Challenges of insurance in middle east

8/9/2019 Challenges of insurance in middle east

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Chapter-1

Introduction

It is a common belief in all the religions that whatever is created will be destroyed. The universe

as a whole is created; as a thing created it is but natural that it will be destroyed. Creation isinevitable followed by destruction. Destruction is an optimum change to the worse; in that sense

change is a natural course and its occurrence involves risk. Risk is therefore inevitable in life.

Business is a course of life; so in life and business there lie a variety of risks. Risk is closely

connected with ownership. The owners want to save themselves from risk and out of this desire,

the business of insurance born.

The aim of all insurance is to protect the owner from a variety of risks which he anticipates. He

who seeks this protection is called the assured or insured and the other person who takes the risk

by undertaking to protect that other from loss is called the underwriter or insurer and he does this

for a small consideration called as the premium. So a contract of insurance may be defined as acontract whereby one person, called the insurer, undertakes in return for the agreed

consideration, called the premium, to pay to another person called assured, a sum of money or

its equivalent on the happening of a specified event.

Life insurance

In England, even before the mortality tables were available, mutual life assurance was prevalent

in the 17th century commencing with short term insurances and all these mutual offices

disappeared with the passing of the Bubble Act 1720. Only the Amicable Society survived. It

was started in 1705 and its business increased by 1757. In 1807, a fresh charter was obtained andthe Amicable Society thereafter transacted life insurance according to modern methods. For a

number of decades, it was the only society which offered life insurance. In the meanwhile,

mortality tables were prepared which made it possible to do profitable and scientific life

insurance business. Towards the end of the 17th century the requirement of insurance business

was done away with when the life insurance business became a way for gambling. To check this

evil, Life Insurance Act 1774 was passed. Then came big joint stock companies which started

business on sound and scientific principles. Protective legislations like the Policies of Assurance

Act 1867, and the Life Assurance Companies Act 1870 were passed. The Act of 1867, which

regulated the life insurance business, was repealed and replaced by the Assurance Companies

Act 1909 and the legislation now in force is in the Insurance Companies Acts, 1958-67. In thelater years, ordinary life business was extended to accident insurance and further by industrial

and technological advancements to industrial insurance. Instances of this branch can be found in

liability insurance such as engineering, motor vehicles and aviation insurances.

In India, the known history of life insurance commenced in 1871 with the starting of the Bombay

Mutual followed in 1874 by the oriental, both in Bombay. There was a steady growth from 1870


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to the beginning of this century as many other life offices were established in India. The history

during the first half of his century may, for purpose of convenience be divided into the following

periods:

1. Period of Mushroom growth( 1900-1912)2. Period of Struggle and Steady growth(1913-1938)3. Period of Stability and Consolidation (1938-1950)4. Period of Boom and Nationalisation (1950 up to date).

History of Insurance in India:

The Oriental Life Insurance Company, the first corporate entity in India offering life insurance

coverage, was established in Calcutta in 1818 by Bipin Behari Dasgupta and others. Europeans

in India were its primary target market, and it charged Indians heftier premiums. The Bombay

Mutual Life Assurance Society, formed in 1870, was the first native insurance provider. Other

insurance companies established in the pre-independence era included

Bharat Insurance Company (1896) United India (1906) National Indian (1906) National Insurance (1906) Co-operative Assurance (1906) Hindustan Co-operatives (1907) Indian Mercantile General Assurance Swadeshi Life (later Bombay Life)

The first 150 years were marked mostly by turbulent economic conditions. It witnessed, India's

First War of Independence, adverse effects of the World War I and World War II on the

economy of India, and in between them the period of world wide economic crises triggered by

the Great depression. The first half of the 20th century also saw a heightened struggle for India's

independence. The aggregate effect of these events led to a high rate of bankruptcies and

liquidation of life insurance companies in India. This had adversely affected the faith of thegeneral public in the utility of obtaining life cover.

The Life Insurance Act and the Provident Fund Act were passed in 1912, providing the first

regulatory mechanisms in the Life Insurance industry. The Indian Insurance Companies Act of

1928 authorized the government to obtain statistical information from companies operating in

both life and non-life insurance areas. The subsequent Insurance Act of 1938 brought stricter


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state control over an industry that had seen several financially unsound ventures fail. A bill was

also introduced in the Legislative Assembly in 1944 to nationalize the insurance industry

Nationalization

In 1955, parliamentarian Feroze Gandhi raised the matter of insurance fraud by owners of privateinsurance companies. In the ensuing investigations, one of India's wealthiest businessmen, Ram

Kishan Dalmia, owner of the Times of India newspaper, was sent to prison for two years.

Eventually, the Parliament of India passed the Life Insurance of India Act on 1956-06-19, and

the Life Insurance Corporation of India was created on 1956-09-01, by consolidating the life

insurance business of 245 private life insurers and other entities offering life insurance services.

Nationalization of the life insurance business in India was a result of the Industrial Policy

Resolution of 1956, which had created a policy framework for extending state control over at

least seventeen sectors of the economy, including the life insurance. The company began

operations with 5 zonal offices, 33 divisional offices and 212 branch offices.

Life Insurance Corporation

The Life Insurance Corporation of India (LIC) is the largest life insurance company in India

and also the country's largest investor.; it is fully owned by the Government of India. It also

funds close to 24.6% of the Indian Government's expenses. It has assets estimated of 8 Trillion

Rupees (or about $170 Billion dollars). It was founded in 1956.

Headquartered in Mumbai, which is considered the financial capital of India, the Life Insurance

Corporation of India currently has 8 zonal Offices and 101 divisional offices located in different

parts of India, at least 2048 branches located in different cities and towns of India along with

satellite Offices attached to about some 50 Branches, and has a network of around 1.2 million

agents for soliciting life insurance business from the public.

Current status

Over its existence of around 50 years, Life Insurance Corporation of India, which commanded a

monopoly of soliciting and selling life insurance in India, created huge surpluses, and

contributed around 7 % of India'sGDP in 2006.

The Corporation, which started its business with around 300 offices, 5.6 million policies and a

corpus of INR 459 million (US$ 92 million as per the 1959 exchange rate of roughly Rs. 5 for aUS $ , has grown to 25000 servicing around 180 million policies and a corpus of over INR 8

trillion (US$ 173 billion).

The organization now comprises 2048 branches, 109 divisional offices and 8 zonal offices, and

employs over 1,002,149 agents. The corporate Office of LIC is in Mumbai. It also operates in 12

other countries, primarily to cater to the needs of Non Resident Indians.


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With the change in the India's economic philosophy from the early 1990s, and the subsequent

relaxation of state control over several sectors of the economy, the monopolistic position of the

Life Insurance Corporation of India was diluted, and it has had to compete with a number of

other corporate entities, Indian as well as transnational Life Insurance brands. However, it still

manages to be the largest player in the Indian market, with the lion's share of 55%.

The recent Economic Times Brand Equity Survey rated LIC as the No. 1 Service Brand of the

Country.

In the financial year 2006-07 Life Insurance Corporation of India's number of policy holders are

said to have crossed a whopping 200 million (fourth in terms of population of the countries of

the world)

Objectives of LIC of India

Spread Life Insurance widely and in particular to the rural areas and to the socially and

economically backward classes with a view to reaching all insurable persons in the country and

providing them adequate financial cover against death at a reasonable cost.

Maximize mobilization of people's savings by making insurance-linked savings adequately

attractive.

Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose

money it holds in trust, without losing sight of the interest of the community as a whole; the

funds to be deployed to the best advantage of the investors as well as the community as a whole,

keeping in view national priorities and obligations of attractive return.

Conduct business with utmost economy and with the full realization that the moneys belong to

the policyholders.

Act as trustees of the insured public in their individual and collective capacities.

Meet the various life insurance needs of the community that would arise in the changing social

and economic environment.

Involve all people working in the Corporation to the best of their capability in furthering the

interests of the insured public by providing efficient service with courtesy.

Promote amongst all agents and employees of the Corporation a sense of participation, pride and

job satisfaction through discharge of their duties with dedication towards achievement of

Corporate Objective.


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Chapter-2

Insurance in Middle East

The countries which come in Middle East are mainly consisting of Arabic countries where the

majority of population is of Muslims and the law which mostly runs is of mainly Shariah basedwhich is the law to be compulsorily followed by Muslims. The countries which come in Middle

East are:

1. Saudi Arabia2. Iran3. Iraq4. Jordan5. UAE6. Muscat7. Yemen8. Kuwait9. Qatar10.Bahrain11.Oman

Why is insurance forbidden in Islam?

Takaful is an Islamic insurance concept which is grounded in Islamic muamalat (banking

transactions), observing the rules and regulations of Islamic law. This concept has been practiced

in various forms for over 1400 years.

Islamic references to Takaful:

These fundamentals are based on the sayings of the Islamic prophet Muhammad. Based on the

hadith and Quranic verses mentioned below, Islamic scholars had decided that there should be a

concerted effort to implement the Takaful concept as the best way to resolve these needs. Some

of the examples are:

Allah will always help His servant for as long as he helps others.

Basis of Responsibility The place of relationships and feelings of people with faith, betweeneach other, is just like the body; when one of its parts is afflicted with pain, then the rest of the

body will be affected.

One true Muslim and another true Muslim is just like a building whereby every part in it

strengthens the other part.


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Basis of Mutual Protection By my life, which is in Allahs power, nobody will enter Paradise if

he does not protect his neighbour who is in distress.

The basic fundamentals underlying the Takaful concept are very similar to co-operative and

mutual principles, to the extent that the co-operative and mutual model is one that is accepted

under Islamic Law."

Some Muslims believe insurance is unnecessary, as society should help its victims. Muslims

can no longer ignore the fact that they live, trade and communicate with open global systems,

and they can no longer ignore the need for banking and insurance. Mr. Aly Khorshid

demonstrates how initial clerical apprehensions were overcome to create pioneering Muslim-

friendly banking systems, and applies the lessons learnt to a workable insurance framework by

which Muslims can compete with non-Muslims in business and have cover in daily life. The

book uses relevant Quranic and Sunnah extracts, and the arguments of pro- and anti-insurance

jurists to arrive at its conclusion that Muslims can enjoy the peace of mind and equity of an

Islamic insurance scheme."

Principles of Takaful:

The principles of Takaful are as follows:

Policyholders cooperate among themselves for their common good.

Every policyholder pays his subscription to help those that need assistance.

Losses are divided and liabilities spread according to the community pooling system.

Uncertainty is eliminated in respect of subscription and compensation.

It does not derive advantage at the cost of others.

Theoretically, Takaful is perceived as cooperative insurance, where members contribute a certain

sum of money to a common pool. The purpose of this system is not profits but to uphold the

principle of "bear ye one another's burden." Commercial insurance is strictly not allowed for

Muslims as agreed upon by most contemporary scholars because it contains the following

elements:

Al-Gharar (Uncertainty)

Al-Maisir (Gambling)

Riba (Interest)

There are three (3) models and several variations on how takaful can be implemented.

Mudharabah Model


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Wakalah Model

Combination of both

Why is conventional insurance not permissible in Islam?

Conventional insurance contains elements contradictory to Islamic Shariah.

Gharar: Uncertainty

The insurance contract contains uncertainty due to:

Uncertainty whether the payment will be accepted as promised

The amount to be paid is not known

The time it will occur is not known

Any form of contract which is lopsided in favour of one party at the expense and unjust loss to

the other is classified as Gharar.

When a claim is not made the insurance company may acquire all the profits whilst the

participant may not obtain any profit whatsoever. The loss of premiums on cancellation of a life

insurance policy by the policyholder, or the "double standard" condition of charging a customary

short period in general insurance, whilst only a proportional refund is made if the insurance

company terminates the cover is also considered as unjust.

Maisir: Gambling

The participant contributes a small amount of premium in hope to gain a large sum

The participant loses the money paid for the premium when the insured event does not occur

The company will be in deficit if claims are higher than contributions

When a life insurance policyholder dies after only paying part of the premium his dependants

receive a certain some of money which the policyholder has not been informed of and has no

knowledge as to how and from where it has been derived.

Riba: Interests

An element of interest exists in conventional life insurance products - as the insured, on his

death, is entitled to get much more than he has paid

Insurance funds invested in financial instruments such as bonds and stocks contain and element

of Riba


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Mudaraba is an agreement between two partners where one party has the know-how, equipment

and manpower, and the other has financial strength. They join together to form a temporary

partnership to execute a specific project work, and agree on sharing the expected profit.

ISLAMICITY OF INSURANCE:

Insurance is an exchange contract. Ibn Abidin rejected it as it did not fit in the exchange

contracts known in Islam. The first phase of acceptance of insurance took place when the so

called Modernists became the trend-setters for Muslim society, particularly under the leadership

of Muhammad Abduh. A series of attempts were made to insert insurance into permitted

contracts and to prove its legality. A correspondent of Pakistan and Gulf Economists cites fatwa

(religious rulings) of prominent ulema (Islamic scholars) of different mazahib (Islamic schools of

thought) generally favouring insurance, and refuting the presence of riba (usury and interest),

mai'sar (gambling) and gharar (indeterminacy) therein. Another survey of fatwa for and against

the contract of insurance issued up to 1965 is given in Muslehuddin.

In its 1972 meeting the Islamic Studies Conference (ISC) considered eighty opinions on

insurance submitted by scholars worldwide, but adjourned without making final

recommendations, leaving the topic pending for.

Positions taken by scholars on insurance differ depending on their views regarding presence of

gharar, riba, and gambling in insurance contracts. Gambling and riba are condemned in the

Qur'an while condemnation of gharar is supported by (chained) Ahadith (Prophets rulings).

Insurance is blamed for gharar because, at the time of the contract, the insured are uncertain

about (i) occurrence of indemnity, (ii) amount accrued in case of indemnity, and (iii) the timing

of indemnity. But supporters of insurance argue that these matters are unknown only at the

individual level, while at the collective level, they are scientifically determined by statistical laws

of large numbers, actuary and probability. It would not be proper to prohibit it due to gharar at

the individual level.

Gharar inherent in the contract of insurance is condoned under the doctrines of darura (necessity)

and mosalahah (public interest). The scholars emphasizes that the present system of wealth

creation and the present level of civilization is simply inconceivable without recourse to

insurance. Insurance is important, he argues, for the smooth flow of business activity and

production processes; large-scale supply of capital; availability of goods requiring a long

production period; and reduction in cost of goods. Others argue that insurance is a hedging

against misfortunes through personal means rather than relying on the public means or family

support, which may not be realised.

Insurance is declared mai'sar because the policy holders are seen to bet premiums on the

condition that the insurer will make payment (indemnity) on the happening of a specified event.

The advocates of insurance argue that insurance is the contract of indemnity, which is altogether


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different from gambling. A specified event must occur by the appointed time and one of the

parties must win or lose in gambling. In the case of insurance, the specified event may or may

not happen during the policy period. But the indeterminacy of event used to disclaim gambling

can be cited as a reason for gharar. Moreover, the insured holds a specific financial interest,

called insurable interest, in the subject-matter of insurance. He is entitled to compensation only if

he suffers any loss or damage and indemnity is limited to the actual loss or damage. In gambling,

the parties have no other interest than the sum to be won or lost by the determination of an event.

They further argue that the act of gambling creates a new risk while insurance tries to manage

inherent, though predictable, risks to make losses bearable to the individuals susceptible to such

risks. The risk of financial loss courted by a gambler can be avoided if desired, but the inherent

risks cannot be avoided. Insured persons seek protection against the financial loss which may

result from such risks.

Riba refers to transactions involving unequal exchange of the same thing. Insurance is viewed as

unequal exchange of money in premiums and compensations. In fact, money paid in premiums,

never equals the money received in indemnity. The insured receives less or nothing, as the case

may be, in exchange of the premium when (i) he withdraws the policy, (ii) defaults on premiums,

(iii) does not experience peril deserving indemnity and (iv) the insurance contract is declared

void due to any other reason. Moreover, compensation received from insurers may be far greater

than the premiums if a peril strikes. So riba accrues to the insured if the indemnity is more than

the premium and to the insurers when compensation is nil or falls short of premiums. Therefore

insurance contract, interpreted as exchange of money, cannot be free from riba. Moreover, there

is riba beyond the riba embedded in the insurance contracts since the premium is invested by

insurers in interest-bearing securities.

The advocates of insurance argue that there is no riba in insurance because neither is the

premium a loan nor compensation a returning of the loan with an incremental amount. The

money received in claim by the insured neither depends on the elapsed period nor on the total

money in the premium. The amount actually depends on the extent of financial loss incurred in

consequence of a peril. Such increment is not riba.

It is also argued that individuals engage in riba transactions with the sole purpose of monetary

gains. Insurance is a systematic pooling of individual resources to cover collectively the expected

inherent risks of loss that each and every member faces. The purpose of an insurance policy is to

protect, not to enhance, the financial position of the insured.

Insurance is also considered unlawful because the compensation is given to nominees, which is

contrary to the Islamic laws of inheritance.

Qur'an ordains compensation including monetary benefits to the victim's family for killing

someone by mistake. Therefore, in principle, there is no harm in obtaining monetary gains

against this death of a family member which seemingly justifies conduct of life insurance. In


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fact, liability insurance covering compensation to victims of (say) accidents shall be made

compulsory in Muslim countries to ensure compliance with the Qur'anic injunction, particularly

when damage is done by the financially weak or runaway aggressors.

Insurance is also an essential part of banking and international trade transactions. For instance,

banks do not negotiate the international bills of exchange unless the goods are insured againstMarine insurance and do not finance large industrial projects without an insurance arrangement.

Omar Farrukh argues that "insurance may be equated with an agreement between two parties in

which one gives a guarantee to the other regarding some property in possession of the other

against its perishing, undergoing startling degradation or deviating from its normal course of

development Islam admits some aspects of this guarantee." Obviously, if insurance is viewed as

a contract of guarantee, rather than an exchange of money, then it is absolved of contractual riba.

However, commercial insurance has been generally condemned while mutual insurance,

organised as a private or a public venture, is commended. Commercial insurance is condemnedbecause insurers are alleged to "profit out of the weakness of individual insures". But, barring the

profit motive, mutual and commercial insurance are not very different. Profit-seeking activities

are not prohibited in Islam. Moreover, insurance performs security functions similar to zakah,

although to different categories of people. As managers of zakah are entitled to remuneration

from zakah fund then, in principle, the managers of insurance should not be denied profits for

performing insurance services.

In a nutshell, insurance itself is not contrary to Islam. However, the conduct of insurance is

suspect mainly on account of gharar, riba and gambling.

III. PRINCIPLES AND PRACTICES OF TAKAFULS:

As noted above, all banks require insurance on their financing transactions. Success of Islamic

banks has encouraged them to establish their own takafuls which, among other things, lend

greater credibility to their banking operations.

Takaful is an alternative form of insurance. Consequently many of the principles and practices of

insurance equally apply to takaful. Takafuls cover general as well as life insurance.

According to the CIIP, if the premium is considered debt then all principal amounts must be

returned and if it is considered investment then profits of some participants cannot be diverted in

favour of others.

In sum, in case of general insurance, there is no substantive difference between tabaru and

premium from the insured point of view as the entire contributions of the participants are treated

tabaru, like premium in insurance. The contributions, like premium, depend on the value of the

property to be covered. But, unlike insurance, takaful participants are entitled to surplus in the

tabaru fund, if any.


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Islamic life insurance is organised in the name of family takaful by the STMSB, Solidarity

Mudarabas by the IICG (Islamic Investment Company of the Gulf) and the ITCL (Islamic

Takaful Company Luxembourg), and by the IICS. Premiums, unlike insurance, are determined

by the participants themselves depending on their financial strength. Installments paid by the

participants are divided into takaful, also called tabaru, account and participants' mudaraba

investment account by the STMSB, the ITCL and the ITCB (Islamic Takaful Company Bahrain).

The proportion for tabaru fund, like insurance, is calculated on actuarial basis which varies

according to the age and participation period of the participants. In the case of ITCL, 2.5 percent

to 10 percent of installments go to takaful fund and the balance goes to the mudaraba investment

account of the participants.

Insurance benefits are paid from the tabaru fund. Participants pledge to make additional

contributions if the takaful fund proves insufficient. However, in reality, companies prefer to

carry such deficits forward till the takaful fund enjoys surplus. In the meanwhile, companies

finance the deficits on the basis of interest-free loans.

Participants are entitled to reimbursements upon maturity, withdrawal and, in some cases, upon

disablement. U pon, death of a participant, his heirs is entitled to takaful benefits. The takaful

benefits are reimbursed according to the Islamic inheritance laws. Benefits are payable to the

nominees, in case of STMSB, as under insurance contracts because the nominees are considered

trustees of the heirs of the deceased participants. If a participant lives till the maturity of the

takaful contract, he is entitled to all his mudaraba investment including its profits. In addition,

the STMSB pays net surplus from the tabaru account as well. The CIIP did not deliver any

judgement on the STMSB due to lack of information. But the STMSB model will be disqualified

on the same basis as the IAIC has been.

If a participant withdraws before the maturity of contract then the money in the investment

account is paid as surrender benefits. However, participants may withdraw only after

participating for a minimum of two years in the case of ITCL and IICG. In the case of IICG,

withdrawing participants have to relinquish 5 percent of their account in consequence of a

sudden withdrawal. This money is, reinvested in favour of other participants.

If a member is disabled, the IICS waives future installments and pays all the benefits to the

disabled participants out of the mudaraba profits of the participants. In the case of the death of a

participant, his heirs are entitled to full value of the deceased participant's share in the mudaraba

investment account plus money equal to all unpaid installments, due to be paid in future if helived, from the takaful account. In the case of the IICG, the solidarity benefits are paid only if not

less than a year has elapsed, installments were paid regularly, and no withdrawal request has

been made.


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In the case of family takaful in the STMSB, tabaru contribution varies, like the insurance

premium, with the length as well as the maturity of the takaful plan. Calculation of tabaru, like

premium, is based on the principles of actuary. The takaful companies satisfy themselves

regarding the health condition of the clients. Installments are to be paid in advance as, premium.

Participants can withdraw from the takaful schemes after a specified period, as in the case of

insurance, but their contributions to tabaru, like the insurance premium, are forfeited.

Like insurance, takaful is concerned with uncertain future events which produce losses; and the

special legal rules governing insurance contracts similarly apply to takaful. Participants cannot

interfere with the management activities as the management assumes full authority. However, if

a loss occurs due to disrespect of mudaraba conditions, the takaful companies will bear those

losses.

Takaful, like insurance, is based on the principles of insurable interest, indemnity, subrogation,

and utmost good faith. The utmost good faith clause is required for the disclosure of all material

facts, a condition commended in Islam. Unfortunately, insurers misuse it arid try to avoidcontracts. Subrogation entitles insurers to claim from a third party on behalf of the insured.

Indemnity implies that a claim can be made only to the extent of actual financial loss to the

insured. Indemnity and subrogation together ensure compliance with the requirements of

insurable interest. Insurable interest itself ensures that a client can obtain insurance only if

susceptible to loss for which insurance in sought. Takaful companies perform entrepreneurial

and managerial tasks. But management of takaful funds, unlike insurance premiums, is kept

separate from the management of shareholders' funds. Even the rules to resolve takaful disputes

are similar to those for insurance. All takaful companies have recourse to reinsurance companies.

In insurance, any insurance surplus becomes profit of the company (shareholders) while takaful

surplus is shared between the participants and the management (company) in the prescribed

ratios.

Takafuls do buy reinsurance, like these insurance companies, because existing retakaful

companies are very few and too new for handling the entire retakaful needs of existing takaful

companies. However, the takaful companies deal with them on a net basis in order to minimise

their indulgence in riba practices of reinsurers.

In sum, takafuls are different from insurance in several respects. Takaful differs from

conventional insurance in the sense that the company manages and employs the funds for

investment, business and administration on behalf of the participants. Profits attributed to theparticipants' funds are shared between the takaful company and the participants according to an

agreed formula. In case of insurance, the premium funds become property of the company and

any profits or losses go to the company's account.


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The takafuls need to invest funds in long-term as well as in short-term avenues to match their

liquidity requirements. Takaful companies, unlike insurance, certainly face difficulties in making

short-term investments on and interest-free basis. Otherwise, the takafuls and the insurance

companies are at liberty to employ funds in projects of their choice. Therefore, one may

conclude that the takaful companies primarily operate on similar lines as insurance companies,

although they may have to select only halal projects to meet Shariah requirements.

IV. COMPARISON OF CIIP MODEL AND EXISTING TAKAFULS

The 1984 report of the CUP maintains that premium is paid against an insured sum making the

insurance contract an exchange contract. The insurance contracts contain prohibited elements

including gharar, gambling and riba. Therefore, "insurance in all its forms, except postal

insurance in Pakistan, is wrong, wicked, unlawful, prohibited and unenforceable".

According to the CIIP 1984 report, cooperative insurance based on tabaru, ta'awan, tadhaman,

and takaful containing, among others, the following characteristics would be lawful: (i) when aninsured is paid a certain sum at the happening of an incidence, the sum paid is considered tabaru

from all the Insured. In such cases, the presence of gharar is accepted, (ii) as cooperative

insurance is not meant to receive profit so gambling and riba will not be present hi it, and (iii) the

insured are eligible for receiving qard al-hasan from the insurance fund. As pointed out earlier,

the CIIP has also discarded existing takafuls which are considered Islamic alternatives to

insurance. The CIIP has recommended a takaful model which is claimed to be "in complete

agreement with Islamic teachings". But, there are striking similarities between the existing

takafuls and the model proposed by the CIIP. To avoid repetition of conditions discussed earlier,

only the distinguishing features of the CIIP model are presented here.

The CIIP recommended that the takaful business shall be conducted by an autonomous, non-

profit, state organisation. The takaful fund be established,' as in other takafuls, and it shall be a

permanent fund, with the status of a waqf (endowment). Installments paid by the participants

towards short-term general insurance will be added to the takaful fund. Installments paid for

long-term insurance plans will be divided into mudaraba (or musharakah) investment and takaful

contributions. Contributions of participants to the takaful fund shall be non-refundable, although

they shall be entitled to receive indemnity and compensation from the fund. Administrative

expenses for the fund be covered from the profits on the mudaraba investments It is also

recommended that a specified percentage of the takaful fund be reserved for assistance of

deserving non-participants. The CIIP recommends state-run insurance which is all right in principle, but is doomed to failure in reality. State-run enterprises are notoriously inefficient.

This fact is apparent from the collapse of the socialist system and the rise of privatisation in most

countries including Pakistan. That is why, perhaps, the CIIP in its 1992 recommendations

showed flexibility regarding private insurance provided the Shariah compatibility of its

operations is guaranteed. Given the disappointing performance of state enterprises, it would be

better to encourage private takafuls with necessary monitoring by the state.


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From an operational viewpoint, the CIIP recommendations do not make any headway toward

changing the character of takafuls or enhancing their Islamicity. Therefore, some measures are

proposed in the following section which, if adopted, shall improve the Islamicity of takafuls.

V. RECOMMENDATIONS FOR ISLAMISATION OF TAKAFULS

As discussed above, insurance is criticised due to riba, gharar and gambling. Judging takafuls on

the criteria of these prohibitions, it is clear that riba resulting from investment of insurance funds

through interest-based channels is completely eliminated. There is an additional improvement as

the takaful funds are employed into halal activities only while insurance investments are partly

channeled into haraam industries like casinos and liquor businesses.

Takafuls, like insurance, contain riba because the contracts can still be interpreted as an unequal

exchange of money. Besides, indeterminacy regarding installments, and timings and accrual of

indemnity and resemblance to gambling remain intact. In other words, elements, of contractual

riba, gharar and gambling still exist in takafuls. Even the CIIP model is not absolved of theseobjections since its operational aspects are identical to the takaful operations. Few modifications

are proposed here which, if incorporated, will enhance the Islamicity of the takaful operations.

Takaful and insurance provide cover for defined losses only to the participants in exchange of

premium payments. The spirit of community cooperation is not imparted in the takaful contracts.

Since indemnity is paid only up to defined monetary limits, which may or may not be sufficient

to repair damages of the victims. Moreover, only the contributors to the tabaru, like the insured,

are entitled to obtain indemnity and benefits out of the tabaru. If the tabaru is different from

premium, then it shall also be accessible to other members in the community who cannot afford

to buy takafuls. Therefore, takafuls, like insurance, are business deals devoid of community co-operation.

Contracts of takafuls, like insurance, are prone to disputes among the insured and the insurers

whenever a peril strikes. Disputes result because the hope of monetary gains supersedes the

principles of honesty. Each party tries to shift the incidence of risks, even through legal battles,

by finding faults with the other party. The onus of proving that the loss was caused by an insured

peril rests upon the insured. The onus of proving that the loss was caused by an excepted peril

rests upon the insurer. It is generally held that even an innocent misrepresentation of a material

fact is no defence to the insured, if the insurer elects to avoid a contract.

The insured are required to disclose all material facts at the time of signing a contract. At the

occurrence of an eventuality, the insurers could get the contracts void if it is found that certain

facts were not disclosed even due to an innocent mistake or unintentionally. Insurers try to pay

the minimum amount within the liability limit stipulated in money terms. Therefore, if the

compensation required to cover intended loss rises due to inflation, then the insured is not fully

indemnified.


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In fact, following the prohibitions of riba, gambling and gharar would minimize business

disputes and, thus contribute to justice in the society. One may differ on the extent of these

prohibitions in takafuls and insurance, but, no one can deny that disputes are rampant. In fact,

whenever a claim is filed, the insurers actively search for loopholes and excuses to avoid

payment of compensation, while the insured actively manipulate and forge information in order

to claim the maximum possible compensation. In addition, an insured may walk out of takaful

contract after recovering indemnity, leaving others to bear the unpaid losses which make the

contracts inequitable. It is, therefore, desirable to modify the character of takafuls to minimize

disputes related with claims and compensations.

The aim of takaful, as well as insurance, is to combat loss on a self-supporting basis, although

their approach is a bit different. It is proposed here that the mechanics of self-support shall be

modified along the following lines.

First, the participants who incur claims, in excess of their contributions, shall be required to

continue their usual payments until the excess received in indemnity is fully refunded to thetakaful. The difference between the contributions and the compensations may be treated as; qard

al-hasan to the participants. If the insured dies before the payment of the qard then his heirs must

bear the responsibility to clear it. The idea is that the participants should not have the incentive to

shift the risk of loss to others although they can postpone unbearable losses. In fact, the adoption

of the risk-bearing model would reduce exaggerations in claims by the participants as they

cannot obtain material advantage on account of shifting burdens. The provision of qard al-hasan

certainly represents the spirit of cooperation and also eliminates the possibility of gambling

through takaful.

It is worthwhile to note that, in certain cases, participants may not have the ability to pay backthe entire debt. Such participants may be given relief from the tabaru funds in a spirit of

cooperation in consideration of his inability to pay the debt, but not as a right in exchange of;

premium payments. Such support can also be extended from the zakah fund. In other words,

zakah funds of the company maybe utilised to assist those participants who do not have the

ability to bear losses. Similarly, assistance may be given to non-participating deserving

individuals from the tabaru fund, rather than reserving it exclusively for the benefit of the

contributors to the tabaru only.

Second, the indemnity shall be to the extent of the actual loss in property and not, as practised

currently, in the form of money units to the extent of monetary limits stipulated in the contractsamong the insured and the takaful companies. There are several ways by which an insured can be

indemnified: by cash payment, repairs, replacement, and reinstatement. It is proposed here that,

wherever possible, the indemnity be made in kind only in the form of necessary goods and

services to the extent of the loss up to the insured interest. Otherwise, the insured may remain

deprived of appropriate indemnity, particularly, in the face of inflation. This condition will

eliminate the possibility of contractual riba from takafuls as this would mean exchange of money


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with commodities, rather than money with money. In addition, the participants would be certain

to obtain replacement of their real losses so that the extent of gharar, compared with the current

practices of takafuls, will be lessened. Gambling cannot take place under the proposed

amendments as individual participants would have to continue to bear all their losses.

In sum, under the present system, policyholders, in takaful and insurance, have the incentive toshift incidence of risks to others. The object of the above proposals is to remove that incentive by

incorporating risk-bearing conditions and, thus, to eliminate risk-shifting which causes disputes.

Conditions of risk-bearing and indemnity in kind will change the character of existing takafuls

and free them from the odium of contractual riba, gambling and, to some extent, gharar.

An Islamic Critique of the Modern Economic Theory of Insurance

An insured's economic decision in the purchase of insurance is based on an utility criterion ,which denotes a positive function of his expected savings, i.e. future benefit payment, and adeclining function of the expected risk of all other members in a group. The insured's utilityfunction is, however, not a decreasing function of his own risk, because this is assumed to becompensated for by the realisation of the benefit payment. Therefore, through the principle thatthe insurer maximises his own utility function in risk and return, subject to holding the totalpooled risk constant, the insured is made to pass on his risk coverage to another's shoulder in thegroup, in return for premiums. The premium rates are, therefore, estimated to be large enough tocover the cost of benefit payment.The premium income builds up the policy reserves that cover the total risk. On top of this thepremium income is also subsequently invested in a fairly riskless combination of short- and long-term assets to yield a sufficiently high rate of return. The returns are used in reserveaccumulation and for dividend payment to policy holders and management. These investmentstake the form of corporate bonds, mortgages, direct loans to business firms, preferred and

common stocks, federal, state and local government bonds, real estate, and direct equityinvestments through partnerships in various enterprises.

(a) Life Insurance

Let us look at this picture of modern insurance functions from an Islamic perspective. First, theindeterminateness of risk is clearly in the picture. The mortality used to set up total reserves has abuilt-in allowance for mortality rates higher the experience has shown to be realistic. This is dueto the use of total mortality rates opposed to age-specific and sex-specific mortality rates ofindividual life policy. Consequently, the margin of difference between the policy reserve and thetotal reserve must be made up in the aggregate by premium loadings and the interest returns on

the investment of premium income.


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This type of premium and reserve construction implies two things:

(1) increasing cost of life insurance over and above that projected by the use of pure premiums(without loading), and the subsequent increase in profits for the insurer;

(2) The indeterminacy of the exact number of payments of premiums up to the time that risk oflife is realised, and consequently, the Islamic voidance of the life insurance contract.

The mode of accumulation of insurance reserves and unassigned surpluses contradicts theIslamic principle of financing on two grounds:

(1) Level premium in the absence of a determinate Islamic financial contract as explainedabove, plus the long-term investment in real assets to earn interest, are both Riba;

(2) Long-term promissory delivery of monetary value (insurance value) as in the case ofwhole life insurance policies is inadmissible in Islamic perspective, both from the point of view

of indeterminacy of risk as well as the subjective real cost of capital.

(b) Group Life Insurance

Group life can operate both on a contributory (employees contribute voluntarily to buy additional protection) as well as on a non-contributory basis. When the group life is of a purely non-contributory type, i.e., the employer pays all the cost of insurance for a group of employees, itcan be categorised under the Islamic contract of "Hiba", i.e., a simple gift type of contract.Furthermore, where group life is combined with group health insurance, the resulting insuranceplan in principle is all the more acceptable in Islamic perspective.

With contributory and non-contributory forms of group insurance existing side by side in anindustrial environment the employee has the option of participating in either of the two. Thus, between the employee and the employer group insurance can be developed as a co-operativeinsurance. Group insurance as a term insurance would call for a voluntary contribution to coverthe cost of protection on an annual renewable basis. This reduces the nature of risk to adeterminate phenomenon. Unused premiums can be invested in short-term riskless equities onthe principle of "Mudaraba", to earn a normal rate of profit. In this way, consequently, aminimum "waqf" is established, after dividends are declared to the policy holders annually. Thechance of undue enrichment by the insurance companies would be eliminated. All these wouldjustify group insurance as a valid Islamic financial contract.

In the Islamic perspective benefits from a non-contributory plan would be flat insuranceproceeds in the event of the occurrence of a stated contingency. Because the employer pays thecost of protection in this case, therefore, the benefits from the plan would remain independent ofthe earnings of various employees in the group. Benefits are thus distributed evenly through thegroup. This in turn would allow a broader coverage of the number insured in the group plan. Thisis what the dictates of equity would demand. In an Islamic perspective the nature of group


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insurance as mentioned herein must be extended universally in the industrial sector irrespectiveof one's earnings and professional category.

In contributory types of group insurance the employee can be considered as a shareholder in thecorporation. In Islamic perspective, the employee as a shareholder is entitled not only to the part

of the "waqf' built up by his contributions, but also to the return on these contributions net ofmeeting a minimum reserve requirement for the group insurance.

In contributory group insurance contracts, the benefits, both as insurance payment as well asdividend payment yearly would depend largely on the type of investment in which the employerputs the shareholder's contributions. The type of investments to be looked for would be those thatmaximise investment return, both on a short- and long-term basis, so that after dividends are paidout annually, a minimum reserve is maintained to payoff benefits when they become due. Theinvestments chosen must be as little risky as possible, so that a guaranteed level of "waqf"reserve can be maintained. This is possible through risk diversification in public and privatesector investments, particularly, in common stocks. This would be effective in Islamic

economies with their smaller speculative uncertainty of capital markets.

In an Islamic capital market such a risk diversification is effected through the institution of"Mudaraba", i.e., the profit and loss sharing system in joint Islamic entrepreneurial ventures. Ithas been shown by the author elsewhere, that a large corporation, such as a central bank,commercial bank, Investment Corporation and other large financial intermediaries in an Islamiceconomy, can diversify the risk not only of the joint entrepreneurs but also its own risk in capitalinvestment. It can do so because as a highly centralised form of public institution it has betterinformation about future risk and returns from an uncertain project. Also, by involving as manyprivate entrepreneurs as possible in joint investment ventures, the public authority can pass on asubstantial part of the total risk through the private sector to the tax payers or multiple firms.

This is the process of risk diversification.

The institution of Mudaraba, therefore, helps in maximising investment returns through marketforces, while it also minimises the riskiness of real investment through risk diversification. Inthis way the solvency of the "waqf" fund as a reserve fund for a group insurance is guaranteed.

We need to point out two points with regard to the nature of group insurance in Islamic perspectives. First, that the nature of a financial transaction over the waqf fund precludes theneed for an exclusive life insurance company selling group plans. Secondly, in the absence of anexclusive life insurance company to manage a group plan, the group insurance arrangement inthe Islamic perspective becomes a self-insuring arrangement.

Group and self-insurance in the Islamic perspective are special cases of the broader category ofinsurance known as mutual insurance. The Islamic principles of co-operation and riskdiversification through Mudaraba make mutual insurance the single most admissible form ofpooling risk. Other extended forms of this mutual insurance device are workmen's compensation,disaster insurance, and social insurance.


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Mutual Insurance in Islamic Perspective

By definition a mutual insurance company would be owned and controlled by policy holders.There would be no stockholders and, therefore, no capital stock. This would result in aninsurance arrangement where there is no profit for the insurer and all insurance is provided at

cost. This is the conventional idea of mutual insurance. Mutual insurance schemes could beaffected by two kinds of risk:

(1) Those which occur fairly regularly year by year.

(2) Those which occur irregularly over a period of years.

Mutual insurance would not cover contingencies which are fairly uncertain and remote in time,because in the Islamic perspective the mutual insurance would operate as a one-yearly renewableterm plan, with a pay-as-you-go method of financing. The first type of cost needs small reservesto be accumulated. In both cases a high level of liquidity and only short-term investment support

are required for mutual funds. Consequently, the problems of long-term financing, such ashedging against inflation, choice of long-run productive investments, automatic stabilisation ofeconomic downturns, do not inhibit the pay-as-you-go method of financing involved in mutualfunds.

In Islamic perspective the scope of mutual insurance is slightly different from that ofconventional mutual insurance. In the conventional system premiums are fixed, which istantamount to a pre-determination of risk. This point was discussed earlier. The annual proceedsfrom the premiums are not invested, i.e., the conventional mutual company does not have capitalstock, does not build up reserves, and does not have profits. In the Islamic perspective fixed premium is inadmissible replaced by the insured's own voluntary contribution. In the broader

case of mutual institutions there are Islamic injunctions to make the insured's contribution to themutual fund compulsory. The annual net reserves after deducting year benefit payments,administrative costs and dividends are invested in common pursuits permissible in Islam, so thata reasonable amount of accumulation mutual funds takes place to maintain the reserves.

(a) Workmen's Compensation

Islamic mutual insurance schemes can be effectively applied to workmen's compensation(industrial mutuals). The workman enters into a mutual sharing of price and risk with hisemployer by voluntarily contributing his premium to "waqf", gets in return a promise for wages,a dividend in proportion to the level of contribution, and compensation for work-place injury.

An argument is also made to form a collective where profits in different firms pooled. In thisway profit-sharing between the workmen and the single-employee firm is made independent ofthe employment condition of the firm, the expected profits of which would determine theworkers' employment prospects [20]. Real diversification would, therefore, be effected byestablishing a mutual fund involve the pooled risks of several firms.


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Direct profit-sharing plans by workers seem to have experienced a tremendous growth in theUnited States since the year 1950, particularly, because of favourable treatment of such plans andtheir participants in the corporate income tax laws [21]. In an Islamic mutual insurance scheme asimilar Zakah (Islam wealth tax) reduction would exist for the shareholders (policy holders) whomobilize their savings into real investment through the mutual fund.

(b) Community-Based Mutual Insurance.

At the community level the Islamic mutual insurance scheme comes closer to a social insurancescheme. Types of assistance under the mutual fund that could be available in this case would befinancing of programmes of human capital formation and self-employment assistance. Zakah isparticularly effective in this area, when the programme reaches the needy.

It is well known in the literature on manpower planning , that in the event of structuralunemployment, disguised unemployment and under-employment, monetary and fiscal policiesimplemented to improve the hard-core unemployment situation are not found to be effective.

This is due to the failure of macroeconomic policies in tackling problems that lie embedded at avery micro-level, as in the case of pockets of hard-core unemployed and disadvantaged. Now,since one of the expressed objectives of Zakah is to provide cash benefits, training and educationto the needy, it is found to be an effective instrument of alleviating the problems of thehard...core unemployed and disadvantaged.

It has been shown elsewhere that Zakah used for funding training programmes andunemployment assistance programmes is found to be associated with an income multiplier effect.For, as Zakah rate increases on real assets, it will cause holders of idle cash balances to put theminto productive use. Investment flow thus generated will cause income to increase through themultiplier effect. Increased investment on the other hand will create a higher labour force

participation rate.

Mutual insurance can, therefore, be used in certain short-run programmes of social assistance,leaving the long-run programmes to be covered by social security. In those cases Zakah would bea powerful instrument for financing the cost of the associated contingencies.

Organizational problems:Some of the most significant challenges to the fast-growing insurance industry in the MiddleEast and the UAE in particular were named as:

- Training and recruitment of insurance professionals, particularly among national population- Unprofessional practices among some smaller brokers- The problem of low premiums- Potential for more emphasis on risk management- Warehouse fires and poor safety standards- Need for more specialist judges for insurance especially in marine insurance and measures todissuade people from lengthy and costly court proceedings


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- The new rules on compulsory medical insurance- Marketing and public perceptions of insurance

Insurance is a lucrative industry but Saudi Arabia lacks enough qualified people to work in theinsurance sector.

"We do not get visas to recruit foreign manpower, therefore, we have to hire them locally fromother existing companies on higher salaries," he said, and added that his company has a staff of350 personnel in all its 10 branches of which 56 per cent are Saudis. He added that lack ofawareness about insurance was another major problem in the Kingdom. "Even if it is mandatory,some do come to know about auto insurance only when they go to renew their car registration atthe traffic department," he said, and added that his company has deployed a special team toexplain the values of the various insurances schemes available in the Kingdom among thepeople.

Regulatory Authorities

The first challenges, therefore, must be faced by the regulators. Regulation of insurance within

the GCC falls under diverse bodies such as the Central Bank in Bahrain; The Saudi Arabian

monetary Agency in KSA; Ministry of Commerce and industry in Kuwait; Capital markets

Authority in Oman; Financial Centre Regulatory Authority in Qatar; Ministry of Economy in

UAE.

Whilst all these bodies seek to regulate insurance, they have different structures, accountability

and policy objectives. A common feature, however is that all of them are members of the

International Association of Insurance Supervisors (IAIS). The IAIS sets out principles that are

fundamental to effective insurance supervision. These principles identify areas in which the

insurance supervisor should have authority or control and that form the basis on which standards

are developed.

. The Insurance core principles and methodology

Principles applicable to the supervision of international insurers and insurance groups and their

cross-border business operations (Insurance Concordat)

Principles for conduct of insurance business

Principles on the supervision of insurance activities on the Internet

Principles on capital adequacy & solvency

Principles on minimum requirements for supervision of reinsurers

The challenge therefore is for the GCC supervisory authorities to agree on application of these

principles and implement them in as uniform a fashion as possible.


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For example, in the area of capitalization, Bahrain, Qatar, UAE, and Oman have all set their

levels for direct insurers in the region ofUS$ 10 to 13 million whereas Kuwait is at the lower

end of the scale with US$564,000 and Saudi Arabia at the higher end with US$26.67 million. It

is to be noted that new legislation in Kuwait is expected to be enacted soon but the same could

not be said for KSA with its insurance regulations being relatively new (2004).

The amount of capitalization is perhaps the simplest and most readily available yardstick. More

important is the diverse approach to capital requirements. Some authorities impose a dynamic

risk management approach while others are more reliant on strict written rules and insist on fixed

minimums with fixed reserving policies.

Yet another divergence is in the structure, accountability and powers of the bodies themselves.

One of the core principles is that for the regulatory body to function effectively is that the

supervisory authority:

has adequate powers, legal protection and financial resources to exercise its functions andpowers

is operationally independent and accountable in the exercise of its functions and powers

hires, trains and maintains sufficient staff with high professional standards

treats confidential information appropriately

The respective national governments need to ensure that the above criteria apply to the body

which has been assigned the duty of an insurance regulator.

It is not the purpose of this paper to delve into a comparative study of the legislation, but simplyto highlight the challenge for regulators to build confidence in their functions, accountability and

powers not only from citizens in their own countries but also from citizens of the otherGCC

member states to whom their licensees will strive to sell their services. On the other hand, over-

regulation, or burdening the licensees with unnecessary compliance controls and restrictions, will

place them in a competitive disadvantage in the common market.

Financial environment

When integrating any financial services market, it is important to take into account the domestic

context, industry, structure and stage of development of the financial system and overallmacroeconomic conditions of each member state.

Areas under consideration would be consistent and reliable national monetary policy, a strong

functional banking sector, strict corporate governance rules, clear competition law, laws for the

incorporation of companies, rules for institutional investment and securities. These areas all

affect, in one way or another, the stability and security of the insurance enterprise itself which in

turn reflects on the quality and reliability of its products and services.


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Whilst strict harmonization of the financial system itself is not essential, each member state must

provide clear, equitable, transparent and enforceable rules as well as the economic environment

which helps insurance companies to operate in the interests of all stakeholders.

An interesting development in this regard is the single currency which is anticipated by 2010.

Until this is implemented, exchange rates may fluctuate if unilateral action is taken by any one ofthe member states and this may cause problems with the valuation of assets of an insurance

company. The fact that all but one of the currencies of the GCC states are pegged to the US

dollar and the fact that the dollar is a strong component of the basket of currencies for the

Kuwaiti Dinar is already a factor which contributes towards stabilization and valuation of

financial assets.

However, the trends in other non-financial assets, most notably immovable property may vary

and regulators need to be assured that insurance companies are not allowed to be over

enthusiastic about the property market within their own territory.

Another aspect which will have ramifications on the functioning of a truly common market for

insurance is the current status of rights to ownership of private property, ownership by non-

nationals in equity and access to each others capital markets. It is essential for an insurance

market to function effectively within a common market that the considerable number of barriers

in this area are removed.

Legal Framework

Insurance, as an industry, relies heavily on a transparent, consistent and predictable legal

framework.

Laws for the Prevention of Money Laundering , Electronic Commerce, Professional Secrecy,

Alternative Dispute Resolution, Distance Marketing, and Competition all need to be harmonized

and enacted where they do not exist. Needless to say, Laws must not only exist on the statute

book but must also be put in practice through national agencies and ministries with trained

professional staff.

Human Resources and Training

It is well known that the GCC states currently suffer from a severe shortage of skilled human

resources in the insurance industry who are GCC citizens. This need is being addressed withmany educational initiatives, positive discrimination in favour of nationals and quotas for

employment of nationals.

One needs to look closely into whether the affect of such schemes impede on an insurance

enterprises ability to mobilize its workforce from one member state to another. Under the rules


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of a common market, it would not be possible to keep laws of workforce nationalization as they

stand and labour.

Laws would need to be applied to all GCC nationals equally. Worker rights to social security

should be equally accessible and transportable between member states. By facilitating labour

movement, the end result would be a better mix of skills, increased productivity and morecompetitive pay packages for the GCC nationals.

Although there is freedom of movement of workers in between member states, it remains a fact

that in the short and medium term, insurance companies will need to employ non-GCC nationals

to maintain their competitiveness. Companies may face bureaucratic difficulties if their

workforce is predominantly non-GCC citizens for timely and quick issuance of visas for such

employees travelling on business from one state to another.

It is also essential that insurance personnel are trained in insurance principles and practice which

are consistent and common across theG

CC markets so that they can freely advise and provideprofessional services.

Competition

The main purpose of a common market is for member states to give access to each others

markets on a level playing field for all companies and individuals who are citizens in or are

incorporated in any one of the member state.

Therefore any restrictions or impositions that put up obstacles for insurance companies hindering

them from trading in another state would be illegal.

The first such instance that comes to mind is the current law in Saudi Arabia which allows only

insurance companies operating in a cooperative manner to carry on the business of insurance.

Furthermore, such companies must transact business in accordance with the principles of Islamic

Sharia.

This law is clearly discriminatory against companies which are incorporated under civil law and

which transact insurance in what has become known in this region as conventional insurance.

Effectively such companies incorporated outside KSA and licensed by their respective home

state are barred from transacting insurance business in Saudi Arabia. This is clearly going to be a

major stumbling block for the proper function of a common market in relation to insurance.

With the establishment of a common market, the GCC is also likely to see a major increase in

foreign direct investment. Competition among member states will be fierce to attract insurance

and financial services companies to establish themselves in one of the member states with access

to the whole region. Bahrain, Qatar and UAE (Dubai) have already been vying for this FDI with

their financial centres and legal frameworks. This important influx of business into the common

market must not be hindered by barriers thrown up by one or other member state.


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As companies learn how to take advantage of the benefits of the common market it is likely that

the insurance market will see some major restructurings and cross border mergers and

acquisitions. Current barriers and restrictions into stock ownership by foreign nationals and

companies in some of the member states will have to be withdrawn.

Regulatory Authorities

The first challenges, therefore, must be faced by the regulators. Regulation of insurance within

the GCC falls under diverse bodies such as the Central Bank in Bahrain; The Saudi Arabian

monetary Agency in KSA; Ministry of Commerce and industry in Kuwait; Capital markets

Authority in Oman; Financial Centre Regulatory Authority in Qatar; Ministry of Economy in

UAE.

Whilst all these bodies seek to regulate insurance, they have different structures, accountability

and policy objectives. A common feature, however is that all of them are members of the

International Association of Insurance Supervisors (IAIS). The IAIS sets out principles that are

fundamental to effective insurance supervision. These principles identify areas in which the

insurance supervisor should have authority or control and that form the basis on which standards

are developed.

The Insurance core principles and methodology

Principles applicable to the supervision of international insurers and insurance groups and their

cross-border business operations (Insurance Concordat)

Principles for conduct of insurance business

Principles on the supervision of insurance activities on the Internet

Principles on capital adequacy & solvency

Principles on minimum requirements for supervision of reinsurers

The challenge therefore is for the GCC supervisory authorities to agree on application of these

principles and implement them in as uniform a fashion as possible.

For example, in the area of capitalization, Bahrain, Qatar, UAE, and Oman have all set their

levels for direct insurers in the region ofUS$ 10 to 13 million whereas Kuwait is at the lower

end of the scale with US$564,000 and Saudi Arabia at the higher end with US$26.67 million. It

is to be noted that new legislation in Kuwait is expected to be enacted soon but the same could

not be said for KSA with its insurance regulations being relatively new (2004).

The amount of capitalization is perhaps the simplest and most readily available yardstick. More

important is the diverse approach to capital requirements. Some authorities impose a dynamic


26/27

risk management approach while others are more reliant on strict written rules and insist on fixed

minimums with fixed reserving policies.

Yet another divergence is in the structure, accountability and powers of the bodies themselves.

One of the core principles is that for the regulatory body to function effectively is that the

supervisory authority:

has adequate powers, legal protection and financial resources to exercise its functions and

powers

is operationally independent and accountable in the exercise of its functions and powers

hires, trains and maintains sufficient staff with high professional standards

treats confidential information appropriately

The respective national governments need to ensure that the above criteria apply to the body

which has been assigned the duty of an insurance regulator.

It is not the purpose of this paper to delve into a comparative study of the legislation, but simply

to highlight the challenge for regulators to build confidence in their functions, accountability and

powers not only from citizens in their own countries but also from citizens of the otherGCC

member states to whom their licensees will strive to sell their services. On the other hand, over-

regulation, or burdening the licensees with unnecessary compliance controls and restrictions, will

place them in a competitive disadvantage in the common market.


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Conclusion

Life Insurance has both short range and long range advantages. Primarily it encourages thrift in

the individual and serves to form capital. It protects the potential estate of the policyholder as

distinguished from acquired estate. It saves the insured from worry and makes him a little some

care worn. There is yet any other person who takes interest in the maintenance of the health ofthe assured. If everyone looks after his family, there will be no dependants on society and the

public expenditure and orphanages will be saved. By this insurance the family does not have to

depend upon the charity of the other people, relatives and government. The Middle East

population should also see that insurance is necessary for them also. Thus this insurance acts a as

backbone not permanently but they can survive themselves for time being, which is necessary to

them.

Documents

Challenges of insurance in middle east