takaful absolutely final

Islamic Insurance

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.

Hailey College of Banking & FinanceUniversity of the Punjab

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Islamic Insurance

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.


2

Islamic Insurance

Contracts, called 'aqd muwalat, were entered into for bringing

about an end to mutual amity or revenge.

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;


3

Islamic Insurance

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.

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."


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Islamic Insurance

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.

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

pre-ordainment) 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].


5

Islamic Insurance

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.


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Islamic Insurance

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.

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.


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Islamic Insurance

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 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).


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Islamic Insurance

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).

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.


9

Islamic Insurance

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)

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 for community

well being

Assist those that need assistance

Community pooling system

Halal investments


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Islamic Insurance

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


11

Islamic Insurance

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).

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:


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Islamic Insurance

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

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


13

Islamic Insurance

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

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


14

Islamic Insurance

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.

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


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Islamic Insurance

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

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


16

Islamic Insurance

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

by state and man-made.

Sources of laws are based upon

Divine revelations (Holy Qura’an

and Hadith)

Profit-motive, maximizing returns to

shareholders.

Community well-being optimizing

operations for affordable risk

protection as well as fair profits

for the operator.

Profits and/or Bonus units to be

returned to policyholders as

determined by managers and Board

of insurer.

Takaful contract specifies in

advance how and when

profit/surplus and/or 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

insurer with differing interests.

Coincidence of interests between

policyholder and operator as


17

Islamic Insurance

appointed by participants.

Transfer of losses among insurance

pools and from policyholders to

shareholders.

Losses retained within classes of

business written and sole

obligation of Participants.

Right of insurable interest is vested in

the Nominee absolutely in Life

insurance.

Right of insurable interest is

determined by Islamic principles

of Faraid (inheritance).

Insured may elect cost or

replacement cost valuation and claim

accordingly whether or not they

chose to rebuild property.

Insured may not "profit" from

insurance and entitled to

compensation only for repair or

rebuild or replacement.

Agents and Brokers are typically

independent from insurer and paid a

fee from the premium charged to

policyholders that is not disclosed

that is not disclosed.

Agents are employees of the

Takaful and any sales

commission should be disclosed.

Investment of premiums conducted

by insurer with no involvement by

policyholders.

Takaful contract specified under

principles of al Mudharabah how

premiums will be invested and

how results are shared. Under al

Wakalah, similar practice plus

Participant can direct his


18

Islamic Insurance

investments into a range of

unitized funds.

Insurer invests premiums consistent

with profit-motive with no moral

guidelines; hence co-existence of Al

Riba and Al Maisir.

Takaful invests premiums in

accordance with Islamic values

and Shariah guidelines.

Dissolution - reserves and

excess/surplus belong to the

shareholders.

Dissolution - reserves and

excess/surplus could be returned

to Participants, although

consensus opinion prefers

donation to charity.

Taxes - subject to local, state and

federal taxes.

Taxes - subject to local, state and

federal taxes (if any) plus

obligated to arrange annual tithe

(Zakat) donations to charity.

Benefits paid from general insurance

account owned by insurer.

Benefits paid from contributions

(Al tabarru) made by participants

as mutual indemnification.

Accounting consistent with GAAP and

prevailing statutory rules Auditing for

uniform application of accounting

standards.

Accounting standards consistent

with national rules (with may be

GAAP) plus prevailing statutory

rules. Auditing same standards

plus conformance with Islamic

rules; typically with Shariah


19

Islamic Insurance

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 (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


20

Islamic Insurance

(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 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


21

Islamic Insurance

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

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


22

Islamic Insurance

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

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*


23

Islamic Insurance

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

Note* Operates under Takaful/cooperative principles while evolving

into full accordance with Takaful model.

Additional recent initiatives

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-


24

Islamic Insurance

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

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.


25

Islamic Insurance

Launch of Takaful in Pakistan

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.


26

Islamic Insurance

Shariah Advisors Profile

Justice (Retd.) Mufti Muhammad Taqi Usmani

Dr. Muhammad Imran Ashraf Usmani

Moulvi Muhammad Hassan Kaleem

Shareholders

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).


27

Islamic Insurance

Part III Financial Profile of Takaful Industry

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 non-Arab takaful business. A

geographical spread of takaful business is shown below:


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Islamic Insurance

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

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


29

Islamic Insurance

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

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).


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Islamic Insurance

Acceptance Rates of Insurance

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


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Islamic Insurance

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

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.


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Islamic Insurance

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

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


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Islamic Insurance

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

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 .


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Islamic Insurance

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

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


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Islamic Insurance

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

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


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Islamic Insurance

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

Group Takaful Products


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Islamic Insurance

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.


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Islamic Insurance


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


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Islamic Insurance

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.

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.


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.


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Islamic Insurance

4) Key Man Protection Plan

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.


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).


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Islamic Insurance

Riders Products

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


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Islamic Insurance

Erection All risks Policy

Machinery Breakdown Policy

Contractor’s Plant and Machinery Policy

Motor Takaful

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

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.


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Islamic Insurance

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

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


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Islamic Insurance

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 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.


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Islamic Insurance

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 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


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Islamic Insurance

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.

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.


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Islamic Insurance

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

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.


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Islamic Insurance

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 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.


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Islamic Insurance

Strengths

Significant gap in Islamic

Financial Services industry

Shariah compliant means

products conform with

Islamic principles

Provides an ethical

alternative to conventional

life insurance

Of significant interest to

conventional insurance

operators

Typical for the industry is

the synergy with Islamic

banking

Synergy with the Islamic

Asset Management industry

Weaknesses

No uniform Shariah

authority

Divisions within Shariah

scholars on many issues

relating to Takaful

No significant Corporate

Governance or Shariah audit

guidelines

Lack of uniform

insurance/Takaful regulatory

arrangements

Lack of a long term saving

culture in many Muslim

communities creates a

challenge to persuade

Muslims 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


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Islamic Insurance

investment vehicles for

investors

Opportunities

Vast untapped market

outside the Far East

Low level of insurance

penetration in most markets

Sales to government and

Islamic agencies

Even lower levels of life

Takaful penetration

Affluent markets in many

Muslim countries, resulting

in high

premium/contributions

Large Muslim populations in

many countries

Muslim minorities in western

countries i.e. France,

Germany, UK, USA.

Banctakaful

In general the Muslim

population is growing

significantly worldwide.

Threats

No Shariah consensus could

undermine Takaful

development

Anti insurance beliefs by

some Islamic scholars

Conventional insurance

regulators could hold up

Takaful development

WTO could dilute the

benefits of protectionism

enjoyed by local companies

9/11 and perceived anti

Islamic feelings in the west

Lack of consensus amongst

Takaful operators


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takaful absolutely final

Documents