All participants (policyholders) agree to guarantee each other and, instead of paying premiums, they make contributions to a mutual fund, or pool. The pool of collected contributions creates the Takaful fund.
The amount of contribution that each participant makes is based on the type of cover they require, and on their personal circumstances. As in conventional insurance, the policy (Takaful Contract) specifies the nature of the risk and period of cover.
The Takaful fund is managed and administered on behalf of the participants by a Takaful Operator who charges an agreed fee to cover costs. These costs include the costs of sales and marketing, underwriting, and claims management.
Any claims made by participants are
paid out of the Takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the participants in the fund, and not the Takaful Operator, and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.
An Islamic insurance company must have the following operating principles:
a) It must operate according to Islamic co-operative principles.
b) Reinsurance commission may be paid to, or received from, only Islamic insurance and reinsurance companies.
c) The insurance company must maintain two funds: a participants/policyholders' fund and a shareholders' fund.
The Policyholders' Fund