Operational and Actuarial Aspects of Takaful Emerging Issues in Takaful.
Regulatory Issues in Takaful
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Transcript of Regulatory Issues in Takaful
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Regulatory issues in Takaful
The differences between Takaful and conventional insurance clearly have regulatory
implications. For example:
1) A Takaful operator has an obligation to ensure that all aspects of the insurance
operations are compliant with Sharia rules and principles. To do so, it will draw on in -
house religious advisers, commonly known as a Sharia board.
2) The Takaful operator will be representing to policyholders, either explicitly or
implicitly, that its operations are in accordance with Sharia rules and principles.
Some regulators would consider they had a responsibility to ensure that such
representations are well-founded.
3) In a Family Takaful plan there are generally no guarantees (i.e. they operate on a
defined contribution rather than a defined benefit basis). This implies that the risk
profile is different from the standard insurance product, where guarantees are
normally given in terms of maturity benefits, surrender benefits and death benefits.
This has implications both for capital adequacy and for disclosure to consumers.
4) The solvency regime needs to reflect the location of risk. For example, if there is a
deficit in the underwriting fund, how strong is the obligation on the operator to give an
interest free benevolent loan, and what account should be taken of this in the
solvency regime. This raises the issue in practice of whether liability can be extended
to policyholders investment accounts.
5) Because policyholders share in any surpluses and, in principle, meet any deficits in
the underwriting pool, there is a need to determine how their shares should be
determined. At present different companies follow different policies in this respect.
6) Because investments must be Sharia compliant, a Takaful firm cannot invest in
conventional interest-paying bonds, or in certain types of equity (brewers being an
obvious example). There are also limitations on the use of derivatives, for example to
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hedge currency risk. The asset risk profile will therefore be different from that of a
conventional insurer.
7) Takaful firms might be on the wrong end of a number of shortcomings in audit
procedure. While we determined that the audit firms inspected had put in place
systems and processes in line with global best practices, some specific areas for
improvements were identified. Other than instances where there was insufficient
documentation for the audit evidence obtained, there were instances where the
necessary audit procedures and evidence were clearly not performed or obtained.
8) The restriction in Shariah regarding commercial conventional insurance has led to
the establishment of a number of Takaful (Islamic insurance) company worldwide
providing insurance coverage for the general public. In the majority of cases the
companies are run as limited companies owned by shareholders. Some Takaful
companies are also listed on the stock exchange, where their shares are actively
traded, and thereby going public.
9) Generally, many Takaful companies (especially those using the Mudaraba principle)
claim that their operations are based on the concept of mutual or co-operative
insurance as approved by the Muslim jurists. This claim is on the basis that:
o They receive the premium or contribution from the insured on the basis of the
Mudaraba principle, whereby the company becomes the entrepreneur
(Mudarib) and the insured party the capital provider (Rab al-Mal).
o The insured party agrees to donate a certain percentage (or in some cases as
in General Takaful the whole of the amount paid) of the premium/contribution
to a special fund used to pay compensation or benefits to contributors.
o Any surplus left in the fund after settlement of all claims is shared by the
company and the insured as profit in a ratio as agreed in the contract. An
insured party who has received compensation, the amount of which is greater
than what he could have received as a share of the surplus had he made no
claim, is not entitled to share such a surplus.
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o The company uses normal actuarial principles to calculate risk and premium.
Since this Takaful company operation is claimed to be based on the
Mudaraba principle, the question arises as to whether such an operation can
be considered to be Shariah-compliant.
10) In this case, the parties to the contract are the company (which is owned in most
cases by the shareholders) on the one hand and the group of the insured parties on
the other hand. In other words, the company does not belong to either the insured
parties or the contributors. In fact, the company is a separate legal entity distinct from
the shareholders. Since the operation of the Takaful company is based on the
Mudaraba principle (as claimed), the insured parties are considered capital providers
(arbab al-amwal), and the company as an entrepreneur (Mudarib). Therefore, both
the insured parties (Arbab al-amwal) and the company (Mudarib) according to the
scheme are entitled to share the surplus (or profit) in line with the contract, based on
an agreed ratio or percentage.
11) Compensation or benefits to the insured parties are paid from the amount in the
Takaful fund, receiving the money from the premium or contribution paid by the
insured, which agree to pay the whole amount (or part thereof) as a donation
(Tabarru). This Takaful operation up to this point, is Shariah-compliant, but the
Mudaraba contract should be examined in greater detail. Under the Takaful
operation, the money in the Takaful compensation fund belongs legally to the
company and not to the insured-cum-investors (as in the case of A Family takaful
fund), and it is claimed (in line with the tabarru principle) that by making the donation
(Tabarru), that is when the insured pay the premium or contribution, an individual
insured party is considered to waive his/her right to the money paid. However, if a
general view of Shariah is to be relied upon with regard to all the insured parties as a
group, the whole amount collected by the Takaful fund (particularly in the case of the
general takaful i.e. the compensation fund) must be considered either as trust money
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or as a trust fund for the benefit of all the contributors. It can in no way be treated as
funds belonging to the Takaful companies.
12) Furthermore it is not lawful in Mudaraba to stipulate that either or both parties to the
contract should be entitled to a certain amount of guaranteed proceeds or benefits in
kind or money other than a share of the profit in an agreed ratio or percentage. If, for
instance, the investor / Mudarib should stipulate that he is to be guaranteed an
amount of money or benefit other than the share of profit, the contract becomes void,
because of the possibility that the venture might not yield a profit. This would badly
affect the interest of the party who is not entitled to such favourable treatment due to
the existence of the said unfair terms.
13) In a Takaful operation, there is seemingly a favourable stipulation for the benefit of
the investors/insured parties that in the case of certain events, they are entitled to an
agreed amount of compensation/benefits, or alternatively they may be helped to
discharge the specified civil monetary liabilities as listed in the contract. Technically
and legally this term in itself will render the Mudaraba contract void on the grounds of
unfair terms in the contract. In practice, however, the Takaful company agrees to the
insertion of such unfair terms because the companys actuaries have already
calculated (as is usual in conventional insurance) that under normal circumstances
there will be a surplus in the Takaful fund.
14) Thus such seemingly unfair terms are arguably not unfair to the Takaful Company
which is fully aware of the truth behind the matter. But the matter is not fully known to
the insured parties as individuals who will still hope to receive the benefits stated in
the contract. The Takaful Company knows from the very beginning that only a small
proportion of the insured will in the end claim benefits. There seems to be a
manipulation, some would argue, by the Takaful Company against the insured
parties, both as individuals and as a group.
15) In the case of the group, the accumulated contributions, which in fact belong to the
group (or at least held in trust for their benefit), will be shared in the end by the
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company after all claims are paid. As for an individual insured, there is uncertainty as
to whether he will receive the stipulated Takaful benefits. In the end, what is shared
by the Takaful Company is nothing other than the proportion of the groups money
left in the Takaful account. It is therefore like paying the Mudaraba profit from the
capital provided by the investors, a practice which is not acceptable according to the
rules of the Mudaraba contract. On top of that according to mudaraba principles, in
case of loss, the remaining capital of the mudaraba should be returned back to the
mudaraba investors, and not to be shared with the mudarib since what is supposed
to be shared is profit if there is any. This because in such a contract, the profit needs
to be paid or shared out of the actual profit (ribh) of the business. In the case of
Takaful, what is shared is a part of the capital left (after deduction made for payment
of claims) provided by all the insured as a group of investors (Arbab al-amwal). After
paying all the necessary claims, what normally happens is that the Takaful funds
account would register a loss not a profit i.e. total amount of premium / contribution
paid (capital of the Mudaraba) minus total claims paid. This means that there is no
Mudaraba profit to be shared bearing in mind that profit is defined in Sharia law as
any amount in excess of the original amount of capital in Mudaraba.
16) In accordance with Mudaraba principles and rules, there is thus no profit to be shared
as the business registers a loss. This clearly shows that the Takaful Company shares
what it is not entitled to share according to the principle of the Mudaraba contract. It
seems that there is no real difference between a conventional insurance operation
and its Mudaraba-based Takaful counterpart in this particular aspect. Above all, both
are owned by a certain group of people who are there to make a profit from the
business based on contingencies.
17) This fact alone makes the mudaraba-based Takaful Company and its operations
doubtful if the test adopted for mutual or co-operative insurance is to be faithfully
applied. According to Abu Jayb in his book al-Tamin bayn al-hazar wal ibahah,
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company), the companies main concerns are to safeguard the interest of the
shareholders (who are in the business to make profit), and not, as a general rule, that
of the premium prayers or contributors or at least there is a conflict of interest
situation.
22) Although the commercial Takaful operation as is practiced today seems to be the
only viable Islamic alternative to conventional insurance, it is not fully conforming to
the rule or concept of al-Ta'min al-Taawuni, or mutual or co-operative insurance.
Modern commercial Takaful companies are more akin to normal business ventures
whose prime objectives are to make profit based on contingencies. It is undeniable
that they have provided the society with an alternative, which is closer to the spirit of
the Shariah, compared with those products available under conventional insurance.
23) However, there remain some dubious elements in the Mudaraba-based Takaful
operation which needs to be tackled to make it fully Shariah-compliant. The
emergence of new Takaful models in some parts of the world, based on the true
concept of Takaful Taawuni or mutual Takaful is something that must be welcomed
by all of us. The establishment of such mutual or co-operative societies providing
insurance or Takaful coverage to their members must be supported, primarily to
remedy the shortcomings of current Takaful operations, many of which are run on the
Mudaraba model.
24) Another alternative would be to run the Takaful operation on a basis similar to the
method applied in the running of Islamic unit trust companies, whereby the managers
of the fund are paid professional fees for the services rendered. The advantage of
this method is that it will make it clear that all funds collected belong to the
contributors/investors/insured as a group, and are held in trust for their benefit.
These are only examples, but they should be sufficient to indicate that regulatory regimes
developed for conventional insurance cannot necessarily be applied uncritically to Takaful.
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SOURCE:
Issue 1-6
1. http://www.iaisweb.org/__temp/issues_in_regulation_and_supervision_of_Takaful.pd
f, pp. 8
issue 7
2. http://www.theislamicglobe.com/index.php?option=com_content&view=article&id=2
00:auditing-concerns-for-takaful-firms&catid=7:article&Itemid=38
issue 8-24
3. http://islamiclawoffinance.blogspot.com/2010/03/shariah-issues-in-takaful.html