Shariah Compliant Insurance :
The Next Imperative
Ezamshah Ismail
Teaching Fellow, INCEIF
Agenda
 Introduction
 Global Development of
Shariah Compliant Insurance
(Takaful)
 The Growing Muslim Markets
 Regulatory Environment
 Takaful Operating Models
 Current Issues & Challenges
 Market Entry
 The Way Forward
Introduction
Prohibition of Insurance
• Conventional Insurance is a contract of Exchange
(premium for cover)
• As the realization of the indemnities and its value
is uncertain (Gharar) this contract does not meet
the tenets of a Islamic sales contract
• Investment of most Insurance companies revolves
around interest rates (Riba) instruments e.g.
bonds
Principles of Shariah Compliant
Insurance (Takaful)
• Principles:
– Mutual assistance (Ta’awun);
– Voluntary contribution (Tabarru’); and
– Operation must be within the body and spirit of Shariah.
• Definition: “ A scheme based on brotherhood, solidarity
and mutual assistance which provides for mutual financial
aid and assistance to the participants in case of need
whereby the participants mutually agree to contribute for
the purpose”. (Malaysian Takaful Act 1984)
Takaful vs Conventional Insurance
Context
Takaful
Insurance
Purpose
• Facilitate financial ,social
and economic activities
• Integral role in Social
Security framework
• Strong moral dimension
• Focus mainly on financial
activities
• Corporate Social
Responsibility
Basis
• Ta’awun & Tabarru’
• Riba, Gharar and Maisir
liberated
• Buy & Sell Contract
• Compete on investment yield
and price
Company’s Roles
• Agent and Risk Manager
(Authority?)
• Fees motif
• Risk Underwriter (Risk Taker)
• Business Owner
• Surplus maximization
Contract holders
• Participants/Members
• Capital providers
• Principal
• Customers
• Potential Claimants
Nature of Business
Service and Advisory
Commoditizing of Insurance
Global Development
of Shariah Compliant
Insurance (Takaful)
Development of Islamic Banking
Different Approach in
Development of Islamic
Financial markets
Source: HSBC Amanah, 2010
Slide 9
Development of Takaful
1st Constitution of Madina
. Al-diyah/Al-Aqila
. Fidyah
. Cooperatives
622
1st Retakaful
(ARIL) in Malaysia
Fatwa of Higher
Council of Saudi
Arabia
1976
1st Takaful
Company
in Sudan
1979
1st Takaful Act
(Malaysia)
1984
1977
Growing by
more than 20%
p.a Forecast
US$10-15
billion
1997
2010…
1984 1985
2008
Fatwa of OIC
Fatwa of Muslim
World League
The 1st Malaysian
Takaful Company
TOTAL: US$. 9.4
BILLION (Takaful
Re Figs.)
Global Takaful Contributions
Distribution
GCC
Far East
Africa
Others
40%
45%
3% 12%
Source: Takaful Re
• Iran alone accounts for
43.5% of the GCC
market.
• In term of number of
players, the GCC has 77
Takaful operators, Iran
18, Far East 37 and
Africa 29.
Takaful in Africa
• Sudan : Origin of Takaful
• Egypt -Saudi Insurance House
(General) in 2002
• South Africa - Takaful South
Africa; Reliance Takaful
• Tunisia -Salama Group; Best Re
• Algeria -Albaraka QUA Al Amane
• Gambia-Takaful Insurance Co in
2007
• Kenya- Takaful Insurance of
Africa
• Senegal-Salama Assurance
• Morocco -Salama Group
• Libya
The Growing
Muslim Markets
Insurance Penetration
Penetration Rate
Reasons for low penetration
in Islamic Countries
• lower disposable incomes,
except for the Arabian
Gulf countries.
• greater reliance on social
welfare provisions
• extended family system
• attitude to personal risk
Takaful : The Potential Unrealized
Muslim population
(millions)
Insurance penetration
(%)
250
6
Muslim population (millions)
Insurance penetration
5
200
4.94
4
150
2.88
2.56
3
100
1.64
2.11
1.26
2
1.33
50
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0.67
0.64
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In 2009, overall insurance penetration is 7.7%. Takaful assets accounted for about 8% of the total
insurance industry’s asset.
Source: Data extracted from Swiss Re Sigma No. 4/ 2007 and Reuters
Slide 16
Takaful Operating
Models
Cooperative Model
Operational
Expenses
Participants
Contributions
Takaful Cooperative
Takaful Fund
PIF
PRF
Withdrawal Benefits
Plan Benefits
Investment Profits may be
shared
Underwriting Surpluses
Remain
Mudarabah
Participants Contributions
Takaful Operator Fund
Underwriting
Surplus
Plan
Benefits
Surplus
Pre agreed %age
to operator
%age to
Participants
Deficit
Operational
Expenses
Participants Risk Fund (PRF)
Operators
Outflows
Qard Hasan
P
% age to
Participants
Share of
Investment
Profits at YE
Pre agreed
%age to
operator
Shareholders
Capital
Investment Profits
Share of Surplus
at YE
Investment
Profits
Withdrawal
Benefits
Participants Investment Fund (PIF)
Qard Hasan
When PRF is
in deficit
Riba Free
Wakalah - Mudarabah
Participants Contributions
Takaful Operator Fund
Surplus
%age to
Participants
Charity
Share of
Investment Profits
at YE
Underwriting
Surplus
Plan
Benefits
Participants Risk Fund (PRF)
Operational
Expenses
P
Remaining to
Participants
Operators
Outflows
Deficit
Qard Hasan
Pre agreed
%age to
Operator
Shareholders
Capital
Investment Profits
Upfront
Wakalah fees
Investment
Profits
Withdrawal
Benefits
Participants Investment Fund (PIF)
Qard Hasan
When PRF is
in deficit
Riba Free
Profit & Loss : Wakalah-Mudarabah Model
Takaful
Example :Conventional Insurance
Shareholders’
Fund
+ Investment
Income
- Expenses
Life Fund (Par)
+ Premium
+ Investment
Income
Claims
Commissions
Management
Expenses
Operator’s Fund
+ Investment
Income
+ Wakalah Fees
Commissions
Management
Expenses
Reserves
Profit/Loss
Surplus/Deficit
Surplus shared by both
Shareholders and
Policyholders. Formula
for allocation fixed by
regulators
Takaful Fund
+ Contribution
+ Investment
Income
- Wakalah Fees
- Claims
Reserves
Profit/Loss
Surplus/Deficit
Surplus NOT shared with
Operator
Takaful Models : Comparison
Models
Mudarabah
Creation of Fund
Fees
U/W Surplus
Pure Wakalah
Participants Contributions
As per agreed
Ratio
None (following strict AAOIFI interpretation)
Qard Hasan from TO
None
Waqf to solicit
funds
None
PS Ratio as agreed
Borne by Participants
Borne by TO
(except under
Modified Model)
Liquidation
Jurisdiction
TO Create Initial
Waqf via Donation
Upfront fees as agreed
Investment Losses
Operational
Expenses
Wakala-Waqf
None
U/W Losses
Investment Profits
Combine
Borne by TO
Accrue to Participants only
Saudi Arabia,
Malaysia and Some
GCC
U.K
Malaysia, Sudan &
Bahrain
Pakistan& South
Africa
Model : Strengths and Constraints
Models
Mudarabah
Pure Wakalah
Combine
Wakala-Waqf
Strength
• Simple
• Share in Surplus
• Incentives for
technical
competency
• Forces TO to be
more risk adverse
• Simple
• Does not bear
investment
losses
• Double income
Source
• May incorporate
incentive for
technical
competency
• Double income
Source
• No necessity of
Qard Hasan
Constraints
• Insurance like
• Shariah issues as
surplus is not profit
• Single income
source-no
sharing of
Investment
profits
• Lack of incentive
for technical
competency
Shariah issues if
incentive linked to
surplus availability
No Qard Hasan to
address solvency
issues
• Lack of formal governance structure to address participants rights
• No accounting policy to address equitable distribution of surpluses
Regulatory
Environment
25
Regulatory Overview
Country
Regulator
Takaful
Window
Allowed?
Can TO Share
Underwriting
Surplus?
Separate
Takaful
Regulation?
√
X (follows
AAOIFI)
√
Insurance Rulebook Volume 3Insurance
Regulation
Bahrain
Central Bank of Bahrain
(www.cbb.gov.bh)
Bangladesh
Insurance Development
and Regulatory Authority
X
X
√
Insurance Development and
Regulatory Authority (Islamic
Insurance/Takaful Regulation)
Brunei
Ministry of Finance
(www.mof.gov.bn)
X
√
√
Takaful Order, 2008
√
Law of the Republic of
Indonesia No 2/1992 and
Government Regulations ; PKM
No 18
Indonesia
Ministry of Finance
Labuan
Labuan Offshore Financial
Services Authority
(www.losfa.gov.my)
Malaysia
Pakistan
Bank Negara Malaysia
(www.bnm.gov.my)
Securities and Exchange
Commission
(www.secp.gov.pk)
√
√
√
√
X
Guidelines of Takaful and
International Retakaful Business
in IOFC
X
√
√
Takaful Act 1984
X
X
√
Takaful Rules 2005
Regulatory Overview
Country
Qatar
Regulator
The Qatar Financial Centre
Regulatory Authority
(www.qfcra.com)
Takaful
Window
Allowed?
Can TO Share
Underwriting
Surplus?
√
X (follows
AAOIFI)
Separate
Takaful
Regulation?
Regulation
X
Insurance Rulebook, Chapter
6 Additional Requirement s
for Takaful Entities
Saudi Arabia
Saudi Arabia Monetary
Agency (www.sama.gov.sa)
X
√
√
Law of Supervision of
Cooperative Insurance
Companies and Its
Implementation Regulation
Singapore
Monetary Authority of
Singapore
(www.mas.gov.sg)
√
√
X
Insurance Act
Sudan
Insurance Supervisory
Authority of Sudan
(www.cbos.gov.sd)
X
X
√
Insurance and Takaful Act
2003
UK
Financial Services
Authority (ww.fsa.gov.uk)
√
√
X
Financial Services and
Markets Acts 2000
Free Zone- DFSA
(www.dfsa.ae)
√
X
(follows
AAOIFI)
X
DFSA Rulebook
UAE Insurance Authority
X
X
√
The Takaful Insurance
Regulation 2010
United Arab
Emirates
Current Issues
& Challenges
Market Awareness
• Participants need to understand differences between
Takaful and conventional insurance.
• Participants want a Shariah approved product that is
compatible with their religious belief.
• Participants are looking for Guarantee of Claims or
Benefits
• The cost of Takaful should not be higher than insurance.
Risk
Management
• Fundamentally, the operator is
NOT exposed to underwriting risks
• Investments risks are borne by the
participants
• Business risks fall on the Takaful
operator
• Takaful must protect itself from
any criticism usually directed at
conventional insurance and
uphold the Shariah rulings applied
to the industry
Underwriting: Use SC Shariah
Criteria on Securities
• Besides the activities conducted, the level of contribution
of interest income and dividends received by the
company from conventional finances is taken into account
• If activities are mixed, there must be good public
perception and the non-permissible element must be
small and of public interest to the Muslim ummah
(nation) and the country; such as `umum balwa (common
plight and difficult to avoid)
• 5%(clearly prohibited) ;10 % (umum balwa); 20 % (rental)
and 25% (generally permissible but of public interest)
rule to be applied
Corporate Governance
• Hybrid Nature of Takaful: Operator is agent to both Shareholders
and Participants
• Management to be fair to Shareholders and Participants however,
more evidence of Shareholders priority.
• Need for general assembly of Participants to decide on:
 Final accounts and company’s performance
 Allocation of surpluses
Participants
Shareholders
 Representation on BOD
• Appointed Actuary role in CG to be enhanced or introduced
• Mandate of the SAC to be extended to be participants advocate
Other Issues
•
•
•
•
Regulatory Consideration
Differences in Shariah Implementation
Limited Islamic Investments
Product Innovation (Pricing, Underwriting, Contract
Wording, etc)
• Lack of Qualified Human Resource
• Competition With Conventional and Cannibalisation
• Distribution & Branding
Market Entry
Kenyan Insurance Companies in 2009
Total
Insurers
44
Brokers
and
Agents
Reinsurers
Nonlife
20
Composites
15
Life
9
•137 Insurance Brokers
• 3,076 Insurance Agents
• 21 Medical Insurance
• Providers
Two locally incorporated
Reinsurers
Source: Assoc. Kenyan Insurers,Insurance Industry Report 2009.
•Large number of players
•low capitalization
•Industry RoE averaging at
9.2%
Industry Characteristics
• Many players, yet insurance penetration and density low
• General insurance dominates market share (64%)
• Significant underwriting losses in private motor and workmen’s
compensation
• Only a handful companies generating growth with profitability,
most operators either dormant, generalists or serving captive
markets
• Lack of product differentiation and price competitive
• YE 2009, the industry’s combined assets amounted to KES165bn, or
about US$2bn.
Takaful A Blue Ocean?
• Total number of Muslims,
currently about 10% or higher
• Islamic Finance (viewed as ethical
ways of investing and financing) is
increasingly appealing to nonMuslims and non-Islamic
institutions.
• For the period 2010 to 2015, nonlife penetration to rise from
1.60% to 1.85% and for life
density to rise from US$8 per
capita to US$13.
Takaful :
The Way Forward
Challenges
Players
•Single Country Incumbents
•Global Players
•New Startups
Existing
Takaful
Markets
Embryonic
Established
Insurance
Markets
•Establishing Model amidst Insurance norms
•Capturing Universal Market Share
•Growing Penetration Rates
•Refining Working Model
•Capturing Insurance Market Share
•Investment of Funds
•Raising Insurance Penetration Rates
•Increasing Awareness
•Regulations
Fitting The Pieces
Operators
•Capital
•Expertise
•System
Islamic Capital Markets
•Need of Shariah Compliant
Investments
•Liquidity
Consumers
•Awareness
•Acceptance of Shariah Values
Regulators
•Standards
•Transparency
•Capital Adequacy
Shariah
Branding
• Shariah practices are closely aligned
with the existing universal ideals of
good business practice.
• The average retention of gross
contributions for takaful operators is
58% ( 46% for conventional companies).
• Shariah-friendliness to full Shariahcompliance in all aspects of the brand’s
identity, behaviour and communications
(through TQM)
• Beyond Shariah compliance: means
beating their emotional preference
because compliance is win-win.
Ogilvy Noor.
Social Responsibility Trends at Islamic
Financial Institutions
• A survey was carried out during the fall of 2009 by Dinar Standard and
Dar Al Istithmar with the support of AAOIFI. Overall, the results suggest
that IFIs do have a good start on most aspects of social responsibility,
contrary to criticisms leveled at the industry.
• Some key findings of the survey were:
• Clients: 100% of respondents answered yes to having a policy to screen
prospective clients which is actively implemented. Similarly 97% have an
organizational policy that deals with client responsibly.
• Employees: 83% of respondents‟ state having policies that provide equal
opportunity to all their employees, 93% have policies that ensures meritbased salary and promotion, and 86% having policies that specifically
prohibits any kind of discrimination. However, when it comes to having
policy to monitor employees from different backgrounds and gender, the
response was mix with only 52% admitting to having such a monitoring
policy and 48% not having any such policy.
Social Responsibility Trends at Islamic
Financial Institutions
• Charity: 76% indicated that they had polices for charitable
activities whilst 17% had none. Charitable activities remains a
strong priority for IFIs, but most do not consider utilising their
fund mobilizing capabilities to raise funds for charities or
emergency causes (only 34% said they do.)
• Responsible Investments: 55% responded yes to having some
policy in investment quotas on social, developmental and
environment orientated investments, whilst 38% did not have
such policy. However, amongst the three types, environmental
related investment quotas had the least focus (38%).
• Zakah/ Waqf Management: Only 10% of respondents said they
had a policy to manage Waqf properties on behalf of clients,
while only 33% said they managed Zakah on behalf of clients
Thank You