Takaful

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Takaful
Insurance the Islamic Way
A Presentation by Capt. M. Jamil Akhtar Khan
ACII, MCIT, Master
Mariner
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Outline of Presentation

• Introduction to Takaful
• Objections to Conventional Insurance
• Difference b/w Conventional Insurance Takaful
• Misconceptions about Takaful
• Takaful Through Time
• Takaful Worldwide
• Takaful Models
• Takaful Products
• Takaful Accounting
• ReTakaful
• Foundations of Takaful in Pakistan
• Takaful Prospects in Pakistan

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Introduction to Takaful
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Meaning of Takaful

• Takaful comes from the Arabic root-word kafala-
  guarantee.
• Takaful means mutual protection and joint
  guarantee.
• Operationally takaful refers to participants
  mutually contributing to the same fund with
• the purpose of having mutual indemnity in
• the case of peril or loss.

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Reference - Al Quran

• Help (ta awan) one another in furthering virtue
  (birr) and Allah consciousness (taqwa) and do not
  help one another in furthering evil and enmity
  al maidah verse 2 (52)
• Takaful is a form of mutual help (taawun) in
  furthering good/virtue by helping others who are
  in need / in hardship

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Reference Hadith

• tie the camel first, then submit (tawakkal) to
  the will of Allah
• The hadith implied a strategy to
  mitigate/reduce risk.
• Takaful provides a strategy of risk
  mitigation/reduction by virtue of collective risk
  taking that distributes risks and losses to large
  numbers of participants. This mitigates the
  otherwise very damaging losses, if borne
  individually.

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Origins of Takaful

• Members of the first Islamic community 14
  centuries ago practiced successful schemes of
  co-operative risk sharing.
• Early precursors were developed in response to
  perils and risks associated with long-distance
  trade via caravans or sea voyage and included
• Hilf (undertaking)
• Aaqila (pooling of resources for arranging
  payment of blood money)
• Damaan khatar al tarik (surety)

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origins of Takaful

• In the first constitution in Madinah of 622 CE,
  there were codified references to social
  insurance relying upon practices like
• Al diyah and Al aqila (wergild or blood money
  to rescue accused in accidental killing).
• Fidyah (ransom for prisoners of war)
• Dawania Mutual indemnification amongst officers
  working in the same department during the rule of
  the 2nd Caliph Umar Ibn Al Khattab.
• Cooperative schemes to aid the needy, ill and
  poor.

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Judicial Opinions and Fatwas confirming validity
of Takaful

• Fatwa issued by Higher Council of Saudi Arabia in
  1397 AH.
• Fatwa Issued by the Fiqh Council of Muslim World
  League in 1398 AH.
• Fatwa issued by the Fiqh Council of the OIC in
  1405 AH.
• Approval of the Grand Counsel of Islamic scholars
  in Makkah, Maja Al Fiqh, in 1985.

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Takaful Regulatory Framework

• Takaful Act 1984 of Malaysia.
• Saudi Arabian Monetary Agency (SAMA) Regulations
  of Saudi Arabia - 2004.
• Bahrain Monetary Authority (BMA) Rules 2005.
• Takaful Rules 2005 of Pakistan.

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Basic Elements of Takaful

• Mutuality and cooperation.
• Tabarru (contribution)
• Eliminates the elements of Gharrar, Maisir and
  Riba.
• Wakalah/Modarabah basis of operations.
• Joint Guarantee / Indemnity amongst participants
  shared responsibility.
• Constitution of separate Participants Takaful
  Fund.
• Constitution of Shariah Advisory Board.
• Investments as per Shariah.

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Main drivers of Takaful

• Piety (individual purification)
• Brotherhood (mutual assistance)
• Charity (Tabarru or contribution)
• Mutual Guarantee
• Community well-being as opposed to profit
  maximization.

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Objections to Conventional Insurance
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Declaration by Shariah scholars rendering
conventional insurance un-Islamic

• Fatwa issued in Judicial Conference held in
  Makkah in Shaban 1398 AH.
• Verdict of Supreme Court of Egypt on Dec. 27,
  1926.
• Unanimous resolutions and fatwa by Ulama in the
  Muslim League Conference in Cairo in 1965.
• Unanimous decision by Muslim Scholars in seminar
  held in Morocco on May 6, 1972.

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Objections to Conventional Insurance

• Elements of
• Uncertainty Gharar
• Gambling Maisir
• Interest Riba
• Risk Transfer Mechanism
• UW Investment Profit belongs to the Company

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Uncertainty Gharar

• Conventional insurance contract is basically a
  contract of exchange (muawadat) i.e. buying and
  selling whereby policy (indemnity) is sold as
  goods, with the premium as the price or
  consideration.
• The consideration must be certain for an exchange
  contract.
• The amount to be paid is not known.
• The time it will occur is not known.
• Thus, it involves an element of uncertainty in
  the subject matter of the insurance sales
  contract, which renders its void under the
  Islamic law.

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Gambling Maisir

• The insured loses the money paid for the premium
  when the insured event does not occur.
• The company will be in deficit if claims are
  higher than premium.

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Interest Riba

• . Allah has permitted trading and forbidden
  riba (Al Baqarah 2 275)
• Insurance funds invested in financial instruments
  which contain element of Riba.

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Comparing Takaful to Conventional Insurance
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Misconceptions about Takaful

• Misconception 1
• Risk Protection (insurance) is against Tawakkul
  (total dependence upon Allah (SWT)).
• Response
• In a Hadith narrated by Anas bin Malik, one day
  Prophet Muhammed (PBUH) noticed an Arab Bedouin
  leaving his camel untied. He asked the Bedouin,
  Why dont you tie down your camel?The Bedouin
  answered, I put my trust in Allah (SWT). To
  which the Prophet (SAW) replied, Tie your camel
  first, then put your trust in Allah (SWT).
  ltTirmidhigt

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. . . Misconceptions about Takaful

• Misconception 2
• All risk Protection (insurance) is Haram
  (prohibited)
• Response
• Fiqh Council of World Muslim League resolution
  and Fiqh Council of Organization of Islamic
  Conference in Jeddah resolved that, conventional
  insurance as presently practiced is Haram, and
  that, cooperative insurance (Takaful) is
  permissible and fully consistent with Shariah
  principles.

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. . . Misconceptions about Takaful

• Misconception 3
• All insurance contracts seek to maximize profits,
  which takes benefits away from the policy holders
• Response
• Takaful operators are mutual or cooperative
  entities and they aim for Community well being
  and self-sustaining operations.
• Under the Takaful Wakalah Model, the surplus in
  the fund is returned entirely to the policy
  holders.

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. . . Misconceptions about Takaful

• Misconception - 4
• All types of insurance are a form of Gambling or
  Wagering, which is forbidden in Islam
• Response
• Risk or Uncertainty can be divided into two
  classes
• Pure Risk (involves the possibility of loss or no
  loss)
• Speculative Risk (involves the possibility of
  loss, no loss or gain)
• Takaful insures only Pure Risks and the claims
  are paid in the event of Loss to cover repairs,
  damage, replacement of property, or an agreed
  fixed sum.

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Takaful Through Time

• A chronology of developments

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. Takaful Through Time
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. Takaful Through Time
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. Takaful Through Time
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. Takaful Through Time
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. Takaful Through Time
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Takaful Worldwide

• The first ever Takaful company was established in
  1979 - the Islamic Insurance Company of Sudan.
• 70 Takaful Companies in over 20 countries.
• Takaful premium is 0.1 (USD 3 Billion in 2004)
  of the Global insurance premium and is expected
  to increase to USD 12.5 Billion by 2015.
• Average growth rate higher than conventional
  insurance companies.
• Non Muslims increasingly opting for Takaful
  products for commercial benefits.

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Takaful Models
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Mudaraba Model

• The surplus is shared between the participants
  with a takaful operator. The sharing of such
  profit (surplus) may be in a ratio 55 , 64 etc.
  as mutually agreed between the contracting
  parties. Generally, these risk sharing
  arrangements allow the takaful operator to share
  in the underwriting results from operations as
  well as the favourable performance returns on
  invested premiums.

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Profits attributable to Shareholders
Mudaraba Model
Companys Admin. Mangt. Expenses
Company
Companys Share from Surplus
General Takaful Fund
General Takaful Fund
Operational Cost of Takaful
Surplus (Profit)
Participant
Takaful Contribution paid by Participant
Participants Share from Surplus
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Wakala Model

• Cooperative risk sharing occurs among
  participants where a takaful operator earns a fee
  for services (as a Wakeel or Agent) and does not
  participate or a share in any underwriting
  results as these belong to participants as
  surplus or deficit. Under the Al- Wakala model
  the operator may also charge a fund management
  fee and performance incentive fee.

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Wakala Model
Mudarib's Share of PTFs Investment Income
Profit From Investments
Management Expense of the Company
Profit/Loss attributable to Shareholders
Wakala Fee (30 to 35)
Company (Capital)
Takaful Contribution paid by Participant
Investment by the Company
Investment Income Sharing on Mudaraba Basis
General Takaful Fund
Operational Cost of Takaful/ ReTakaful
Surplus (Profit)
Surplus Distribution to Participants
Participants Takaful Fund
Investment Income
Reserves
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Wakala -Waqf Model

• It is a WAKALAH model with a separate legal
  entity of WAQF in-between.
• The relationship of the participants and the
  operator is directly with the WAQF fund. The
  operator is the Wakeel of the fund and the
  participants pay contribution to the WAQF fund by
  way of Tabarru.
• The contributions received would also be a part
  of this fund and he combined amount will be used
  for investment and the profits earned would again
  be deposited into the same fund which also
  eliminates the issue of Gharar.
• Losses to the participant are paid by the company
  from the same fund.
• Operational expenses that are incurred for
  providing Takaful services are also met from the
  same fund.

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Wakala-Waqf Model
Mudarib's Share of PTFs Investment Income
Wakala Fee (e.g. 30 to 35)
Investment Income
Management Expense of the Company
Profit/Loss attributable to Shareholders
Company (Capital)
Initial Donation to create WAQF Fund
Investment by the Company
Investment Income Sharing on Mudaraba Basis
WAQF Fund
Operational Cost of Takaful/ ReTakaful
Surplus (Profit)
Surplus Distribution to Participants
Investment Income
Reserves
Contribution by Participant
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• Models The beauty of Islam lies in its
• plurality diversity !

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Takaful Products

• General Takaful offers all kinds of non-life
  risk coverages products like motor takaful,
  marine takaful, fire takaful, home takaful, shop
  takaful, etc.
• Family Takaful offers life coverage.
• Banca-Takaful tailored coverages for banks.

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Takaful Accounting

• Two separate accounts are created
• 1. Participants Takaful Fund.
• 2. Shareholders Fund.
• Separate Accounts are created for
• 1. Operational activities.
• 2. Investment activities.
• Dual audit of all transactions
• 1. Financial Auditors.
• 2. Shariah Auditors. (criteria Accounting
  Auditing
• Organization of Islamic Financial
  Institutions, AAOIFI).

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P L Account - Participants Takaful Fund
(Based on Wakala Fee _at_ 35 (say)
(PKR)
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P L - Shareholders Fund (Based on Wakala Fee
_at_ 35 (say)
(PKR)
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ReTakaful

• Currently few ReTakaful companies worldwide
  offering a relatively small capacity
• Sudan (1979) National Reinsurance.
• Sudan (1983) Sheikhan Takaful Company.
• Bahamas (1983) Saudi Islamic Takaful and
  ReTakaful Company.
• Bahrain/Saudi Arabia (1985) Islamic Insurance and
  Reinsurance Company.
• Tunisia (1985) B.E.S.T. Re
• Malaysia (1997) ASEAN ReTakaful International.
• Dubai (2005) TakafulRe by ARIG.
• Lloyds of London to form a ReTakaful Syndicate.
• SwissRe to form a separate ReTakaful Pool
• MunichRe to form a separate ReTakaful Pool
• Provision in Takaful Rules 2005.

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Foundations of Takaful in Pakistan

• 1949 - Declaration made in the Objectives
  Resolution adopted by the Constituent Assembly of
  Pakistan Sovereign state of Pakistan is
  established to enable Muslims individually and
  collectively to order their lives in accordance
  with the injunctions of the Holy Quran and
  Sunnah.
• 1973 - The Constitution of Pakistan declares
  Pakistan as Islamic Republic of Pakistan and
  Islam as the official religion of the state.
• 1985 - Objectives Resolution was made
  substantive part of the constitution.
• 1983 to 1989 - The Council of Islamic Ideology
  held its sessions in order to survey the Islamic
  Insurance System.
• 1992 - The Council of Islamic Ideology submitted
  its report on Islamic Insurance System.
• 2000 - The Insurance Ordinance defines the term
  Takaful in Section 2 and provides for
  establishment of Takaful companies in the
  country.
• Sept., 2005 - Takaful Rules notified .

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Takaful Prospects in Pakistan

• 97 Muslim population.
• Demand for insurance increasing with increase in
  per capita income.
• Personal lines insurance business (leasing,
  health, Medicare) growing at a higher rate than
  other conventional classes.
• Islamic banking on sound footing with support of
  the Govt.

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Conclusion

• Takaful defined.
• Difference with conventional insurance.
• Takaful Models
• Takaful Worldwide
• Prospects and Outlook.

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Thank you for your attention