Critical analysis of third party policy under Motor Takaful in Malaysia

Abstract

Islamic Finance has developed mainly in three directions namely Islamic banking, Islamic capital market and Islamic insurance (Takaful). Takaful is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a pact among a group of members who agree to jointly indemnify the loss or damage that may inflict any of them out of the funds they donate collectively. The benefits of Takaful can be divided into two i.e. Family Takaful Plan (similar to Conventional Life Insurance) and General Takaful Plan (General Insurance). Motor Takaful, being part of the General Takaful Plan is a Syariah compliant product, underwritten by the Takaful operators, which offers three main types of Takaful coverage for motor vehicles. They are the Act Only Motor Takaful policy, Third Party policy and Comprehensive policy. Confining the study to the Third Party policy, it is a type of cover that protects the participants against the third party`s death, bodily injury and/or property damage. Legal Liability to Passengers (LLP) being part of Motor Takaful is an optional cover to protect those passengers/claimants against negligent drivers in the same vehicle. LLP extension is available to both comprehensive and Third Party policies subject to additional contributions. Referring to the general definition of Takaful, the protection to be given by the Operators are confined to those contributed to the fund i.e. the participants only. However, today the protection and compensation are also extended to third party including pedestrian, driver or passengers of another vehicle or those who falls under the LLP category. This study observes the inconsistency (if any) between the general definition of Takaful and the extension of permitted compensation awarded to the third party as non-participants under Motor Takaful together with its adherence to the Shariah principles and requirements. At the same time, critical analysis on the Motor Takaful product, structures and its current practice in Malaysia were undertaken. Its respective strengths, weaknesses and other related features were also discussed. Expert interviews being the primary research instrument were conducted to mainly resolve the gap found supported with findings from other secondary resources. Based on all the information gathered, it can be observed that the third party policy under Motor Takaful is Shariah compliant and functioning in line with the general definition of Takaful. This is because damages owed to third parties are within the scope of coverage offered by the operators. It very much depends on the scope covered under the policy opted by the participants. The permissibility of the mutual transaction is based on the Aqad (contract) agreed between participants.It is homogenous in nature as those policies cover and applicable to all participants having contributed the same amount into the same pool of fund.