Takaful – Opportunities & Challenges
Session IV 24 January 2012
Bilal Khan (IFEC, UK)
Badrul Hasan (SAH Global)
Presentation Layout
Risk mitigation: the Islamic and
conventional contractual perspectives
 Islamic jurisprudential influence on
Takaful model development
 Salient issues in Retakaful
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Meaning of Risk (1.1)
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Legal: The set of “circumstances” that are potential source of
undesirable change or which imply the possibility of undesirable
change is called risk. When the risk materialises it become a
peril
Commercial: An exposure to loss of value
Shari’ah: There are two terms that need further research:
Mukhatarah (risk) and Dhaman Hukmi (liability). Mukhatarah is
similar to risk whereas the Dhaman Hukmi is a hidden liability
which may take place and not always be mitigated
Types of Risk (1.2)
Pure Risk: There is only the possibility of loss or no loss
Thinks that there is
a risk
Does not
manipulate:
Follows the
normal cause
of events
Result by Pure risk – in case of
loss compensation is justified as
this is not gambling but is a
natural cause of event
Mr A
Natural
act
occurs
Result
Result of Pure Risk –
if no loss then there
is no compensation
Types of Risk (1.3)
Speculative Risk: This involves the possibility of loss, profit or no
change in value
Speculative risk
Mr A
Manipulating
risk
Expected outcome
Action occurs
as planned
Result
Good outcome
(as planned)
Both results are unjustified
as gambling is involved
Bad outcome
(not as planned)
Differences between conventional
insurance models (1.4)
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Mutual insurance: A mutual insurer is an insurer
(a) of whom all members:
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qualify as such by virtue only of their being owners of policies issued by
that insurer; and

are entitled to participate in the exercise of control in general meetings of
that insurer
(b) whose profits are distributable only to owners of policies issued by the
insurer, in accordance with the instruments under which the insurer has
constituted and carried on business. Balance of premium is returned to the
insured. If any shortfall, members should contribute.

Proprietary insurance: Its purpose is to make a profit which is to be distributed
among its shareholders and not policyholders.

Takaful: It tends to be a blend of these two in Shar’iah-compliant manner!!
Main legal elements of an insurance
contract (1.5)
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1. It is a contract whereby for some “consideration” (generally but
not necessarily for periodic payments called premium), the insured
secures some benefit on the occurrence of an event (Riba element
due to exchange contract involving money)
2. The event must be uncertain as to whether it will happen or not,
or if the event will happen, there must be uncertainty as to when;
(Gharar Fahish and Maysir are manifest) and
3. The event must be adverse to the insured, in that s/he possesses
an insurable interest in the subject matter insured (inequality in
contract and buying of intangibles)
Haram Elements (1.6)
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Riba: “increase” which an owner of valuable property
(māl) receives from the debtor for allowing time to repay
the debt (Imam Tabari)
Riba is the name of every increase in lieu of which there is
no consideration. Since this period is not a valuable
property (māl), its return has been declared as unlawful
Riba manifests itself in many ways:
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investment of premium in Haram avenues,
the compensation received are not usually equal to premium
paid etc
Haram Elements (1.7)
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Gharar is another prohibited element proven form Hadeeth (Prophetic
tradition)
Lexical meaning: risk; hazard. Taghreer means to expose oneself to or
one’s property to jeopardy.
Technical meaning : Gharar takes place where the consequences (in
dealings) are concealed. (Sarakhsi), i.e. there is uncertainty over the
existence of the subject-matter of sale, or what is bought or sold is
unknown.
No clear definition as it manifests itself in various shades. The quantum of
damages to be paid is not clear, the period to pay premium prior to
materialisation of risk is unknown, extent of risk calculation can be
problematic in non-patrimonial damages etc.
Haram Elements (1.8)
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Maysir: It is often compared to a game of chance which involves a zero
sum game. One party gets everything at the expense of the other
party that loses everything.
Basically conventional insurance is similar to gambling because the
insurance company is hoping (gambling) that the insured events will
most probably not happen; therefore it will insure the events while the
insured is betting that there is high probability that the event will
materialise. Both parties expose a sum of money whereby one will win
while the other will lose.
The element of insurable interest differentiates all insurance with
betting but now UK changed its Gambling Act. Will that have the same
effect?
Maqasid of Shari’ah and Risk
Mitigation (1.9)
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The overarching objectives of the corpus of Islamic law is
to protect 5 fundamental things:
Religion
Life
Family/progeny
Intellect
Wealth
Shari’ah has laid much emphasis on risk mitigation to achieve
these higher objectives. E.g. Yusuf (AS) and draught;
Muhammad (SAW) wearing armour on the battlefield; He
also said “tie your camel then place trust in Allah”.
Need for risk mitigation (1.10)
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In the absence of
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Baitul Mal,
Awqaf
Tribal or family protection system
Individuals are faced with more risk and less
help; the need to find and adopt mitigation
techniques is becoming paramount to achieve
the objectives of Shari’ah
Takaful and Tabarru’ (1.11)
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In modern context insurance policies are
the most widely used and accepted means
to mitigate the risk exposed to religion,
life, family, intellect and wealth
However due to the Haram elements the
need arose to find an Islamic alternative.
Thus Takaful was developed based on the
concept of Tabarru’
Solution to the conventional
insurance contract (1.12)
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When adopting the concept of Tabarru’ the Takaful contract is
converted into a unilateral contract.
This implies that there is no reciprocal consideration that raises
the issue of contractual promise as found in the general theory
of contract.
In Shari’ah, this is tantamount to a unilateral contract and not a
contract of exchange. A contract of exchange attracts Riba,
Gharar, and Maysir but this is not the case in a unilateral
contract as there is no counter value (Mu’awadah) to convert it
into a commercial transaction. This is due to a legal maxim
So Tabarru’ resolves the issue of Riba, Gharar and Maysir that
are encountered in the definition of an insurance contract
Potential problems of
enforceability (1.13)
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A Tabarru’ being a unilateral contract begs for the question of enforceability on
both parties.
Sheikh Mustapha Zarqa observes that there is an implicit Wa’ad (unilateral
promise) that will be binding upon the parties (Wa’ad Iltizami) which has been
held to be legally binding by the OIC
However how would this work in a secular court? Have to prove tort, or
forbearance or under deed under English common law. Another aspect is to
consider it as a Dhaman, a guarantee to cover the participants in case of
problem which can be built into the joint-guarantee contract of participants. This
brings in other legal issues as we do not have a case law nor an Act of
parliament for that yet! Another solution could be maritime insurance.
In some jurisdictions the Mutual Insurance Act has been applied but is a Takaful
contract similar to a mutual insurance policy?
Flow chart (1.14)
Profit
General Takaful
£100,000
Investment
GTF
£1,000,000
GTF
£1,100,000
Takaful
Malaysia
Operational Cost
Of Takaful
Claims
£500,000
Reserves
£300,000
£180,000
60%
Profit
£300,000
40%
Participants
£120,000
Flow chart (1.15)
Takaful
Malaysia
Family Takaful
£1000
Payment/
Installment
FTF
PA
£950
PSA
£50
Profit
30=£30
£100
70=£70
Investment
PA
£
66.50
PSA
£
3.50
£950
£1000
£50
Differences between Commercial Insurance, Mutual Insurance
and Takaful
Need for Retakaful (1.18)
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Retakaful does this by acting as back-up against the risk of ruin
arising out of any catastrophic event, and by reducing the
capital requirements for Takaful companies who would
otherwise be required to shoulder the entirety of their risks on
their own capital base.
Where Retakaful companies are highly rated, this improves
confidence among Takaful market operators and encourages
them to strengthen their relationships with the Retakaful market
in place of the reinsurance market. In this way, Retakaful
completes the Shari’ah compliance circle.
Retakaful leads the way towards Retrotakaful.
Thank you
Questions and answers
Contact details for further enquiries
 bilalakhan@hotmail.co.uk
 0044 7791 288 347
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Badrul.hasan@sahglobal.com
0044 7931 330 293