Takaful: Concepts and Models By Atiquzzafar Khan Nov 3, 2009 Al-Huda Workshop On Takaful Management.

Takaful:Takaful: Concepts and Concepts and ModelsModels

ByByAtiquzzafar KhanAtiquzzafar Khan

Nov 3, 2009Nov 3, 2009Al-Huda WorkshopAl-Huda Workshop

OnOnTakaful ManagementTakaful Management

Main TopicsMain Topics

• Introduction of Modern Introduction of Modern InsuranceInsurance

• Evaluation of Insurance Evaluation of Insurance Business Business from Islamic Point of from Islamic Point of ViewView

• Islamic Alternative: (Review Islamic Alternative: (Review of of Existing Existing Experiences of Experiences of Takaful)Takaful)

• Performance of Takaful Performance of Takaful IndustryIndustry

Risk and Insurance:Risk and Insurance:

Risk and uncertainty are Risk and uncertainty are fundamental facts of life. All fundamental facts of life. All human activities are subject to human activities are subject to risk, which may lead to risk, which may lead to financial or physical losses to financial or physical losses to him. Insurance is a device to him. Insurance is a device to cover the losses arise due to cover the losses arise due to occurrence of some undesired occurrence of some undesired event.event.

Definition of InsuranceDefinition of Insurance

Insurance is an economic Insurance is an economic device whereby the individual device whereby the individual substitutes a small certain cost substitutes a small certain cost (premium) for a large uncertain (premium) for a large uncertain financial loss (the contingency financial loss (the contingency insured against) that would insured against) that would exist if it were not for the exist if it were not for the insurance.insurance.

CLASSIFICATION OF CLASSIFICATION OF INSURANCE BUSINESSINSURANCE BUSINESS

By Type of ProductsBy Type of Products

i)i) Life insuranceLife insurance

ii)ii) General insurance General insurance

iii)iii) Liability insuranceLiability insurance

Nature of Insurance ContractNature of Insurance Contract

Aleatory ContractAleatory ContractUnilateral ContractUnilateral Contract

Conditional ContractConditional ContractContract of AdhesionContract of Adhesion

Principals Governing Insurance Principals Governing Insurance ContractContract

Principal of IndemnityPrincipal of IndemnityPrincipal of Insurable InterestPrincipal of Insurable InterestPrincipal of SubrogationPrincipal of SubrogationPrincipal of Utmost Good FaithPrincipal of Utmost Good Faith

Nature of Insurance ContractNature of Insurance Contract

Premium Compensation

Premium Compensation

General Insurance

Life Insurance

Shariah Position of InsuranceShariah Position of Insurance

Opinion of Shariah scholars is divided Opinion of Shariah scholars is divided on insurance. We can classify them into on insurance. We can classify them into three major groups.three major groups.

– Those who consider both the concept Those who consider both the concept and practice of commercial insurance and practice of commercial insurance un-Islamic.un-Islamic.

– Those who are in agreement with the Those who are in agreement with the present insurance and find nothing present insurance and find nothing wrong in it.wrong in it.

– Those who accept the concept of Those who accept the concept of insurance, but find prohibited insurance, but find prohibited elements in its present practice. elements in its present practice.

Rulings of Collective Fiqhi Rulings of Collective Fiqhi Bodies about Insurance Bodies about Insurance

– Islamic Research Institute of Al-Azhar Islamic Research Institute of Al-Azhar Uni.Uni.

– Council of Grand Ulama of Saudi ArabiaCouncil of Grand Ulama of Saudi Arabia

– Majlis Tahqiqat-e-Shari'yah Lucknow, Majlis Tahqiqat-e-Shari'yah Lucknow, India India

– Islamic Fiqh Academy of Rabita al-Islamic Fiqh Academy of Rabita al-Aa'lam-e-IslamiAa'lam-e-Islami

– Al Majma’ Al-Fiqhi Al- Islami of OICAl Majma’ Al-Fiqhi Al- Islami of OIC

– Council of Islamic Ideology, PakistanCouncil of Islamic Ideology, Pakistan

Major Arguments Against Major Arguments Against InsuranceInsurance

According to these Fiqhi bodies According to these Fiqhi bodies Conventional Insurance is unlawful because Conventional Insurance is unlawful because of involvement of prohibited elements like,of involvement of prohibited elements like,– Riba (Interest)Riba (Interest)– Qimar (Gambling)Qimar (Gambling)– Gharar (Uncertainty, Doubt, Risk)Gharar (Uncertainty, Doubt, Risk)– Unlawful appropriation of others’ propertyUnlawful appropriation of others’ property– Violation of law of inheritance in case of Violation of law of inheritance in case of

life insurance.life insurance.

Islamic SubstituteIslamic Substitute

The Islamic Substitute of The Islamic Substitute of Conventional Insurance, Conventional Insurance, according to these Fiqhi according to these Fiqhi bodies, may be some scheme bodies, may be some scheme based on mutual cooperation based on mutual cooperation and Joint Responsibility.and Joint Responsibility.

That alternative is introduced That alternative is introduced under the title of Takaful in under the title of Takaful in recent past.recent past.

Takaful in IslamTakaful in Islam

Hadith of the ProphetHadith of the ProphetSWASWA

““Tie the camel and Tie the camel and then submit to the then submit to the will of Allah”will of Allah”

This hadith implied a need to mitigate riskThis hadith implied a need to mitigate risk

Historical Examples of “Takaful”Historical Examples of “Takaful”

DawaniaDawania-Mutual indemnification -Mutual indemnification amongst officers working in the same amongst officers working in the same department during the rule of Umar department during the rule of Umar Ibn Al Khattab (the 2Ibn Al Khattab (the 2ndnd Caliph) Caliph)

DiyyahDiyyah and and AquilahAquilah-Blood money and -Blood money and the concept of removing hardship the concept of removing hardship inflicted on the family of the victim inflicted on the family of the victim by payment of by payment of DiyyahDiyyah, on a mutual, on a mutual basis, by the relatives of the offenderbasis, by the relatives of the offender

Takaful PioneersTakaful Pioneers

Takaful started some 30 years Takaful started some 30 years ago in the Middle East with the ago in the Middle East with the launching of two companies in launching of two companies in 1979:1979:– The Islamic Arab Insurance Co. The Islamic Arab Insurance Co.

(IAIC) in the UAE and(IAIC) in the UAE and– The Islamic Insurance Co. of SudanThe Islamic Insurance Co. of Sudan

But it took some time for the But it took some time for the movement to take shape.movement to take shape.

Takaful PioneersTakaful Pioneers Later in 1984, Malaysia played a Later in 1984, Malaysia played a

pioneering role in setting the pioneering role in setting the first Legal framework specific to first Legal framework specific to Takaful (Takaful Act Malaysia).Takaful (Takaful Act Malaysia).

This was instrumental in the This was instrumental in the successful launching of the successful launching of the Takaful movement in Malaysia Takaful movement in Malaysia and in other countries of South and in other countries of South East Asia.East Asia.

Other Islamic/ Takaful Legislations Other Islamic/ Takaful Legislations

Other markets such as the Sudan Other markets such as the Sudan and Iran have Islamic regulatory and Iran have Islamic regulatory environments and became naturally environments and became naturally Takaful markets.Takaful markets.

In Pakistan Takaful Act is enacted in In Pakistan Takaful Act is enacted in 2005.2005.

In the Gulf countries specific Takaful In the Gulf countries specific Takaful legislations are coming through in legislations are coming through in Bahrain and in Saudi ArabiaBahrain and in Saudi Arabia

Takaful TodayTakaful Today

From a handful of operators From a handful of operators two decades ago the Takaful two decades ago the Takaful movement has blossomed movement has blossomed into a fast growing into a fast growing phenomenon in many Muslim phenomenon in many Muslim countries with very countries with very promising prospects in other promising prospects in other countries with a large Muslim countries with a large Muslim community.community.

Takaful driversTakaful drivers

This movement is driven by This movement is driven by – a strong demand from a public a strong demand from a public

who would not insure otherwise who would not insure otherwise (because of religious beliefs); and(because of religious beliefs); and

– The successful development of The successful development of Islamic banking institutions Islamic banking institutions providing capital and Islamic providing capital and Islamic financial instruments for asset financial instruments for asset management and investment.management and investment.

Takaful DriversTakaful Drivers

Islamic banks and financial Islamic banks and financial institutions play a strategic and institutions play a strategic and important role in the distribution of important role in the distribution of Takaful products (especially Life Takaful products (especially Life Takaful Products).Takaful Products).

Just as Bancassurance played an Just as Bancassurance played an important role in the distribution of important role in the distribution of personal lines insurance products personal lines insurance products Bancatakaful is an important driver Bancatakaful is an important driver for Takaful.for Takaful.

Takaful OperatorsTakaful Operators

The number of Takaful operators The number of Takaful operators worldwide is now estimated at:worldwide is now estimated at:

150 Takaful companies operating in 150 Takaful companies operating in 40 countries40 countries

10 Retakaful companies10 Retakaful companies 6 Islamic windows by Conventional 6 Islamic windows by Conventional

Reinsurance companiesReinsurance companies

Takaful PremiumTakaful Premium

Takaful is one of the fastest growing Takaful is one of the fastest growing segments in insurance (at around segments in insurance (at around 20% pa. on average)20% pa. on average)

World Takaful contributions are World Takaful contributions are conservatively estimated at around conservatively estimated at around US$ 3billions, of which:US$ 3billions, of which:– 60% General Takaful60% General Takaful– 40% Family Takaful40% Family Takaful

Takaful Geographical SpreadTakaful Geographical Spread

South& East Asia :South& East Asia : 56%56%Middle East :Middle East : 36%36% Africa:Africa: 7%7% Europe, USA & Others:Europe, USA & Others: 1%1%

Definition of TakafulDefinition of Takaful

The word Takaful means joint guarantee. The objective of Takaful is cooperation and mutual help among the members of a defined group.In a practical sense Takaful can be visualized as a method of joint guarantee among a group of members or participants against loss or damage that may inflict upon any of them. The members of the group agree to guarantee jointly that should any of them suffer a catastrophe or disaster, he would receive certain sum of money to meet the loss or damage. All members of the group pool together their efforts to support the needy.

WORKING OF THE TAKAFUL WORKING OF THE TAKAFUL

BUSINESS: The Malaysian CaseBUSINESS: The Malaysian Case

Takaful Business is based on the concepts of Takaful Business is based on the concepts of Mudarabah and Tabarru. Involvement of these Mudarabah and Tabarru. Involvement of these two Islamic forms of business eliminates the two Islamic forms of business eliminates the elements of Riba from insurance contract and elements of Riba from insurance contract and convert Gharar into tolerable form. convert Gharar into tolerable form.

In Family Takaful each Takaful installment is In Family Takaful each Takaful installment is divided and credited into two separate Accounts divided and credited into two separate Accounts namely, the Participants' Account(PA) and the namely, the Participants' Account(PA) and the Participants’ Special Account(PSA). A Participants’ Special Account(PSA). A substantial proportion of the installments is substantial proportion of the installments is credited into the PA solely for the purpose of credited into the PA solely for the purpose of savings and investment.savings and investment.

The balance of the installments is credited into The balance of the installments is credited into the PSA as `tabarru' for Sharikah Takaful the PSA as `tabarru' for Sharikah Takaful Malaysia to pay the Takaful benefits to the Malaysia to pay the Takaful benefits to the heir(s) of any participant who may die before heir(s) of any participant who may die before the maturity of the maturity of thethe contract. contract.

The amount accumulated in the PA is invested The amount accumulated in the PA is invested in various business according to Islamic in various business according to Islamic financing techniques, and the resultant profits financing techniques, and the resultant profits are divided between the company and the are divided between the company and the participants according to the agreed upon ratio, participants according to the agreed upon ratio, e.g., 30-70. e.g., 30-70.

The participant's share is calculated according The participant's share is calculated according to their individual share in the PA, and credited to their individual share in the PA, and credited into their respective accounts, the PA and the into their respective accounts, the PA and the PSA.PSA.

Company’s Admin

& Manag. Expenses

Profit Attributed

To Shareholders

PA

PSA

FTF

Investment Profit

PA

PSA

Participant

Company

Takaful Contract

based on Mudarabah

30%

70%

Payment from

PA

Payment from

PSA

Mudarabah Model

Family Takaful

Payment of claimsPayment of claimsShould the Participant die or suffer Should the Participant die or suffer Permanent and Total Disability in the Permanent and Total Disability in the fifth year of participation, Takaful benefit fifth year of participation, Takaful benefit will be paid in the following manner:-will be paid in the following manner:-

i. From Participant's Account =RM 4,890i. From Participant's Account =RM 4,890(RM978 x 5)(RM978 x 5)

profit if any, say profit if any, say RM RM 400400

ii. From Participants Special ii. From Participants Special RM RM 5,0005,000

Accounts (RM1000 x 5) Accounts (RM1000 x 5) Total Takaful Benefit PayableTotal Takaful Benefit Payable RM RM

10,29010,290

In case the Partcipant survivedIn case the Partcipant survived

Should the Participant survive until Should the Participant survive until the maturity of his FTP, payment of the maturity of his FTP, payment of Takaful benefit will be made to him Takaful benefit will be made to him as follows:-as follows:-

i.i. From his Participant's Account = RM 9,780From his Participant's Account = RM 9,780(RM978 x 10) (RM978 x 10)

profit from investmentprofit from investment RM 1,800 RM 1,800ii. From Participants Special ii. From Participants Special RM XXXX RM XXXX

AccountAccountTotal Takaful Benefit =Total Takaful Benefit = RM 11,580 + RM 11,580 +

surplus surplus determined determined by Sharikah by Sharikah Takaful.Takaful.

Mudarabah ModelMudarabah ModelPROFITS

ATTRIBUTABLE TOSHAREHOLDERS

COMPANY'SADMINISTRATION &

MANAGEMENTEXPENSES

INVESTMENT BYCOMPANY

PROFITSFROM

INVESTMENT

TAKAFULCONTRIBUTION PAID BY

PARTICIPANT

GENERALTAKAFUL

FUND

GENERALTAKAFUL

FUND

OPERATIONALCOST OFTAKAFUL

OPERATIONALCOST OF TAKAFUL

OPERATIONALCOST OFTAKAFUL

SHARE OFSURPLUS FOR THE

PARTICIPANT

SURPLUS(PROFIT)

SHARE OFSURPLUS FORTHE COMPANY

40% (Example Only)

60% (Example Only)

COMPANY

TAKAFUL CONTRACTBASED ON PRINCIPLE OF

AL-MUDHARABAH

PARTICIPANT

General Takaful

Wakalah ModelWakalah Model

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL ADMIN & MARKETINGEXPENSES 25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTIO

N PAID BYPARTICIPANT

GENERALTAKAFUL

FUND65% TO 75%

GENERALTAKAFUL

FUND

OPERATIONAL COSTOF TAKAFUL /RETAKAFUL

OPERATIONAL COSTOF TAKAFUL

OPERATIONAL COSTOF TAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT

SURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

Waqf ModelWaqf Model

Definition of WaqfDefinition of Waqf

Waqf is an Arabic word and it means Waqf is an Arabic word and it means to stop to withhold and not to let go.to stop to withhold and not to let go.

In technical meaning Waqf means to In technical meaning Waqf means to allocate or donate some property or allocate or donate some property or cash for a specific purpose to get cash for a specific purpose to get pleasure of Allah and not to let it go pleasure of Allah and not to let it go through consumption or sale.through consumption or sale.

The Waqf property comes into The Waqf property comes into ownership of Allah (SWT) and Waqif ownership of Allah (SWT) and Waqif will have no property rights on itwill have no property rights on it. .

Waqif has right to set the rules Waqif has right to set the rules for Waqf and manage the for Waqf and manage the Waqf.Waqf.

Waqf may be general purpose Waqf may be general purpose or specific purpose, like or specific purpose, like Waqf ‘Ala al Aulad or Waqf ‘Ala al Aulad or Waqf ‘Ala al Aqarib.Waqf ‘Ala al Aqarib.

In Islamic Law Waqf is a legal In Islamic Law Waqf is a legal entity entity

Waqf ModelWaqf Model

PROFIT / LOSSATTRIBUTABLE TOSHAREHOLDERS

TAKAFUL OPERATOR FEES FORADMIN & MARKETING EXPENSES

25% TO 35%

INVESTMENTBY FUND

PROFITS FROMINVESTMENT

TAKAFULCONTRIBUTION

PAID BYPARTICIPANT

WAQF FUND65% TO 75%

WAQF FUND

OPERATIONAL COST OFTAKAFUL /RETAKAFUL

OPERATIONAL COST OFTAKAFUL

OPERATIONAL COST OFTAKAFUL

SHARE OFSURPLUS FOR

THE PARTICIPANT

SURPLUS(PROFIT)

100%

COMPANY

TAKAFULCONTRACT BASEDON PRINCIPLE OF

AL-WAKALAH

PARTICIPANT

60%

SHARE OF PROFITFOR THE COMPANY

40%

MANAGEMENTEXPENSES OF

COMPANY

Waqf

INITIAL DONATION BYSHAREHOLDERS TOCREATE WAQF FUND

Waqf

PROFIT SHARING ONMUDARABHA BASES

A Waqf Fund would basically be a A Waqf Fund would basically be a separate legal entity to which the separate legal entity to which the Shareholders would initially make a Shareholders would initially make a donation to establish the Waqf Fund.donation to establish the Waqf Fund.

The donation can be of any reasonable The donation can be of any reasonable amount (Shariah Board may specify such amount (Shariah Board may specify such an amount).an amount).

The objectives of the Waqf fund would be The objectives of the Waqf fund would be to provide relief to participants against to provide relief to participants against defined losses as per the rules of the defined losses as per the rules of the Waqf fund.Waqf fund.

In this modified Wakala Model with Waqf, the In this modified Wakala Model with Waqf, the relationship of the participants and of the relationship of the participants and of the operator is directly with the Waqf fund. The operator is directly with the Waqf fund. The Operator is the Wakeel of the Waqf Fund and Operator is the Wakeel of the Waqf Fund and the participants pay one sided donation to the participants pay one sided donation to the WAQF fund (not conditional) which also the WAQF fund (not conditional) which also eliminates the issue of Gharar. The WAQF eliminates the issue of Gharar. The WAQF fund rules may define the sharing of surplus fund rules may define the sharing of surplus and other rules under which it would operate and other rules under which it would operate but there is no obligation to distribute but there is no obligation to distribute surplus. Further the Qard would be given by surplus. Further the Qard would be given by the shareholders to the WAQF entity and not the shareholders to the WAQF entity and not to individuals as in the typical Wakalah to individuals as in the typical Wakalah model.model.

The Challenges aheadThe Challenges ahead

Despite a remarkable breakthrough Despite a remarkable breakthrough and a dynamic and sustained growth, and a dynamic and sustained growth, there are challenges facing the there are challenges facing the Takaful industry.Takaful industry.

The business model dilemmaThe business model dilemma The existence of three business models:The existence of three business models:

Mudharabah (Profit & Loss sharing)Mudharabah (Profit & Loss sharing)Wakala (agency contract with a Wakala (agency contract with a

performance fee element to replace performance fee element to replace surplus sharing)surplus sharing)

Wakala with Waqf modelWakala with Waqf model

Could create an uneven / unfair business Could create an uneven / unfair business environment to operateenvironment to operate

Need to reach a consensus internationally Need to reach a consensus internationally on a common and standard Takaful business on a common and standard Takaful business modelmodel

Future OutlookFuture Outlook

Despite the remarkable growth rate Despite the remarkable growth rate recorded by the Takaful industry, recorded by the Takaful industry, penetration is still far below the penetration is still far below the enormous market potential offered enormous market potential offered by the Muslim community worldwide by the Muslim community worldwide (23% of the total world population).(23% of the total world population).

Growth OutlookGrowth Outlook

World Muslim population is estimated World Muslim population is estimated at 1.5 billions, of which around 97% at 1.5 billions, of which around 97% are based in Asia and Africa.are based in Asia and Africa.

A two-digit growth in the range of A two-digit growth in the range of 15% to 20% can be reasonably 15% to 20% can be reasonably sustained for at least the next 10 sustained for at least the next 10 years in the existing markets (Far years in the existing markets (Far and Middle East).and Middle East).

New Takaful FrontiersNew Takaful Frontiers

Markets like Europe, North and Latin Markets like Europe, North and Latin America, Central Asia, Australia America, Central Asia, Australia where large Muslim communities live where large Muslim communities live are huge untapped reservoirs;are huge untapped reservoirs;

The recent opening towards “Islamic The recent opening towards “Islamic windows” in the banking sector in windows” in the banking sector in Europe is likely to be followed by Europe is likely to be followed by “Takaful windows” initiatives.“Takaful windows” initiatives.

Takaful Products to Non-MuslimsTakaful Products to Non-Muslims

Takaful Products are not exclusive to Takaful Products are not exclusive to Muslims.Muslims.

Competitively priced and sold Competitively priced and sold through the right channel it could through the right channel it could attract any consumer irrespective of attract any consumer irrespective of their origin or faith.their origin or faith.

ConclusionsConclusions

Despite the challenges facing this Despite the challenges facing this “new” industry, exciting times are “new” industry, exciting times are ahead once the latent potential is ahead once the latent potential is unleashed.unleashed.

The success of Takaful largely The success of Takaful largely depends on that of Islamic Financial depends on that of Islamic Financial institutions on a global basis.institutions on a global basis.

THANK YOUTHANK YOU