Justin Lee, Senior Vice President
There has been much talk about peer-to-peer (P2P) insurance, and a number of startups in this space are emerging globally and in Asia. But while P2P insurance is a new disruptor in the insurance market, it is not a new concept. “Takaful”— an Islamic alternative to conventional insurance that’s been around since 622 CE – shares several similarities with P2P insurance, and for Malaysia, which is one of the world’s largest Takaful markets, there are opportunities aplenty if the country can ride the growth in the popularity of P2P insurance.
Takaful
Some aspects of conventional insurance are prohibited by Islam, and Takaful shifts the focus away from individual contractual agreements to insurance’s benefit to society as a whole. Takaful is in line with Islamic principles of mutuality and cooperation, encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity. The system is a collective enterprise that allows a community to pool together resources in order to assist its members in times of need.
In Takaful, the participants of the pool are joint investors with the operator. The participants contribute to a fund that is separated into a Takaful fund and a shareholders’ fund. Any losses experienced by the participants can be claimed from the Takaful fund, and any amount remaining is distributed back to the participants. The shareholders’ fund holds the seed money provided by the operator’s shareholders. It pays administrative expenses, and the remaining capital is invested in sharia-compliant investments.
The operator is remunerated through various contract forms, the two most common being “wakalah” and “mudharabah”:
- Under wakalah, the operator acts as an agent for the participants and manages the fund. In return, the operator receives a management fee from the participants. Any returns from the sharia-compliant investments go back to the participants only.
- A mudharabah contract is a profit-sharing agreement between two parties. Here, one party supplies the capital (shareholders) while the other manages the business (operator), and profit is shared among the parties according to an agreed-upon ratio. The key difference between mudharabah and wakalah is that a portion of the surplus from the Takaful fund and the sharia-compliant investments goes to the participants as well as into the shareholders’ fund.
It is also very common to have a mix of these contract forms. Regardless of the contract form, any deficit faced by the Takaful fund requires the operator’s shareholders to provide an interest-free loan to the Takaful fund to meet its claims obligations.