Takaful (an Arabic word meaning “guaranteeing each other“) is a shariah compliance mutual risk sharing arrangement which involves participants and operators. Shariah is based on the Qur’an and Assunah. Takaful as a concept that some extent is similar to conventional mutual risk sharing such as Mutual Insurance and Protection and Indemnity Club ( P and I Club ). It is a mutual sharing of risk based on the concept of Taawun (Mutual Protection).The difference between Takaful and conventional insurance rests in the way the risk is assessed and handled, as well as how the Takaful fund is managed. Further differences are also present in the relationship between the operator (under conventional insurance using the term: insurer) and the participants (under conventional it is the insured or the assured. In risk assessment (underwriting) and handling, Takaful do not allow what is called Gharar (uncertainty or speculation) and Maisir (i.e. gambling). In investment or fund management Riba (i.e. usury) is also not allowed.
These three Gharar, Maisir and Riba are the areas that must be totally avoided by the Takaful operation, and where it differs with the conventional insurance In order to avoid Gharar, there must be a complete clarity or full disclosure of any Takaful contract. Full disclosure is applicable on both sides, i.e. on both the subject matter and terms of the contract (scope of cover, etc). Its not allowable in to enter into a takaful contract if there is any unknown element on the subject matter and/or unknown exposure to the extent of the contract itself. As this ideal situation is hardly exist, the Takaful contract then need to be made in a way that there is no exchange of Gharar from one party to another. Maisir (gambling) is regarded as the excessive side of the Gharar. Whilst the participants (insured) may have an insurable interest in the subject matter, if the risk transfer (risk sharing in Takaful) contains any speculative element, it is prohibited under the Takaful.
Riba (usury) is totally prohibited under the shariah law and under a Takaful arrangement. In order to avoid the Riba, Takaful treats participants’ contribution to the risk sharing scheme not as a premium in the way conventional insurance does. In Takaful terms it is treated as being a contribution (Mushahamah) in the form of donation with a condition of compensation (Tabarru). Furthermore, the pool of funds secured from those participants’ contributions or donations must be managed and invested in accordance with the Shariah. In the same way that Gharar and Maisir represent a continuous challenge for Takaful operators to ensure that pure Takaful arrangements are free of them, Riba free investment and fund management is also becoming a specialist discipline which requires more in depth elaboration.
Whilst risk is nature of human life, it is impossible to eliminate this nature from human life. What is not allowed in Islam is not the risk or uncertainty itself (so it need to be eliminated) - but selling or exchange of risk or risk transfer to the third party using sales/exchange contract that is not allowable. On the other hand helping each other in any situation including in the event misfortune is highly encouraged in Islamic teaching as Allah mentioned in the Qur’an.
“….Help you one another in Al Birr and At Taqwa (virtue, righteousness and piety); but do not help one another in sin and transgression….“
(Al-Maidah : 2)
Sharing the risk with the purpose to help each other is therefore recommendable.