
conventional re-insurance company assumes the role of rabbul mal.
• When profit is distributed as per the ratio agreed upon, the share of the
conventional re-insurance company is to be added to its account with the takaful
operator, where the share of the profit earned by the takaful operator for
performing the investment as an independent personality is to be added to the
account of the participants;

Re-Takaful
• The periods of the re-insurance agreements sought by takaful operators from
conventional re-insurance companies should be commensurate with the actual need;
• Before signing agreements with conventional re-insurance companies, takaful
operators should seek the approval of their Shari'ah boards;
• Takaful operators should stick to the minimum size of re-insurance with
conventional re-insurance companies, and Shari'ah boards should undertake the
follow-up in this matter (ISRA, 2012-533).

Re-Takaful
• The IFSB in Item 91 of Guiding Principles on Governance for Takaful
(Islamic Insurance) Undertakings (2009) states that: "Takaful operators shall
ensure that any re-takaful arrangement duly serves the purpose of the takaful
undertakings and is undertaken with the interests of takaful participants as
the foremost consideration.

Re-Takaful
• The pricing and protection offered by the re-takaful operator shall be
consistently reviewed from time to time to ensure that it is commensurate
with the needs and requirements of the takaful undertakings.
• As far as possible, takaful operators should strive to use re-takaful operators,
rather than conventional re-insurers, in support of a fully Shari'ah compliant
financial system for the takaful undertakings." (ISRA, 2012: 533)

Re-Takaful
According to Sheikh Wahba Zuhayli, when using conventional insurance •
companies for re-takaful:
• (1) Payment to re-insurance companies should be kept to the minimum
possible amount to satisfy the need, following the rule, "Necessities are
measured by their degree." The evaluation of the amount needed to satisfy
the need is left to the bank's experts to determine;

Re-Takaful
• (2) The takaful operator does not collect a profit commission or any other
commission from the re-insurance companies;
• (3) The takaful operator does not keep any reserves with the re-insurance company
for natural disasters, since keeping such reserves would lead to interest payments to
re-insurance companies;
• (4) The takaful operator should not be involved in determining the investments of
the reinsurance companies. It should not demand any share in the profits gained
from such investments, nor ask about any losses they incur;

Re-Takaful
• (5) The contract with the re-insurance company should be for the shortest
possible period;
• (6) The takaful operator works towards the establishment of a re-takaful
operator that would allow it to avoid dealing with conventional re-insurance
companies (ISRA, 2012: 532).

Takaful as a Risk Mitigation Tool

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