Takaful - Saudi Cooperative Insurance Model vs Takaful

The Saudi cooperative insurance model and Takaful both aim to provide Shari’ah-acceptable insurance protection, but they are structured differently.

1. Saudi Cooperative Insurance Model

• Saudi insurance companies operate under a cooperative insurance framework.
• The insurance company itself may be a shareholder-owned joint-stock company. Saudi Arabia’s Insurance Authority currently recognises joint-stock companies as an accepted legal structure for insurance businesses. [IA\.gov\.sa](https://www.ia.gov.sa/en/help-and-supports/faqs?utm_source=chatgpt.com)
• Therefore, there are:
• Policyholders who purchase insurance
• Shareholders who own the insurance company

How It Works

• Policyholders pay insurance premiums to the insurance company.
• The insurance company accepts the insured risks.
• If an insured event occurs, the company pays the eligible claim according to the insurance policy.
• Under the model described , there remains an element of risk transfer:
• The policyholder transfers the insured risk to the insurance company.
• The insurance company bears responsibility for eligible claims.

Simple Process

Policyholder pays premium → Insurance company accepts risk → Covered loss occurs → Insurance company pays claim

2. Example of the Saudi Cooperative Model

Suppose Ahmad buys motor insurance.

• Ahmad pays an annual premium of SAR 2,000.
• Ahmad causes an accident.
• The covered third-party loss is SAR 50,000.
• The insurance company pays the eligible claim according to Ahmad’s policy.

Therefore:

Ahmad pays premium → Risk transferred to insurance company → Accident occurs → Insurance company pays covered claim

• Ahmad is a policyholder.
• He is not necessarily an owner of the company.
• The company’s shareholders are its owners.

3. Surplus in the Saudi Cooperative Model

• If insurance operations perform well, a net insurance surplus may arise.
• Under the Saudi surplus-distribution rules referred :
• 10% of the net surplus is distributed to eligible policyholders.
• It may be paid directly or provided as a reduction in future premiums.
• The remaining 90% is transferred to the shareholders’ income statement. [IA\.gov\.sa](https://www.ia.gov.sa/Regulations/1%D8%B3%D9%8A%D8%A7%D8%B3%D8%A9%20%D8%AA%D9%88%D8%B2%D9%8A%D8%B9%20%D9%81%D8%A7%D8%A6%D8%B6%20%D8%B9%D9%85%D9%84%D9%8A%D8%A7%D8%AA%20%D8%A7%D9%84%D8%AA%D8%A7%D9%85%D9%8A%D9%86.pdf)

Example

Suppose the insurance operations produce a net surplus of:

SAR 10 million

Then:

• 10% = SAR 1 million
• allocated to eligible policyholders
• 90% = SAR 9 million
• transferred to the shareholders’ income statement

Simple Idea

Saudi Cooperative Surplus → 10% Policyholders + 90% Shareholders

The official Saudi surplus policy confirms that the policyholder portion may be distributed directly or used to reduce the following year’s premium. [IA\.gov\.sa](https://www.ia.gov.sa/Regulations/1%D8%B3%D9%8A%D8%A7%D8%B3%D8%A9%20%D8%AA%D9%88%D8%B2%D9%8A%D8%B9%20%D9%81%D8%A7%D8%A6%D8%B6%20%D8%B9%D9%85%D9%84%D9%8A%D8%A7%D8%AA%20%D8%A7%D9%84%D8%AA%D8%A7%D9%85%D9%8A%D9%86.pdf)

4. Traditional Takaful Model

• In Takaful, participants are not simply transferring their risks to the Takaful operator.
• Instead, participants agree to mutually share their risks.
• Each participant contributes money into a Participants’ Risk Fund.
• The participants collectively provide protection to one another.
• Eligible claims are paid from this common fund.

Simple Process

Participants contribute → Participants’ Risk Fund → Risks shared among participants → Claims paid from the fund

5. Role of the Takaful Operator

• The Takaful operator normally manages the Takaful arrangement.
• The operator is not intended to be the conventional insurer that purchases the participant’s risk.
• Its role may include:
• Collecting contributions
• Managing the participants’ fund
• Assessing claims
• Paying eligible claims from the participants’ fund
• Managing investments
• Managing administration and underwriting
• The operator receives compensation according to the particular Takaful model.

Simple Idea

Participants = Risk sharers

Takaful operator = Fund manager/operator

6. Example of Takaful

Suppose 10,000 participants join a Motor Takaful scheme.

• Each participant contributes RM1,000.
• Total contributions = RM10 million.
• The appropriate portion is placed into the participants’ risk fund.
• During the year, some participants suffer covered accidents.
• Eligible claims are paid from the common participants’ fund.

Therefore:

Participants contribute together → Some participants suffer losses → Common fund assists those participants

The important idea is:

Participants mutually protect one another.

The operator manages the arrangement rather than simply acting as the party purchasing all of the participants’ risks.

7. Risk Transfer vs Risk Sharing

Saudi Cooperative Insurance Model

• In the model described , risk transfer remains present.
• The policyholder purchases insurance protection.
• The insurance company accepts responsibility for covered claims.
• The shareholders ultimately own the insurance company.

Simple Idea

Policyholder → transfers risk → Insurance company

Takaful

• Takaful is principally based on risk sharing.
• Participants contribute to a common risk fund.
• The risks are collectively shared among participants.
• The Takaful operator manages the arrangement.

Simple Idea

Participant ↔ Participant ↔ Participant

All mutually share the risk through the common fund

8. Who Owns the Company?

Saudi Cooperative Insurance

• The insurance company is generally owned by its shareholders.
• Policyholders purchase insurance but are not automatically shareholders.
• Saudi regulations recognise shareholder-owned joint-stock companies as an insurance-company structure. [IA\.gov\.sa](https://www.ia.gov.sa/en/help-and-supports/faqs?utm_source=chatgpt.com)

Simple Idea

Shareholders = Owners

Policyholders = Customers / insured persons

Takaful

• A Takaful operator may also have shareholders.
• However, an important distinction is made between:
• Shareholders’ Fund
• Participants’ Risk Fund
• The participants’ risk fund exists for the mutual protection of participants.
• The shareholders’ fund belongs to the operator/shareholders.

Simple Idea

Participants’ Risk Fund = For participants’ mutual protection

Shareholders’ Fund = Belongs to shareholders/operator

9. Who Pays the Claims?

Saudi Cooperative Insurance

• The insurance company is responsible for settling eligible claims according to the insurance contract.
• The policyholder has transferred the covered insurance risk to the company under the model described.

Simple Process

Premium → Insurance company → Claim arises → Insurance company pays

Takaful

• Eligible claims are normally paid from the Participants’ Risk Fund.
• Participants have collectively contributed to that fund.

Simple Process

Contributions → Participants’ Risk Fund → Claim arises → Fund pays eligible claim

10. What Happens to the Surplus?

Saudi Cooperative Insurance

• Under the surplus-distribution framework discussed above:
• 10% of net surplus → eligible policyholders
• 90% → shareholders’ income statement [IA\.gov\.sa](https://www.ia.gov.sa/Regulations/1%D8%B3%D9%8A%D8%A7%D8%B3%D8%A9%20%D8%AA%D9%88%D8%B2%D9%8A%D8%B9%20%D9%81%D8%A7%D8%A6%D8%B6%20%D8%B9%D9%85%D9%84%D9%8A%D8%A7%D8%AA%20%D8%A7%D9%84%D8%AA%D8%A7%D9%85%D9%8A%D9%86.pdf)

Example

SAR 10m surplus

→ SAR 1m to policyholders

→ SAR 9m to shareholders’ income statement

Takaful

• An underwriting surplus arises when the participants’ risk fund has more available resources than required for:
• Claims
• Reserves
• Relevant expenses and obligations
• The treatment of the surplus depends on the particular Takaful model and applicable Shari’ah rules.
• It may:
• Remain in the participants’ fund as reserves
• Be distributed partly or fully to eligible participants
• Be dealt with according to another approved surplus-sharing arrangement
• It is therefore not automatically divided 10% to participants and 90% to shareholders.

Simple Idea

Takaful surplus originates from the participants’ risk-sharing arrangement and is dealt with according to the Takaful contract and Shari’ah-approved model.

11. Main Difference in Purpose of Contributions

Saudi Cooperative Insurance

• Policyholder pays a premium.
• The premium purchases insurance protection from the insurance company.
• The insurer accepts the covered risk.

Simple Idea

Premium → Buy insurance protection

Takaful

• Participants make Takaful contributions.
• Part of the contribution is generally provided for mutual assistance through the participants’ risk fund.
• Participants agree to help compensate one another when covered losses occur.

Simple Idea

Contribution → Mutual assistance and risk sharing

12. Simple Scenario Comparing Both

Suppose Ahmad needs motor protection.

Saudi Cooperative Insurance

• Ahmad pays SAR 2,000 premium.
• The insurance company accepts Ahmad’s insured risk.
• Ahmad causes a covered accident.
• Claim = SAR 50,000.
• The insurance company settles the eligible claim.
• At the end of the year, if the insurance operations generate a surplus, Ahmad may qualify for a share of the 10% policyholder allocation.

Flow

Ahmad → Premium → Insurance Company

Insurance Company → Accepts risk

Accident → Insurance Company → Pays claim

Takaful

• Ahmad contributes RM2,000 to a Motor Takaful arrangement.
• The relevant portion goes into the participants’ risk fund.
• Thousands of other participants also contribute.
• Ahmad suffers a covered loss.
• The eligible claim is paid from the participants’ risk fund.

Flow

Ahmad + Other Participants → Contributions → Common Risk Fund

Covered loss occurs → Common Risk Fund → Pays eligible claim

Therefore:

Saudi Cooperative Model → Insurance company accepts the risk

Takaful → Participants mutually share the risk

Easy Way to Remember

Saudi Cooperative Insurance

• Policyholders purchase insurance.
• Company is owned by shareholders.
• Risk transfer remains present in the model described in the textbook.
• Company pays covered claims.
• Net surplus under the cited framework:
• 10% → Policyholders
• 90% → Shareholders’ income statement
• It is regarded as cooperative insurance under the Saudi regulatory framework. [SAMA Rulebook](https://rulebook.sama.gov.sa/en/entiresection/1364)

Takaful

• Participants make contributions.
• Participants mutually share risks.
• Claims come from the participants’ risk fund.
• Takaful operator manages the fund.
• Participants’ fund is distinguished from the shareholders’ fund.
• Surplus treatment depends on the particular Shari’ah-approved Takaful model.

Most Important Difference

Saudi Cooperative Insurance:

Policyholder → Risk Transfer → Insurance Company

Traditional Takaful:

Participants → Risk Sharing → Participants’ Common Risk Fund

So, although both may be regarded as Shari’ah-compliant within their respective frameworks, the underlying mechanism is different: the Saudi cooperative model described in your text retains risk transfer, while traditional Takaful is structured around mutual risk sharing among participants.