Takaful Concepts and Models by Atiquzzafar Khan
Takaful: Concepts and
Models
By
Atiquzzafar Khan
Nov 3, 2009
Al-Huda Workshop
On
Takaful Management
Main Topics
• Introduction of Modern Insurance
• Evaluation of Insurance Business
from Islamic Point of View
• Islamic Alternative: (Review of
Existing Experiences of Takaful)
• Performance of Takaful Industry
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.
Insurance is a device to cover the
losses arise due to occurrence of
some undesired event.
Definition of Insurance
Insurance is an economic device
whereby the individual substitutes a
small certain cost (premium) for a
large uncertain financial loss (the
contingency insured against) that
would exist if it were not for the
insurance.
CLASSIFICATION OF
INSURANCE BUSINESS
By Type of Products
i) Life insurance
ii) General insurance
iii) Liability insurance
Nature of Insurance Contract
Aleatory Contract
Unilateral Contract
Conditional Contract
Contract of Adhesion
Principals Governing Insurance
Contract
Principal of Indemnity
Principal of Insurable Interest
Principal of Subrogation
Principal of Utmost Good Faith
Nature of Insurance Contract
General Insurance
Premium Compensation
Life Insurance
Premium Compensation
Shariah Position of Insurance
Opinion of Shariah scholars is divided
on insurance. We can classify them
into three major groups.
– Those who consider both the
concept and practice of commercial
insurance un-Islamic.
– Those who are in agreement with
the present insurance and find
nothing wrong in it.
– Those who accept the concept of
insurance, but find prohibited
elements in its present practice.
Rulings of Collective Fiqhi
Bodies about Insurance
– Islamic Research Institute of Al-Azhar
Uni.
– Council of Grand Ulama of Saudi Arabia
– Majlis Tahqiqat-e-Shari'yah Lucknow,
India
– Islamic Fiqh Academy of Rabita al-
Aa'lam-e-Islami
– Al Majma’ Al-Fiqhi Al- Islami of OIC
– Council of Islamic Ideology, Pakistan
Major Arguments Against
Insurance
According to these 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.
Islamic Substitute
The Islamic Substitute of
Conventional Insurance,
according to these Fiqhi
bodies, may be some scheme
based on mutual cooperation
and Joint Responsibility.
That alternative is introduced
under the title of Takaful in
recent past.
Takaful in Islam
Hadith of the ProphetSWA
“Tie the camel and
then submit to the
will of Allah”
This hadith implied a need to mitigate risk
Historical Examples of “Takaful”
Dawania-Mutual indemnification
amongst officers working in the same
department during the rule of Umar
Ibn Al Khattab (the 2nd Caliph)
Diyyah and Aquilah-Blood money
and the concept of removing
hardship inflicted on the family of the
victim by payment of Diyyah, on a
mutual basis, by the relatives of the
offender
Takaful Pioneers
Takaful started some 30 years
ago in the Middle East with the
launching of two companies in
1979:
– The Islamic Arab Insurance Co.
(IAIC) in the UAE and
– The Islamic Insurance Co. of Sudan
But it took some time for the
movement to take shape.
Takaful Pioneers
Later in 1984, Malaysia played a
pioneering role in setting the
first Legal framework specific to
Takaful (Takaful Act Malaysia).
This was instrumental in the
successful launching of the
Takaful movement in Malaysia
and in other countries of South
East Asia.
Other Islamic/ Takaful Legislations
Other markets such as the Sudan
and Iran have Islamic regulatory
environments and became naturally
Takaful markets.
In Pakistan Takaful Act is enacted in
2005.
In the Gulf countries specific Takaful
legislations are coming through in
Bahrain and in Saudi Arabia
Takaful Today
From a handful of operators
two decades ago the Takaful
movement has blossomed
into a fast growing
phenomenon in many Muslim
countries with very promising
prospects in other countries
with a large Muslim
community.
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 Drivers
Islamic banks and financial
institutions play a strategic and
important role in the distribution
of Takaful products (especially
Life Takaful Products).
Just as Bancassurance played an
important role in the distribution
of personal lines insurance
products Bancatakaful is an
important driver for Takaful.
Takaful Operators
The number of Takaful operators
worldwide is now estimated at:
150 Takaful companies operating in
40 countries
10 Retakaful companies
6 Islamic windows by Conventional
Reinsurance companies
Takaful Premium
Takaful is one of the fastest growing
segments in insurance (at around
20% pa. on average)
World Takaful contributions are
conservatively estimated at around
US$ 3billions, of which:
– 60% General Takaful
– 40% Family Takaful
Takaful Geographical Spread
South& East Asia : 56%
Middle East : 36%
Africa: 7%
Europe, USAUnited States of America & Others: 1%
Definition of Takaful
The word Takaful means joint guarantee. The objective
of 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 TAKAFUL
BUSINESS: The Malaysian Case
Takaful Business is based on the concepts of
Mudarabah and Tabarru. Involvement of
these two Islamic forms of business eliminates
the elements of Riba from insurance contract
and convert Gharar into tolerable form.
In Family Takaful each Takaful installment is
divided and credited into two separate
Accounts namely, the Participants'
Account(PA) and the Participants’ Special
Account(PSA). A substantial proportion of the
installments is credited into the PA solely for
the 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,
e.g., 30-70.
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.
Mudarabah Model
Profit Attributed
Family Takaful To Shareholders
Company Company’s Admin
& Manag. Expenses
30%
Takaful Contract Investment Profit
based on Mudarabah 70%
PA PA Payment from
PA
Participant FTF
Payment from
PSA PSA PSA
Payment of claims
Should the Participant die or suffer
Permanent and Total Disability in the fifth
year of participation, Takaful benefit will
be 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 5,000
Accounts (RM1000 x 5)
Total Takaful Benefit Payable RM 10,290
In case the Partcipant survived
Should the Participant survive until
the maturity of his FTPFile Transfer Protocol, payment of
Takaful benefit 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 determined
by Sharikah Takaful.
Mudarabah Model
General Takaful PROFITS
ATTRIBUTABLE TO
SHAREHOLDERS
COMPANY
COMPANY'S
ADMINISTRATION &
MANAGEMENT
EXPENSES
TAKAFUL CONTRACT PROFITS
INVESTMENT BY
BASED ON PRINCIPLE OF FROM
COMPANY
AL-MUDHARABAH INVESTMENT
OPERATIONAL SHARE OF
COST OF SURPLUS FOR
TAKAFUL THE COMPANY
TAKAFUL
GENERAL GENERAL 40% (Example Only)
PARTICIPANT CONTRIBUTI OPERATIONAL SURPLUS
TAKAFUL TAKAFUL
ON PAID BY COST OF TAKAFUL (PROFIT)
FUND FUND 60% (Example Only)
PARTICIPANT
OPERATIONAL SHARE OF
COST OF SURPLUS FOR THE
TAKAFUL PARTICIPANT
Wakalah Model
COMPANY MANAGEMENT PROFIT / LOSS
TAKAFUL ADMIN & MARKETING SHARE OF PROFIT
EXPENSES OF ATTRIBUTABLE TO
EXPENSES 25% TO 35% FOR THE COMPANY
COMPANY SHAREHOLDERS
40%
TAKAFUL
CONTRACT BASED INVESTMENT PROFITS FROM
ON PRINCIPLE OF BY FUND INVESTMENT
AL-WAKALAH
60%
OPERATIONAL COST
OF TAKAFUL /
RETAKAFUL
TAKAFUL GENERAL
PARTICIPANT GENERAL SHARE OF
CONTRIBUTIO TAKAFUL OPERATIONAL COST SURPLUS
TAKAFUL SURPLUS FOR
N PAID BY FUND OF TAKAFUL (PROFIT)
FUND THE PARTICIPANT
PARTICIPANT 65% TO 75%
OPERATIONAL COST
100%
OF TAKAFUL
Waqf Model
Definition of Waqf
Waqf is an Arabic word and it means
to stop to withhold and not to let go.
In technical meaning Waqf means to
allocate or donate some property or
cash for a specific purpose to get
pleasure of Allah and not to let it go
through consumption or sale.
The Waqf property comes into
ownership of Allah (SWT) and Waqif
will have no property rights on it.
Waqif has right to set the rules
for Waqf and manage the
Waqf.
Waqf may be general purpose
or specific purpose, like
Waqf ‘Ala al Aulad or
Waqf ‘Ala al Aqarib.
In Islamic Law Waqf is a legal
entity
Waqf Model
COMPANY TAKAFUL OPERATOR FEES FOR MANAGEMENT PROFIT / LOSS
SHARE OF PROFIT
ADMIN & MARKETING EXPENSES EXPENSES OF ATTRIBUTABLE TO
FOR THE COMPANY
25% TO 35% COMPANY SHAREHOLDERS
40%
PROFIT SHARING ON
INITIAL DONATION BY MUDARABHA BASES
SHAREHOLDERS TO
CREATE WAQF FUND
Waqf Waqf INVESTMENT PROFITS FROM
BY FUND INVESTMENT
TAKAFUL 60%
CONTRACT BASED
ON PRINCIPLE OF
AL-WAKALAH OPERATIONAL COST OF
TAKAFUL /RETAKAFUL
TAKAFUL
SHARE OF
PARTICIPANT CONTRIBUTION WAQF FUND SURPLUS
WAQF FUND OPERATIONAL COST OF SURPLUS FOR
PAID BY 65% TO 75% TAKAFUL (PROFIT)
THE PARTICIPANT
PARTICIPANT
OPERATIONAL COST OF 100%
TAKAFUL
A Waqf Fund would basically be a
separate legal entity to which the
Shareholders would initially make a
donation to establish the Waqf Fund.
The donation can be of any reasonable
amount (Shariah Board may specify such
an amount).
The objectives of the Waqf fund would be
to provide relief to participants against
defined losses as per the rules of the
Waqf fund.
In this modified Wakala Model with Waqf, the
relationship of the participants and of the
operator is directly with the Waqf fund. The
Operator is the Wakeel of the Waqf Fund and
the participants pay one sided donation to
the WAQF fund (not conditional) which also
eliminates the issue of Gharar. The WAQF
fund rules may define the sharing of surplus
and other rules under which it would operate
but there is no obligation to distribute
surplus. Further the Qard would be given by
the shareholders to the WAQF entity and not
to individuals as in the typical Wakalah
model.
The Challenges ahead
Despite a remarkable breakthrough
and a dynamic and sustained
growth, there are challenges facing
the Takaful industry.
The business model dilemma
The existence of three business models:
Mudharabah (Profit & Loss sharing)
Wakala (agency contract with a
performance fee element to replace
surplus sharing)
Wakala with Waqf model
Could create an uneven / unfair business
environment to operate
Need to reach a consensus internationally
on a common and standard Takaful
business model
Future Outlook
Despite the remarkable growth rate
recorded by the Takaful industry,
penetration is still far below the
enormous market potential offered
by the Muslim community worldwide
(23% of the total world population).
Growth Outlook
World Muslim population is estimated
at 1.5 billions, of which around 97%
are based in Asia and Africa.
A two-digit growth in the range of
15% to 20% can be reasonably
sustained for at least the next 10
years in the existing markets (Far
and Middle East).
New Takaful Frontiers
Markets like Europe, North and Latin
America, Central Asia, Australia
where large Muslim communities live
are huge untapped reservoirs;
The recent opening towards “Islamic
windows” in the banking sector in
Europe is likely to be followed by
“Takaful windows” initiatives.
Takaful Products to Non-Muslims
Takaful Products are not exclusive to
Muslims.
Competitively priced and sold
through the right channel it could
attract any consumer irrespective of
their origin or faith.
Conclusions
Despite the challenges facing this
“new” industry, exciting times are
ahead once the latent potential is
unleashed.
The success of Takaful largely
depends on that of Islamic Financial
institutions on a global basis.
THANK YOU
