Takaful insurance concepts are derived from Syariah concepts which are born from Islamic teachings. While conventional insurance is in no way illegal, there are certain aspects of it that breach Syariah law. Under Syariah compliant insurance policies, it uses Aqad which are actually contracts. These contracts must be free of Riba, Maisir and Gharar. What do these Arabic words mean?
Riba - Refers to interest which are related to the investments made by the insurance companies.
Maisir - Refers to elements of gambling where the business could be unstable and gambling on the outcome of its profit margins.
Gharar- is actually defined as unpredictable conditions that are beyond the control of the company.
Gharar and Maisir are very much inter-related, in that they correspond to anything that leads to too much uncertainty and an inability to be clearly define terms or conditions of its dealings.
To simplify how their investment portfolios work, a takaful insurance company can only invest in halal businesses. Basically they are not allowed to invest in companies that deal in interest, alcohol, gambling or provide too much uncertainty.
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