Takaful Absolutely Final

Islamic Insurance 1 Takaful Takaful is a noun stemming from the Arabic Verb "Kafala" meaning to guarantee. Takaful is an alternative for the contemporary insurance contract. A group of persons agree to share certain risk (for example, damage by fire) by collecting a specified sum from each. In case of loss to anyone of the group, the loss is met from the collected funds Thus it can be visualized as a pact among a group of members or participants who agree to jointly guarantee among themselves against loss or damage that may inflict upon any of them as defined in the pact. Should any member or participant suffer a catastrophe or disaster he would receive a certain sum of money or financial benefit from a fund, as also defined in the pact, to help him meet the loss or damage. In other words, the basic objective of Takaful is to pay for a defined loss from a defined fund. Each member of the group pools effort to support the needy. It means mutual help among the group.

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Islamic Insurance 2 Islam & Insurance Precedents for Islamic Insurance (Takaful) An Islamic alternative to contemporary insurance is known as Takaful, and is based on the concept of Ta'awun, or mutual assistance. Ta'awun forms the basis of many Islamic practices. The teaching of Islam in regard to the equality and brotherhood of believers, and their responsibilities toward one another and all humanity led to several forms of mutual assistance both social and economic. Takaful as practiced in the sixth century (Christian era A.D. and +50 Hijrah) actually evolved from tribal practices of mutual assistance dating back to pre Islamic times. There are several examples in pre-Islamic history whereby families, tribes or related members throughout the Arabia peninsula pooled their resources as a mean to help the needy on a voluntary and gratuitous basis. There practices were validated by Prophet Muhammad (PBUH) and incorporated into the institutions of the early Islamic State in Arabia around 650 C.E. Examples of these early Islamic practices include the following:



Merchants of Mecca formed funds to assist victims of natural disasters or hazards of trade journeys.



Surety called Daman khatr al-tariq was placed on traders against losses suffered during a journey due to hazards on trade routes.



Assistance was provided to captives and the families of murder victims through a grouping known as a'qila.



Contracts, called 'aqd muwalat, were entered into for bringing about an end to mutual amity or revenge.

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Islamic Insurance 3 

Confederation was brought about by means of a hilf, or an agreement for mutual assistance among people.

To illustrate the importance of this relationship in a life of a Muslim, Islam calls for the protection of certain basic rights, viz.: 

The right to protect the Religion.



The right to protect the life.



The right to protect dignity/honor.



The right to protect the property.



The right to protect the mind.

In view of the above as well as the real need for insurance cover, Muslim jurists looked further into the Islamic system of insurance. Their conclusion was that insurance in Islam should be based on the principles of mutuality and cooperation. On the basis of these principles, Islamic system of insurance embodies the elements of shared responsibility, joint indemnity, common interest, solidarity, etc. According to the jurists this concept of insurance is acceptable in Islam because, 

the policyholders would cooperate among themselves for their common good;



every policyholder would pay his subscription in order to assist those of them who need assistance;



it falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system;



the element of uncertainty will be eliminated insofar as subscription and compensation are concerned;



it does not aim at deriving advantage at the cost of other individuals.

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Islamic Insurance 4 Takaful Referenced with the Qura'an and Sunnah Although the word Takaful does not appear in the Holy Qura’an, it is derived from the term Ta'awun, or mutual assistance and connotes the same meaning. The second verse of Surah 5 in the Holy Qura’an exhorts the individual to assist others:

"Assist one another in the doing of good and righteousness. Assist not one another in sin and transgression, but keep your duty to Allah" V.5:2.

In addition, many of the virtuous customs from the pre-Islamic period of Jahiliyya were declared "Islamic" by the Prophet Muhammad (PBUH) when he said: “the virtues of the Jahiliyya are acted upon in Islam." He further clarified this point in the constitution written in Medina.



They {Muslims of the Quraysh and Yathrib tribes} are one community (ummah) to exclusion of all men. The Quraysh emigrants according to their personal custom shall pay the blood-rite {aqila} within their number and shall redeem their prisoners with the kindness and justice common among believers."



Believers are to other believers like parts of a structure that tighten and reinforce each other." Al-Bukhari and Muslim.



The Believer, in their affection, mercy and sympathy towards each other, are like the body- if one of its organs suffers and complains, the entire body responds with insomnia and fever." Muslim.

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Islamic Insurance 5 Given the Qura’anic admonition to "assist one another" and the words of the Prophet Muhammad (PBUH) regarding mutual assistance, Takaful may be understood as an imperative upon Muslim believers: •

"… a system based on solidarity, peace of mind and mutual protection which provides mutual financial and other forms of aid to Members {of the group} in case of specific need, whereby Members mutually agree to contribute monies to support this common goal." O.Fisher

Finally, although a believing Muslim is required to accept (destiny or preordainment) which can incorporate misfortune, s/he is not a passive "victim of circumstances. Conversely, the believing Muslim is exhorted by the injunctions of the Holy Qura'an to proactively take precautions in order to minimize potential misfortune, losses or injury from unfortunate events. One specific such instruction appears in Hadith to the owner of the camel to first tie your camel then rely upon the destiny ordained by Allah (swt).[Al Tirmidhi Vol.4,p.668].

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Islamic Insurance 6 Main Objections against Conventional Insurance While there a number of objectionable elements existing with conventional insurance, three main ones stand out. Qard Al Hassan According to Islamic principles, only one type of loan, Qard el Hasan (lit. good or benevolent loan) is allowable. Under the concept of Qard el Hassan, the lender may not charge interest or any premium above the actual loan amount. Some Muslim jurists state that this restriction includes directly or indirectly any benefits associated with the loan: "…this prohibition applies to any advantage or benefits that a lender might secure out of the qard (loan), such as riding the borrower's mule, eating at his table, or even taking advantage of the shade of his wall." Muslims are encouraged to invest actively in ventures with an intent to share profits or losses that may result, rather than becoming a passive creditor. Unlike conventional commercial banking (largely based upon fixed, guaranteed rates of return-interest), this mutual sharing of risk promotes communal enterprises, risk-taking and productive activities. Monies are not sitting idle or invested at nominal, fixed rates of return. Instead, monies are applied to commercial transactions or agrarian cultivation where risks and rates of return are balanced. A higher degree of risk in investment attracts a concomitant high rate of return to investors, provides stimulus to an economy and creates an environment for entrepreneurs to maximize their productive efforts.

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Islamic Insurance 7 By contrast, most conventional insurers invest premiums in bonds/loans (corporate and municipal) as well as other interest generating investments (involving Riba from Islamic perspective). Riba (Interest/Premium/Usury) The single most important aspect that differentiates Islamic finance from conventional finance and banking is the absence of interest. As discussed earlier, the Shariah prohibits both the taking and paying of interest (Riba) no matter what the purpose of the transaction, or the amount of interest charged. Apart from a minority interpretation of Shariah by a few Scholars, the consensus among Islamic jurists is that Riba and interest are the same. There are four occasions in the Holy Qura’an where Riba is clearly prohibited. Refer to V.30:39; V.4:161; V.3:130 and V.2:275-276. The use of Riba is clearly prohibited by Prophet Muhammad (PBUH) in a Hadith, where the Prophet (PBUH) condemned those who accept interest, as well as those who pay it or are witness to such a transaction. Riba, however, circumscribes other aspects that make commercial transactions suspect as well: "The Prophet (PBUH) forbade indeterminist, doubtful or speculative transactions or selling something before having possession of it." "The Prophet (PBUH) forbade purchases from needy people and purchases involving uncertainty such as the sale of fruit before its maturity. " Al Gharar (Uncertainty) All commercial transactions must contain full disclosure. In other words, any transaction entered into should be free of uncertainty, deception and unknown

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Islamic Insurance 8 elements or speculation. Al parties involved should have "full disclosure" or knowledge of the "counter values intended to be exchanged as a result" of the transaction, including the fact that "profits" cannot be guaranteed. The purpose of this prohibition is to avoid exploitation and injustice, especially on the part of the holder of capital. Examples of prohibited transactions include: options, futures, derivatives, short sales and forward foreign exchange transactions (rates are determined by interest differentials). A number of transactions are treated as exceptions to the rule of Gharar. Such commercial transactions contain special treatments to assure they are organized to minimize harm and risk to both parties. Such transactions are: a. Sales with payment in advance (bai'bithaman ajil) b. Contract to manufacture (Istisna) c. Hire contract (Ijara).

Specifically, Takaful transactions are design to minimize Al Gharar since the risk of future events can neither be known in advance nor influenced in any way. Note that the mere fact of purchase of a Takaful Contract in no manner affects future events nor does it guarantee that any specific outcome will/will not occur. Obviously, nothing in Takaful operations can influence Al Qadar (Allah's swt destiny).

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Islamic Insurance 9 Principles & Models of Takaful Origins and Operations of Takaful System Background Elements to Takaful Four fundamental factors must co-exist to establish the proper framework for a Takaful system: A. Nea’a or utmost sincerity of intention for knowingly following guidance and adhering to the rules of a Takaful system. B. Integration of Shariah Conditions, namely: risk protection sharing under ta'awuni principle, coincidence of ownership, participation in management by policyholders, avoidance of Riba and prohibited investments, and inclusion of al Mudharabah or Wakalah principles for Takaful management. C. Presence of Moral Values and Ethics, business is conducted openly in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealings. D. No Unlawful Element that contravenes Shariah and strict adherence to Islamic rules for commercial contracts; namely the key elements present are:



Parties have Legal Capacity (i.e. +18 years old) and are mental fit



Insurable Interest



Principle of Indemnity prevails



Payment of Premium is consideration (offer and acceptance)



Mutual Consent (which includes voluntary purification)

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Islamic Insurance 10 

Specific Time Period of Policy and underlying Agreement

The Principles of Takaful Insurance Uncertainty



is

eliminated

in

respect

of

subscription and compensation. It does not derive advantage at the cost of



others. 

Solidarity and joint guarantee



Self

reliance

and

self

sustaining

community well being 

Assist those that need assistance



Community pooling system



Halal investments

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for

Islamic Insurance 11 Takaful Models As a matter of deep faith, Muslims believe that there is unity in diversity. One expression of this is that no single "best" model exists for Takaful. Shariah scholars worldwide concur on fundamental components that characterize a Takaful scheme, yet in their judicial opinions (fatwas) operational differences are tolerated that do not contradict essential religious tenets. As such, Takaful Models may be separated into three categories: (A) Ta’awuni Takaful Non-Profit Model, includes social-governmental owned enterprises and programs operated on a non-profit basis (such as Al Sheikhan Takaful Company - Sudan), which utilize a contribution that is 100% Tabarru (donation) from Participants who willingly give to the less fortunate members of their community. (B) Al Mudharabah Model, whereby cooperative risk-sharing occurs among Participants yet the Takaful Operator shares also in any operating surplus as a reward for its careful underwriting on behalf of Participants. Examples of this Model include Takaful Malaysia (STM - Malaysia), Takaful Nasional (Malaysia) and Takaful International (Bahrain). (C) Al Wakalah Model, whereby cooperative risk-sharing occurs among participants with 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 funds management fee and a performance incentive fee (as Bank Aljazira does).

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Islamic Insurance 12 Ta’awuni model Ta'awuni is a system of mutual cooperation for financial assistance and protection based upon the Qura’anic principles of "Ta'awuni, or mutual assistance." In the context of takaful, Ta’awun meaning mutual help allows participants make donations with the intention of helping one another within the takaful group. The elements underpinning the Ta’awun concept as applied in takaful, can be broken down into the following: 1) Mutual responsibility 2) Mutual cooperation 3) Mutual protection Benefits of Takaful Ta'awuni?



Fulfils the social obligations towards community and family.



Enables financial assistance for the unfortunate and needy.



Avoidance of Al-Riba, Al Maysir and Al Ghirar and similar prohibited elements within financial dealings.



Promotes moral values, ethical dealings and full disclosure in all its business activities and operations.



Protection of lifestyle.



Security for the family and the group against misfortune.

Through "Tabarru" donations it allows Participants to achieve self-purification and peace of mind

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Islamic Insurance 13 Mudharabah-A Profit Sharing Islamic contract Points to consider with Non-Surplus Sharing Mudharabah Model •

Excellent and laudable model

•

In many ways exceeds a Mutual insurance model as no expenses are charged to the participants funds

•

Operator does not share in surplus therefore no Mudharabah issue to debate

•

Very difficult business model as a stand-alone Family/Individual Life Takaful operation (especially where no charging of expenses to participants fund envisaged)

•

Possibly only potentially viable where a composite Takaful operation is being considered.

•

Could take many years to realize a commercial profit from such a business model as it relies on the build up of reserves and savings funds

•

As a stand-alone model, would lend itself to a philanthropic, state sponsored or participants providing capital, business operation.

•

Points to consider with a Mudharabah Surplus Sharing Model

•

First and foremost, this is a Shariah issue, not an issue between operators

•

Surplus is what remains of capital/contributions after the deduction of claims and direct expenses.

•

Profit is the creation of a value in excess of the capital provided.

•

As no profit (only surplus) is generated in the Takaful underwriting operations , the application of a Mudharabah contract is being debated by Shariah scholars

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Islamic Insurance 14 •

Applying a Mudharabah contract to the investment profits however, is accepted

Wakalah-A fee driven Islamic contract Points to consider with the BAJ Wakalah Model •

Fees only taken if a product is sold

•

No charging of expenses to the participants fund

•

Operator alone totally responsible for all start up expenses and operational costs

•

No issue of agency or commission sales

•

Clear separation between participant and operator

•

Wakalah Fee on Surplus accepted by Shariah advisors

•

Total transparency on all aspects of the operation and fee structure

•

Wakalah Model-1

•

Same Wakalah model for all plans, Group or Individual

•

A single Wakalah contract throughout for both underwriting and investment operations.

•

Contribution is clearly broken down into Tabar’ru, Fees and where applicable, individual investments.

•

Tabar’ru is only applied when the cost of risk is due.

•

Total transparency and clear breakdown of costs and Wakalah fees stated in contract schedule.

•

Participants therefore only pay actually costs plus declared Wakalah fees. No unknown loadings.

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Islamic Insurance 15

Takaful vs. Conventional Insurance “Commercial insurance is originally haram as agreed upon by most contemporary scholars. 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. But, if a cooperative insurance company is not found one may enter into a contract with a commercial insurance company only by way of necessity. If a person is forced by law to insurance or by way of need, it is obligatory for him to be content with the minimum proportion of insurance that covers his need or to the minimum of such transaction he’s being forced to carry out.”

European Council for Fatwa and Research

Brief Comparison of Conventional Insurance and Takaful It is beyond the scope of this paper to present the features of each model and the Shariah arguments for or against. However, the key structural issues to be examined and understood - especially to fully appreciate differences between conventional insurance and Takaful - are the following items:



Sources of Capital and Returns to Capital



Organizing principle; i.e. Relationship among participants themselves and between Participants and the Takaful Operator.



Treatment of Expenses and Liability for Claims

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Islamic Insurance 16 

Zakat and Charitable features - how to cleanse profits



Funds management - pooled or unitized



Investment of Premiums in accordance to Shariah



Dissolution - who ends up with any surplus capital



Regulations, Taxation and Auditing

A comparison is made below to highlight the salient differences between conventional insurance (excluding mutual companies that share many aspects in common with Takaful companies) and Takaful companies:

Conventional Insurers Takaful Operators Sources of laws & regulations are set bySources of laws are based upon Divine state and man-made. Profit-motive,

revelations (Holy Qura’an and Hadith)

maximizing

returns

shareholders.

toCommunity operations

well-being for

optimizing

affordable

risk

protection as well as fair profits for the operator. Profits and/or Bonus units to be returnedTakaful contract specifies in advance to

policyholders

as

determined

byhow and when profit/surplus and/or

managers and Board of insurer.

Bonus units will be distributed.

Initial capital supplied by shareholders.

Initial capital supplied by Rabb al Mal (Agent) or paid in via premiums from participants.

Separation of policyholder and insurerCoincidence with differing interests.

policyholder

of

interests

and

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between

operator

as

Islamic Insurance 17 appointed by participants. Transfer of losses among insurance poolsLosses retained within classes of and from policyholders to shareholders.

business written and sole obligation of Participants.

Right of insurable interest is vested in theRight Nominee absolutely in Life insurance.

of

insurable

interest

is

determined by Islamic principles of Faraid (inheritance).

Insured may elect cost or replacementInsured cost valuation

and

claim

may

accordinglyinsurance

not and

whether or not they chose to rebuildcompensation property. Agents

only

"profit"

from

entitled

to

for

or

repair

rebuild or replacement. and

Brokers

are

typicallyAgents are employees of the Takaful

independent from insurer and paid a feeand any sales commission should be from

the

premium

charged

todisclosed.

policyholders that is not disclosed that is not disclosed. Investment of premiums conducted byTakaful insurer

with

policyholders.

no

involvement

contract

specified

under

byprinciples of al Mudharabah how premiums will be invested and how results are shared. Under al Wakalah, similar practice plus Participant can direct his investments into a range of unitized funds.

Insurer invests premiums consistent withTakaful

invests

premiums

in

profit-motive with no moral guidelines;accordance with Islamic values and

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Islamic Insurance 18 hence co-existence of Al Riba and AlShariah guidelines. Maisir. Dissolution - reserves and excess/surplusDissolution belong to the shareholders.

-

reserves

and

excess/surplus could be returned to Participants,

although

consensus

opinion prefers donation to charity. Taxes - subject to local, state and federalTaxes - subject to local, state and taxes.

federal taxes (if any) plus obligated to

arrange

annual

tithe

(Zakat)

donations to charity. Benefits paid from contributions (Al Benefits paid from general insurance tabarru) made by participants as account owned by insurer. mutual indemnification. Accounting standards consistent with Accounting consistent with GAAP and prevailing statutory rules Auditing for uniform

application

standards.

of

accounting

national rules (with may be GAAP) plus

prevailing

Auditing

same

conformance typically

statutory standards

with

with

rules.

Islamic

Shariah

plus rules;

Advisory

oversight.

Part II Profile of Global Takaful Industry & Trends Introduction The Takaful industry is roughly 30 years young as the first Takaful company was established in 1979 - the Islamic Insurance Company of Sudan. Today there are some 28 registered Takaful companies worldwide writing General Takaful

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Islamic Insurance 19 (commercial property/liability) and Family Takaful (Life) on a direct basis. In addition, there are 10 more Takaful programs either as Islamic "Windows" or marketing agencies that place insurance risk with conventional insurers or with takaful operators. In fact, the total number of takaful companies could be higher because all insurance companies in Sudan are deemed to operate in accordance with Islamic Shariah guidelines. More takaful companies are under formation in Sri Lanka and in Singapore. At least four more takaful companies will likely be established in the Middle East (viz.

Bahrain,

Kuwait,

U.A.E.

and

Egypt).

Several

others

are

being

contemplated in various countries such as Saudi Arabia, Pakistan, Australia and Lebanon. It is also understood that interest is shown in Takaful in the Philippines, South Africa, Nigeria, and some of the former states of the Soviet Union. Overall, the Takaful industry in the Middle East region is newly emerging when compared to other relatively developed markets such as Malaysia. The more successful companies in the Middle East (Bahrain/UAE) have grown at 10% annually whereas in Malaysia the rate of growth has been 60% annually.

Proliferation of Takaful Programs Spurred on by such re-confirmations by Islamic scholars and their own person discomfort with existing insurance schemes, Muslims began in 1973 a rediscovery of the Takaful models and to pioneer their implementation. In rapid succession, groundbreaking efforts to introduce Takaful schemes as

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Islamic Insurance 20 Islamic alternatives to conventional insurance produced outcroppings in many countries:

•

Sudan (1968), General United Insurance Co.

•

Sudan (1973), National Reinsurance Company of Sudan

•

Sudan (1979), The Islamic Insurance Company

•

Saudi Arabia (1979), The Islamic Arab Insurance Company

•

UAE (1980), The Islamic Arab Insurance Company (Dallah)

•

Switzerland (1981), and UK (1982) Dar Al Mal Al Islami

•

Bahrain (1983), Bahrain Islamic Insurance Company {recapitalized and renamed Takaful International in 1999}

•

Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company

•

Luxembourg (1983), Islamic Takaful Company

•

Sudan (1984), Al Barakah Insurance company

•

Saudi Arabia (1983), Takaful Islamic Insurance Co. / Bahrain

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Islamic Insurance 21 •

Bahrain and Saudi Arabia(1985), Islamic Insurance and Reinsurance Company

•

Malaysia (1984), Sayrikat Takaful Malaysia

•

Saudi Arabia (1986), National Company for Cooperative Insurance

•

Turkey, Uluslarais Sigorta ve Reasurar

•

Saudi Arabia (1992), Al Rajhi Islamic Company for Cooperative Insurance

•

Bahrian (1992), Al -Salam Islamic Takaful Co.

•

Brunei (1993), Takaful IBB Berhad

•

Brunei (1993), Takaful TAIB Berhad

•

Brunei , Tabung Amanah Islam

•

Iran, Alborz Insurance Company*

•

Iran, Beimeh Iran Insurance Company*

•

Indonesia (1994), PT Sayarikat Takaful Indonesia

•

Indonesia (1994) , PT Asuransi Takaful Keluarga

•

Indonesia (1994), Asuransi Takaful Umum

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Islamic Insurance 22 •

Singapore (1995), Syarikat Takaful Singapore

•

Singapore (1997), Keppel Insurance Co. Ltd

•

Singapore Ampro Holding , Pte.

•

Malaysia (1993), Malaysia National Insurance Takaful Company

•

Qatar (1995), Islamic Insurance Company of Qatar

•

UAE/Dubai (1997), Dubai Takaful Insurance Co.

•

Trinidad-Tobago Takaful Friendly Society (1999)

•

USA (1997-2000), First Takaful USA*

•

Pakistan (2005-06), Pak-Kuwait Takaful Company.

Note* Operates under Takaful/cooperative principles while evolving into full accordance with Takaful model.

Additional recent initiatives

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Islamic Insurance 23 Soar Al-amane, Senegal (1998), Amana Takaful Ltd., Sri Lanka (1999), the Bangladesh Islamic Insurance Co. (1999), plus 3 new Takaful licenses approved in Kuwait (2000), a Takaful Taawuni (Family/Life) program sponsored by Bank Aljazira in Saudi Arabia to be launched in early fall 2001 and at least one license under review in Egypt. Further takaful licenses are being considered in Malaysia.

Retakaful or Reinsurance As more progress occurred and primary Takaful operators aggregated risks on commercial property (General Takaful) and on persons (Life/Family Takaful), there emerged a concomitant need to share these risks with other insurers, commonly called reinsurance. However, Islamic insurance companies are required to reinsure their risks on a Re-Takaful basis. According to the Islamic Banking and Insurance Encyclopedia (IIBI, London 1998) due to the meager reinsurance capacity of Retakaful operators, latitude has been granted by Shariah Advisors to cede primary Takaful premiums to conventional re-insurers. Such dispensation is understood to be for a temporary period and lay down the challenge to Takaful and Retakaful operators alike to work towards for a swift resolution of these anomalies.

The evolution of primary Takaful operators has naturally spawned creation of Retakaful entities: •

Sudan (1979) - National Reinsurance

•

Sudan (1983) Sheikan Takaful Company

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Islamic Insurance 24 •

Bahamas (1983) - Saudi Islamic Takaful and Retakaful Company

•

Bahrain/Saudi Arabia (1985) , Islamic Insurance and Reinsurance Company

•

Malaysia (1996), ASEAN Takaful Group which evolved into ASEAN Retakaful International (ARIL) in 1997, Labuan

•

Tunisia (1985), Beit Ladat Ettamine, Sauodi Takafol, Ltd. (BEST Re)

•

Malaysia (1993) - Takaful Nasional, part of the Malaysian National Insurance (MNI) Group.

Launch of Takaful in Pakistan Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 25 Pak-Kuwait Takaful Company Limited (PKTCL) is pioneer and multinational joint venture partnership between Pakistan, Kuwait, Malaysia, Saudi Arabia and Sri Lanka. With an Initial Paid up capital of Rs.250 million and an authorized capital of Rs.500 million, along with the financial strength and backing of equity partners. PKTCL is well poised to launch operations in an environment of trust and reliability. The Takaful way of Insurance in Pakistan is greatly needed and much awaited as a significant segment of population desire Shariah-Compliance in all their financial dealings. A parallel can be drawn from the immense success of the Islamic Banking in Pakistan. PKTCL, emerging in this backdrop, is well positioned to assist all such individuals and organizations. Equipped with the repute and financial standing of its local and foreign sponsor. Shariah Advisors Profile •

Justice (Retd.) Mufti Muhammad Taqi Usmani

•

Dr. Muhammad Imran Ashraf Usmani

•

Moulvi Muhammad Hassan Kaleem

Shareholders

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Islamic Insurance 26 Local Shareholder: •

Pakistan Kuwait Investment Company (Private Limited, Pakistan.

•

Meezan Bank Limited, Pakistan

•

Saudi Pak Industrial and Agricultural Investment Company (Pvt) Ltd, Pakistan

Foreign Shareholders: •

TN Overseas Investments Pte Ltd, Malaysia (Representing Takaful Nasional of Malaysia, the largest Takaful Company in the world).

•

Noor Financial Investment Company, Kuwait.

•

Takaful Holdings Limited, Dubai (representing Amanah Takaful of Sri Lanka).

Part III Financial Profile of Takaful Industry Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 27 Takaful Industry Statistics A broad estimate of the total Gross Premiums Written (GPW) within the Takaful industry in 1998 is approximately US$500m for both Life and Non-Life business, of which around $200m pertains to Asia Pacific region. Malaysia is one of the largest markets outside the Arab region for Takaful, writing 78% of the nonArab takaful business. A geographical spread of takaful business is shown below:

The growth in Takaful business had indeed been very impressive. As the following Table illustrate, the annualized average growth since 1994 has been 92% in Family Takaful and 34% in General. Most growth appears to be in the Family and group Family Takaful (68% and 11% respectively) of GPW as compared to General Takaful (4-6%). In Family Takaful the products sold were individual and Group Term as well as savings products, mortgage policies and pension plans. In General Takaful, all classes of commercial business were sold. Retakaful

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Islamic Insurance 28 Collectively, these Retakaful operators write approximately $35 - $75 million of premiums annually. Their staff is estimated to be about 750 and their paid-up capital ranges between $80 - $100 million. A thumbnail sketch of the reinsurance industry may assist us to become more familiar with their traditional counterparts. Global reinsurance premiums in 1998 grew 10% to $76 Billion. Five OECD nations dominate this sector with 77% of worldwide reinsurance:



Germany



USA



Switzerland



UK



Japan

The reinsurance business overall was profitable in 1988 with Pre-Tax profits of $3.9 Billion {vs. $7.0 Bil. in 1997}. The industry Loss Ratio was 73.6% vs. 71% {1997 was the lowest in 10 years}. A quotation from the Journal of Commerce, USA(September 19, 1999) is very informative: "At the beginning of the decade (1990) a rein surer was consider strong if it had capital and /or surplus of $50 Million. Today, capital of 10 times that is considered barely adequate with several companies having many billions." Examples are: Gen RE, $505 Bil; Employers RE,$4.0 Bil; American RE $1.8 Bil. There are massive stock corporations with substantial capital assets and a global reach. Taking the 15 countries with dominant Muslim populations

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Islamic Insurance 29 Bahrain, Brunei, Egypt, Indonesia, Jordan, Kuwait, Morocco, Pakistan, Qatar, Singapore, Tunisia, Turkey, Saudi Arabia and UAE. There are today Life and Non-Life insurance premiums written annually of $24.5 Billion (of these 50% is in ASEAN countries). Assuming that over the next ten years, the Insurance Penetration Rates (i.e., Per Capita usage increases refer to the section following in this paper) and the local market share of Takaful coverage rises to approximately 15% then the Gross Premiums Written could climb to $3.75 Billion. Further, if 33% of this were to be ceded to Retakaful operators, then $1.2 Billion of Retakaful revenues could result as reinsurance business, which would require a capital base of between $600 Million and $1 billion. This compares with the existing (estimated) global capital base for Retakaful companies of less than $100 Million (1999).

Acceptance Rates of Insurance

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Islamic Insurance 30 Acceptances of insurance, so called Penetration Rates, are measured as an average percentage of per capita expenditures. In 1999, industrialized nations enjoyed Penetration Rates of 8.8% of Net Domestic Product, or $2,285. Switzerland was the highest overall at $4,643 per capita, with 5% Penetration Rate ($1,729) in Life per capita premiums. Japan's 10% Penetration Rate ($3,103) for Life per capita alone is the highest in the world. From these charts it is quite clear that the traditional cultural perspective on risk and risk protection throughout the Central Asia, Pacific and Middle East regions has curtailed the development of an insurance industry and limited the penetration, especially for Life insurance, as a percentage of per capita income. The highest rates of penetration exists in mature markets of Asia Pacific region, 1.72% ($62/year) for Non-Life and 2.16% ($78/yr) for Life in Malaysia and 1.03% ($271) for Non-Life and 3.15% ($828) for Life in Singapore, respectively. By contrast, the lowest penetration rates are in Saudi Arabia with 0.55% ($37) for Non-Life and 0.01% ($0.60) for Life and in Kuwait with 0.50% ($77) for Non-Life and 0.11% ($16) for Life, respectively

Part IV Products & Services

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Islamic Insurance 31 Executive Overview The ranges of Takaful Products offered are categorized into two areas: A. Risk type products. These products are provided for the protection of the Participants. There is little, if any, maturity benefits payable at the end of the contracted term. There is no Participant investment component involved, therefore, such products are marked risk only. B. Investment type products with an element of Risk. These products are generally regular savings plans where a Participant indicates his need to achieve a target savings lump sum through saving on a regular basis, by a certain time in future. The risk element under such products reduces over time as the accumulated savings increase, or can be maintained at a fixed level, depending on the type of cover chosen by the Participant at plan inception . Savings plans are offered under different 'labels', e.g. as a Retirement plan (to save for retirement) or as an Education plan (to save for the children's college education). .

Investment Products

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Islamic Insurance 32 The theme for each product is that the takaful cover is to provide for a target savings amount at a future date and to also provide protection for the possibility that the participant does not survive the term of the savings contract.

Retirement Plan Under this plan the participant contracts to contribute a monthly amount under a Retirement Takaful Plan. The term of the plan will be the difference between the targeted retirement age and his current age. The death benefit under this plan will reflect the various options available to the client (i.e. escalating, level or reducing) and the value of his accumulated savings under the plan at the date of death. Ladies Flexible Savings Plan It is appreciated that ladies could have certain targeted savings at particular points in their lifetime. For example, to provide for their children's education. This product is basically the same as the Retirement Plan in its features but is repackaged to appeal to the female population. Ladies Single Contribution Plan This is the Ladies Plan above but where the contribution is a single lump sum. Under this plan death benefit choices will be available.

Capital Plan

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Islamic Insurance 33 This is a regular savings plan where the executive chooses a certain level of death cover (which remains unchanged over the period) and fixes the annual contribution over a chosen term. This

product

has

been

designed

to

compete

with

similar

mutual

funds/conventional insurance combinations available in KSA . Capital Plan This is the Single Premium version of the previous plan. As with the ladies single premium plan the death cover is equal to the single lump sum contribution. The participant determines the term of the plan. Education Plan This plan will be marketed as a savings plan for the breadwinner of the family for his children's university education. Based on a targeted savings amount at the point of time the child is expected to attain university entry age, a monthly contribution is determined. The benefit on death or disability will be premium waiver for the balance of the contract period Marriage Plan This plan is identical to the Education Plan except that the target expense here is the expected marriage expenses of the child and the maturity age is the expected age at marriage of the child.

Savings for Awqaf Plan

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Islamic Insurance 34 This is a plan to save towards a Waqf contribution. The proceeds of this plan will go to the selected charities chosen from a list provided by the Shariah Advisory Council of BAJ and administered by the same. Term with Return of Contribution Plan Under this plan the contribution to the takaful plan is returned to the participant if he survives the term of the contract. On death during that period the contracted level death benefit is payable.

Risk Only Products Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 35 Level Term (Risk Only) Under this variation of the preceding plan, the contribution to the takaful plan is not returned to the participant if he survives the term of the contract. On death during that period the contracted level death benefit will be payable. Key man Takaful (Risk Only) The bank disburses significant amounts of loans to businesses for working capital and the purchase of capital goods. These businesses are usually controlled and/or run by certain key individuals. Under Key man Takaful these individuals are covered for an amount equal to the loan taken up, over the duration of the loan. On death or total permanent disability during this period an amount equal to the loan taken up is payable. This amount is then available to repay the loan from the Bank thus protecting the partners in the business, the deceased's immediate family and the Bank. Decreasing Term (Risk Only) This variation of level term pays a decreasing level of cover throughout the contract period, allowing for a high level of cover at inception reducing to zero at contract maturity. Increasing Premium/Limited Payment (Risk Only) Commonly known as a "low start premium” plan, it allows an individual to take a high level of cover at a low initial premium with the premium increasing throughout the term of the contract but ceasing a number of years prior to the cover under the contract terminating.

Group Products

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Islamic Insurance 36 Group Takaful Products These are Takaful Ta'awuni products where many participants are grouped under one contract. These products provide for a death and total permanent disability cover determined by the relationship between the contract holder and the participants as explained below: 1) Group Loan Repayment Plan The Takaful Ta'awuni Group Loan Repayment Plan is designed to repay outstanding loans/leases/financing upon death or total permanent disability of the Borrower/Lessee. Benefits to Employer/Company 

Raises esteem of company when covered by Islamic Insurance.



Eliminates bad debts and write-offs of Loans, Leases and Installment Sales.



Guarantees that financing/leasing will be repaid upon death or total permanent disability of Borrower/Lessee.



Avoids expense and time of repossessing Assets upon default.



Protects company's Principal and Profit in asset financing and leasing.

2) Group Retirement Plan The Takaful Ta'awuni Group Retirement Plan enables the employer to provide its employees with retirement benefits, in form of either a lump sum payment at

retirement,

or

a lump

sum

used

to purchase

an

annuity,

i.e.

monthly,quaterly,half yearly, yearly income during employee's retirement. Upon maturity of the plan, the benefit payable is the final maturity value in the investment plan.

Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 37 Benefits to Employer/Company 

Powerful Incentive to reward and to retain Key Employees.



Depending upon employer/company, the Group Retirement Plan can be designed to be Contributory or Non Contributory.



Depending upon employer/company, Plan can have a flexible period of "Vesting" whereby ownership of retirement benefits passes from employer to employee. If an employee resigns prior to retirement, either no benefits, or a proportion of the accumulated saving could be

paid

to

employee

with

balance

returned

to

the

company/employer. 

Reduced employee turn-over and saving for company in less training costs, less down time, less disruption to staff productivity.



Staff loyalty is enhanced resulting in better retention of key staff.



Added Financial Incentive/Reward for Key Employees.



Encourages higher Productivity from Key Employees.



Expands the company's Compensation Package and Benefits to be more competitive.



Enhanced Benefits can help attract better talent from job market.

3) Group Term Protection Plan The Takaful Ta'awuni Group Term Protection Plan is level risk protection coverage that protects employees in the event of death or disability, so that a multitude of that employee's yearly salary can be paid to his family or dependants to ease their financial burden in a sad time of loss. This multiple is typically two or three times annual salary in the year of death. Minimum protection is 12 months salary or SR 50,000, whichever is greater. Maximum level of protection is five (5) to eight (8) times annual salary, depending upon underwriting considerations.

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Islamic Insurance 38 The Plan is sponsored by the employer/company on a yearly renewable contract. Additional Riders are available for coverage of Total and Permanent Disability; Permanent and Partial Disability. Benefits to Employer/Company 

Shows Caring attitude towards employees.



Peace of mind for employees.



Added Financial Security for employees and family.



Reduced Employee Turnover and saving for company in less training costs, less down time, less disruption to staff productivity.



Staff loyalty is enhanced resulting in better retention of staff.



Happier staff means higher Productivity.



Better compensation package with Takaful Benefits helps attract qualified staff.



Many employees do not accept coverage on a conventional insurance basis; Takaful coverage would raise the esteem employees have for their employer.



Avoids Lump Sum Payment by employer/company from its own funds to deceased employees family (typical moral obligation)



Enhances Image of employer/company in local community.

4) Key Man Protection Plan

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Islamic Insurance 39 The Takaful Ta'awuni Key Man Protection Plan is term protection coverage on Key management staff or technical personnel critical to operations of an employer/company in order to protect the interests and the core business of the company. Benefits to Employer/Company 

Protects primary Partners in business from serious losses due to death of a Key Owner or Personnel.



Provides payment of benefits to a company to assist in finding a replacement or temporary staff for the job performed by deceased worker.



Covers any financial obligation from Key Employee to company (i.e. Executive Loans etc)



Reduces downtime and lost productivity that weakens business effectiveness.



Resource for the business to compensate beneficiaries of deceased where it is agreed that upon death the owner's shares will be bought out (buy-sell agreement).

Riders Products Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 40 Riders or Supplements (All Risk Only) As well as the base products identified in the foregoing, a number of riders will be offered as either standalone products to be attached to the base product at the participant's request or as a bundled attachment to a base product. The riders to be made available to the participants are as follows 1. Total Permanent Disability 2. Partial Permanent Disability 3. Premium Waiver on either Disability or Death 4. Critical Illness 5. Family Income Benefit 6. Term Rider 7. Top-Up Rider

Concise Profile of Takaful Products Property Takaful 

Fire & Allied Perils Policy



Householder’s Comprehensive Policy



Shop Owner’s Policy



Contractor’s All risk Policy



Erection All risks Policy



Machinery Breakdown Policy



Contractor’s Plant and Machinery Policy

Motor Takaful

Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 41 

Private Car



Motor Cycle



Commercial Vehicle

Marine Takaful 

Imports



Exports



Inland Transit

Miscellaneous Takaful 

Accident Takaful Policy



Money Takaful Policy



Fidelity Takaful Policy



All Risk Takaful Policy



Third Party Liability Takaful Policy



Product Liability



Burglary



Work’s men Compensation



Public Liability



Plate Glass



Travel Takaful



Umrah & Hajj Travel Takaful

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Islamic Insurance 42 Part V Strengths, Weaknesses, Opportunities and Threats In this section we will show and analyze the overall strengths, weaknesses, opportunities and threats facing the Takaful Industry. Understanding these issues will allow a better understanding of the goals and objectives of the master plan.

Strengths 1. Takaful life insurance is in its infancy. This is a major gap in the provision of an Islamic financial service to the Muslim community worldwide. Significant opportunities exist to develop this market 2. Offering a Shariah compliant Takaful product to a Muslim provides him with both a financial product required in everyday life plus the added benefit of adhering to Islamic principles as well as potentially assisting brother Muslims within the cooperative Takaful pool 3. Takaful allows the avoidance of “haram” elements associated with conventional insurance products. 4. Conventional insurance operators are showing a great interest in Takaful. Adoption by one or two international players will see an immediate global development of Takaful. 5. Islamic and conventional banks have the opportunity to create and develop Banctakaful programmes which will greatly enhance the ability to introduce Takaful to the Muslim communities worldwide The synergy between life insurance and the asset management industries is well known. It is no different for the Takaful and Islamic asset management industries. The development of Takaful will greatly enhance the ability of Islamic fund managers to significantly increase assets under management as well as the number of clients in a fund

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Islamic Insurance 43 Weaknesses 1. The lack of a “supreme” Shariah judicial authority and the uniform Shariah decisions such an authority would provide, or endorse where decisions are referred to them from “national” or company Shariah boards, will continue to undermine the Takaful industry, both now and the immediate future. The industry will be weakened in the eyes of many until this matter is resolved. 2. To this day many Shariah scholars refuse to accept the concept of insurance, whether it be Islamic or conventional. Worse some scholars cause confusion amongst the Islamic community by declaring there is no difference between commercial and Takaful insurance, thus undermining the industry’s attempts to both distinguish itself from conventional insurance and the “haram” elements contained therein 3. The lack of a uniform Corporate Governance standard and Shariah audit guidelines, which the industry can follow, leaves the industry open to criticism when companies fail or fail to protect the consumer. The potential to utilize participant’s funds in a way, which contradicts good corporate governance within the Takaful industry, is a very real threat going into the future. 4. Because of the very nature of Takaful and the Islamic elements making it Shariah compliant, other than Malaysia (and Sudan) where a separate Takaful law has been introduced, nowhere else in the world is there an insurance regulation, which embraces Takaful. This causes difficulties in establishing Takaful in specific areas such as the European and USA markets. This is also a problem, albeit less of a one, in predominantly Muslim countries. 5. Within many Muslim countries, especially those in the Middle East where conventional life insurance has also taken hold, the concept of long term

Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 44 savings is an alien concept to many Muslims who rely on the state or state pension, as well as family ties for security in their old age or time of crisis. 6. This also applies to the concept of risk protection, again be it one of conventional or Takaful. The concept is alien to many in the Middle East countries. 7. Having no rated Retakaful company causes consternation amongst many, both inside and outside of the Takaful industry. Although the problem is really one of “a chicken and an egg”, in that you cannot have retakaful unless and until you have built up a sufficient pool of Takaful business, this necessitates the use of conventional reinsurance. Critics do rightly point out that even with Shariah dispensation in supporting the use of conventional reinsurance, that the Takaful industry is a “cocktail” of conventional and Islamic. ARIL, at this time, is the only Islamic retakaful operator providing life retakaful support, but unfortunately does not have a rating. This situation will continue to dog the industry until resolved. 8. As many of the new life Takaful operators are adopting a unit-linked rather than a pooled investment strategy, the range of unit linked funds open to a Takaful participant is somewhat limited and ranges from Equity to Murabaha but at this moment in time is quite weak in the areas in between i.e. Islamic property funds, Islamic Leasing funds, Islamic Sukuk funds. More effort is needed by the Islamic asset industry to introduce a broader range of Islamic unit-linked funds for the Takaful industry. 9. Unfortunately in some areas of the Islamic world, government agencies and leading Islamic institutions, although praising the development of Takaful and in many ways supporting this development, are not supporting it in a commercial sense by either changing from

Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 45 conventional life insurance to Takaful or adopting Takaful where the use of conventional life insurance is quite rightly prohibited. 10. In many ways the Takaful life industry does not help itself when promoting and selling Takaful products. The very essence of Takaful is mutual risk protection between members on a cooperative basis, under Shariah compliant principles. The adoption of a savings element for individual participants is to be lauded and welcomed but as in conventional insurance, such funds are not mutual or cooperative but belong exclusively to the member making the contribution. It is therefore unfortunate that as an industry we market Shariah compliant investment products, with very little or no Takaful coverage included, as Takaful. To move away from the very essence of Takaful and what it means is to lean too far towards a conventional insurance model, mimicking the tax advantages of products which are significantly more investment and tax avoidance vehicles than they are protection or Takaful products. The industry is open to criticism if we do not recognize the roots of our Takaful concept as being mutual risk protection under Shariah law.

Opportunities 1. Takaful is being driven by the vast untapped Islamic market, which can be introduced to the Takaful concept. Whether such potential participants are part of a Muslim majority in markets such as the Middle East, or part of a minority in European countries, the potential for Takaful life insurance is enormous.

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Islamic Insurance 46 2. Although many of the potential Takaful markets are familiar with an insurance concept, many more, specifically in the Middle East are not, resulting in a very low penetration level for the insurance industry in general. 3. Potential sales to government and leading Islamic agencies is enormous, where such agencies presently either do not utilize life insurance or perhaps do accept conventional life insurance because of a lack of Takaful in the past. 4. Regions of low insurance penetration can jump direct to a Takaful concept leaving the insurance industry little choice but to move directly to Takaful as a solution. As such there is little or no opportunity for the conventional life insurance industry in such a situation. Saudi Arabia is a prime example of such a development with nearly all of the new life insurance licenses issued being for Takaful operators. 5. Many “virgin” Takaful regions have high income levels resulting in the opportunity for significantly higher levels of premiums than possible in either existing Takaful regions such a Malaysia or even potential Takaful regions such as Europe 6. Many Takaful opportunities are in regions with very large populations i.e. Pakistan, India, Egypt, Iran etc. although contributions may be smaller, the market size is significant 7. The Muslim minorities in the west are a vast untapped potential 8. Banctakaful and the relationship with Islamic banks, or, where permitted, conventional banks with Islamic windows, opens up yet again significant potential for development. 9. Although many Takaful markets still remain untapped the fact of the matter is that the Muslim population worldwide is growing with some populations predicted to double by 2020 i.e. Saudi Arabia

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Islamic Insurance 47 Threats 1. As a repeated theme in this paper, the lack of a Shariah consensus is not just a weakness but is a very real threat to the development of Takaful. If the industry is to be taken seriously, this issue needs to be resolved 2. Again, a perceived weakness also becomes a threat where potential participants are subjected to conflicting arguments between scholars on their beliefs concerning conventional and Islamic insurance. We cannot afford to have a perceived weakness turn into a threat because of a lack of action on the part of the industry to resolve such issues. 3. Unless a movement, presently underway between the IFSB and the ISIS, meets in success whereby the conventional insurance industry embraces Takaful at the highest level, thus leading the way in resolving the many difficulties faced by the industry in its dealing with national regulators, such potential failure to resolve such issues would result in Takaful not developing beyond the borders of predominantly Muslim countries 4. WTO developments, in many of the countries in the Middle East, sees the breaking down of traditional protectionism practices, which is to be welcomed. What must also be clearly understood though is that such practices should not lead to an unwelcome competitive advantage for the conventional insurance industry. 5. The 9/11 events still remain, to many, an obstacle to Takaful even starting the development process in the USA and possibly some European countries. This may be a perceived rather than an actual threat but clouds still hang over many potential Islamic financial developments in the USA. 6. Pending any developments recommended in this paper as essential to the development of Takaful over the next ten years, one final threat to this industry does remain. Unless the Takaful operators can unite in a

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Islamic Insurance 48 cause to jointly develop Takaful worldwide, albeit via their own possibly small contribution within their own borders, with the adoption of uniform standards even before such may become compulsory, then the threat of fragmentation looms over the industry moving forward over this next decade.

Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 49  Strengths 

 Weaknesses

Significant

gap

in

Islamic

Financial Services industry 

Shariah

compliant



means

principles



Shariah

to Takaful No

significant

Corporate

Provides an ethical alternative

Governance or Shariah audit

to conventional life insurance

guidelines

Of

significant

interest

to



insurance

Lack

of

uniform

insurance/Takaful

operators



within

scholars on many issues relating



conventional



Divisions



products conform with Islamic



No uniform Shariah authority

regulatory

arrangements

Typical for the industry is the



Lack of a long term saving

synergy with Islamic banking

culture

Synergy with the Islamic Asset

communities

Management industry

challenge to persuade Muslims

in

many

Muslim

creates

a

to save long term. 

Lack of awareness in Muslim communities

on

Takaful

insurance and risk protection inhibits demands for insurance 

Lack of Retakaful. So far there is no retakaful company rated with BBB and above.



Lacking

in

broad

range

of

Shariah compliant investment vehicles for investors

Hailey College of Banking & Finance University of the Punjab

Islamic Insurance 50 Opportunities 

Threats

Vast untapped market outside



the Far East 

Low

level



of

insurance



Sales to government and Islamic



Anti insurance beliefs by some Conventional

insurance

regulators could hold up Takaful

Even lower levels of life Takaful

development

Affluent



markets

in

Large

Muslim

populations

local companies 



Muslim minorities in western

9/11 and perceived anti Islamic feelings in the west

in

many countries

WTO could dilute the benefits of protectionism enjoyed by

many

high premium/contributions



could

agencies

Muslim countries, resulting in



consensus

Islamic scholars

penetration 

Shariah

undermine Takaful development

penetration in most markets 

No

Lack

of

consensus

Takaful operators

countries i.e. France, Germany, UK, USA. 

Banctakaful



In

general

population

the is

Muslim growing

significantly worldwide.

Hailey College of Banking & Finance University of the Punjab

amongst