new dimensions in takaful sector investment and products.pptx

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New Dimensions in Takaful Sector

Investment and ProductsBy

Dr. Atiquzzafar KhanIIIE, IIUI

January 28, 201418th Distance Learning Course

on Islamic Finance



Main Topics

• Shari’ah Status of Insurance

• Islamic Alternative: (Review ofExisting Takaful Models)

• Performance of Takaful Industry

Investment

Products



Risk and Insurance:

Risk and uncertainty are fundamental

facts of life. All human activities are

subject to risk, which may lead to

financial or physical losses to him.

Every individual try to protect himself

against future potential losses.

Insurance is a modern time device to

cover the losses arise due to occurrence

of some undesired event.



Definition of Insurance

Insurance is an economic devicewhereby the individual substitutes a

small certain cost (premium) for alarge uncertain financial loss (thecontingency insured against) that

would exist if it were not for theinsurance.



Major Arguments Against

Insurance

According to Shariah scholars and Fiqhi bodies

conventional Insurance is unlawful because of

involvement of prohibited elements like, – Riba (Interest)

– Qimar (Gambling)

– Gharar (Uncertainty, Doubt, Risk) – Unlawful appropriation of others’ property

– Violation of law of inheritance in case of life

insurance.



Rulings of Collective Fiqhi

Bodies about Insurance

Islamic Research Institute of Al-Azhar

Council of Grand Ulama of Saudi Arabia

Majlis Tahqiqat-e-Shari'yah Lucknow, India

Islamic Fiqh Academy of Rabita al-A’alam al-Islami

Al Majma’ Al-Fiqhi Al- Islami of OIC

Council of Islamic Ideology, Pakistan



Nature of Insurance Contract

Premium Compensation

Premium Compensation

General Insurance

Life Insurance



Islamic Substitute

These Fiqhi bodies suggested that ascheme based on the concept of mutual

cooperation and Joint responsibility maybe considered as Islamic Substitute forConventional Insurance.

That alternate is introduced under thetitle of Takaful in the recent past.



Takaful Pioneers

Islamic insurance started some 30 yearsago in Sudan and Middle East in 1979 withthe establishment of:

– The Islamic Arab Insurance Co. (IAIC) in theUAE and

– The Islamic Insurance Co. of Sudan

But it took some time for the movement totake shape.



Takaful Pioneers

Later in 1984, Malaysia played a pioneeringrole in setting the first Legal frameworkspecific to Takaful (Takaful Act Malaysia).

This was instrumental in the successfullaunching of the Takaful movement inMalaysia and in other countries of SouthEast Asia.

First Takaful company Takaful MalaysiaBerhad started its business in 1985.



Takaful drivers

This movement is driven by

– a strong demand from a public who

would not insure otherwise (because of

religious beliefs); and

– The successful development of Islamic

banking institutions providing capital and

Islamic financial instruments for asset

management and investment.



Takaful Operators

The number of Takaful operatorsworldwide is now estimated at:

150 Takaful companies operating in40 countries

10 Retakaful companies

6 Islamic windows by ConventionalReinsurance companies



Takaful Premium

Takaful is one of the fastest growingsegments in insurance.

According to World Takaful Report

2012, Global Takaful contributionsgrew by 19% to reach a total ofaround $12bn.

Of these the GCC contributed$5.68bn and South East Asiacontributions were $ 2bn.



Takaful Leaders

Country Contributions

Saudi Arabia $ 4.3bn

Malaysia $ 1.4bn

UAE $818 ml

Sudan $363 ml

Large Muslim markets such as Egypt,Libya, Bangladesh, Indonesia andBrunei are opening to Takaful.



Definition of Takaful

The word Takaful means joint guarantee. The objectiveof Takaful is cooperation and mutual help among the

members of a defined group.

In a practical sense Takaful can be visualized as a

method of joint guarantee among a group of members or participants against loss or damage that may inflict upon

any of them. The members of the group agree to

guarantee jointly that should any of them suffer a

catastrophe or disaster, he would receive certain sum of

money to meet the loss or damage. All members of the

group pool together their efforts to support the needy.



WORKING OF THE FAMILY TAKAFUL

BUSINESS: The Malaysian Case

Takaful Business is based on the concepts ofMudarabah and Tabarru. Involvement ofthese two Islamic forms of business eliminatesthe elements of Riba from insurance contract

and convert Gharar into tolerable form.

In Family Takaful each Takaful installment isdivided and credited into two separate

Accounts namely, the Participants'Account(PA) and the Participants’ SpecialAccount(PSA). A substantial proportion of theinstallments is credited into the PA solely forthe purpose of savings and investment.



The balance of the installments is credited into the PSA

as `tabarru' for Sharikah Takaful Malaysia to pay the

Takaful benefits to the heir(s) of any participant who

may die before the maturity of the contract.

The amount accumulated in the PA is invested in various

business according to Islamic financing techniques, and

the resultant profits are divided between the company

and the participants according to the agreed upon ratio,

The participant's share is calculated according to their

individual share in the PA, and credited into their

respective accounts, the PA and the PSA.



Company’s Admin

& Manag. Expenses

Profit Attributed

To Shareholders

C

O

NT

R

I

B

U

T

I

O

N

PA

PSA

FTF

Investment Profit

PA

PSA

Participant

Company

Takaful Contract

based on Mudarabah

Payment toThe Family from

PA & PSA

Mudarabah Model

Family Takaful

Share ofProfit onS.H. capital

Share ofProfit forMudarib

Cost of Re-takafulAnd Other DirectBusiness Expenses

ShareHolders Fund

Surplus



Payment of claims

Should the Participant die or sufferPermanent and Total Disability in the fifthyear of participation, Takaful benefit willbe paid in the following manner:-

i. From Participant's Account =RM 4,890(RM978 x 5)profit if any, say RM 400

ii. From Participants Special RM 5,000Accounts (RM1000 x 5)

Total Takaful Benefit Payable RM 10,290 + Surplusif any



In case the Partcipant survived

Should the Participant survive until thematurity of his FTP, payment of Takafulbenefit will be made to him as follows:-

i. From his Participant's Account = RM 9,780

(RM978 x 10)

profit from investment RM 1,800

ii. From Participants Special RM XXXX

Account

Total Takaful Benefit = RM 11,580 + surplus if any



Shariah Concerns regarding Mudaraba Model

Mudaraba is a commercial contract, hence not suitable for adonation (Tabarru) based scheme.

Donation given by the participants can not become capital for

Mudaraba at the same time.

Distribution of surplus among the participants in proportion oftheir contributions is like a conditional gift (Hiba bis-Sawab)

which is not allowed.

Sharing of surplus in case of General Takaful(instead of profit)

makes the contract essentially the same as conventionalinsurance contract.

Provision of Qard-e-Hasan from the Share holders fund in case

of deficit is not correct as Mudarib is not a guarantor.



Wakalah Model

In this model contract betweenparticipant and operator is arranged onthe basis of Wakalah instead of

Mudarabah. Wakalah means hiring services of an

individual or organization to perform any

act on behalf of the principal. Wakeel can accomplish the assigned

task either voluntarily or against a fixed

commission.



Company’s Admin

& Manag. Expenses

Profit Attributed

To Shareholders

C

O

N

T

R

I

B

U

T

I

O

N

GTF

Investment Profit

Participant

Takaful

Company

Takaful Contract

based on Wakalah

Wakalah Model

General Takaful

Sources of Income for Takaful Operator



Payment of Claims

Cost of Re-takaful

Business Expenses

Wakalah Fee

25 to 35 %

65 to75%

GTFSurplus

100% for theParticipants

After Reserves



Shar’iah Concerns regarding Wakalah Model

Wakalah model is free from many objections raised againstMudaraba model but some shariah concerns are still therewhich are as follows:

Distribution of surplus among the participants in proportionof their contributions is like a conditional gift(Hiba bis-Sawab) which is not allowed.

Provision of Qard-e-Hasan from the Share holders fund in

case of deficit is not correct as Wakeel is not a guarantor.



Definition of Waqf

Waqf is an Arabic word and it means to stop towithhold and not to let go.

In technical meaning Waqf means to allocate ordonate some property or cash for a specificpurpose to get pleasure of Allah and not to let it gothrough consumption or sale.

The Waqf property comes into ownership of Allah(SWT) and Waqif losses all property rights on it.



Cont…

But Waqif has right to set the rules forwaqf and manage the waqf.

Waqf may be general purpose or specificpurpose, like Waqf ‘Ala al Aulad orWaqf ‘Ala al Aqarib.

In Islamic Law Waqf is a legal entity,which can enter into contracts and canown things



Company’s Admin

& Manag. Expenses

Profit Attributed

To Shareholders

Waqf

Fund

Investment Profit

Participant

Waqf-Wakalah Model

General Takaful

Return for Takaful Operator



Payment of Claims

Cost of Re-takaful

Business Expenses

Wakalah Fee

25 to 35 %

65 to75%

WaqfFund

Surplus


After Reserves

Share holderFund

Waqf

Donation

Takaful Co.



A Waqf Fund would basically be aseparate legal entity to which theShareholders would initially make adonation to establish the Waqf Fund.

The donation can be of any reasonableamount (Shariah Board may specify suchan amount).

The objectives of the Waqf fund would beto provide relief to participants againstdefined losses as per the rules of theWaqf fund.



Cont….

In this modified Wakala Model with Waqf, the

relationship of the participants and of theoperator is directly with the Waqf fund. TheOperator is Wakeel of the Waqf Fund and theparticipants pay one sided donation to WAQF

fund (not conditional) which also solves theissue of Gharar. The WAQF fund rules maydefine the sharing of surplus with theparticipants and other rules, under which itwould operate but there is no obligation to

distribute surplus. Further the Qard–e-Hasanwould be given by the shareholders to theWAQF entity and not to individuals as in the

typical Wakalah model.



Company’s Admin

& Manag. Expenses

Profit Attributed

To Shareholders

Waqf

Fund

65 to75%

Investment Profit

Participant

Waqf-Wakalah Model

Family Takaful

Return for Takaful Operator



Payment of Claims

Cost of Re-takaful

Business Expenses

Wakalah Fee

25 to 35 %

Waqf

Fund

Surplus


After Reserves

Share holderFund

Waqf

contribution

PIA PIA

Takaful Co.



Differences between Takaful &Insurance

Insurance Takaful

Contract Utilized Exchange Contract Donation Contract

Ownership of Premium Insurance Company Participant or Waqf

Company Responsibility Pay Claims from Pay Claims with

underwriting funds underwriting fund and Qarz-and Shareholders Equity e-Hasan in case of Shortfall

Participants responsibility Pay Premium Pay Contribution

Capital Utilized Share Capital Participants’ Funds

Investment Considerations No restrictions except Shariah Complient

prudential

Business Concerns Can provide insurance Can provide Takaful cover

cover to any business to only Permissible Business



Investment Composition2010 - 2012

Av. Share of GCC Saudi Arabia Malaysia

Investment (excluding S.A.)

------------------------------------------------------------------------------------------------

Equity 25 7 11

Sukuk 2 22 58

Deposit 41 44 23

Others 32 26 9

Total 100 100 100



Average Investment Yield

2010 2011 2012

GCC Conventional

---------------

Takaful

3--------------

6

4--------------

4

4--------------

6

Malaysia Conventional

--------------- Takaful

5--------------

4

5--------------

4

5--------------

5

Saudi Arabia cooperative 1 2 3



Takaful Products



Takaful Products

General (Personal)

–Takaful myPA CARE

–Fire Takaful

–House owner’s & Householder’s Takaful

–Motor Takaful

–Personal Accident Takaful



Products

General (Corporate)– Takaful mySME

– All Risks Takaful

– Burglary Takaful– Business Interruption Takaful

– Employer’s Liability Takaful

– Fidelity Guarantee Takaful

– Foreign Worker Compensation Takaful

– Group Personal Accident Takaful

– Money Takaful

– Professional Indemnity Takaful



Public Liability Takaful

School Children Personal Accident Takaful

Workmen’s Compensation Takaful

Boilers & Pressure Vessel Takaful

Contractor’s All Risks Takaful Electronic All Risks Takaful

Erection All Risks Takaful

Loss of Profits (Machinery) Takaful

Machinery Breakdown Takaful Marine Cargo Takaful

Plate Glass Takaful

Storage Tanks Takaful



Fire and Allied Perils Takaful

Medical Malpractices Takaful

Marine Hull Takaful

Energy Takaful

Motor Takaful Deterioration of Stock Takaful

Civil Engineering Completed Risk Takaful

Directors and Officers Liability Takaful

Foreign Workers Takaful Guarantee



N lif i d i t d b



Non-life insurance dominated bymotor and property insurance

Motor Takafuldominant in mostemerging markets

Compulsory third part liability insurance

Own damage insurance (ex: leasing contracts

for cars)

Property, accident and healthinsurance are generally next biggest

Accident and health depends on

governement’s role in this lob (high whereWCA are covered by private insurance (LatinAmerica, Asian markets) or where publichealth is unsufficient).

St th b t 1998



Strong growth between 1998and 2003

Non-life growth was mainly driven byincreases in property business

– Risk awareness and rates increases since 2001

Motor premiums strongly increasedmainly driven by improving economic

conditions– More motor vehicles sales



The business model dilemma

The existence of three business models:Mudharabah (Profit & Loss sharing)

Wakala (agency contract with aperformance fee element to replace

surplus sharing)Wakala with Waqf model

Could create an uneven / unfair businessenvironment to operate

Need to reach a consensus internationallyon a common and standard Takafulbusiness model



Future Outlook

Despite the remarkable growth raterecorded by the Takaful industry,

penetration is still far below theenormous market potential offeredby the Muslim community worldwide

(23% of the total world population).



Questions ??

[email protected]

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