Participation Insurance (Takaful): An Alternative to Conventional Insurance

Purpose and scope of the regulation

The Regulation on the Operational Procedures and Principles of Participation Insurances’ (“Regulation”) was published in the Official Gazette on 20th September 2017 and will enter into force on 20th December 2017. The regulation aims to provide a formal legal framework for participation insurance (takaful) which is in practice already offered by insurance providers. In addition to the distinct features of participation insurance (takaful) that are set forth in the Regulation, the provisions that regulate conventional insurance in Turkey will remain applicable where the Regulation is otherwise silent.

How is participation insurance (takaful) distinct from conventional insurance?

Participation insurance (takaful) is an alternative to conventional insurance based on the concepts of mutuality and cooperation.

Conventional insurance is a commercial contract in which the insured only benefits from the protection if an event of loss occurs; if no event of loss occurs during the term the insurer is still entitled to the full value of the insurance premiums. This is the fundamental distinction of participation insurance (takaful) from conventional insurance; in participation insurance (takaful) if no event of loss occurs during the term, or the loss suffered has a value lower that the insurance premiums, then any surplus premiums will be redistributed to the participants. This essential element of mutuality establishes an arrangement whereby risk is shared between the parties rather than transferred, creating a system which is beneficial for both the operator and the participants.

Features of participation insurance (takaful)

In the spirit of mutuality and cooperation, the Regulation defines a participation insurance provider as an “operator” and the persons who pay the insurance premiums as “participants”, as opposed to “insurer” and “insured” in conventional insurance terms.

Within the scope of the Regulation, a participation insurance operator may choose to provide the participation insurance in the legal form of:

• an agency (wakala or vekaletname);
• a partnership (mudaraba or mudarabe);
• a combination of partnership and agency (the hybrid model); or
• a model approved by the advisory committee.

Whichever legal form is utilised by the participation insurance operator, it is critical that the insurance premium and the calculation thereof is certain and transparent. Furthermore, once the insurance premium is determined, it must remain constant for a year.

A participation insurance operator must establish two distinct funds, one being the “risk fund” similar to conventional insurance and the other being the “participation fund” which all the insurance participants will concurrently contribute to.

Thus, an insurance system based upon mutuality and cooperation has been formally established in Turkey.