Islamic Insurance Challenges

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Islamic InsuranceChallenges Opportunities

• Financial Services Research Forum June 28th 2005

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Overview of presentation

• Why conventional insurance is not allowed
• Principles of Takaful
• Models of Takaful
• The global sector
• Challenges for the future
• Insurance for the low-income sector
• 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
• Shariah approved investments and products
• Bear ye one anothers burden

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Takaful models in practice

• Not for profit model
• Taawuni model cooperative insurance
• Al Mudharabah model profit sharing
• Al Wakala model agency agreement

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The Global Takaful sector

• 1979 First Takaful Company established
• 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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Insurance 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 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 microtakaful be provided?

• 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

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Islamic Insurance 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 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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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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Conclusions

• Takaful sector is firmly established
• Growing rapidly
• Micronsurance/takaful is an important tool for
  poverty alleviation
• Increasing awareness of Takaful in Non-Muslim
  countries
• Development of Takaful in Non-Muslim countries
  can encourage greater participation into
  insurance market

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Thank youwww.icmif.org/takaful