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8/10/2019 New Dimensions in Takaful Sector Investment and Products.pptx
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New Dimensions in Takaful Sector
Investment and ProductsBy
Dr. Atiquzzafar KhanIIIE, IIUI
January 28, 201418th Distance Learning Course
on Islamic Finance
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Main Topics
• Shari’ah Status of Insurance
• Islamic Alternative: (Review ofExisting Takaful Models)
• Performance of Takaful Industry
Investment
Products
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Risk and Insurance:
Risk and uncertainty are fundamental
facts of life. All human activities are
subject to risk, which may lead to
financial or physical losses to him.
Every individual try to protect himself
against future potential losses.
Insurance is a modern time device to
cover the losses arise due to occurrence
of some undesired event.
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Definition of Insurance
Insurance is an economic devicewhereby the individual substitutes a
small certain cost (premium) for alarge uncertain financial loss (thecontingency insured against) that
would exist if it were not for theinsurance.
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Major Arguments Against
Insurance
According to Shariah scholars and Fiqhi bodies
conventional Insurance is unlawful because of
involvement of prohibited elements like, – Riba (Interest)
– Qimar (Gambling)
– Gharar (Uncertainty, Doubt, Risk) – Unlawful appropriation of others’ property
– Violation of law of inheritance in case of life
insurance.
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Rulings of Collective Fiqhi
Bodies about Insurance
Islamic Research Institute of Al-Azhar
Council of Grand Ulama of Saudi Arabia
Majlis Tahqiqat-e-Shari'yah Lucknow, India
Islamic Fiqh Academy of Rabita al-A’alam al-Islami
Al Majma’ Al-Fiqhi Al- Islami of OIC
Council of Islamic Ideology, Pakistan
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Nature of Insurance Contract
Premium Compensation
Premium Compensation
General Insurance
Life Insurance
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Islamic Substitute
These Fiqhi bodies suggested that ascheme based on the concept of mutual
cooperation and Joint responsibility maybe considered as Islamic Substitute forConventional Insurance.
That alternate is introduced under thetitle of Takaful in the recent past.
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Takaful Pioneers
Islamic insurance started some 30 yearsago in Sudan and Middle East in 1979 withthe establishment of:
– The Islamic Arab Insurance Co. (IAIC) in theUAE and
– The Islamic Insurance Co. of Sudan
But it took some time for the movement totake shape.
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Takaful Pioneers
Later in 1984, Malaysia played a pioneeringrole in setting the first Legal frameworkspecific to Takaful (Takaful Act Malaysia).
This was instrumental in the successfullaunching of the Takaful movement inMalaysia and in other countries of SouthEast Asia.
First Takaful company Takaful MalaysiaBerhad started its business in 1985.
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Takaful drivers
This movement is driven by
– a strong demand from a public who
would not insure otherwise (because of
religious beliefs); and
– The successful development of Islamic
banking institutions providing capital and
Islamic financial instruments for asset
management and investment.
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Takaful Operators
The number of Takaful operatorsworldwide is now estimated at:
150 Takaful companies operating in40 countries
10 Retakaful companies
6 Islamic windows by ConventionalReinsurance companies
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Takaful Premium
Takaful is one of the fastest growingsegments in insurance.
According to World Takaful Report
2012, Global Takaful contributionsgrew by 19% to reach a total ofaround $12bn.
Of these the GCC contributed$5.68bn and South East Asiacontributions were $ 2bn.
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Takaful Leaders
Country Contributions
Saudi Arabia $ 4.3bn
Malaysia $ 1.4bn
UAE $818 ml
Sudan $363 ml
Large Muslim markets such as Egypt,Libya, Bangladesh, Indonesia andBrunei are opening to Takaful.
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Definition of Takaful
The word Takaful means joint guarantee. The objectiveof 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.
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WORKING OF THE FAMILY TAKAFUL
BUSINESS: The Malaysian Case
Takaful Business is based on the concepts ofMudarabah and Tabarru. Involvement ofthese two Islamic forms of business eliminatesthe elements of Riba from insurance contract
and convert Gharar into tolerable form.
In Family Takaful each Takaful installment isdivided and credited into two separate
Accounts namely, the Participants'Account(PA) and the Participants’ SpecialAccount(PSA). A substantial proportion of theinstallments is credited into the PA solely forthe purpose of savings and investment.
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The balance of the installments is credited into the PSA
as `tabarru' for Sharikah Takaful Malaysia to pay the
Takaful benefits to the heir(s) of any participant who
may die before the maturity of the contract.
The amount accumulated in the PA is invested in various
business according to Islamic financing techniques, and
the resultant profits are divided between the company
and the participants according to the agreed upon ratio,
The participant's share is calculated according to their
individual share in the PA, and credited into their
respective accounts, the PA and the PSA.
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Company’s Admin
& Manag. Expenses
Profit Attributed
To Shareholders
C
O
NT
R
I
B
U
T
I
O
N
PA
PSA
FTF
Investment Profit
PA
PSA
Participant
Company
Takaful Contract
based on Mudarabah
Payment toThe Family from
PA & PSA
Mudarabah Model
Family Takaful
Share ofProfit onS.H. capital
Share ofProfit forMudarib
Cost of Re-takafulAnd Other DirectBusiness Expenses
ShareHolders Fund
Surplus
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Payment of claims
Should the Participant die or sufferPermanent and Total Disability in the fifthyear of participation, Takaful benefit willbe paid in the following manner:-
i. From Participant's Account =RM 4,890(RM978 x 5)profit if any, say RM 400
ii. From Participants Special RM 5,000Accounts (RM1000 x 5)
Total Takaful Benefit Payable RM 10,290 + Surplusif any
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In case the Partcipant survived
Should the Participant survive until thematurity of his FTP, payment of Takafulbenefit will be made to him as follows:-
i. From his Participant's Account = RM 9,780
(RM978 x 10)
profit from investment RM 1,800
ii. From Participants Special RM XXXX
Account
Total Takaful Benefit = RM 11,580 + surplus if any
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Shariah Concerns regarding Mudaraba Model
Mudaraba is a commercial contract, hence not suitable for adonation (Tabarru) based scheme.
Donation given by the participants can not become capital for
Mudaraba at the same time.
Distribution of surplus among the participants in proportion oftheir contributions is like a conditional gift (Hiba bis-Sawab)
which is not allowed.
Sharing of surplus in case of General Takaful(instead of profit)
makes the contract essentially the same as conventionalinsurance contract.
Provision of Qard-e-Hasan from the Share holders fund in case
of deficit is not correct as Mudarib is not a guarantor.
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Wakalah Model
In this model contract betweenparticipant and operator is arranged onthe basis of Wakalah instead of
Mudarabah. Wakalah means hiring services of an
individual or organization to perform any
act on behalf of the principal. Wakeel can accomplish the assigned
task either voluntarily or against a fixed
commission.
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Company’s Admin
& Manag. Expenses
Profit Attributed
To Shareholders
C
O
N
T
R
I
B
U
T
I
O
N
GTF
Investment Profit
Participant
Takaful
Company
Takaful Contract
based on Wakalah
Wakalah Model
General Takaful
Sources of Income for Takaful Operator
Share ofProfit onS.H. capital
Share ofProfit forMudarib
Payment of Claims
Cost of Re-takaful
Business Expenses
Wakalah Fee
25 to 35 %
65 to75%
GTFSurplus
100% for theParticipants
After Reserves
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Shar’iah Concerns regarding Wakalah Model
Wakalah model is free from many objections raised againstMudaraba model but some shariah concerns are still therewhich are as follows:
Distribution of surplus among the participants in proportionof their contributions is like a conditional gift(Hiba bis-Sawab) which is not allowed.
Provision of Qard-e-Hasan from the Share holders fund in
case of deficit is not correct as Wakeel is not a guarantor.
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Definition of Waqf
Waqf is an Arabic word and it means to stop towithhold and not to let go.
In technical meaning Waqf means to allocate ordonate some property or cash for a specificpurpose to get pleasure of Allah and not to let it gothrough consumption or sale.
The Waqf property comes into ownership of Allah(SWT) and Waqif losses all property rights on it.
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Cont…
But Waqif has right to set the rules forwaqf and manage the waqf.
Waqf may be general purpose or specificpurpose, like Waqf ‘Ala al Aulad orWaqf ‘Ala al Aqarib.
In Islamic Law Waqf is a legal entity,which can enter into contracts and canown things
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Company’s Admin
& Manag. Expenses
Profit Attributed
To Shareholders
Waqf
Fund
Investment Profit
Participant
Waqf-Wakalah Model
General Takaful
Return for Takaful Operator
Share ofProfit onS.H. capital
Share ofProfit forMudarib
Payment of Claims
Cost of Re-takaful
Business Expenses
Wakalah Fee
25 to 35 %
65 to75%
WaqfFund
Surplus
100% for theParticipants
After Reserves
Share holderFund
Waqf
Donation
Takaful Co.
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A Waqf Fund would basically be aseparate legal entity to which theShareholders would initially make adonation to establish the Waqf Fund.
The donation can be of any reasonableamount (Shariah Board may specify suchan amount).
The objectives of the Waqf fund would beto provide relief to participants againstdefined losses as per the rules of theWaqf fund.
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Cont….
In this modified Wakala Model with Waqf, the
relationship of the participants and of theoperator is directly with the Waqf fund. TheOperator is Wakeel of the Waqf Fund and theparticipants pay one sided donation to WAQF
fund (not conditional) which also solves theissue of Gharar. The WAQF fund rules maydefine the sharing of surplus with theparticipants and other rules, under which itwould operate but there is no obligation to
distribute surplus. Further the Qard–e-Hasanwould be given by the shareholders to theWAQF entity and not to individuals as in the
typical Wakalah model.
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Company’s Admin
& Manag. Expenses
Profit Attributed
To Shareholders
Waqf
Fund
65 to75%
Investment Profit
Participant
Waqf-Wakalah Model
Family Takaful
Return for Takaful Operator
Share ofProfit onS.H. capital
Share ofProfit forMudarib
Payment of Claims
Cost of Re-takaful
Business Expenses
Wakalah Fee
25 to 35 %
Waqf
Fund
Surplus
100% for theParticipants
After Reserves
Share holderFund
Waqf
contribution
PIA PIA
Takaful Co.
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Differences between Takaful &Insurance
Insurance Takaful
Contract Utilized Exchange Contract Donation Contract
Ownership of Premium Insurance Company Participant or Waqf
Company Responsibility Pay Claims from Pay Claims with
underwriting funds underwriting fund and Qarz-and Shareholders Equity e-Hasan in case of Shortfall
Participants responsibility Pay Premium Pay Contribution
Capital Utilized Share Capital Participants’ Funds
Investment Considerations No restrictions except Shariah Complient
prudential
Business Concerns Can provide insurance Can provide Takaful cover
cover to any business to only Permissible Business
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Investment Composition2010 - 2012
Av. Share of GCC Saudi Arabia Malaysia
Investment (excluding S.A.)
------------------------------------------------------------------------------------------------
Equity 25 7 11
Sukuk 2 22 58
Deposit 41 44 23
Others 32 26 9
Total 100 100 100
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Average Investment Yield
2010 2011 2012
GCC Conventional
---------------
Takaful
3--------------
6
4--------------
4
4--------------
6
Malaysia Conventional
--------------- Takaful
5--------------
4
5--------------
4
5--------------
5
Saudi Arabia cooperative 1 2 3
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Takaful Products
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Takaful Products
General (Personal)
–Takaful myPA CARE
–Fire Takaful
–House owner’s & Householder’s Takaful
–Motor Takaful
–Personal Accident Takaful
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Products
General (Corporate)– Takaful mySME
– All Risks Takaful
– Burglary Takaful– Business Interruption Takaful
– Employer’s Liability Takaful
– Fidelity Guarantee Takaful
– Foreign Worker Compensation Takaful
– Group Personal Accident Takaful
– Money Takaful
– Professional Indemnity Takaful
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Public Liability Takaful
School Children Personal Accident Takaful
Workmen’s Compensation Takaful
Boilers & Pressure Vessel Takaful
Contractor’s All Risks Takaful Electronic All Risks Takaful
Erection All Risks Takaful
Loss of Profits (Machinery) Takaful
Machinery Breakdown Takaful Marine Cargo Takaful
Plate Glass Takaful
Storage Tanks Takaful
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Fire and Allied Perils Takaful
Medical Malpractices Takaful
Marine Hull Takaful
Energy Takaful
Motor Takaful Deterioration of Stock Takaful
Civil Engineering Completed Risk Takaful
Directors and Officers Liability Takaful
Foreign Workers Takaful Guarantee
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N lif i d i t d b
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Non-life insurance dominated bymotor and property insurance
Motor Takafuldominant in mostemerging markets
Compulsory third part liability insurance
Own damage insurance (ex: leasing contracts
for cars)
Property, accident and healthinsurance are generally next biggest
Accident and health depends on
governement’s role in this lob (high whereWCA are covered by private insurance (LatinAmerica, Asian markets) or where publichealth is unsufficient).
St th b t 1998
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Strong growth between 1998and 2003
Non-life growth was mainly driven byincreases in property business
– Risk awareness and rates increases since 2001
Motor premiums strongly increasedmainly driven by improving economic
conditions– More motor vehicles sales
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The business model dilemma
The existence of three business models:Mudharabah (Profit & Loss sharing)
Wakala (agency contract with aperformance fee element to replace
surplus sharing)Wakala with Waqf model
Could create an uneven / unfair businessenvironment to operate
Need to reach a consensus internationallyon a common and standard Takafulbusiness model
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Future Outlook
Despite the remarkable growth raterecorded by the Takaful industry,
penetration is still far below theenormous market potential offeredby the Muslim community worldwide
(23% of the total world population).
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Questions ??