Insurance and Takaful
Domain 6: Insurance and Takaful
This domain tests protection products and the principles that make a contract valid, plus the distinctive mechanics of Takaful. Insurance in Pakistan is regulated by SECP under the Insurance Ordinance, 2000; Takaful operates under SECP Takaful Rules and Shariah governance.
Core principles
- Insurable interest: the policyholder must suffer a financial loss. Utmost good faith requires honest disclosure of material facts.
- Indemnity restores the insured to the pre-loss financial position, subject to sum insured, deductibles, and exclusions. Subrogation lets the insurer pursue a third party after paying.
- Contribution applies when multiple policies cover the same loss; proximate cause determines which peril triggered the loss.
Takaful mechanics
Participants pay contributions into a pool; a portion is tabarru (donation) for mutual protection. The operator manages the pool under a wakala or mudaraba model, with a Shariah board. Claims are paid from the pool; any surplus belongs to participants, not the operator, and is distributed per the rules. Family takaful combines protection with savings; general takaful covers property, motor, and health.
Worked example
A client with a PKR 5 million mortgage buys a PKR 5 million term policy and later dies. Reasoning: the bank has an insurable interest in the mortgage; the nominee receives the sum insured, but the payout should first clear the mortgage. If the client had concealed a serious illness, the insurer may avoid the contract for non-disclosure. A Takaful surplus is not a guaranteed investment return.
Traps
Insurance is not a savings account. A nominee is not automatically the absolute owner of proceeds. Takaful is not conventional insurance with an Islamic label: pool ownership, surplus, and Shariah approval matter.