Quora Answer: What is a Comparative Analysis between Takaful & Conventional Insurance?

The following is my answer to a Quora question: “How can you do a comparative analysis between takaful and conventional insurance?”

The question of how to compare takaful with conventional insurance assumes they are equivalent products serving equivalent purposes through different structural mechanisms.  They are not.  Takaful and conventional insurance share a surface resemblance — both involve the pooling of risk — and diverge at every level that matters to the policyholder: legal structure, fund architecture, investment mandate, cost loading, and long-term performance.  A fair comparison requires understanding what each structure is actually doing and why — and then measuring the outcomes rather than the intentions.

What is Takaful?

Takaful is a mutual risk-sharing structure in which participants contribute to a pooled tabarru’ fund — a donation rather than a premium in the commercial sense — and the operator manages the fund as either a wakil (agent) for a fee or as a mudharib (profit-sharing partner).  Underwriting surpluses, when they exist, are returned to participants rather than retained by shareholders.  The investment portfolio is restricted to shari’ah-compliant instruments — swukuk, Islamic equity funds, and shari’ah-screened fixed income — which excludes conventional bonds, interest-bearing instruments, and equities in prohibited sectors.

The Fiqh Academy of the Organisation of Islamic Cooperation, in Resolution No. 9 (2/5) at its Fifth Session in Amman in December 1985, explicitly approved cooperative insurance structured as tabarru’ as shari’ah-compliant while prohibiting commercial insurance.  This ruling remains the foundational reference for the takaful industry.  The jurisprudential coherence does not, however, translate into financial equivalence with conventional insurance.  It translates into a different risk-return profile, a narrower investment universe, a more complex cost structure, and — as the data consistently demonstrates — lower long-term returns.

The Structural Problems

The first structural problem is the restricted investment mandate.  Takaful funds invest in shari’ah-compliant instruments.  The global swukuk market —US$850 billion in outstanding issuance as of 2025 — is smaller, less liquid, and more concentrated than the conventional bond market.  The shari’ah-screened equity universe excludes financial services companies, conventional banks, tobacco, alcohol, entertainment, and other sectors that have historically been among the strongest contributors to equity market returns.  A CAMEL-based analysis of Malaysian takaful and conventional insurance companies over the period 2019 to 2024 found that conventional insurers exhibit higher profitability and capital strength, while takaful operators demonstrate stronger capital buffers, liquidity, and operational efficiency.  The takaful structure is efficient at managing its constrained universe.  It is structurally incapable of accessing the returns that the unconstrained universe generates.

The second structural problem is the cost architecture.  The takaful operator charges a wakalah fee — typically 20 to 35 per cent of contributions — for managing the fund.  In the mudharib model, the operator takes a share of investment returns in addition to the management fee.  Shari’ah board fees, audit costs, and compliance costs add further layers.  These costs sit on top of the investment management costs that a conventional insurer also incurs.  The takaful participant is paying for the compliance architecture whether it delivers superior financial outcomes.  For example, HSBC Islamic charges 0.40 per cent in management fees versus 0.15 per cent for its conventional equivalent.  Over 30 years on a £50,000 investment at equivalent gross returns, the fee differential compounds to £8,600 in foregone capital — before accounting for the return differential produced by the restricted investment mandate.  The shari’ah compliance premium has a quantifiable cost.  It does not have a quantifiable return premium.

The third structural problem is the shari’ah board’s independence — or the lack thereof.  Shari’ah boards are funded by the institutions whose products they certify.  A 2019 study found that the top 20 shari’ah scholars globally held 621 board positions across the industry.  The scholars who certify the most products are, by definition, the most commercially connected to the institutions whose products they are certifying.  This is not an allegation of corruption.  It is a structural conflict of interest that undermines the independence that genuine compliance assurance requires.  The Dana Gas PJSC case from June 2017 is the anecdote that crystallises this problem.  Dana Gas unilaterally declared its own US$700 million swukuk non-shari’ah-compliant during a liquidity crunch — a claim the English High Court rejected outright.  If an issuer can dispute its own product’s shari’ah status the moment repayment becomes inconvenient, the certification was not the fixed, load-bearing guarantee that participants assumed they were paying a premium for.

The Performance Comparison

AIA Singapore’s participating fund generated a net investment return of 10.9 per cent in 2025, 7.0 per cent in 2024, and a 10-year average of 4.97 per cent.  Total participating fund assets stood at S$33,312 million as of 31^st December 2025, with S$622 million in bonuses and dividends declared for the year.

I am using Malaysia-specific data as it is the most available because Malaysia has the most developed takaful market in Southeast Asia — it accounts for 70 per cent of global family takaful premiums and has the longest track record of regulated takaful operators.  Singapore’s takaful market is smaller and less developed, with fewer publicly available fund performance datasets.  The problem is that Singapore takaful operators do not publish fund performance data with the same granularity as Malaysian operators or AIA Singapore’s participating fund.  MAS does not require takaful-specific fund performance disclosure in the same format as the participating fund updates that AIA Singapore publishes.

Malaysian family takaful operators recorded a return on assets of 2.5 per cent in the first half of 2025, down from 8.1 per cent in 2024, as equity valuations normalised.  The 2024 figure of 8.1 per cent reflects the strong Malaysian equity market performance in 2024 rather than a structural improvement in the takaful model.  Family takaful new business growth lagged conventional life insurance in recent years — negative 5 per cent in the first half of 2025 and positive 1 per cent in 2024 — partly due to strong demand and a rebound in investment-linked products, a niche where conventional players have aggressively pursued.

Sun Life Malaysia Takaful’s bond-oriented fund recorded a return of 4.9 per cent in 2025, 4.0 per cent in 2024, 6.6 per cent in 2023, 0.6 per cent in 2022, and negative 3.0 per cent in 2021.  Over the five years, the cumulative return reflects the volatility of a swukuk-heavy portfolio in a rising interest rate environment — with the 2021 and 2022 negative returns demonstrating the downside that the conventional participating fund’s smoothing mechanism is specifically designed to prevent.

The AIA participating fund’s contractual zero-per-cent floor — the mechanism that prevented negative returns in 2022 when the fund itself recorded negative 9.2 per cent on a mark-to-market basis — is the feature that the takaful fund’s structure does not provide in equivalent form.  The participant in a takaful investment fund bears the mark-to-market risk of the underlying portfolio without the smoothing buffer that a conventional participating fund provides.

The Shari’ah Compliance Question

The assumption underlying the takaful comparison is that conventional insurance is not shari’ah-compliant and takaful is.  This assumption is contested at the jurisprudential level.  The classical Hanafi position — as articulated by scholars including Shaykh Muhammad Muswthafa Ahmad az-Zarqa, whose permissive ruling on insurance underpins the minority scholarly position — holds that conventional insurance is not inherently impermissible because the contract structure avoids the specific forms of riba’ and gharar that the prohibition targets.  Insurance policies define contributions, benefits, and claims clearly.  The uncertainty in an insurance contract is not the kind of speculative gharar that the prohibition was designed to address.  It is the kind of actuarial uncertainty that is inherent in any risk-sharing mechanism.

The principle of husn azh-zhan — that everything is permissible unless proven otherwise — governs by default.  A well-structured, MAS-regulated Investment-Linked Policy with sub-funds screened to exclude haram activities achieves the shari’ah objective without the additional cost of a formal takaful structure or the performance compromise of a restricted investment mandate.  The Muslim investor who needs shari’ah-compliant investment exposure does not need takaful to achieve it.  They need a conventional insurance wrapper with a shari’ah-screened fund selection.  The compliance outcome is identical.  The cost and performance outcomes are not.

The Honest Comparison

A comparative analysis between takaful and conventional insurance produces the following conclusions.

On jurisprudential grounds, takaful is designed for shari’ah compliance and carries the institutional endorsement of the Fiqh Academy.  On jurisprudential grounds, the permissibility of conventional insurance under the classical Hanafi position means that takaful’s shari’ah advantage is narrower than its proponents claim.

On financial grounds, the restricted investment mandate, the additional cost layers, and the historical return data consistently favour conventional insurance when measured over a full market cycle.  The AIA participating fund’s 10-year average of 4.97 per cent, delivered with a contractual floor and a smoothing mechanism that protected policyholders through 2022’s market decline, compares favourably with takaful investment fund returns that are more volatile, more exposed to sukuk market dynamics, and more constrained in their ability to access the full range of global investment opportunities.

On structural grounds, the shari’ah board independence problem, the Dana Gas precedent, and the multiple-board shopping phenomenon undermine the confidence that the takaful compliance premium is purchasing independent oversight rather than commercially convenient certification.

The investor who insists on takaful for religious conviction deserves a clear-eyed presentation of these trade-offs.  The investor who is considering takaful because someone told them conventional insurance is haram deserves an equally clear-eyed presentation of the jurisprudential debate — including the positions that do not appear in the marketing materials of takaful operators.  The comparison is not straightforward.  But the data is.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code