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The Actuary The magazine of the Institute & Faculty of Actuaries
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Insurance: Takaful gaining ground

Takaful originates from the Arabic word ‘Kafalah’, which means ‘guaranteeing each other’ or ‘joint guarantee’. The Takaful market started in Sudan in 1979 and then spread to Asia, with Malaysia being one of the most mature markets in the Islamic Asian region. The Takaful concept reached the Gulf regional market in 2002, and gained ground in 2005.

The principles of Takaful are similar to those that underpin mainstream mutual insurance, as the Takaful system is based on mutual cooperation, responsibility, assurance, protection and assistance between groups of participants. In addition, however, a Takaful-branded product has to strictly follow the Muslim business norms of Islamic contracts for clients and Boards of Islamic Sharia scholars whose role is to vet business decisions.

Major international companies moving into the Takaful segment include AIG, Allianz, HSBC, Aviva, and Prudential. Further in 2008, the second largest Takaful company in the world, British Islamic Insurance Holding, is due to launch a UK base with the intention of raising more than $350m (£174m) of capital. As well as targeting the UK market, the company is also setting its sights on other European countries, especially France and Germany, the Gulf States and some Asian countries.

Why the demand?
Islamic banking institutions providing capital and Islamic financial instruments for asset management and investment have already developed successfully and there is now a strong demand, due to religious beliefs, for a Shariacompliant insurance product.

Takaful is one of the fastest-growing segments in insurance, with an average growth of 20% per annum. In 2006, worldwide Takaful contributions were estimated at around $3bn. Approximately 60% comes from general Takaful (general insurance) and 40% from family Takaful (life insurance and pensions).

According to Moody’s Global Credit Research service, total Takaful premiums were worth more than $2bn in 2005 and it is predicted that this will rise to $7bn by 2015.

In addition, consumer surveys have shown a high willingness for Muslims to switch their conventional savings, health and education plans to a Takaful product, given the same level of customer service, quality and profitability.

Defining a Takaful system
There are five elements that must co-exist to establish a proper framework for a Takaful system:

1. Ne’aa or utmost sincerity of intention — for knowingly following the guidance of, and adhering to the rule and purpose of, Takaful — co-operative risk sharing and mutual assistance.
2. Integration of Sharia principles — in particular, risk sharing under Ta’awuni principles, coincidence of ownership, participation in management by policyholders, avoidance of riba (an agreement in which the policyholder expects to receive a predetermined/ fixed amount that is greater than that invested), gambling (referred to as ‘qimar’ or ‘maisir’ in Arabic, which means any activity that involves an arrangement between two or more parties, each of whom undertakes the risk of a loss where a loss for one means a gain for the other), and al Gharar (activities that have elements of uncertainty, ambiguity or deception. In a commercial transaction, it refers to either the uncertainty of the goods or price of goods, or deceiving the buyer on the price of goods), and inclusion of the al Mudharabah (profitsharing arrangements) and/or al Wakalah (agents) principles for management practices.
3. Presence of moral value and ethics — whereby business is conducted openly in accordance with utmost good faith, honesty, full disclosure, truthfulness and fairness in all dealing.
4. No unlawful element — that contravenes Sharia and strict adherence to Islamic rules for commercial contract, namely:

  • Parties have legal capacity and are mentally fit n Insurable interest n Principle of indemnity prevails
  • Payment of premium is consideration (offer and acceptance)
  • Mutual consent, which includes voluntary purifi cation
  • Specific time period of policy and underlying agreement.

5. Appointment of a Sharia Advisory Council or Committee — to oversee the development and Islamic auditing of the Takaful operation and to make sure the investments are made in eligible areas that are allowed and approved by the Sharia board.

Two areas of business
Most Takaful products fall into two main areas.

General Takaful
General Takaful refers to schemes designed to meet the protection needs of individuals and corporate bodies in relation to material loss or damage resulting from a catastrophe or disaster infl icted upon properties, assets or belongings.

Participants (policyholders) pay their premiums (calculated by actuaries) into the Takaful fund as a Tabarru’ (donation). This will eliminate the elements of al Gharar and gambling. That is, the participant agrees to donate their contribution (premium) to the fund with a mission to help other participants covered under the various Takaful schemes when in distress. Therefore, it is the members who carry the risk and the Takaful operator is merely a custodian. Mudharabah, Musharakah and Wakalah models (see Takaful models box) can be implemented under this approach.

Family Takaful
The range of Takaful products offered falls into two categories: risk-type products that are provided for the protection of the participants; and investmenttype products with an element of risk. These products tend to be regular savings plans where a participant indicates his need to achieve a target lump sum by a specifi ed time in the future. Under this scheme the participants pay their premiums into the Takaful fund. A portion of the premium is allocated purely for saving and investment, and the balance goes as a Tabarru’ to build up reserves (claims reserves, unearned premium reserves and so on), to direct expenses, and to pay for Retakaful (reinsurance). Again, Mudharabah, Musharakah and Wakalah models can be implemented under this approach.

Beyond these two main areas, Takaful products are also available for health and pensions needs. It should be noted that Takaful insurance is not just for Muslims but also for non-Muslims, as it is seen by them as an ethical form of insurance.


Takaful models
» Mudharabah model (profit and loss sharing) This is a contract between capital providers with management, where any profi t is shared according to ratio or percentage agreed by both parties but any losses are borne entirely by the capital provider. In practice, participants provide capital to the Takaful operator.
» Musharakah model (joint venture) Both parties provide capital and/or management. Profi t is split either based on capital or upon negotiation, and any loss is distributed in proportion to capital contributions.
» Kafalah model (surety) A guarantor to become the surety in the event the debtor fails to honour his obligation. This type of contract can be used for the development of the Takaful scheme for bonds products.
» Wakalah model (agency) The principal appoints and authorises someone to act on his behalf. The authorisation could be either specific or general. The Wakeel (agent) could then charge a fee to the principal. This model is suitable for most Takaful products including products for corporate risks such as a ‘Rent-a-Captive’ concept.
» Ju’alah model (commission) Similar to the Wakalah contract except that the payment to the agent is measured on his output and performance. This contract could be used to develop distribution channels for Takaful. The most important element of a Takaful model is that there must be a subject matter of contract upon which contracting parties mutually agree by an ijab (proposal) and a qabul (acceptance).


Takaful structures
A Takaful operation in a non-Muslim country can be established in any one of the followings ways:
» A Takaful operator set up under the local Company’s Act with a distinct legal entity
» A Takaful window with any of the existing insurance companies
» A branch of any established Takaful company under a franchise agreement or other understanding
» Establishment of marketing facilities for Takaful products as part of an existing Takaful company with an agency agreement.

Hussein Mahmoud is a Senior Actuarial Analyst at ACE European Group