EKO - INSURANCE

Definition of Participation-Based Insurance

First Insurance Practices in Islamic History (Pre-Takaful)

Takaful 20. Yy has been institutionalized. Before the takaful system, people developed different methods to compensate for the financial damage caused by the risks that may occur to their lives and property. In the pre-Islamic Period of Ignorance, they used to share their risks with the aqila system. During the period of ignorance, even if one person deliberately killed another person, the criminal's tribe would pay the diet resulting from the killing. The Prophet (peace be upon him) put a limit on this system and could only pay for a diet of unintentional killing and wounding. A person's relatives would be his father's male relatives. During the reign of Hazrat Umar, the divan system was established and its foundation was based on the principle of cooperation and solidarity. From now on, the person who committed the crime was made up of those who were registered in the same place in the court.

Yıldırım, Ş. (2020). TİCARİ VE KATILIM (TEKAFÜL) SİGORTACILIĞINDA. İstanbul, türkiye.

History of Takaful Insurance

Commercial insurance was first discussed at the First Islamic Economics Conference held in 1976. The first fatwa in favor of Takaful was issued in 1977. The first modern takaful company in Sudan was established in 1979. The Organization of Islamic Cooperation approved takaful insurance in 1980. Later, takaful began to be implemented in Malaysia, Bahrain and Saudi Arabia.
Özcan, S. (2017). https://dergipark.org.tr. dergipark: https://dergipark.org.tr/en/download/article-file/324542#:~:text=2.4.&text=Bu%20ba%C4%9Flamda%20Tekaf%C3%BCl%20sigorta%20uygulamalar%C4%B1na, sigortac%C4%B1l%C4%B1k%20onaylanm%C4%B1%C5%9Ft%C4%B1r%20(EY%202015). adresinden alındı.

Parties in the Takaful Insurance System

Insurer: The person who undertakes the management of the fund for a fee within the framework of the elements contained in the contract. The risk is borne by the insurer. One of the conditions required for takaful insurance is that the fund is managed by a company that is allowed to carry out insurance activities.

Insured Participant: A person who is obliged to pay the premium mentioned in the contract by entering into a contract with the insurer. Unless otherwise stated in the contract, the interests arising belong to the participant. For this reason, even if the beneficiary is someone else, the participant owns the share and income from the fund in case the risk is not realized, unless otherwise stated.

Insured: It is the person whose interest is secured by the contract and who has the right to claim compensation. The insurer secures both his own interest and the interest of the third party.

Terzioğlu, B. (2019). SİGORTA ACENTELERİNİN KONVANSİYONEL VE TEKAFÜL . İSTANBUL, TÜRKİYE.

Takaluf Insurance Models

The Mudarabah Model

The Mudarabah model is a profit-sharing business model used among members of Takaful. The operator manages the investments, and the returns generated are shared between the operator and the participants according to predetermined ratios. Partners also bear the losses. However, profit-sharing applies only to increases in equity, and surplus capital is generally not shared. Some companies cover their costs with the profits from investments.

The Mudarabah system is based on a profit-loss sharing partnership structure. This system enables individuals who will use the funds to invest them in the most profitable ventures as if it were their own money, thereby creating added value. At the same time, it provides significant benefits to the country's economy, such as employment and taxation.

Power of Attorney Model

The Powe of Attorney model resembles the Mudarabah model. Contributions from participants are allocated to investment and insurance funds. Payments from the insurance fund and surpluses from the investment fund are returned to the participants, but the operator does not take a share of these surpluses. The agency operator acts as an "agent" appointed by the participants and collects fees based on a specified percentage. Profits from operations can cover management and other expenses. The agent does not share in losses, but if losses occur, additional funds may be requested from the participants. However, in practice, this system can be challenging as participants may not know each other in real life.

Recently, scholars have expressed concerns about the suitability of the Mudarabah model. It has been noted that Takaful generates "surplus" instead of "profit" and that the surplus arising from insurance risk is not a profit-sharing but rather a result of risk, indicating that it may not be compliant with Islamic Law.

The Hybrid Model

The Hybrid model operates as a combination of the Mudaraba and Wakala models. The involvement of participants in the system and the allocation of income occur similarly to the previous models. In the Hybrid model, the takaful operator receives a certain percentage from the contributions of participants (wakala), while also taking a predetermined percentage of the income generated from investments (mudaraba).

Wakf Model

The classic waqf model forms the basis of participatory insurance companies. The company establishes a waqf and makes the initial investment, then collects funds from participants. Participants pay operating fees, and the operations are conducted based on the capital provided by the waqf. The profits generated are shared among the participants. This model is widely implemented in countries like Pakistan, South Africa, Sudan, Malaysia, and Indonesia. Unlike the agency model, participants are at the forefront, and activities are based on philanthropy through the waqf. Participants enter the system through participation shares and donations. Both the shareholders and participants bear the same risk. This model is considered the most suitable in terms of meeting the requirements of Islamic finance. In case of insufficient funds, the continuity of the system can be ensured through interest-free loans. Since the savings of the company's shareholders are also managed in the waqf fund, an increase in profit sharing encourages more careful investment decisions.

Comparison of Participation-Based Insurance and Conventional Insurance

Breakthrough insurance and traditional insurance are types of contracts that serve the same purpose but have fundamental differences. While participation insurance is completely voluntary, it is carried out with the donations paid by the participants. In traditional insurance, money is used against premiums. Donations are collected as funds in the takaful system, while premiums are collected in the insurance company. In a takaful fund, the participants own the fund and bear any potential losses, while in traditional insurance, the company assumes the risk. While the profit generated at the end of the period is returned to the participants in participation insurance, it is added to the company's bottom line in traditional insurance. In participation insurance, it is obligatory to use investment instruments in accordance with Islamic principles, but in traditional insurance, all kinds of tools can be used within the scope of legal regulations. In traditional insurance, the company generates profit for risk transfer, while in participation insurance, the company is non-profit and is based on the principle of cooperation for the risk sharing of the participants. In participation insurance, the company is the operator and has to prefer instruments that comply with religious principles, but the traditional insurance company does not have such an obligation and they generally prefer interest-bearing investment instruments.

FIQH RELATIONSHIP BETWEEN THE PARTIES TO COMMERCIAL INSURANCE

Adaptation of Insurance to the Trading Framework

In order for the insurance to be valid, there must be elements such as offer-acceptance, costs, a legitimate subject and the capacity of the parties. Offer refers to the making of the offer, and acceptance refers to the acceptance of this offer. In insurance, the offer is usually made by the customer and the acceptance is valid at the time the insurer assumes the risks. If the contract is in writing, the signatures of the parties represent offer and acceptance. Insurance companies operate through agents, and the relationship between the agency and the company is based on a power of attorney agreement. Prices are fixed after the offer and acceptance are realized. The insurance contract must be based on a legitimate subject and the parties must have capacity. According to Islamic law, declarations of will are not valid for persons whose power is far from the power of appeal.

Subject of the Insurance Contract

The subject of the insurance contract is important for understanding the place of insurance in Islamic law and has given rise to different approaches. According to some, the subject of the insurance contract is "economic benefit" or "what the risk is attached". According to another approach, the subject of the insurance contract is "trust, security" and "risk transfer". These approaches, which cannot be evaluated within the framework of the trade contract, may encounter some difficulties. However, focusing on the essence of insurance, it can be assumed that the insurance contract is based on security and risk transfer.

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