Topic

By “Author”

Sub heading – describing topic

Islamic Life InsuranceThe World of Takaful

By Shivash Bhagaloo

2

South Africa

Contents

• Market Overview

• What is Takaful Insurance?

• How is Takaful Insurance Different?

• Takaful Models

• Regulation

• Challenges

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South Africa

Market Overview

• Market born in Sudan in 1979

• Global Presence• Largest market in the GCC and South East Asia

• Global contributions of $2-3bn (2006) (60% GI, 40% LA and Pensions)

• Annual growth of 15-20% over the past 3 years

• African Presence• Largest markets in Sudan, Egypt, Tunisia, Algeria, Senegal

• Smaller presence in South Africa, Gambia

• Industry driven • High economic growth

• Increased awareness

• Increase in Sharia compliant financing

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South Africa

What is Takaful Insurance ?

• Compliant with Sharia principles (Islamic law)

• Literally translated means “ joint guarantee”

• Similar to co-operative or mutual insurance• Policyholders underwrite the risk

• Policyholders own the company

• Allowance for a charitable donation of surplus

• Terminology• General Takaful – general insurance

• Family Takaful – life assurance and pensions

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South Africa

How is Takaful Insurance Different ?

• Certain aspects of normal insurance conflict with Sharia principles

Maysir

(Gambling)

Gharar

(Risk & Uncertainty)

Riba

(Interest)

Haram

(Forbidden / Unlawful)

insurers make bets on the loss occurrence

and this is deemed to be gambling-

-

-

-

timing and amount of the loss are

uncertain

investments in interest bearing securities

and possible interest on loans

investments in commodities or involvement

in activities that are forbidden (alcohol,

pork etc).

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South Africa

How is Takaful Insurance Different ?

• Important Practical Implications of

• Uncertainty – No term or endowment assurance products allowed

• Interest – Bond investments not allowed, equity investments permissible since market risk replaces credit risk.

• Haram – Trading in futures is forbidden

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South Africa

Takaful Models

• Differ in the way funds are shared between policyholders and the Takaful operator

Wakalah (Fee based) Model• Operator acts as an agent, administers funds on behalf of participants • Receives a fee for operating expenses

Mudharabah (Profit share) Model • Operator acts as Mudarib (entrepreneur) with participants as the

capital providers• Losses paid by participants with a pre-agreed profit sharing agreement

Wakalah/Mudharabah (Fee based/Profit share) Hybrid• Wakalah for insurance activities and Mudharabah for investment

profits

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South Africa

Wakalah ModelManagement

ExpensesPARTICIPANTS

Shariah compliant

Investments

Takaful

Fund

Reserves

Reinsurance/

Retakaful

Claims

Investment Profits

Surplus/(Deficit)

Shareholders’

Fund

Charitable Donation

Qard

HassanUnderwriting Profit

Contribution Wakalah Fee (eg 30%)

100% surplus

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South Africa

Mudharabah ModelManagement

ExpensesPARTICIPANTS

Shariah compliant

Investments

Takaful

Fund

Reserves

Reinsurance/

Retakaful

Claims

Investment Profits

Surplus/(Deficit)

Shareholders’

Fund

Charitable donation

Qard

Hassan

(interest free loan)

In case of a deficit

in the fund to

be repaid from

surpluses in future

years

Underwriting Profit

Contribution

X% of Surplus 100% - X% of Surplus

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South Africa

Wakalah / Mudharabah Hybrid

Management

ExpensesPARTICIPANTS

Shariah compliant

Investments

Takaful

Fund

Reserves

Reinsurance/

Retakaful

Claims

Investment Profits

Surplus/(Deficit)

Shareholders’

Fund

Charitable donation

Qard

HassanUnderwriting Profit

Contribution Wakalah Fee (eg 30%)

100% of Surplus

100% - X% of

Investment Profits

X% of Investment Profits

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South Africa

Regulation

• First set of regulation was 1984 Takaful Act, Malaysia• Mandatory compliance in certain countries (Saudi Arabia,

Sudan)• Regulation is still in its infancy• Takaful compliance is overseen by a Sharia Advisory Board

comprising Sharia scholars• Lack of fiscal involvement• Lack of harmonisation of rules globally

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South Africa

Challenges

• Not as developed as conventional insurance

• Lack of global awareness

• Shortage of skilled resources in the Takaful market

• Limited Shariah compliant investments

• Lack of harmonised regulation of Takaful industry

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South Africa

Summary

• Takaful Insurance is based on Sharia principles

• Market is developed in Far East and Middle East but less of a presence in Africa

• Similar to a mutual or co-operative, where policyholders underwrite risk

• Gambling, uncertainty, interest and forbidden activities are removed

• Models differ in the way funds are shared between policyholders and the Takaful operator

• Compliance is overseen by a Sharia Advisory Board

• Still require a harmonised global regulatory framework

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South Africa

Questions ?

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South Africa

Aon named

2008 Best Takaful Reinsurance Intermediary

at the 2nd International Takaful Summit in London, recognised for its reinsurance and consultancy

work in the Takaful and Retakaful sectors