Islamic Insurance Takaful

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Islamic Insurance(Takaful)

• Institute of Islamic Banking and Insurance London
• April 27th 2005

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Overview of presentation

• Why conventional insurance is not allowed
• Principles of Takaful/ReTakaful
• Models of Takaful
• The global sector
• Challenges for the future
• About ICMIF
• Poverty Alleviation
• Takaful in Non-Muslim countries

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Why is conventional insurance not permissible?

• Uncertainty (Gharar)
• Gambling (Maisir)
• Interest (Riba)

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Earlier forms of Islamic insurance

• Dawania Mutual indemnification amongst officers
  during the rule of Umar Ibn Al Khattab (2nd
  Caliph)
• Diyyah and Aquilah Blood money and concept of
  removing hardship from victims family by payment
  of Diyyah, on a mutual basis, by relatives of
  offender
• Marine Insurance Early second century mutual
  fund to cover robberies and mishaps

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Fiqh Academy Resolution 1985

• Commerical insurance is prohibited
• Alternative contract confirming to principles of
  Islamic dealings is the contract of cooperative
  insurance, which is founded on the basis of
  charitable donation and Shariah compliant dealings

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Principles of Takaful

• Solidarity and joint guarantee
• Self reliance and self sustaining for community
  well being
• Assist those that need assistance
• Community pooling system
• Halal investments

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Retakaful

• Preferred reinsurance is proportional (quota
  share or surplus)
• Non proportional permissible on a strict profit
  commission
• If takaful reinsurance is unavailable then it is
  permissible to use a conventional reinsurer

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Takaful models in practice

• Not for profit model
• Taawuni model
• Al Mudharabah model
• Al Wakala model

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The Global Takaful sector

• 1996 30 Institutions transacting Takaful
• 2002 50 Takaful operators and four Retakaful
  providers
• 2004 80 Takaful operators, 200 Takaful windows
  and 12 Retakaful providers
• Source IBB Solicitors, UK (2005)

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The Global Takaful sector

Source Bhatty (2001)
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Challenges for the future

• Dynamic Growth
• Harmonization
• Best practices
• Awareness
• Reinsurance
• Governance
• Low-income sector
• Non-Muslim countries

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About ICMIF

• Established in 1922
• Not-for-profit voluntary trade association
• Represents 142 members from 67 countries
• Member driven
• Strengthen and promote the cooperative and
  mutual insurance sector

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The Federations position

• Our purpose is to enhance and accelerate
  development of a distinct, unified, strong and
  influential cooperative and mutual insurance
  sector of the global financial services industry.
• We promote international collaboration to help
  strengthen cooperative and mutual insurers in
  different countries and regions that operate on
  the basis of shared principles.
• We help our members identify with, remain
  committed to and contribute significantly to the
  cooperative movement and democratic mutuality
  nationally, regionally and globally.

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The Federations position

• ICMIF Board of Directors meeting, Chicago Oct 02
• Principles of Takaful in line with cooperative
  and mutual philosophy
• Tawuni and not-for-profit Takaful models
  eligible for membership
• Al Mudharabah and Al Wakala models assessed case
  by case
• ICMIF should support the development of the
  Takaful sector and increase awareness of
  cooperative and mutual form
• ICMIF Board of Directors meeting, Tokyo Oct 04
• Reaffirmed commitment to work with sector
• Associate membership for Al Mudharabah and Al
  Wakala model
• How membership benefits ICMIF strategy and
  activities in the region
• Encourage member to become more policyholder
  orientated

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Closer ties between the two movements

• Mutuality, Cultural Diversity and Sustainable
  Development Seminar - May 2004, Tunisia
• The best form of Takaful would ideally be an
  existing mutual or
• cooperative insurer which invested its premiums
  compliant with
• Islamic principles.
• Dawood Taylor, Takaful Tawunni
• It is now important for ICMIF to build on the
  findings of this seminar
• and extend the hand of cooperation to the
  Takaful movement and
• support the principles of mutuality in all its
  various forms
• Hans Dahlberg, ICMIF

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Avenues for collaboration

• Reinsurance
• Information
• Training
• Establishing Takaful windows within member
  companies
• Microtakaful schemes

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ICMIF Takaful Members

• Takaful Operators
• Sudan (three)
• Saudi Arabia (two)
• Trinidad and Tobago
• Malaysia
• ReTakaful Operator
• Tunisia
• Cooperative with Takaful window
• Indonesia
• Takaful Training Institute
• United Kingdom
• Pending Applications
• Bangladesh
• Sri Lanka
• Malaysia
• Qatar

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Reinsurance capacity

• If there is a need to turn to the conventional
• reinsurance market then the Takaful operator
  should
• first try and obtain coverage from the
  cooperative and
• mutual reinsurance sector.

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Update of ICMIF activities Training

• Simulations have been run in Algeria, Lebanon,
  Morocco, Tunisia, Malaysia, Indonesia by Best Re
• MOROTANIA is available in Arabic
• Agreement in process to introduce Takaful model
  into MOROTANIA and ATLAS simulations
• Initial discussions on a Takaful management course

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Other activities

• ICMIF Endorsement of Takaful Conferences and
  seminars
• Establishment of AMENA
• Creating a Takaful network
• Takaful Directory

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Poverty Alleviation

• The poor are the most vulnerable
• The impact of losses are more severe
• They have minimum means of recovery
• Success of microfinance schemes show the poor can
  and want to save
• Savings and credit are used unproductively
• The poor need a safety net to escape poverty

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• Insurance is being recognized as an important
  tool for poverty alleviation

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Providing microinsuranceThe challenges

• Coverage
• Regulation
• Moral hazard and Fraud
• Adverse selection
• Education and trust
• Technical expertise
• Affordability
• Retention
• Sustainability

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Providing microinsuranceThe possibilities

• The cooperative microinsurance model
• History of organising the poor
• Operate for the interest of members by
• members
• Trust
• Ownership and loyalty
• Peer pressure
• Surplus reinvested or redistributed

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Providing microinsuranceThe possibilities

• The partner agent model
• No-risk fee for microinsurance provider
• Better coverage for policyholder
• Access to new market
• Pooling of risks between informal and formal
• sector

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Providing microinsuranceThe possibilities

• The donor agent model
• Access to expertise
• Financial sustainability
• Guiding hand

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The need in Muslim countries

• Social services inadequate or unavailable
• Large sectors of poverty in many Muslim countries
  
• Over half of worlds lowest developed countries
  have a majority Muslim population
• Increasing inequality in Middle East and Gulf
  countries

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• Takaful is the second most important social
  institution to counter poverty and
  deprivation Omar Fisher,1999

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How can we provide microtakaful products?

• Establish informal microtakaful schemes
• Encouragement of pro-poor organisations
• Education of government and donor agencies
• Involvement of Takaful sector
• Technical expertise
• Financial assistance
• Partner-agent model
• Bear ye one anothers burden

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ICMIF development function

• Methodology
• ICMIF Fees
• Technical expertise provided by members
• Development projects led by members
• Partnerships with national and international
• donor agencies

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ICMIF development activities

• Established 25 people-orientated insurance
• organisations
• Unique Insurance Company Ghana
• Financial support received for Latin America
• Contract to write guidelines on microinsurance
• Turkmenistan State Insurance Organisation
• Health Mutual scheme Mali
• Currently involved in 22 countries

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ICMIF development Takaful projects

• Paper on poverty alleviation
• Takaful Trinidad and Tobago
• Takaful Health Mutual Fund in South Africa
• Mutual Health Fund and Takaful scheme in Jordan
• Health Mutual Funds in Lebanon and ILO Case study
• Takaful in Bosnia Herzegovina and Russia
• Microinsurance/microtakaful pilot scheme Tunisia
• Proposed Poverty Seminar in UK

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Takaful in Non-Muslim countries

• Challenges
• Dispersed population
• Capital requirements
• Regulation
• Awareness
• Credibility
• Technical expertise

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Ruling by the European Council of Fatwa and
Research

• It is well known that in most non-Islamic
  countries there are cooperative and mutual
  insurance companies. There is no harm from the
  Shariah point of view to participate in these
  services. So, it is unlawful for a Muslim living
  in a country where there is such a cooperative
  insurance company to make an agreement with a
  commercial insurance company..

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Ruling by the European Council of Fatwa and
Research

• Muslims are obliged to purchase their statutory
• insurance requirements from the cooperative and
• mutual insurer if there is no Takaful company in
  the
• country

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ICMIF Member countries where there are no Takaful
companies available
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Is this a real business opportunity for ICMIF
members? The case of Folksam

• 350,000 Muslim population
• Fastest growing immigrant community
• Collaboration with Swedish Muslim Council
• Marketing of Folksam products through
  representatives of Council in communities and
  mosques
• Insurance committee has been established

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The Possibilities in Non-Muslim countries

• There is a growing awareness and demand for
  Islamic financial instruments including insurance
  in non-Muslim countries. There is a great
  potential for established financial institutes to
  set up Takaful windows. In particular the
  Shariah ruling presents an opportunity for
  cooperative and mutual insurers to penetrate this
  niche market with minimal costs.

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Conclusions

• Takaful sector is firmly established
• Growing investment and retakaful sector
• Increasing awareness
• Greater collaboration needed
• Maintain links to Takaful basic philosophy
• Opportunity for conventional banks and insurers

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Thank youwww.icmif.org/takaful