Takaful - Where Does the Money to Pay Claims Come From?

The main source of money used to pay Takaful claims is the Participants’ Risk Fund (PRF). This fund is built mainly from the participants’ contributions, particularly the Tabarru‘ portion.

1. Participants’ Contributions – Main Source

• Participants pay Takaful contributions.
• Part of each contribution is allocated as Tabarru‘ (donation).
• These Tabarru‘ amounts are pooled together in the Participants’ Risk Fund.
• When a participant suffers a covered loss, the claim is paid from this fund.

Example

Suppose:

• 10,000 participants contribute.
• Each contributes RM1,000.
• RM700 from each contribution is allocated to the risk fund.

Therefore:

10,000 × RM700 = RM7 million Participants’ Risk Fund

If claims during the year total RM4 million:

RM7m Risk Fund → RM4m claims paid

So the most important answer is:

Claims are primarily funded by the participants themselves through their pooled Tabarru‘ contributions.

2. What About Investments?

Yes. Part of the Participants’ Risk Fund may be invested in Shari’ah-compliant investments while it is not immediately needed.

For example:

• Participants’ Risk Fund = RM7 million
• RM5 million is invested
• Investment return = RM250,000

The fund now benefits from that investment income.

So resources available to support claims can include:

Participants’ contributions + Investment income earned by the fund

However, the investment itself is still an asset belonging to the Participants’ Risk Fund.

It may be converted into cash when necessary to meet claims.

Simple Idea

Contributions → Risk Fund → Part invested → Investment return added to fund → Claims paid from fund

3. What About Assets?

The word assets refers to everything the fund owns that has financial value.

The Participants’ Risk Fund may hold assets such as:

• Cash
• Islamic deposits
• Sukuk
• Shari’ah-compliant investments
• Other permitted financial assets

Therefore, technically, claims are paid using the assets of the Participants’ Risk Fund.

For example:

The fund has:

• RM2m cash
• RM4m Sukuk
• RM1m Islamic deposits

Total assets = RM7m

If a RM3m claim needs to be paid, the operator may use available cash and liquidate investments if necessary.

So:

Participants’ contributions create the fund → the fund holds assets → those assets are used to meet claims.

4. What About Surplus?

A surplus is not normally the original source of claims.

Surplus is what remains after claims, reserves, expenses and other obligations have been accounted for.

For example:

• Contributions and investment income = RM10m
• Claims = RM5m
• Expenses/reserves = RM3m

Remaining:

RM10m − RM5m − RM3m = RM2m surplus

That RM2 million may remain in the Participants’ Risk Fund, depending on the Takaful model.

If retained, it strengthens the fund and can help support future claims.

So:

Surplus = money left after current obligations

It can strengthen the fund for the future, but it is not a separate payment made by participants specifically to settle a claim.

5. What If the Participants’ Risk Fund Does Not Have Enough Money?

This is where the Takaful operator/shareholders’ fund can become important.

Suppose:

• Participants’ Risk Fund assets = RM7m
• Claims and obligations unexpectedly reach RM8m

There is a:

RM1m deficit

The Takaful operator may provide an interest-free loan called Qard from the shareholders’ fund.

Flow

Participants’ Fund has RM7m

→ Claims require RM8m

→ RM1m shortfall

→ Operator provides RM1m Qard

→ Claims can be met

The Qard is generally expected to be repaid from future surpluses of the participants’ fund according to the applicable structure.

Put Everything Together

The claim fund basically develops like this:

Participants pay contributions

→ Tabarru‘ portion enters Participants’ Risk Fund

→ Risk Fund holds cash and other assets

→ Part of the fund may be invested

→ Investment income increases the fund

→ Claims are paid from the Participants’ Risk Fund

→ If money remains after claims and obligations, there may be a surplus

→ If there is a shortage, the operator may provide Qard from the shareholders’ fund

Easy Way to Remember

Main source: Participants’ Tabarru‘ contributions

Additional growth: Shari’ah-compliant investment income

What actually pays claims: Assets/cash of the Participants’ Risk Fund

Surplus: What remains after obligations; can strengthen future claim capacity

If there is a deficit: Qard from the shareholders’ fund

So, in one sentence:

The participants fund the claims collectively; investments help grow the fund, surplus strengthens it, and shareholder Qard provides temporary support when the fund is insufficient.