Takaful - Why Window-Based Retakaful Can Be More Profitable Than Full-Fledged Retakaful

• In the Retakaful industry, many full-fledged standalone Retakaful operators have struggled to survive.
• By contrast, many stronger Retakaful operations today operate as Retakaful windows within larger insurance or reinsurance groups.
• One important reason is that a window can remain viable with a much smaller volume of Retakaful business than a standalone company.

1. What Is a Full-Fledged Retakaful Operator?

• A full-fledged Retakaful operator is a separate company established specifically to conduct Retakaful business.
• Its main source of business comes from:
• Retakaful contributions
• Investment income
• Other income related to Retakaful operations
• It must maintain its own:
• Capital
• Staff
• Office
• IT systems
• Shari’ah governance
• Underwriting team
• Claims department
• Accounting
• Risk management
• Regulatory compliance

Simple Idea

Full-fledged Retakaful = Separate company that must support all its own costs

2. What Is a Retakaful Window?

• A Retakaful window is a Shari’ah-compliant Retakaful operation within a larger conventional reinsurer or insurance group.
• The Retakaful business is operated separately in accordance with Shari’ah requirements.
• However, the window may benefit from the parent company’s existing:
• Employees
• Technology
• Offices
• Claims expertise
• Underwriting systems
• Global network
• Administrative infrastructure

Simple Idea

Retakaful Window = Retakaful business using the infrastructure of a larger existing company

3. Why Windows Need Less Business to Be Profitable

• A standalone Retakaful company has many fixed costs.
• These costs must be paid even if the company receives only a small amount of business.

Example – Full-Fledged Operator

Suppose a standalone Retakaful company has annual fixed expenses of:

RM50 million

Its Retakaful contributions are only:

RM150 million

The RM50 million cost represents:

33% of its contribution income

This creates pressure on profitability.

Window Example

Suppose a large conventional reinsurer already has:

• Offices
• IT systems
• Claims staff
• Underwriters
• Accounting systems
• Global distribution network

It opens a Retakaful window.

The additional annual cost of operating the window may only be:

RM10 million

If the window receives the same:

RM150 million of Retakaful contributions

its fixed operating cost represents only:

6.7% of contribution income

Simple Idea

Same amount of Retakaful business + Lower operating cost = Better chance of profitability

4. Shared Infrastructure

• Retakaful windows can use the parent company’s existing infrastructure.
• This significantly reduces the cost of establishing and operating the business.

Shared Resources May Include

• Office buildings
• Technology
• Human resources
• Finance department
• Legal department
• Risk-management systems
• Claims systems
• Underwriting expertise
• Investment-management systems

Example

A standalone Retakaful company may need to spend:

RM20 million

to develop a new claims and IT system.

A Retakaful window may already have access to the parent reinsurer’s existing system.

Therefore, it may only need minor modifications.

Simple Idea

Shared infrastructure → Lower costs

5. Economies of Scale

• Large reinsurance groups already operate at a significant scale.
• Adding Retakaful business allows them to spread their fixed costs across:
• Conventional reinsurance business
• Retakaful business
• This creates economies of scale.

Example

A global reinsurance company spends:

RM100 million

on technology and administration.

If it only had Retakaful business worth RM200 million, the cost would be very high relative to the business volume.

But if it already handles:

RM10 billion of conventional reinsurance

and adds:

RM200 million of Retakaful

the additional Retakaful business can use much of the existing infrastructure.

Simple Idea

Large parent company → Costs spread across more business → Lower average cost

6. Access to Existing Expertise

• Retakaful requires specialised knowledge in:
• Underwriting
• Catastrophe modelling
• Actuarial analysis
• Claims
• Investment
• A large conventional reinsurer may already employ these specialists.
• A Retakaful window can therefore access this expertise without creating an entirely new team.

Example

A parent reinsurer already has:

• Aviation underwriters
• Marine specialists
• Catastrophe-modelling experts

When it opens a Retakaful window, these specialists may also support Shari’ah-compliant Retakaful business.

Simple Idea

Existing expertise → Lower recruitment and training cost

7. Access to a Larger Global Network

• Large conventional reinsurance companies often already have relationships with:
• Insurance companies
• Takaful operators
• Brokers
• Governments
• Large corporations
• A Retakaful window can use this network to obtain business.

Example

A global reinsurer already operates in:

• Malaysia
• Saudi Arabia
• UAE
• Indonesia
• Europe

Its Retakaful window can access Takaful operators in these markets without establishing a completely new distribution network.

Simple Idea

Existing client network → Easier access to Retakaful business

8. Full-Fledged Operators Need Critical Mass

• Standalone Retakaful operators need a sufficiently large amount of business to cover their fixed costs.
• This minimum business volume is sometimes referred to as critical mass.

Example

Suppose a standalone Retakaful operator needs:

RM500 million annual contributions

to operate efficiently.

But the market only provides:

RM200 million

The company may struggle to:

• Cover expenses
• Build reserves
• Earn acceptable returns
• Maintain sufficient capital

A window may be able to survive with the same RM200 million because its operating costs are lower.

Simple Idea

Standalone operator → Needs high business volume

Window → Can survive with lower business volume

9. Rating Advantage

• Retakaful clients often prefer providers with a strong financial strength rating.
• Ratings are important because Takaful operators want confidence that the Retakaful provider will be able to pay large claims.
• A Retakaful window within a large international reinsurance group may benefit from:
• Stronger capital
• Larger asset base
• Established reputation
• Stronger financial rating

Example

A Takaful operator has two choices:

• Small standalone Retakaful company with weak financial rating
• Retakaful window of a major global reinsurer with a strong rating

The Takaful operator may prefer the window because it appears financially stronger.

Simple Idea

Stronger parent company → Greater confidence in claim-paying ability

10. Why Many Standalone Retakaful Operators Struggled

• Standalone Retakaful operators have faced several challenges:
• Small global Takaful market
• Low Retakaful business volume
• High fixed operating costs
• Need for substantial capital
• Large and volatile claims
• Limited diversification
• Difficulty achieving economies of scale

Simple Relationship

Low business volume + High costs + Large volatile risks = Sustainability problem

11. Example Comparing Both Models

Suppose both businesses receive:

RM200 million Retakaful contributions

Full-Fledged Retakaful

Annual expenses:

• Staff = RM20m
• Technology = RM15m
• Office and administration = RM10m
• Compliance and governance = RM5m

Total expenses:

RM50 million

Expense ratio:

RM50m ÷ RM200m = 25%

Retakaful Window

Because the parent company already provides infrastructure:

• Additional staff = RM5m
• Technology = RM2m
• Shari’ah governance = RM2m
• Additional administration = RM1m

Total additional cost:

RM10 million

Expense ratio:

RM10m ÷ RM200m = 5%

Result

The window has much lower operating expenses relative to its business volume.

Simple Idea

Same business volume → Window has lower cost → Greater chance of profit

Easy Way to Remember

Full-Fledged Retakaful

• Separate company
• Own capital
• Own employees
• Own technology
• Own offices
• Own administrative systems
• Needs large business volume
• Higher fixed costs

Simple Idea

High fixed cost → Needs critical mass

Retakaful Window

• Operates within a larger existing company
• Shares infrastructure
• Shares expertise
• Uses existing distribution network
• Lower additional operating cost
• Can operate with smaller business volume

Simple Idea

Shared resources → Lower cost → Lower volume needed for profitability

Main Reason

The main advantage of a Retakaful window is:

It does not need to build an entire reinsurance company from the beginning.

Therefore:

Existing Parent Infrastructure + Lower Additional Costs + Existing Expertise + Stronger Financial Capacity = Greater Chance of Retakaful Window Profitability

Takaful - Retakaful Contributions and Retakaful Shareholders

1. What Is a Retakaful Premium / Contribution?

• In conventional reinsurance, the insurer pays a reinsurance premium to the reinsurer.
• In Retakaful, it is more accurate to refer to this as a Retakaful contribution.
• The Takaful operator pays this contribution to the Retakaful operator so that part of the Takaful operator’s large risks can be shared.

Example

• A Takaful operator covers a factory with a potential loss of RM500 million.
• The Takaful operator does not want to keep the entire risk.
• It retains RM100 million and shares RM400 million with a Retakaful operator.
• To obtain this Retakaful protection, the Takaful operator pays a Retakaful contribution.

Simple Process

Participant → Takaful Operator → Retakaful Contribution → Retakaful Operator

Why Is the Contribution Paid?

• To obtain protection against large losses
• To increase the Takaful operator’s risk capacity
• To reduce the burden on the Participants’ Risk Fund
• To make very large risks more manageable

Simple Idea

Retakaful contribution = Amount paid by the Takaful operator to share part of its risk with the Retakaful operator

2. Where Does the Retakaful Contribution Come From?

• The Retakaful contribution is generally funded from the relevant Takaful risk fund, because Retakaful is used to protect that fund against large claims.
• It is treated as part of the cost of managing the participants’ risks.

Example

• Participants’ Risk Fund receives RM50 million in contributions.
• The Takaful operator decides that RM5 million should be used for Retakaful protection.
• That RM5 million is paid to the Retakaful operator.

Simple Idea

Participants’ Risk Fund → Retakaful contribution → Retakaful protection

3. What Are Retakaful Shareholders?

• A Retakaful operator may be established as a shareholder-owned company.
• The shareholders are the owners and investors of the Retakaful company.
• They provide the company with shareholder capital.

Example

Suppose investors establish ABC Retakaful.

• Shareholders invest RM200 million.
• That money becomes shareholder capital.
• The capital helps the Retakaful operator:
• Obtain a licence
• Meet regulatory capital requirements
• Establish operations
• Hire staff
• Build systems
• Provide financial strength
• Support the Retakaful fund when necessary

Simple Idea

Retakaful shareholders = Owners who invest capital in the Retakaful company

4. Role of Shareholder Capital in Retakaful

• Shareholder capital provides additional financial strength.
• This is important because Retakaful deals with potentially very large and volatile claims.

Shareholder Capital Can Help With

• Initial establishment costs
• Operating expenses
• Regulatory capital requirements
• Technology and infrastructure
• Absorbing operational losses
• Providing financial support to the Retakaful risk fund when required

Example

• Retakaful shareholders invest RM200 million.
• The Retakaful operator uses part of this money for:
• Systems
• Staff
• Liquidity
• Shari’ah-compliant investments
• The capital also provides a financial cushion.

5. Is Shareholder Capital Used Directly to Pay Claims?

• Normally, claims are primarily paid from the Retakaful risk fund.
• That fund is built from Retakaful contributions received from Takaful operators.
• However, if the Retakaful fund suffers a deficit, shareholder support may become important.

Example

Retakaful risk fund has:

RM300 million

But claims amount to:

RM350 million

There is a deficit of:

RM50 million

• Depending on the Retakaful structure, the shareholders’ fund may provide Qard, an interest-free loan, to support the risk fund.

Simple Process

Retakaful contributions → Retakaful Risk Fund → Claims

If insufficient:

Shareholders’ Fund → Qard → Retakaful Risk Fund

6. Difference Between Retakaful Contribution and Shareholder Capital

Retakaful Contribution

• Comes from Takaful operators
• Paid to obtain Retakaful protection
• Goes into the Retakaful risk-sharing arrangement
• Used to support claims and related obligations
• Similar in purpose to a reinsurance premium, but structured according to Shari’ah

Shareholder Capital

• Comes from the owners/investors of the Retakaful company
• Represents ownership capital
• Supports the company’s operations and financial strength
• Is separate from the Retakaful risk fund
• May support the risk fund through Qard if there is a deficit

Simple Example Bringing Both Together

Suppose ABC Retakaful is established.

Shareholders

• Invest RM200 million
• This forms the shareholders’ fund.

Takaful Operators

• Various Takaful operators purchase Retakaful protection.
• Together they pay RM100 million in Retakaful contributions.
• These contributions go into the Retakaful risk fund.

Now:

Shareholder capital = RM200 million

Retakaful contributions = RM100 million

They are not the same thing.

If Claims Are RM70 Million

• Claims are mainly paid from the Retakaful risk fund.
• RM100m contributions − RM70m claims = amount remaining before other expenses and reserves.

If Claims Are RM130 Million

• The risk fund may face a shortfall.
• The shareholders’ fund may provide Qard, depending on the structure.

Easy Way to Remember

Retakaful Contribution

= Money paid by Takaful operators

= Used for Retakaful protection

Retakaful Shareholders

= Owners of the Retakaful company

= Provide capital and financial support

Simple Formula

Takaful Operators → Retakaful Contributions → Retakaful Risk Fund → Claims

Shareholders → Shareholder Capital → Support Retakaful Company + Possible Qard Support

Takaful - Example of a Sufficiently Large Number of Risks

• A sufficiently large number of risks means having enough separate risks in the pool so that overall claims become more predictable and manageable.
• The idea is that one individual loss should not have too much impact on the whole fund.

Example 1 – Motor Takaful

Suppose a Motor Takaful operator covers only:

• 20 cars

If 5 cars are involved in serious accidents, the claims may be very large compared with the size of the pool.

Small Pool

• 20 cars covered
• 5 serious claims
• Very difficult to predict
• A few claims can heavily affect the fund

Larger Pool

Now suppose the operator covers:

• 100,000 cars

From past experience, it may estimate that:

• Around 5% will make claims
• Around 5,000 claims may occur
• Average claim may be approximately RM5,000

The operator still cannot predict exactly which cars will have accidents, but it can estimate the overall level of claims more reliably.

Simple Idea

20 risks → Very unstable

100,000 risks → More predictable

Example 2 – Retakaful

Retakaful needs an even larger and more diversified pool because each risk can be very large.

Suppose a Retakaful operator accepts risks from only:

• 3 Takaful operators

Each Takaful operator has large factory risks.

If one major earthquake affects all three, the Retakaful operator may face extremely large claims at the same time.

Small Retakaful Pool

• 3 Takaful operators
• Similar types of property risk
• Same geographical area
• One catastrophe can affect all of them

This is not a sufficiently large and diversified pool.

Better Retakaful Example

Suppose the Retakaful operator instead accepts business from:

• 50 Takaful operators
• 15 different countries
• Several types of risk:
• Motor
• Property
• Marine
• Family Takaful
• Engineering
• Agriculture

Now one event is less likely to affect the entire portfolio.

Example

A flood in Malaysia may affect:

• Malaysian property risks

But it may not affect:

• Motor risks in Saudi Arabia
• Marine risks in Indonesia
• Family Takaful risks in the UAE

Simple Idea

More risks + Different countries + Different types of risks = Better pooling

Why the Number Must Be Large

The larger the number of risks:

• The easier it is to estimate expected claims
• The less impact one individual claim has
• The more stable the financial results become
• The better the risk can be spread

Simple Example

If a fund contains only:

10 large risks

and one claim is RM100 million, that one claim may seriously damage the fund.

But if the fund contains:

10,000 diversified risks

the impact of one RM100 million loss may be more manageable relative to the entire pool.

Easy Way to Remember

Sufficiently large number of risks does not simply mean “many customers.”

It means having:

• Many risks
• Different types of risks
• Different geographical locations
• Enough financial volume
• Good diversification

Simple Formula

Large Number + Diversification = More Predictable Claims + More Stable Risk Pool

Takaful - Absence of Large Numbers and Retakaful Sustainability

• One major challenge faced by the Retakaful industry is the absence of a sufficiently large number of risks to create an effective risk pool.
• Retakaful requires a much larger pool of risks than ordinary Takaful.
• This is because the risks transferred to Retakaful operators are generally:
• Larger
• Less frequent
• More unpredictable
• More volatile
• Capable of producing very large claims

1. Why Large Numbers Are Important

• Takaful and Retakaful rely on the principle of risk pooling.
• When many independent risks are pooled together, losses become easier to predict and manage.
• This is related to the law of large numbers.
• The larger the number of risks in the pool:
• The more predictable the overall claims become
• The easier it is to estimate contributions
• The easier it is to absorb individual losses

Simple Idea

More risks in the pool → Better predictability → More stable financial results

2. Why Takaful Can Work With Smaller Numbers

• Ordinary Takaful may cover large numbers of relatively common risks.
• Examples include:
• Motor accidents
• House fires
• Medical claims
• Personal accidents
• Although individual claims are uncertain, the operator may have thousands or millions of participants.

Example

Suppose a Motor Takaful operator covers:

100,000 cars

Historical data may show that approximately:

5,000 claims occur each year

• The operator cannot predict exactly which 5,000 cars will have accidents.
• However, with a large participant base, it may estimate the overall number and cost of claims reasonably well.

Simple Idea

Many similar risks → Claims become more predictable

3. Why Retakaful Needs Even Larger Numbers

• Retakaful does not normally deal with small individual risks.
• It receives risks from Takaful operators.
• These risks may include:
• Aviation
• Marine
• Oil and gas
• Major industrial plants
• Large property portfolios
• Natural catastrophes
• These claims can be extremely large and irregular.
• Therefore, a Retakaful operator needs a much larger and more diversified pool.

Simple Idea

Takaful pools individual risks

Retakaful pools large risks from many Takaful operators

4. Retakaful Claims Are More Variable and Volatile

• Variability means that claim amounts can differ greatly from one year to another.
• Volatility means that financial results can change sharply and unpredictably.

Example

A Retakaful operator may experience:

Year 1

• Contributions = RM500 million
• Claims = RM200 million

Year 2

• Contributions = RM500 million
• Claims = RM250 million

Year 3

• A major earthquake occurs.
• Claims = RM1.2 billion
• Therefore, Retakaful results can change dramatically because one catastrophe can create many large claims at the same time.

Simple Idea

Normal year → Small claims

Catastrophe year → Extremely large claims

This is why Retakaful needs a large financial pool and broad risk diversification.

5. Example Comparing Takaful and Retakaful

Takaful

Suppose:

• 100,000 Motor Takaful participants
• Average claim = RM5,000
• Claims occur regularly

The operator can use historical information to estimate expected claims.

Simple Idea

High number of participants + Manageable claim amounts = Easier pooling

Retakaful

Suppose a Retakaful operator covers only:

• 10 Takaful companies
• Each has exposure to major industrial and catastrophe risks

One earthquake may affect several Takaful operators at the same time.

Claims may suddenly reach:

RM2 billion

Simple Idea

Small number of very large risks = Harder to predict and manage

6. Why Diversification Is Important

• A Retakaful operator should ideally have risks from:
• Many Takaful companies
• Different countries
• Different industries
• Different types of risk
• This reduces the possibility that one event will affect the entire portfolio.

Example

A Retakaful operator covering only properties in one country may suffer badly if a major earthquake affects that country.

A more diversified operator may cover:

• Motor risks in Malaysia
• Property risks in Saudi Arabia
• Marine risks in Indonesia
• Family Takaful risks in the UAE

A single event is less likely to affect all these risks simultaneously.

Simple Idea

More geographical and business diversification → Lower concentration risk

7. Low Volume of Retakaful Business

• The global Takaful market is much smaller than the conventional insurance market.
• Therefore, there is also less business available for Retakaful operators.
• A standalone Retakaful company may not receive enough contributions to build a sufficiently large risk pool.

Example

A Retakaful company may need:

RM1 billion of annual business

to cover:

• Claims
• Staff
• Technology
• Capital costs
• Shari’ah governance
• Administration
• Investment management

But suppose it only receives:

RM300 million

in annual Retakaful contributions.

The business may struggle to cover its expenses and build sufficient reserves.

Simple Idea

Low business volume → Small pool → Higher average costs → Sustainability problem

8. Limited Financial Capacity

• Retakaful operators also require substantial financial resources.
• They must be capable of absorbing very large losses.
• If their capital and risk funds are too small, they cannot accept large amounts of business.

Example

A Takaful operator wants to transfer:

RM500 million of aviation risk

But the Retakaful operator can only safely accept:

RM100 million

The remaining RM400 million must be placed elsewhere.

Simple Idea

Limited capital → Limited risk-taking capacity

9. The Combination Creates a Difficult Problem

Two problems reinforce each other:

Problem 1 – Low Business Volume

• Not enough Takaful operators or risks are being placed with Retakaful providers.

Problem 2 – Limited Capacity

• Retakaful operators do not have enough capital to accept very large risks.

Together:

Low business volume + Low capacity → Difficulty achieving sufficient scale

This makes it difficult for a standalone Retakaful operator to become financially sustainable.

10. Why Standalone Retakaful Can Struggle

• A standalone Retakaful operator depends mainly on Retakaful business.
• It needs enough contributions to:
• Pay claims
• Build reserves
• Cover operating costs
• Maintain capital
• Support technology and specialist staff
• If the volume of business is too small, these fixed costs are spread across too little business.

Example

Annual fixed expenses:

RM50 million

If contributions are:

RM1 billion

Fixed expenses represent only:

5% of contributions

But if contributions are only:

RM200 million

The same RM50 million represents:

25% of contributions

Simple Idea

Small business volume → Higher cost per unit of business

11. Historical Examples

• The text identifies early attempts to establish standalone Retakaful operators that were not successful.
• Examples include:
• Asean Retakaful International (L) Limited in Labuan, Malaysia
• Takaful Re Limited in Dubai, UAE
• Their experiences demonstrate how difficult it can be to operate a standalone Retakaful business when:
• Market volume is limited
• Risk pools are small
• Financial capacity is insufficient
• Large claims are volatile

12. What Retakaful Needs to Become More Sustainable

• Larger number of Takaful operators
• Greater volume of Retakaful business
• More capital
• Larger contribution pools
• Greater geographical diversification
• Wider variety of risks
• Better underwriting
• Stronger investment management
• More skilled professionals

Simple Process

More Takaful business → More Retakaful contributions → Larger pool → Better diversification → Greater capacity → More sustainable Retakaful industry

Easy Way to Remember

Takaful

Many individual risks + Usually manageable claims → Pooling easier

Retakaful

Fewer but much larger risks + Highly volatile claims → Much larger pool required

Main Problem

Too few risks + Too little business + Limited capital = Small Retakaful pool

Result

Small pool → Large claims become difficult to absorb → Standalone Retakaful operator may struggle to survive

Simple Formula

Large Numbers + Diversification + Strong Capital + High Business Volume = Sustainable Retakaful

Takaful - Reinsurance Capacity vs Retakaful Capacity

• The global reinsurance market is much larger than the Retakaful market.
• This means conventional reinsurers generally have a much greater financial capacity to absorb very large losses than Retakaful operators.
• The difference is mainly caused by:
• Larger premium pools
• Larger shareholder capital
• Longer market history
• Greater number of reinsurance companies

1. Global Insurance Premiums

• In 2020, total global insurance premiums were estimated at approximately:

USD6,300 billion

• This represents premiums collected by insurance companies around the world.

Simple Idea

Global insurance market = USD6.3 trillion in premiums

2. Global Reinsurance Premiums

• Total global reinsurance premiums were estimated at approximately:

USD320 billion

• This is approximately 5% of total global insurance premiums.

Calculation

USD320 billion ÷ USD6,300 billion ≈ 5%

• This means that part of the risks originally accepted by insurance companies was passed on to reinsurers.

Simple Process

Policyholder → Insurance company → Part of risk → Reinsurance company

Simple Idea

Insurance premiums = USD6,300bn

Reinsurance premiums ≈ USD320bn

3. Global Reinsurance Capacity

• Global reinsurance capacity was estimated at more than USD500 billion.
• Reinsurance capacity does not come only from reinsurance premiums.
• It is supported by:
• Reinsurance premiums collected
• Shareholder capital
• Accumulated financial resources

Simple Structure

Reinsurance Premiums + Reinsurance Shareholder Capital → Reinsurance Financial Capacity

• In simplified terms, this large financial base determines how much loss the global reinsurance industry can absorb.

Example

• A large earthquake causes losses across many insurance companies.
• Those insurers may have transferred part of their risks to reinsurers.
• Because global reinsurers have hundreds of billions of dollars of financial capacity, they can absorb a substantial portion of these losses.

Simple Idea

Large financial pool → Greater capacity to absorb catastrophic losses

4. Global Takaful Contributions

• By comparison, total global Takaful contributions were estimated at only around:

USD30 billion

• This is significantly smaller than the conventional insurance market of USD6,300 billion.

Comparison

Conventional Insurance = USD6,300bn

Takaful = USD30bn

• Therefore, the total pool supporting the Takaful industry is much smaller.

5. Estimated Global Retakaful Contributions

• If we assume Retakaful represents approximately the same 5% share of Takaful contributions as reinsurance represents of insurance premiums:

5% × USD30 billion = USD1.5 billion

• Therefore, estimated global Retakaful contributions would be approximately:

USD1.5 billion

Simple Calculation

USD30bn × 5% = USD1.5bn

6. Reinsurance vs Retakaful

Reinsurance

• Reinsurance premiums ≈ USD320 billion
• Financial capacity exceeds USD500 billion
• Very large global risk pool
• Greater ability to absorb catastrophic losses

Retakaful

• Estimated contributions ≈ USD1.5 billion
• Much smaller risk pool
• Lower financial capacity
• More limited ability to absorb very large losses

Simple Idea

Reinsurance pool = Very large

Retakaful pool = Much smaller

7. Why the Size of the Pool Matters

• Reinsurance and Retakaful exist to help insurers and Takaful operators manage large risks.
• The larger the financial pool:
• The more risk can be accepted
• The larger the claims that can be absorbed
• The greater the ability to support insurers/Takaful operators

Example

Suppose an aviation loss produces a claim of:

USD500 million

For a large global reinsurance market:

• USD500 million is relatively small compared with its total financial capacity.

For a much smaller Retakaful market:

• A USD500 million loss represents a much larger proportion of the industry’s available resources.

Simple Idea

Same claim + Smaller fund = Much greater financial impact

8. Why This Is a Challenge for Takaful Operators

• Takaful operators may want to cover large risks such as:
• Aircraft
• Ships
• Oil and gas projects
• Large factories
• Infrastructure
• However, they may need significant Retakaful protection.
• If Retakaful capacity is limited, Takaful operators may struggle to transfer/share enough of these large risks.

Example

• A Takaful operator covers an aircraft with potential exposure of:

USD300 million

• It wants to retain only USD50 million.
• It therefore needs Retakaful protection of:

USD250 million

• If Retakaful operators cannot provide sufficient capacity, the Takaful operator may have difficulty accepting the risk.

Simple Process

Large risk → Takaful operator → Needs Retakaful → Limited Retakaful capacity creates difficulty

9. Why Reinsurance Has Greater Capacity

• Conventional reinsurance has:
• A much larger insurance market supporting it
• More premiums
• More shareholder capital
• More established international reinsurers
• Greater geographical diversification
• Therefore, risks can be spread across a much larger financial base.

Simple Idea

Large insurance industry → Large reinsurance industry → Greater risk-bearing capacity

10. Why Retakaful Has Lower Capacity

• The global Takaful industry itself is much smaller.
• Therefore, Retakaful receives fewer contributions.
• There are also fewer major Retakaful providers.
• This results in a smaller pool available to absorb losses.

Simple Relationship

Smaller Takaful market → Smaller Retakaful market → Lower loss-absorbing capacity

Easy Numerical Comparison

Conventional Market

• Global insurance premiums = USD6,300bn
• Global reinsurance premiums = USD320bn
• Reinsurance share ≈ 5%
• Reinsurance capacity = More than USD500bn

Takaful Market

• Global Takaful contributions = USD30bn
• Estimated Retakaful contribution at 5% = USD1.5bn

Main Lesson

• The difference between USD320 billion of reinsurance premiums and approximately USD1.5 billion of Retakaful contributions shows how much smaller the Retakaful market is.
• Consequently, Retakaful has a more limited capacity to absorb very large losses.
• This is one reason why the Takaful industry needs:
• More Retakaful operators
• Greater capital
• Larger contribution pools
• Stronger financial resources

Easy Way to Remember

Insurance market is huge → Reinsurance pool is huge → Can absorb huge risks

Takaful market is smaller → Retakaful pool is smaller → Capacity for huge risks is more limited

Simple Formula

Larger Risk Pool + More Capital = Greater Capacity to Absorb Losses

Takaful - Key Success Factors for the Takaful and Retakaful Industry

The successful development of the Takaful and Retakaful industry depends on several important factors.

1. Transparency of Processes

• Takaful operators should clearly explain how their operations work.
• Participants should understand:
• How contributions are allocated
• How much goes into the Participants’ Risk Fund
• What fees are charged
• How claims are assessed and paid
• How investments are managed
• How surplus and deficit are treated

Example

• Ahmad contributes RM1,200 to a Takaful plan.
• The operator clearly shows:
• Tabarru‘ portion
• Wakalah fee
• Investment allocation
• Surplus treatment

Simple Idea

Transparency = Participants know where their money goes and how the fund is managed.

2. Innovative Takaful Products

• Takaful operators need to create products that respond to new and changing risks.
• Innovation helps the industry remain relevant and competitive.

Examples

• Cyber Takaful
• Climate-risk Takaful
• Micro-Takaful
• Crop Takaful
• Livestock Takaful
• SME Takaful
• Digital Takaful
• Health-related Takaful

Example

• A small online business faces cyberattack risks.
• A Takaful operator develops Cyber Takaful to protect against covered cyber losses.

Simple Idea

New risks → New products → More relevant Takaful solutions

3. Sustainable Takaful Models

• Takaful models should remain financially strong over the long term.
• Contributions should be sufficient to support:
• Claims
• Reserves
• Expenses
• Other obligations
• Operators should avoid structures that repeatedly create deficits.

Example

• If contributions are too low, claims may continuously exceed the fund.
• The operator may repeatedly need to provide Qard.
• This would weaken long-term sustainability.

Simple Idea

Sustainable Takaful = Adequate contributions + Strong reserves + Good risk management

4. Inclusive Takaful Models

• Takaful should be available to a wider range of society.
• Products should not only target high-income customers.
• Inclusive models may serve:
• Low-income households
• Farmers
• Rural communities
• Small businesses
• Underserved groups

Example

• A Takaful operator offers Micro-Takaful for RM10 per month.
• This gives lower-income families access to basic protection.

Simple Idea

Inclusive Takaful = Affordable protection for more people

5. Harnessing Technological Advancement

• Technology can improve:
• Efficiency
• Distribution
• Claims processing
• Customer service
• Underwriting
• Fraud detection
• Data management
• Digitalisation can also reduce operating costs.

Example

• A participant submits a motor claim using a mobile application.
• Photos and documents are uploaded online.
• The claim is processed faster than through a fully manual system.

Simple Idea

Technology = Faster service + Lower cost + Better customer experience

6. Robust Shari’ah Governance

• Strong Shari’ah governance is essential to maintain trust and compliance.
• Takaful and Retakaful operators must ensure that:
• Products are Shari’ah-compliant
• Investments are Shari’ah-compliant
• Contracts are properly structured
• Fees are transparent
• Fund management follows approved Shari’ah principles
• Shari’ah committees should review and monitor operations continuously.

Example

• A Takaful operator wants to invest in a new financial instrument.
• The Shari’ah Committee reviews the instrument before approval.
• If it contains riba or other prohibited elements, it is rejected.

Simple Idea

Strong Shari’ah governance = Innovation without compromising Shari’ah compliance

Overall Key Success Factors

The Takaful and Retakaful industry needs:

• Transparency
• Product innovation
• Sustainable models
• Inclusive models
• Technology
• Strong Shari’ah governance

Easy Way to Remember

Transparency + Innovation + Sustainability + Inclusion + Technology + Shari’ah Governance = Successful Takaful and Retakaful Operations

Takaful - Moving Beyond Shari’ah Compliance

• The statement means that Islamic finance and Takaful should not stop at simply asking:
• “Is this product Shari’ah-compliant?”
• Instead, institutions should also ask:
• Does this product benefit customers?
• Does it help society?
• Does it support the economy?
• Does it protect the environment?
• Does it create long-term sustainable value?
• This is what is meant by shifting the current paradigm beyond compliance.

What Does “Beyond Compliance” Mean?

• Shari’ah compliance remains the minimum requirement.
• But institutions are encouraged to go further by creating:
• Social value
• Economic value
• Environmental value
• Financial inclusion
• Sustainable business opportunities

Example

A Takaful operator develops a normal Family Takaful product.

If it only focuses on compliance:

• The contract avoids riba
• The investment is Shari’ah-compliant
• The product follows Takaful principles

If it goes beyond compliance:

• The product is made affordable for lower-income families
• Digital technology is used to reduce cost
• Part of the investment supports green Sukuk
• Customers receive financial education
• The product helps strengthen family financial resilience

Simple Idea

Compliance = Make sure the product is permissible

Beyond compliance = Make sure the product is also useful, sustainable and beneficial

How This Creates More Business Opportunities

• By looking at wider social and economic needs, Takaful operators can develop new products for groups that may previously have been ignored.

Examples

• Micro-Takaful for low-income households
• Crop Takaful for farmers
• Cyber Takaful for small businesses
• Green Takaful linked to sustainable projects
• Digital Takaful for underserved communities
• Health protection for vulnerable groups

Simple Process

Wider social needs → New Takaful products → New customers → New business opportunities

Benefits to Financial Consumers

• Customers may receive:
• More affordable products
• Better protection
• More relevant products
• Easier digital access
• Better long-term value

Example

• A low-income family that previously could not afford protection may now access Micro-Takaful through a mobile application.

Benefits to Wider Stakeholders

• The benefits are not limited to the customer who buys the product.
• Wider stakeholders may include:
• Employees
• Investors
• Communities
• Small businesses
• Governments
• Future generations
• The environment

Example

• A Takaful operator invests in a renewable-energy Sukuk.
• The operator earns investment income.
• The project creates jobs.
• The community receives cleaner energy.
• The environment benefits from lower emissions.

So one financial decision can create benefits for many stakeholders.

Benefits to the Economy

• A value-based Takaful industry can support:
• Business growth
• Employment
• Financial inclusion
• Sustainable investment
• Economic resilience

Example

• SME Takaful protects small businesses against major losses.
• If a fire occurs, the business can recover faster.
• Employees keep their jobs.
• Suppliers continue receiving orders.
• The local economy remains active.

Easy Way to Remember

Traditional approach:

“Is it Shari’ah-compliant?”

Beyond-compliance approach:

“Is it Shari’ah-compliant, financially sustainable and beneficial to customers, society, the economy and the environment?”

Simple Formula

Shari’ah Compliance + Positive Impact + Sustainability = More Business Opportunities + Wider Stakeholder Benefits

Takaful - Future Growth and Key Success Factors

• The Takaful industry is expected to continue growing strongly in the future.
• Positive market projections are likely to attract more participants and institutions into the industry.
• Future growth may include:
• More conventional insurers opening Takaful windows
• More Retakaful operators
• Possible development of Retro-Takaful
• Greater product innovation
• Wider use of technology

1. Expansion of Takaful Windows

• More conventional insurance companies may establish Takaful windows.
• A Takaful window allows a conventional insurer to offer Takaful products through a separate Shari’ah-compliant arrangement.
• The Takaful operation must maintain proper separation of:
• Funds
• Investments
• Accounting
• Shari’ah governance

Example

• ABC Insurance already provides conventional motor insurance.
• It establishes a Takaful window to offer Motor Takaful.
• The Takaful business must be managed according to Shari’ah requirements.

Simple Idea

Growing Takaful demand → More insurers may open Takaful windows

2. More Retakaful Players

• As Takaful operators take on larger risks, they need more Retakaful support.
• Retakaful helps Takaful operators share large risks and reduce the burden on the Participants’ Risk Fund.

Example

• A Takaful operator covers a factory worth RM1 billion.
• It does not want to retain the entire risk.
• Part of the risk is shared with a Retakaful operator.

Simple Process

Participant → Takaful Operator → Part of risk → Retakaful Operator

Simple Idea

More Takaful business → Greater demand for Retakaful

3. Possible Development of Retro-Takaful

• In the future, the industry may also develop Retro-Takaful.
• Retro-Takaful allows a Retakaful operator to share part of the risks it has accepted with another Retakaful provider.
• This creates another layer of risk sharing.

Example

• Takaful Operator A transfers part of a large risk to Retakaful Operator B.
• Retakaful Operator B considers the risk too large to retain completely.
• It transfers part of the risk to Retakaful Operator C.

Simple Process

Takaful → Retakaful → Retro-Takaful

Simple Idea

Retro-Takaful helps Retakaful operators manage very large risks

Key Factors for Successful Takaful Operations

4. Transparency

• Takaful operators must ensure that their processes are clear to participants.
• Participants should understand:
• How contributions are allocated
• How much goes into the Participants’ Risk Fund
• What fees are charged
• How claims are paid
• How investments are managed
• How surplus and deficit are treated

Example

• Ahmad contributes RM1,200 to a Takaful plan.
• The operator clearly explains:
• Tabarru‘ amount
• Wakalah fee
• Investment portion
• Treatment of surplus

Simple Idea

Participants should know how their money is managed

5. Innovation of More Takaful Products

• Takaful operators need to develop products that respond to new and changing risks.
• Innovation helps Takaful remain competitive and relevant.

Possible New Products

• Cyber Takaful
• Climate-risk Takaful
• Micro-Takaful
• Crop Takaful
• Livestock Takaful
• SME Takaful
• Digital Takaful
• Health-related Takaful

Example

• More businesses depend on online systems.
• A Takaful operator develops Cyber Takaful to protect against data breaches and cyberattacks.

Simple Idea

New risks → New Takaful products

6. Sustainable Takaful Models

• Future Takaful models should be financially sustainable.
• The Participants’ Risk Fund should be able to meet:
• Claims
• Reserves
• Expenses
• Other obligations
• Operators should avoid structures that repeatedly create deficits.

Example

• If contributions are consistently too low, claims may exceed the available fund.
• The operator may repeatedly need to provide Qard.
• This would not be sustainable over the long term.

Simple Idea

Good pricing + Strong reserves + Effective risk management = Sustainable Takaful

7. Inclusive Takaful Models

• Takaful should be accessible to a wider range of society.
• Protection should also reach:
• Low-income families
• Farmers
• Rural communities
• Small businesses
• Underserved groups

Example

• A Takaful operator offers Micro-Takaful for RM10 per month.
• It provides basic death and accident protection to lower-income families.

Simple Idea

Inclusive Takaful = Affordable protection for more people

8. Harnessing Technological Advancement

• Technology can improve the efficiency and accessibility of Takaful.
• Digital technology may help with:
• Online applications
• Digital payments
• Automated underwriting
• Claims processing
• Fraud detection
• Customer service
• Data analysis

Example

• Ahmad has a motor accident.
• He submits his claim through a mobile app.
• Photos and documents are uploaded electronically.
• The claim is processed more quickly.

Simple Idea

Technology → Lower cost + Faster service + Better customer experience

9. Robust Shari’ah Governance

• Strong Shari’ah governance is essential for the future of Takaful.
• Innovation and technology must still comply with Shari’ah.
• The Shari’ah Committee should review:
• Product design
• Contracts
• Investments
• Fees
• Claims
• Surplus treatment
• Fund management

Example

• A Takaful operator wants to launch a new investment-linked product.
• The Shari’ah Committee reviews:
• Investment assets
• Contract structure
• Fees
• Risk-sharing arrangement
• The product is only approved if it complies with Shari’ah.

Simple Idea

Innovation must always remain within Shari’ah principles

Overall Future Direction

The future success of the Takaful industry depends on:

• More Takaful windows
• More Retakaful capacity
• Possible Retro-Takaful development
• Greater transparency
• More innovative products
• Sustainable business models
• Inclusive protection
• Better technology
• Strong Shari’ah governance

Easy Way to Remember

Growth + Transparency + Innovation + Sustainability + Inclusion + Technology + Shari’ah Governance = Successful Future for Takaful

Takaful - Key Challenges: Actuaries, Investments, Efficiency and Economies of Scale

• The Takaful industry faces several challenges that may affect its future growth and competitiveness.
• Important challenges include:
• Shortage of qualified actuaries who understand Takaful
• Limited Shari’ah-compliant investment opportunities
• Need to improve operational efficiency
• Difficulty achieving sufficient critical mass
• Need to benefit from economies of scale
• Need for continued market development and appropriate regulation

1. Need for More Muslim and Takaful-Specialised Actuaries

• An actuary is a professional who uses:
• Mathematics
• Statistics
• Probability
• Financial modelling
• Risk analysis

to estimate future risks and financial obligations.

• Actuaries play an important role in both insurance and Takaful.
• However, Takaful also requires professionals who understand:
• Shari’ah principles
• Tabarru‘
• Participants’ Risk Fund
• Surplus and deficit
• Qard
• Family and General Takaful structures

Simple Idea

Actuary = Person who calculates and analyses risk so that Takaful can be priced properly.

2. Why Actuaries Are Important for Pricing

• Takaful contributions should not be set randomly.
• The actuary estimates:
• Probability of claims
• Expected number of claims
• Expected size of claims
• Operating expenses
• Required reserves
• Possible future liabilities
• These calculations help determine an appropriate Takaful contribution.

Example – Motor Takaful

Suppose an actuary studies 10,000 drivers.

The actuary estimates:

• Expected claims = RM6 million
• Expenses and reserves = RM2 million
• Additional safety margin = RM1 million

Total amount required:

RM9 million

The operator therefore needs to collect enough contributions from the participants to support approximately RM9 million of expected requirements.

Simple Process

Risk data → Actuarial calculation → Appropriate contribution → Stronger Takaful fund

3. Why Takaful Actuaries Need to Understand the Spirit of Takaful

• A conventional actuary may understand risk pricing very well.
• However, a Takaful actuary should also understand that Takaful is based on:
• Mutual assistance
• Risk sharing
• Fairness
• Shari’ah compliance
• Pricing should therefore balance:
• Financial sustainability
• Affordability
• Fair treatment of participants
• Adequacy of the Participants’ Risk Fund

Example

If an operator charges contributions that are too low:

• Participants may initially be happy.
• However, the fund may later be unable to meet claims.
• Frequent deficits may occur.
• The operator may repeatedly need to provide Qard.

If contributions are too high:

• Takaful becomes unaffordable.
• Fewer people may participate.
• The purpose of mutual protection may be weakened.

Simple Idea

Good Takaful pricing = Affordable + Fair + Sufficient to support claims

4. Contributions Need to Be Invested

• Participants’ contributions are not necessarily kept entirely in cash.
• Part of the available funds may be invested in Shari’ah-compliant investments.
• Investment returns can help strengthen the relevant Takaful funds.

Investments Can Help With

• Future claims
• Reserves
• Long-term obligations
• Investment-related benefits
• Overall financial sustainability

Simple Process

Contributions → Takaful fund → Part invested → Shari’ah-compliant return generated

5. Investment Needs of General Takaful

• General Takaful normally covers risks such as:
• Motor
• Property
• Fire
• Marine
• Business risks
• Claims may arise relatively quickly.
• Therefore, General Takaful operators usually need investments that are:
• Relatively liquid
• Low risk
• Easily converted into cash

Example

• A Motor Takaful fund may have claims every day.
• The operator cannot place all available money into investments that cannot be sold for ten years.
• It needs enough liquid assets to pay claims when required.

Simple Idea

General Takaful → Claims may arise soon → Need more liquid investments

6. Investment Needs of Family Takaful

• Family Takaful may involve much longer periods.
• Participants may remain in a scheme for:
• 10 years
• 20 years
• 30 years or longer
• Therefore, Family Takaful operators may need suitable long-term Shari’ah-compliant investments.

Example

• Ahmad joins a 25-year Family Takaful plan.
• The operator needs investments that can generate appropriate returns over a long period.
• Long-term Sukuk may therefore be more suitable than keeping everything in short-term cash deposits.

Simple Idea

Family Takaful → Long-term obligations → Need suitable long-term investments

7. Limited Range of Shari’ah-Compliant Investment Instruments

• One challenge is that the range of available Shari’ah-compliant investment products may be more limited than the conventional investment market.
• Takaful operators cannot simply invest in every financial instrument.
• Investments must comply with Shari’ah.

Conventional Insurer May Invest In

• Conventional bonds
• Interest-bearing deposits
• Other conventional instruments

Takaful Operator Must Seek

• Sukuk
• Islamic money-market instruments
• Shari’ah-compliant equities
• Islamic funds
• Other approved Shari’ah-compliant assets

Simple Idea

Takaful has fewer investment choices because investments must comply with Shari’ah.

8. Why More Islamic Investment Products Are Needed

• A wider range of investment products would help Takaful operators better manage:
• Return
• Risk
• Liquidity
• Duration
• Future claims
• Different Takaful funds require different investment characteristics.

Example

A Family Takaful operator needs:

• Long-term investments

A Motor Takaful operator needs:

• More liquid short-term investments

Therefore, the Islamic capital market should provide a wider variety of:

• Short-term instruments
• Medium-term instruments
• Long-term Sukuk
• Sustainable investments
• Different risk levels

Simple Idea

More Shari’ah-compliant investment products → Better management of Takaful funds

9. Need to Improve Efficiency

• Another challenge is improving the operational efficiency of Takaful operators.
• Efficiency means providing protection and services while controlling costs.

Operators Need to Reduce

• Administrative expenses
• Distribution costs
• Claims-processing costs
• Manual processes
• Unnecessary overheads

Operators Can Improve

• Technology
• Digital distribution
• Automated claims
• Staff productivity
• Risk management
• Customer service

Example

Traditional claims process:

Customer visits branch → Paper documents → Manual assessment → Slow payment

Digital claims process:

Customer uploads documents online → Automated processing → Faster assessment → Faster payment

Simple Idea

Lower cost + Faster service = Greater efficiency

10. Critical Mass

• Critical mass means reaching a sufficiently large number of participants and contributions for the Takaful operation to become more efficient and financially sustainable.
• A very small Takaful operator may have difficulty because its fixed costs are spread over only a small number of participants.

Example – Small Operator

Suppose a Takaful operator has:

• 10,000 participants
• Annual fixed operating costs = RM10 million

Average fixed cost per participant:

RM10 million ÷ 10,000 = RM1,000

Now suppose the operator grows to:

• 100,000 participants

With the same RM10 million fixed cost:

RM10 million ÷ 100,000 = RM100 per participant

The cost per participant falls significantly.

Simple Idea

More participants → Costs spread across more people → Lower average cost

11. Economies of Scale

• Economies of scale occur when the average cost of providing a service decreases as the organisation becomes larger.
• Large Takaful operators may benefit because major fixed costs can be spread over many more participants.

Fixed Costs May Include

• IT systems
• Headquarters
• Regulatory compliance
• Shari’ah governance
• Actuarial systems
• Digital platforms
• Claims infrastructure

Example

A Takaful operator spends:

RM20 million on a digital platform

If it serves:

• 20,000 participants → RM1,000 cost per participant

If it serves:

• 200,000 participants → RM100 cost per participant

The same technology supports many more customers.

Simple Idea

Larger scale → Lower average cost → Greater competitiveness

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12. Why Only a Few Operators May Currently Enjoy Economies of Scale

• Larger and established operators may already have:
• Large customer bases
• Strong distribution networks
• Established technology
• Strong brands
• Greater contribution income
• Smaller operators may have:
• Fewer participants
• Higher average costs
• Less bargaining power
• Smaller investment portfolios
• Higher distribution costs per participant

Simple Idea

Large operator → Costs spread widely

Small operator → Same types of costs spread over fewer participants

13. How Market Expansion Can Help

• As the Takaful market grows:
• More people participate
• Contribution pools become larger
• Risks can be spread across more participants
• Operators can achieve critical mass
• Average operating costs may fall

Example

A Takaful operator grows from:

50,000 participants → 500,000 participants

The operator may be able to:

• Spread technology costs
• Negotiate better service-provider rates
• Invest more efficiently
• Improve product pricing
• Strengthen risk diversification

Simple Idea

Market growth → Larger participant pool → Better efficiency and stronger risk sharing

14. Role of Proper Regulation

• Appropriate regulation is important for the healthy development of the Takaful industry.
• Regulators can help ensure:
• Financial stability
• Adequate capital
• Fair treatment of participants
• Proper fund management
• Effective Shari’ah governance
• Transparent product structures
• Strong risk management

Example

• A regulator may require Takaful operators to maintain sufficient capital and reserves.
• This reduces the risk that an operator becomes unable to meet its obligations.

Simple Idea

Good regulation → Stronger operators → Greater participant confidence

Overall Challenges

Human Capital Challenge

• Not enough specialised Takaful actuaries.
• Need more training and professional development.

Investment Challenge

• Limited range of Shari’ah-compliant investment products.
• Need more suitable short-, medium- and long-term instruments.

Efficiency Challenge

• Operators need to reduce costs and improve service.

Scale Challenge

• Operators need enough participants to achieve critical mass and economies of scale.

Regulatory Challenge

• Appropriate regulation is needed to support growth while protecting participants.

Easy Way to Remember

Actuaries

Calculate risk → Determine appropriate contribution

Investments

Contributions → Shari’ah-compliant investments → Returns help strengthen funds

Critical Mass

More participants → Larger pool → Greater efficiency

Economies of Scale

Larger operation → Lower average cost

Regulation

Proper rules → Stable and trustworthy Takaful industry

Simple Formula

Skilled Actuaries + More Islamic Investments + Greater Efficiency + Critical Mass + Economies of Scale + Proper Regulation = Stronger Takaful Industry

Takaful - Sustainability, SDGs and Maqasid al-Shari’ah

• The Takaful industry should not focus only on providing financial protection.
• It should also help strengthen the sustainability of the wider financial ecosystem.
• Takaful operators are encouraged to take a more proactive approach in achieving the objectives of Maqasid al-Shari’ah.
• This means considering wider social, economic and environmental outcomes when designing:
• Products
• Business strategies
• Investment policies
• Internal policies

1. Strengthening the Sustainability of the Financial Ecosystem

• A sustainable financial ecosystem is one that can continue operating effectively over the long term.
• Takaful operators can contribute by:
• Managing risks responsibly
• Investing in sustainable activities
• Supporting financially vulnerable groups
• Avoiding activities that create long-term harm
• Developing products that strengthen social and economic resilience

Example

• A Takaful operator invests in Shari’ah-compliant renewable-energy projects.
• The investment may generate financial returns while also supporting:
• Cleaner energy
• Reduced pollution
• Long-term environmental sustainability

Simple Idea

Takaful should protect people today without creating harm for society tomorrow.

2. Proactive Approach to Maqasid al-Shari’ah

• Maqasid al-Shari’ah refers to the broader objectives and purposes of Shari’ah.
• These objectives aim to:
• Bring benefit to people
• Prevent harm
• Protect essential human interests
• Takaful should therefore not only react after a loss occurs.
• It can also help prevent risks and improve resilience before losses happen.

Example

• A Crop Takaful operator does not only pay farmers after floods.
• It may also support:
• Weather-monitoring technology
• Flood-risk education
• Better agricultural practices
• Early-warning systems

Simple Idea

Maqasid-based Takaful = Protection + Prevention + Long-term benefit

3. Integrating Sustainable Development Goals - SDGs

• Takaful operators can incorporate the Sustainable Development Goals (SDGs) into their business models and policies.
• The SDGs focus on improving:
• Social well-being
• Economic development
• Environmental sustainability
• Many of these objectives are consistent with the broader aims of Maqasid al-Shari’ah.

Areas That Takaful Can Support

• Poverty reduction
• Good health
• Financial inclusion
• Sustainable cities
• Climate protection
• Responsible investment
• Economic opportunity

4. Example - Poverty Reduction

• Takaful operators can develop Micro-Takaful for lower-income households.
• Affordable protection can help families recover from:
• Death of a breadwinner
• Accident
• Illness
• Property loss

Example

• A low-income family pays a small monthly contribution.
• The breadwinner dies unexpectedly.
• The family receives a Takaful benefit.

Connection

• Supports social protection
• Reduces financial hardship
• Supports the objective of protecting life and wealth

Simple Idea

Micro-Takaful → Financial resilience → Social sustainability

5. Example - Health and Well-Being

• Takaful operators can provide affordable health-related protection.
• They may also encourage:
• Preventive healthcare
• Health screening
• Wellness programmes

Example

• A Family Takaful plan rewards participants who attend regular health screenings.
• The aim is to reduce health risks before serious illness occurs.

Simple Idea

Prevent illness where possible, not only compensate after illness happens.

6. Example - Environmental Protection

• Environmental sustainability is consistent with the Shari’ah objective of preventing harm.
• Takaful operators can:
• Avoid investing in environmentally harmful businesses
• Support green Sukuk
• Develop climate-related Takaful products
• Encourage environmentally responsible behaviour

Example

• A Takaful operator invests in a Green Sukuk that finances solar-energy projects.
• The operator earns a return while supporting lower carbon emissions.

Simple Process

Takaful funds → Green Sukuk → Renewable energy → Financial return + Environmental benefit

7. Example - Climate and Disaster Protection

• Takaful operators can develop products for:
• Flood
• Drought
• Storm
• Crop loss
• Livestock loss
• These products help communities recover from climate-related disasters.

Example

• A farmer’s crops are destroyed by severe drought.
• Crop Takaful provides financial assistance.
• The farmer is able to restart production.

Simple Idea

Climate risk → Takaful protection → Faster recovery

8. Socio-Economic Development

• Takaful can support wider socio-economic development by:
• Protecting small businesses
• Supporting farmers
• Promoting financial inclusion
• Providing affordable protection
• Investing in productive sectors
• This helps strengthen households and businesses.

Example

• A small business obtains SME Takaful.
• A fire damages its premises.
• The Takaful benefit helps the business reopen and retain its employees.

Result

• Business survives
• Employees retain jobs
• Local economy remains supported

Simple Idea

Takaful protection can support both individuals and the wider economy.

9. Preservation of Life on Earth

• Sustainability also involves protecting resources for future generations.
• Takaful operators can consider the long-term effects of:
• Investments
• Business activities
• Product design
• This is consistent with the idea that humans should avoid causing unnecessary harm to the environment and society.

Example

A Takaful operator chooses between:

• Investing in a highly polluting company
• Investing in a Shari’ah-compliant clean-energy project

A sustainability-focused approach would favour the investment that provides financial return while creating less environmental harm.

10. Bringing Benefit and Preventing Harm

• A central objective of Shari’ah is to:
• Promote benefit
• Prevent harm
• Therefore, sustainable Takaful should consider whether its activities:
• Improve people’s lives
• Reduce vulnerability
• Protect the environment
• Strengthen economic stability
• Avoid long-term social or environmental damage

Simple Idea

Maqasid al-Shari’ah = Create benefit + Prevent harm

Overall Relationship

Maqasid al-Shari’ah

→ Provides the ethical and Shari’ah objectives

SDGs

→ Provide global sustainability goals

Takaful

→ Can translate these objectives into practical products, investments and policies

Example

Maqasid objective: Protect wealth and life

SDG objective: Reduce poverty and improve well-being

Takaful action: Develop affordable Micro-Takaful

Easy Way to Remember

Traditional Approach

Loss happens → Takaful pays claim

Proactive Sustainable Approach

Identify risk → Prevent harm → Provide protection → Invest responsibly → Support long-term recovery

Simple Formula

Maqasid al-Shari’ah + SDGs + Sustainable Takaful Practices = Stronger Social, Economic and Environmental Impact

Final Simple Idea

Takaful should not only compensate losses; it should also help create a more resilient, sustainable and beneficial society.