The Wakalah fee may be defined upfront (generally in the range of 20% to 35% of the contributions) and transferred to the shareholders’ account. The remaining portion of the contributions is transferred to the Takaful account, which is used to pay claims, re-Takaful costs, etc. The surplus is then allocated 100% for the benefit of the participants.
Generally a portion of the surplus is retained as a contingency reserve and the balance distributed to participants in proportion to their contributions (to those who have not claimed, although other methods are also applicable). In the case of a deficit, the shareholders would be required to give a Qard Hasnah to the participants to pay for the deficit (as recovery from the participants may not be practical), which may be returned from future surpluses (should these arise). The shareholders are responsible for all expenses of management, marketing, etc, and their earnings come from expenses, as they are less than the fee and the investment income share as a mudarib for the Takaful fund and investment income on the shareholders’ funds.
(ii) This gives rise to issues such as inheritance (it is not possible to measure the share of surplus in the pool at time of death) and zakat in the case of death of the person, as the donation is a conditional gift.
(iii) The relationship is between the participants and the operator and also amongst the participants (exchange of gift for a gift). This also creates doubts about the contract becoming a contract of compensation.
(iv) Qard Hasnah is an obligation on shareholders which will be returned by future generations, different from those who gave rise to the deficit, as the participants keep changing on a continuous basis.
(v) Contingency reserves may not be equitable between generations as the operator is likely to also hold higher proportionate reserves in the early years for future contingencies. Since the participants keep changing on a continuous basis, it leads to an inter-generational equity issue. In a pure pooling arrangement, one should be able to call on members to actually contribute more in case of a deficit on a pro rata basis. This is not seen as practical in retail commercial insurance and therefore alternative solutions may be explored.
(vi) The wakeel should not be the guarantor of the participants whom he represents.
These concerns were not considered to be serious and it was proposed to look for solutions to these issues within the Wakalah model, as in principle this model was well accepted by most scholars from a Shariah perspective. The proposed refinements are discussed next, referred to as “Wakalah with Waqf fund.”
Waqf may be set up as a separate Shariah entity which has the ability to accept ownership or make someone the owner of any asset. The Waqf entity may be registered if there are no legal issues, else this is not required. The objectives of the Waqf fund are to provide relief to participants against defined losses, as per the rules of the Waqf fund.
Many examples of cash Waqf funds exist, for instance to give interest-free loans, or money given to manage where the returns may be used for social benefits, as defined by the Waqf rules. The fund may be managed on a commercial basis for a fee by a fund manager or administrator appointed for this purpose. I understand that the Islamic Development Bank operates several Waqf funds for different social purposes.
A conventional insurance contract is a contract between two parties where there is an offer and an acceptance, and therefore a Aqd-e-Moawza. The shareholders become the owners of the premiums, against which they take on the obligation to pay claims. In the case of Waqf, the tabarru’ becomes a part of the Waqf fund, which becomes the owner and not the operator.
In a typical Wakalah contract, the tabarru’ or hiba is not complete, as it is conditional on being used to pay claims, and there is a element of surplus which may come back to the participants. From a Shariah perspective, proportionate ownership therefore remains with the participants to the extent of the funds not utilized for claims.
The original donation of the Waqf fund needs to be invested in a very safe Shariah compliant investment and its returns used for the benefit of the participants, the idea being that the Waqf fund should remain intact.
For different lines of Takaful services (or different types of risks), more than one Waqf fund can be formed with the shareholders’ money to form a Waqf fund further allocated into different portions to form separate Waqf funds for different lines of Takaful services.
The rate of donation is as appropriate to the risk of the participants’ assets as per actuarial and underwriting principles applicable.
This reserve would also be the property of the Waqf fund and the profit received on it would be treated as property of Waqf fund. With the help of this fund, Waqf may compensate the current as well as future participants. The Waqf fund would not need to refund the reserve to the participants in any given period of time.
(i) For performing services, the company would be eligible to take a defined remuneration, which would be deducted from the Waqf fund.
(ii) As mudarib by sharing in the investment profits OR as agent for investment by taking service charges.
(iii) By investing the money of the shareholders and earning profits.
From this remuneration, the company would bear the expenses related to the salaries of its employees, rents and other administrative expenses, as well as initial expenses related to setting up.
The refinements to the Wakalah model discussed above in principle follow the same approach as under a typical Wakalah model, but with some amendments to address some of the concerns and doubts identified by Shariah scholars. It is thought that these refinements address these concerns and at the same time should not be difficult to implement.
The author is a Fellow of the Society of Actuaries, and director and actuary at SHMA Private Limited, Pakistan. He can be contacted by email on: