Cooperative Insurance and Takaful

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Cooperative Insurance and Takaful

• Takaful Forum July 20-21 2005

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Overview of presentation

• Cooperative and mutual insurance principles
• The global cooperative and mutual movement
• Similarities and differences with Takaful
• Opportunities for collaboration

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Cooperative definition

• A cooperative is an autonomous association of
  persons united voluntarily to meet their common
  economic, social, and cultural needs and
  aspirations through a jointly-owned and
  democratically controlled enterprise.
• Source International Cooperative Alliance
  (ICA)

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Cooperative/mutual values

• Self-help, self-responsibility
• Democracy, equality, equity
• Solidarity
• Honesty, openness
• Social responsibility, caring for others

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Cooperative principles

• Voluntary and open membership
• Democratic member control
• Member economic participation
• Autonomy and independence
• Education, training and information
• Cooperation among co-operatives
• Concern for community
• Source International Cooperative Alliance
  (ICA)

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Cooperative v Mutuals
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Worldwide importance of mutual insurers,
2001Percent of total premiums

• 100 2416 bio USD

USA
EUR
CAN
JAP
KOR
Source Swiss Re for worldwide total premium
ICMIF
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Europe, importance of mutual insurance sector,
2002Percentage of gross direct domestic
premium written
VERY ROUGH ESTIMATES

• Mut Coop Joint Stock
• Mut Joint Stock
• Coop Joint Stock

Luxembourg
Finland
Sweden
Netherlands
France
Belgium
Germany
UK
Austria
Italy
Slovenia
Ireland
Hungary
Spain
Denmark
Czech Rep.
Mutual and cooperative insurers mutual
insurers controlled by mutual holding Except
Luxembourg and Ireland domestic and
foreign Source National supervisory
authorities Industry associates Company
websites / annual reports, AISAM and ACME analysis
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Similarities and differences between Cooperative
Insurance and Takaful
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Cooperative/mutual values

• Self-help, self-responsibility
• Democracy, equality, equity
• Solidarity
• Honesty, openness
• Social responsibility, caring for others

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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
• Shariah approved investments and products
• Bear ye one anothers burden

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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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Takaful model in Sudan

• Surplus belongs to policyholders
• proportionally distributed
• special reserve
• invested on behalf of policyholders
• Policyholders represented on the board of
  directors
• Shareholders share of investment income

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Differences between Cooperative and Takaful

• Takaful is not insurance
• Shariah compliant investments and products
• Sharholder surplus participation
• Shareholder governance

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• A cooperative and mutual scheme providing
  Shariah approved products and investments is
  permissible under Islamic Law.

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Opportunities for Collaboration
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Technical Cooperation

• Industry development
• 13 Takaful companies are members ICMIF
• Takaful Network
• Takaful Xchange
• Policyholder participation
• Disseminating information www.icmif.org/takaful

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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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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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Takaful for the low-income sector
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Can insurance assist 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 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 microtakaful be provided?

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

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Takaful in Non-Muslim countries
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Takaful in Non-Muslim CountriesIs there a need?
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Takaful in Non-Muslim countriesIs there a need?

• Fasting growing immigrant population
• Belief in will of God
• Acceptance that insurance is not allowed
• First and second generations are purchasing
  insurance
• Increased availability of information
• Development of Islamic financial sector

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Takaful in Non-Muslim countriesThe 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 directed 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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The case of Folksam - Sweden

• 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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Conclusion

• The Takaful sector is experiencing phenomenal
  growth and is facing a multitude of challenges
  and issues in its present development cycle. The
  similarities in principles with the established
  cooperative and mutual insurance sector provides
  an opportunity for cooperation which will benefit
  existing and potential policyholders in the
  Muslim world

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Thank youwww.icmif.org/takaful