TAKAFUL - THE ETHICAL WAY TO INSURE

Ajmal Bhatty

Tokio Marine Middle East Limited DIFC, Dubai

CEO Takaful and Chief Operating Officer

Takaful stands for Islamic insurance but in essence it could easily be called ethical insurance.

What's so ethical about it?

Well, would you like to have motor insurance where, if you don't claim during the insured period of one year for which your policy is valid (which is a good news) and if your company makes overall profit in its motor insurance business (which is also good news), then you get to share in its profits?

This would be in addition to any no claim discount that you would enjoy as a good driver.

The same goes for any other insurance that is offered as takaful. No prizes for guessing what the answer would be!

How would you feel where every penny you pay for your takaful policy adds up to be invested in businesses and trades that are socially and environmentally friendly for a premium that costs you the same as conventional insurance premium?

Your money will not be channelled into funds that invest in industries that repeatedly breach health and safety regulations, rules for reduction of greenhouse gases, abuse of human rights, production and sale of armaments, adult entertainment and tobacco, pork and alcohol whose excess is socially and medically proven to be bad for society.

These are just two examples to illustrate the fair and ethical nature of Takaful.

The need to have insurance based on certain criteria that revolves around the idea of what is good for individuals is good for community and society at large is the essence of Islamic insurance.

Takaful originates from Islamic Shariah (laws) that strictly follow a code to ensure that money and wealth and all things financial should be for the good of society, should be transparent and fair to all parties, should be non-exploitative with little or no margin for misinterpretation and where money should generate trade, wealth and employment and not where it would create merely more money (i.e., interest based dealings that can be exploitative).

One can argue that conventional insurance does most of this if not all, i.e., it helps individuals at time of need (through insurance protection) which is about the goodness of society.

Through its protection and savings schemes it helps to preserve and create wealth, and through the statutory regulations, its prudent policies and good governance the interests of its policyholders are well looked after.

The big difference however is that Takaful is a system that remains strictly on a stated path that is ethical and fair whereas conventional system is open to practices and applications that may become one-sided in favour of the insurer rather than the insured.

‘Takaful' is an Arabic word with literal meaning of ‘joint guarantee'. It is driven from another word called ‘Kafala' meaning ‘helping each other or joint guarantee'. It expresses the essence of insurance acceptable within the Shariah, that of shared responsibility or solidarity amongst those who take steps to help each other for a common good.

Conventional insurance provides ‘guarantee or promise to pay an insured amount' at a participants to help each other at the time of need.

Takaful is about risk management at its best. The insured takes proper precautions to mitigate the risk in the first place and then leaves it for the insurance fund (takaful fund) and reinsurance / retakaful fund to absorb the excess. This is akin to Alternative Risk Transfer (ART) as we know it in the conventional sense.

Takaful is about an insured's safety culture, be it an individual or a corporate.

For example, it would be in the interest of the insured in a takaful medical scheme to make sure that a medical claim is precisely to cover necessary medical costs, recognizing the fact that if unnecessary visits to the doctor or unwanted laboratory tests are avoided then this benefits the participants collectively with a share in future underwriting surplus.

A classic example of corporate safety culture is one of Du Pont going back to an event that took place in 1818. Shortly after the company was established, its gunpowder mill exploded. The mill was destroyed with loss of life. Forty people died and many more were injured including the wife of the Company's founder.

He realized that if the company were to survive, such accidents must be avoided. In building a safety culture for the company he had his managerial staff and their families live on the factory site where he also lived.

The modern day ART would require similar risk-mitigating steps on behalf of the insured, and the excess risk is managed through insurance and reinsurance programs. Takaful's safety philosophy is very much in line with this.

The Takaful industry is still evolving but has already come a long way in improving its products, services and standards. The pace of development has been extremely fast, with industry growth ranging between 15% pa in the Middle East to around 30% pa in the Asia Pacific in the recent past.

It all started with a small group of dedicated and determined businessmen in the Middle East, the pioneers back in the Seventies, who felt strong desire to uphold the principles of Shariah in their everyday dealing of business and finance. Amongst these pioneering entrepreneurs were some prominent investors from Saudi Arabia.

For many years they persevered. They made losses and only small amounts of profits for several years but they did not give up. In the beginning it was more a case of religious application to business practices. Later it evolved into application of business expertise and technical know-how applied within the boundaries of Shariah principles.

Malaysia soon emulated in a pragmatic way. Other countries in the Middle East, Asia and Africa followed suit.

And it worked in the end. Islamic banking flourished. Now so many countries claim to have achieved excellence in Islamic banking and Finance, like Bahrain, Singapore, London and Dubai.

Estimates of the size of Islamic banking industry vary between US$300 billion to $400 billion of Shariah compliant assets with some 280 Islamic banks in 48 countries and 300 Islamic windows. The potential remains huge with a sustained growth over the past many years of more than 15% per annum.

Investors from the GCC alone have invested over US$1.2 trillion in international assets, predominantly in the US and Europe. Islamic insurance lagged behind for a while during the 1980's but over the last decade, this too has gathered momentum. It has started to make inroads into market share of conventional business.

The potential is phenomenal in life insurance where conventional products have not made any real impact reflecting less than $1 of life premium per capita in Saudi Arabia. The potential is many times more, possibly US$10 per capita in a country where population is in excess of 24 million.

The size of takaful industry estimated for 2002 at US$2 billion, is likely to exceed US$12 billion in the next ten years, with assets under management of some US$30 billion if the current trends continue.

The Following highlights some of the characteristics of a takaful company with some FAQs:

Takaful Company

A takaful company must have all of the following characteristics:

1. Its Memorandum and Articles should be non-contradictory to Shariah norms.

2. Its Investment management must be Shariah compliant and for Islamic windows all financial transactions related to takaful must be distinguishable separately.

3. Its products must be clear and transparent as to benefits, charges and operations.

4. The contract of takaful must be based on recognized Shariah norms of methods and principles.

5. The Policy must be unambiguous and the structure and operation must minimize doubt (al-gharar) and maisir (exploitation) through contracts and concepts based on collective rights, clarity of role of the company, ownership of funds and profit sharing.

6. The operations must generate goodwill for the society and community in the long run

7. A demonstrable balance must be maintained between making profits and in serving customer needs, i.e., between shareholder interests and interests of the society.

Is Co-operative same as Takaful?

A co-operative insurance company could be a normal conventional company as the concepts of insurance are based on law of large numbers.

Many argue that the aspect of law of large numbers makes an insurance fund a co-operative fund, which benefits the policyholders collectively.

But the real question is who owns the fund in this instance? The shareholders own the fund. The policy document is contractual basis between the company and the policyholder to pay the benefits and receive the premiums.

Beyond that, the policyholder has no right over the insurance funds. That is not so in a takaful company.

Is Takaful same as a Mutual Company?

A mutual company has no access to external capital. Its policyholders are its shareholders and it has to manage its affairs out of premiums. That is different from a takaful company, which has its own shareholders, and must maintain two accounts (policyholders and shareholders) separately.

Conclusions

Takaful is an ethical and fair way to insure. It's a win-win proposition for all parties in the business. It generates a spirit of goodwill amongst the community and can be used to develop micro-insurance or takaful solutions for masses.

Takaful is all to do with fulfilling the perceptions of customers. Insurance to them is interesting when they see it through the ‘fair' and ‘ethical' filters of takaful. This is especially so in case of life insurance.

A universal recognition of this fact would lead us to provide insurance that is good for everybody and not just for those who show preference for something that is Islamic.