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Summary of Presentation
• Origins & Development• Global Takaful Industry• The Takaful Concept• Key Differences• Practicals of Takaful• Q & A04/21/23 Takaful Insurance of Africa 1
DEFINATIONS OF TAKAFUL
• AOIFI defines Takaful as follows:“ Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants.”
04/21/23 Takaful Insurance of Africa 2
ORIGIN & CURRENT STATUS
Global Takaful Industry
04/21/23 Takaful Insurance of Africa 3
4
Africa3%
East Indian Sub-Continent
0%Far East
12%
GCC35%
Levant0%
Middle East (Non Arab)50%
Africa East Indian Sub-Continent Far East GCC Levant Middle East (Non Arab)
Contributions by Region
Source: World Islamic Insurance Directory 2012
5
Number of Islamic/Takaful companies
Africa, 26East Indian Sub-
Continent, 12
Far East, 35
GCC, 72
Levant, 9
Middle East (Non Arab), 18
Others, 7
Africa East Indian Sub-Continent Far East GCC Levant Middle East (Non Arab) Others
185 companies
* GCC: 72 companies including all licensed companies in KSA
Source: World Islamic Insurance Directory 2012
DEVELOPMENT OF ISLAMIC FINANCE
Government Directives
Private Initiatives
People’s Driven
Government Directives
Revolutionary(Full Islamisation)
Gradualist(Partial Islamisation)
Pakistan Iran
Sudan
Malaysia
1980s
A new dawn emerges in East Africa
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Definition of Takaful
• AAOIFI defines Takaful as follows:“ Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants.”
Azman Ismailwww.iifin.net
Islam As A Way of Life
ISLAM
ShariahPractices & Activites
AKHLAQMoralities & Ethics
AQIDAHFaith & Belief
IBADAHMan-to-God Worship
MUAMALATMan-to-Man Activities
ECONOMIC ACTIVITIES
SOCIAL ACTIVITIES
POLITICAL ACTIVITIES
RISK MANAGEMENT / INSURANCE
Religion
Culture
Education WORLDVIEW
History
Geography
Technology
Certification of permissible Financial Instruments through fatwas
(ex-anteShariah Audit) & verification of Transactions’ compliance
With Issued fatwa (ex-post Shariah Audit)
Disposal of Non-Shariah Compliant
earnings
Advice on the distribution of income & expenses among s/holders
Issue report to certify the conformity of all transactions with the Shariah
principles
The calculation & paymentOf Zakah
Roles and Responsibilities of Shariah Supervisory Council (SSC)
Fatwas and resolutions on conventional insurance
• 1972 Fatwa by National Council for Islamic religious affairs of Malaysia that life insurance is not lawful as it contains gharar, maysir and riba.
• 1985, OIC Fiqh academy, in its resolution No.9 (2/9) rules that commercial insurance is haram as it contains gharar etc.
What is gharar?
• Uncertainty,• deception, risk, • hazard, • ignorance.• Gharar is where the buyer does not know
what he bought, or the seller does not know what he sold (Ibn Hazm).
ARGUMENTS FOR GHARAR
• Identify the gharar element in conventional insurance.
• Will insured get the compensation as promised?
• How much will the Insured get?• When will the compensation be paid?• Can the above be considered gharar? If yes,
what extent of gharar, minor or major?
Riba
• Investment of premium in riba-based financial instruments (e.g, interest bearing accounts and conventional bonds).
• May impose charges for late payment of premiums.
Azman Ismailwww.iifin.net Topic 2azmanwong@yahoo.com
Investment
• Premiums are invested in non-shariah compliant instruments – what about shariah investment link?
• Can the legal maxim “whatever leads to haram, is haram itself” be applied here?
• Degree
Maysir (gambling)
• How does conventional insurance involve gambling?
• By purchasing the policy with non-proportionate premium in the hope of getting much higher compensation should peril occur.
ELEMENTS OF GHARAR, RIBA MAYSIR IN TAKAFUL?
• These elements do not exist in Takaful as long as it is a contract of taburru’ (gratuitous contract), not a contract of exchange (‘aqd mu’awadah) as in conventional insurance.
Key Differences
Between Takaful & Conventional Insurance
04/21/23 Takaful Insurance of Africa 20
Insurance Company
Payments
Claim Paid
Unfortunate
Loss
Insurance
Takaful
Risk Fund
Claim Paid
Unfortunate
Loss
Payments
Customer
CustomerAny Difference?
04/21/23 Takaful Insurance of Africa 21
Insurance Company
Insured
Premiums
Unfortunate
Loss
Indemnify
Risk Trading Concept(Financial Risk)
Insured sells his Risk / Insurer Buys the Risk (financial risk)
Operation of ‘Insurance’
04/21/23 Takaful Insurance of Africa 22
Tabarru Fund (Contribution Fund)
Participants/Members
Contributions
Unfortunate
Loss
Indemnify
Concept of Mutual Assistance
Company
Fund Manager
Pooling of Risks
Operation of ‘Takaful’
Management Fee
Risk Pooling Concept(Financial Risk)
Refund of Surplus
04/21/23 Takaful Insurance of Africa 23
TIA Ushirika Model
04/21/23 24Takaful Insurance of Africa
SHARE HOLDERFUNDS
PARTICIPANTS CONTRIBUTIONS
INVESTMENTS
MANAGEMENTEXPENSES
RESERVES
TAKAFUL ADMIN AND MGMNT EXPENSES
SURPLUS DECLARED
TO PARTICIPANTS.
DIVIDENDSTO
SHAREHOLDERS.
INVESTMENTINCOME
SURPLUS/ DEFICIT
PROFIT/LOSS TO
SHAREHOLDES
GENERAL TAKAFUL FUNDS.
X%
Y%
QH
P%
Q%
QH
Actual Transaction Cost.
Re-Takaful,Levies/Duties.
One-Off
Commissions,Claims,
Re-Takaful.
DONATIONS POOL
( TABARRU’).
( + )
CONTRIBUTION
CLAIMS & REINSURANCE
INVESTMENT INCOME
PROFIT / SURPLUS ( = )
TAKAFUL OPERATOR - INSURANCE COMPANY
TABARRU (DONATIONS)
( - )
MANAGEMENT FEE ( - )
Operations
04/21/23 Takaful Insurance of Africa 25
• When there is a will, there is way
04/21/23 Takaful Insurance of Africa 26
Q & A
?s
PRACTICALS OF TAKAFUL
• After concept and development what practical actions make each insurance stage compliant:
Promotion / Marketing StageProducts DevelopmentRisk Assessment / UnderwritingFinance / AccountingReinsurance & ClaimsConcept in Family Takaful
AT PROMOTION/MARKETING Explain/Demystify Takaful Concept For all but sharia compliance makes it
especially acceptable to Muslims. Offers same classes under different –
Compliant - Business Model:• Contribution into own fund instead of
premium payment• Possibility of Surplus Share at end of year –
Bond beyond premium payment• Unethical and harmful pursuits excluded
AT PROMOTION/MARKETING There is dual governance – by Internal
Auditor to the Board of Directors and by Head of Sharia Department to Sharia Supervisory Council
Quarterly Sharia audits and rulings Despite additional costs to ensure Sharia
Compliance we ensure competitive pricing. Participate in and abide by industry
regulations and Insurance law of the country An equal opportunity employer.
WHILE DEVELOPING PRODUCTS Ensure CLARITY - Strive to remove any apparent
ambiguities to reduce contentions at claim Develop Membership Certificate and Cover Summary
in addition to usual working docs – PF, PD, Schedules, Cover Notes, Clauses,
PF & PD to contain the Sharia Compliant Declaration. PF & PD to contain the key non compliant exclusions –
Pork, Gambling, Alcohol, pornography, Khat, Riba, unethical businesses and pursuits harmful to society
Use compliant terms such as Contribution instead of Premium, Participant instead if Insured ** Sum covered
COMPLIANT DECLARATION Recognises the agency relationship between
Participant and (appoints) Operator to run fund Participant vouches info given is true to the … Sets out the premium segregation ratio–40/60 Allows investment in compliant instruments Authorises purging of uncompliant income and
channeling it to charity. Agrees sharing ratios for investment income Entrenches the sharing of any surplus from the
risk fund.
QUOTING & COMPLETING P. FORM
Capture sufficient participant and risk info to facilitate bonding beyond insurance and availing shared surplus
Quotation to contain key non compliant exclusions. Not exhaustive and Participant to be guided by the ejusdem generis rule for others.
Highlight need to continuously advise change of use or business to reduce contention at claim
Affirms importance of completing proposal form – Info capture & Compliant Declaration
RISK ASSESMENT / UNDERWRITING Ensure completeness of Documentation and details –
Subject of Sharia Audit. Also IRA & KRA audits Accept only compliant risks and reject others. Where
in doubt consult Sharia Department. Being ethical, adhere to industry guidelines including
Motor terms, Listed Risks, WIBA Tariffs Exercise Equity in rating – avoid huge subjective rate
disparities. NCD, fleets & volume discounts allowed Issue Cover Summary as you book any new business. For Comprehensive motors valuation letter at
inception and renewal to minimise contention at claim
FINANCE – PREMIUM DISTRIBUTION Segregation of funds - 5 different accounts Premium Receiving Account. From here distributed to
respective accounts. Commissions, Levies, Stamp duty and purchases of Yellow Cards & Motor Certs drawn from here.
Other accounts are Operator, Risk Fund, Charity Account.
Operator Account – office Rent, stationery, salaries, marketing & promotion, transport, office running
Risk Fund – Direct Claims expenses, Reinsurance. Surplus Account – If and once Surplus amount is
determined it is moved from the Risk Fund to this account for sharing among qualifying participants
CLAIMS Claims payment is considered one of the justifications for
the existence of Takaful – not a wasted expense. Reality of covered events and need to cushion oneself.
There are no ex- gratia considerations. A claim is either payable or not. Equity demands that what you do to one, be ready to do to the entire group
Payments are out of the risk fund and must be sanctioned by the Sharia Department upon satisfying themselves
The highest body of appeal on any claims issue is the Shariah Supervisory Council whose ruling is final unless one wishes to pursue in a court of law
To cushion the Fund some of the Surplus at the end of the period is retained in the Risk Fund and rest is distributed among qualifying participants.
REINSURANCE / RETAKAFUL Reinsured/Cedant becomes Takaful Operator
and Reinsurer becomes Retakaful Operator The Retakaful Operator must be Sharia
Compliant – we expect surplus from them as we share surplus with our participants
Led Inward facultative support to other players but obtain outwards facultative only from compliant operators who will support the Surplus already shared
Give the Mandatory cessions to Kenya Re, Zep Re and Africa under their Sharia compliant windows / operations
PECULIARITY OF LONG TERM TAKAFUL
Promotion, Product Development, Underwriting and Reinsurance are more less as in General
Group Life and Credit Protection surplus share not to individuals but companies and lenders who are in actual sense the participants. Are annual
Pension & Annuities and Endowment Plans are long term investments. Funds are not segregated.
No Surplus Share is envisaged. Only substantial growth each year and end term bonuses.
PA Rider may be considered for Surplus Share
END
QUESTIONS & ANSWERS?s
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