Islamic Insurance Opertunities and Challenges

    Islamic Insurance

Challenges & Opportunities

  Financial Services Research

      Forum June 28th 2005

      Overview of presentation

• Why conventional insurance is not allowed

• Principles of Takaful

• Models of Takaful

• The global sector

• Challenges for the future

• Insurance for the low-income sector

• Takaful in Non-Muslim countries

 Why is conventional insurance

               not permissible?

• Uncertainty (Gharar)

• Gambling (Maisir)

• Interest (Riba)

Earlier forms of Islamic insurance

• Dawania – Mutual indemnification amongst officers during

 the rule of Umar Ibn Al Khattab (2nd Caliph)

• Diyyah and Aquilah – Blood money and concept of

 removing hardship from victims family by payment of

 Diyyah, on a mutual basis, by relatives of offender

• Marine Insurance – Early second century – mutual fund to

 cover robberies and mishaps

 Fiqh Academy Resolution 1985

• Commerical insurance is prohibited

• Alternative contract confirming to principles of Islamic

 dealings is the contract of cooperative insurance, which is

 founded on the basis of charitable donation and Shariah

 compliant dealings

          Principles of Takaful

• Solidarity and joint guarantee

• Self reliance and self sustaining for community well being

• Assist those that need assistance

• Community pooling system

• Shari’ah approved investments and products

               “Bear ye one another’s burden”

   Takaful models in practice

• Not for profit model

• Ta’awuni model – “cooperative insurance”

• Al Mudharabah model – profit sharing

• Al Wakala model – agency agreement

    The Global Takaful sector

• 1979 First Takaful Company established

• 1996 – 30 Institutions transacting Takaful

• 2002 – 50 Takaful operators and four Retakaful providers

• 2004 – 80 Takaful operators, 200 Takaful windows and 12

 Retakaful providers

Source: IBB Solicitors, UK – (2005)

The Global Takaful sector

    Source: Bhatty (2001)

    Challenges for the future

• Dynamic Growth

• Harmonization

• Best practices

• Awareness

• Reinsurance

• Governance

• Low-income sector

• Non-Muslim countries

Insurance for the low-

   income sector

    Can insurance assist poverty

                   alleviation?

• The poor are the most vulnerable

• The impact of losses are more severe

• They have minimum means of recovery

• Success of microfinance schemes show the poor can and

 want to save

• Savings and credit are used unproductively

• The poor need a safety net to escape poverty

“Insurance is being recognized

    as an important tool for

      poverty alleviation”

     Providing microinsurance

             The challenges

• Coverage

• Regulation

• Moral hazard and Fraud

• Adverse selection

• Education and trust

• Technical expertise

• Affordability

• Retention

• Sustainability

    Providing microinsurance

           The possibilities

• The cooperative microinsurance model

 History of organising the poor

 Operate for the interest of members by

   members

 Trust

 Ownership and loyalty

 Peer pressure

 Surplus reinvested or redistributed

    Providing microinsurance

           The possibilities

• The partner agent model

 No-risk fee for microinsurance provider

 Better coverage for policyholder

 Access to new market

 Pooling of risks between informal and formal

   sector

    Providing microinsurance

           The possibilities

• The donor agent model

 Access to expertise

 Financial sustainability

 Guiding hand

  The need in Muslim countries

• Social services inadequate or unavailable

• Large sectors of poverty in many Muslim countries

• Over half of world’s lowest developed countries have a

 majority Muslim population

• Increasing inequality in Middle East and Gulf countries

“Takaful is the second most

important social institution to

counter poverty and

deprivation”

             Omar Fisher,1999

     How can microtakaful be

                 provided?

• Establish informal microtakaful schemes

• Encouragement of pro-poor organisations

• Education of government and donor

 agencies

• Involvement of Takaful sector

  Technical expertise

  Financial assistance

  Partner-agent model

Islamic Insurance in Non-

   Muslim countries

 Takaful in Non-Muslim Countries

          Is there a need?

Country   Est. Muslim   Country   Est. Muslim

           population             population

Argentina 800,000 Italy 600,000

 Brazil     1 million   Japan     1.3 million

Canada      500,000     Kenya     8.4 million

France    4.8 million Netherlands  500,000

Germany 3 million UK 2 million

  Takaful in Non-Muslim countries

             Is there a need?

• Fasting growing immigrant population

• Belief in will of God

• Acceptance that insurance is not allowed

• First and second generations are

 purchasing insurance

• Increased availability of information

• Development of Islamic financial sector

  Takaful in Non-Muslim countries

             The challenges

• Dispersed population

• Capital requirements

• Regulation

• Awareness

• Credibility

• Technical expertise

Ruling by the European Council of Fatwa

                     and Research

“… It is well known that in most non-Islamic countries there

 are cooperative and mutual insurance companies. There is

 no harm from the Shari`ah 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…..”

 Ruling by the European Council of Fatwa

                  and Research

Muslims are obliged to purchase their statutory

insurance requirements from the cooperative and

mutual insurer if there is no Takaful company in the

country

    The case of Folksam - Sweden

• 350,000 Muslim population

• Fastest growing immigrant community

• Collaboration with Swedish Muslim Council

• Marketing of Folksam products through

 representatives of Council in communities and

 mosques

• Insurance committee has been established

The Possibilities in Non-Muslim countries

There is a growing awareness and demand for Islamic

financial instruments including insurance in non-Muslim

countries. There is a great potential for established

financial institutes to set up Takaful windows. In particular

the Shari’ah ruling presents an opportunity for cooperative

and mutual insurers to penetrate this niche market with

minimal costs.

                      Conclusions

• Takaful sector is firmly established

• Growing rapidly

• Micronsurance/takaful is an important tool for poverty

 alleviation

• Increasing awareness of Takaful in Non-Muslim countries

• Development of Takaful in Non-Muslim countries can

 encourage greater participation into insurance market

   Thank you

www.icmif.org/takaful