CIFE Takaful Insurance 1 — Questions and Answers
Question 1: What is the fundamental principle underlying Takaful?
- Mutual guarantee and shared responsibility: participants pool contributions to help each other in times of loss based on Tabarru' (donation) (Correct answer)
- Profit maximisation for the Takaful operator
- Interest-based investment of premiums
- Transfer of risk from all participants to a single insurer
Correct answer: Mutual guarantee and shared responsibility: participants pool contributions to help each other in times of loss based on Tabarru' (donation)
Takaful is based on mutual solidarity; participants donate funds (Tabarru') into a collective pool from which claims are paid, ensuring shared responsibility rather than risk transfer to a commercial insurer.
Question 2: What is 'Tabarru'' and what role does it play in Takaful?
- Tabarru' is a voluntary charitable donation each participant makes to the collective risk pool, which is used to pay claims and cannot be reclaimed as profit (Correct answer)
- Tabarru' is the Takaful operator's management fee
- Tabarru' is the investment return paid to participants
- Tabarru' is the regulatory deposit paid to the central bank
Correct answer: Tabarru' is a voluntary charitable donation each participant makes to the collective risk pool, which is used to pay claims and cannot be reclaimed as profit
Tabarru' converts the participant's contribution from a commercial premium (which involves Gharar) into a charitable donation, removing the element of uncertainty and speculation that makes conventional insurance impermissible.
Question 3: What are the two most common Takaful operating models?
- Wakala (agency) model and Mudarabah (profit-sharing) model (Correct answer)
- Murabaha and Ijara models
- Riba and Gharar models
- Conventional premium and reinsurance models
Correct answer: Wakala (agency) model and Mudarabah (profit-sharing) model
The Wakala model pays the operator a fixed agency fee for managing the Takaful fund; the Mudarabah model shares underwriting or investment surplus between participants and the operator based on a pre-agreed ratio.
Question 4: In the Wakala Takaful model, how does the Takaful operator earn its remuneration?
- By charging a fixed Wakala fee as a percentage of contributions for managing the Takaful fund on behalf of participants (Correct answer)
- By retaining all underwriting surplus as profit
- By charging interest on participant loan balances
- By investing participant funds in conventional bonds
Correct answer: By charging a fixed Wakala fee as a percentage of contributions for managing the Takaful fund on behalf of participants
In the Wakala model, the operator acts as agent and earns a predetermined percentage of contributions as its management fee, keeping the operator's income separate from the participants' risk pool.
Question 5: What happens to any underwriting surplus (excess of contributions over claims and expenses) in a Takaful fund?
- The surplus belongs to participants and is distributed back to them or carried forward in the participants' fund, not retained as operator profit (Correct answer)
- It is kept entirely by the Takaful operator as profit
- It is paid to the government as tax
- It is used to pay operator salaries only
Correct answer: The surplus belongs to participants and is distributed back to them or carried forward in the participants' fund, not retained as operator profit
Since Takaful participants own the risk pool through their Tabarru' contributions, any underwriting surplus belongs to them; it may be returned as a surplus distribution or retained for future claims in the participants' fund.
Question 6: What is 'Retakaful' and why is it needed?
- Retakaful is the Shariah-compliant equivalent of conventional reinsurance, used by Takaful operators to share large risks with other funds and maintain solvency (Correct answer)
- Retakaful is a customer loyalty reward scheme
- Retakaful is the fund for paying operator bonuses
- Retakaful is the surplus distributed to participants
Correct answer: Retakaful is the Shariah-compliant equivalent of conventional reinsurance, used by Takaful operators to share large risks with other funds and maintain solvency
Retakaful enables Takaful operators to cede portions of large or catastrophic risks to other Retakaful entities through Shariah-compliant structures, protecting participant funds from catastrophic losses.
CIFE Takaful Insurance 1
What is the fundamental principle underlying Takaful?