After Islamic banking, it's the turn of Islamic insurance. Even as the Reserve Bank of India [Get Quote] is exploring Islamic banking opportunities for Indian banks, the Life Insurance Corporation of India has set the ball rolling on takaful (Islamic insurance).

LIC's [Get Quote] new international joint venture company - Indo-Saudi Insurance Company -- will be the first to introduce takaful. This Arabic word means 'guaranteeing each other' or joint guarantee.

"The entire pricing will be different as the benefits differ from conventional insurance policies," LIC Managing Director K Mehrotra told Business Standard. Its actuarial team has started working on the pricing mechanism and senior officials have been sent to Saudia Arabia to look into the product, he added.

Takaful can be described as cooperative insurance where policyholders contribute a certain amount of money to a common pool. Each member pays his subscription (premium) to help those that need assistance. To some extent, it resembles the chit funds that operate mainly in southern India.

The purpose of takaful is not to profit, but to support the belief of "bearing each other's burden". Losses are divided while liabilities spread across the community pooling system. The idea is not to derive any benefits at the cost of others. Instead, it eliminates uncertainty in terms of premium and compensation.

"Takaful is a Shari'ah compliant product," said Mehrotra. It is necessary for LIC to comply with local laws of the land when it starts operations in Saudia Arabia.

While LIC will offer a range of insurance products like endowment, money-back, single premium policies, among others, "the returns would need to be inbuilt into the pricing, and cannot be called bonus or profits," said the managing director.

Today LIC announces annual bonuses depending on its investment performance. Under Takaful plans, it would need to build in the possible profits, Mehrotra pointed out.

According to reports, it is unlawful for a Muslim living in a country where there is such a cooperative insurance company to buy a policy from a commercial insurance entity.

In the event of there not being a cooperative insurance company, individuals may enter into a contract with a commercial insurance company.

Decoding Takaful Policyholders cooperate for the common good of members Each policyholder pays premium to aid those in need of assistance Losses are divided and liabilities spread across the pool