Takaful Operations: Issues and Recommendations on Marketing Takaful Successfully

Azah Atikah Binti Anwar Batcha

Abstract

Islamic insurance, also known as Takaful, is the means of bringing both social and economic benefits of modern insurance coverage, in a form which is consistent with religious beliefs, to Muslims and to the emerging economies of many predominantly Muslim countries. Therefore, the development of Takaful is crucial, and to economic development in a number of countries with emerging market economies. It is therefore hardly surprising that the Takaful industry is undergoing a period of rapid growth. However, the development of Takaful is still facing formidable barriers that are largely due to the fact that the Takaful operators are not handling and marketing Takaful properly as expected by most. Most issues identified which hinder Takaful from being marketed successfully are stressed in this paper and recommendation for the future are provided. It is still long way to go for Takaful to be completely free from all the issues involved in its current practice. Thus, educating the public and maintaining Takaful operations properly by the operators are needed in order to cater the industry.

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Introduction

It is a natural fact in any society that everybody is exposed to all sorts of unexpected risks in his daily life. These risks may occur to one’s life, property or even business ventures. The main question which we should ask ourselves is that how do we prevent or help ourselves in such unfortunate events? One method in doing so is by practicing or applying concept of insurance. The main objective of insurance is to uphold, among parties involved, shared-responsibilities on the basis of mutual cooperation in protecting an individual against unexpected risks.

In addition to the need for raising the level of consumption of basic amenities in life, individuals need adequate and stable income from wage or self-employment, legal protection of their right to livelihood in the informal sector, and protection against natural disasters or social disruption (Getubig & Schmidt, 1992). They also need old age and child care, problems that have become more acute (Getubig & Schmidt, 1992).

However, in this paper, we shall discuss about the concept of Islamic insurance, which is also known as Takaful. We shall also discuss why Takaful operators are said to be merely mimicking what Insurance companies do. Apart from this, issues and recommendation on how Takaful operator could successfully market Takaful will also be address.

0.1 General Concept of Takaful

Islam establishes permissibility rule which is not unallowable (haram) except where it is prohibited by a sound and explicit rule from Quran or clear, authentic, and explicit Sunnah (practice or saying) of Prophet Muhammad S.A.W when it comes to business relationship among people (Iqbal, 2005). This applies to the concept of Insurance.

A Shariah- based insurance policy would never involve the unlawful elements1. In fact, it would be based on al-Mudarabah (profit and loss sharing financing technique). In this dealing, the participant pays contribution to the Takaful operator who runs a business with the accumulated money. Then, the profits earned from such transaction shall be shared by both the participant and operator accordingly (Billah M. M., 2003).

According to Billah (2003), an Islamic model of life insurance, the nominee is not an absolute beneficiary but a mere trustee who is under who is under an obligation to receive the benefits from the policy and distribute them accordingly among the legal heirs of the deceased in accordance with the principles of al-Mirath2 and al-Wasiyah3.

Covering ourselves in the event of our death could benefit our loved ones and our estate. However, depending on our policy, our benefits will vary from covering funeral costs and medical bills to paying any outstanding debts (Razak, 2009).

1 This elements includes Riba (interest), Maisir (gambling) and Gharar (uncertainty)2 An Arabic term which refers to what we called in English: Inheritance3 An Arabic term which denotes a Bequest

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Takaful is widely known from an Arabic word which means “guaranteeing each other”. Takaful is an Islamic insurance which are basically based from the concept of ta’awun4

and tabarru’ 5 whereby the risk that associated with it is shared among a group of people voluntarily (Ismail & Abdul Razak, 2010).

There are many reasons affecting the need of Takaful and Insurance according to Razak, (2009), such as:

(a) Income-replacement needs(b) Final-expense needs(c) Readjustment-period needs(d) Debt-repayment needs(e) College-expense needs(f) Government Benefits(g) Existing Insurance and Assets

According to Venardos (2006), in Malaysia, there are two forms of Takaful insurance which are explained below:

(i) General Takaful InsuranceThe types cover offered are fire, motor, accident, marine, personal accident, workers compensation and employers liability. The participant determines the amount for which he wishes to insure, and pays his Takaful contribution to the company. The amount of contribution is assessed on the value of the asset to be covered. The contract runs for one year and specifies that any profit will be shared in a given ratio if the participant does not make any claims. The company pools all contributions and invests them in halah investments. The participants agree that the company shall pay compensation from the general fund to any fellow participant who might suffer a loss, and also operational costs.

(ii) Family TakafulThis is an investment programme6 to provide halah investment returns to the participant as well as mutual financial aid. Individuals participate to save regularly a sum of money to provide for dependants if they should die prematurely, or as a contingency savings if they survive to maturity of the plan. The plan may be taken for terms of ten, fifteen or twenty years. Participants must be between the ages of eighteen and fifty years, and the plan must mature before the participant reaches sixty years.

4 It means Mutual assistance5 Gift, donation6 This is based on Mudarabah Principle. It is a partnership where one partner gives money to another to invest in a commercial enterprise (the rabb-ul-mal), whilst the management and work is the exclusive responsibility of the other (the mudarib).

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1.0 Sources of Law Affecting Takaful

An insurance policy remains valid if none of its aspects contravene the Shariah principles. Hence, every element of an Islamic insurance policy should absolutely be based from the Shariah. The sources of law affecting Takaful can be gained from the Holy Quran, Traditions of the Prophet (s.a.w)7, Analogical sources8, as well as its Principles of Contract (Billah M. M., 2001).

2.1 The Holy Quran

The Holy Quran and the Sunnah contemplate one community of faithful believers that have, over time, dispersed around the globe (Fisher, 2008). The belief in one God is the universal principles that offer harmony and unity to all humanity (Fisher, 2008). The Holy Quran lays down rules of personal behavior, manners toward others and relations with society in order to assure the believer a safe passage (Fisher, 2008).

There are indeed a number of Divine injunctions in the Holy Quran, which justify the validity of an insurance contract (Billah M. M., 2001). The contract of insurance contains the elements of mutual cooperation9 (Billah M. M., 2001). It is a binding promise, which binds both the insurer and the insured based on the general principle of contract10 (Billah M. M., 2001). It also contains the elements of alleviation of hardships and provision of material security and assistance for those who face unexpected risk and peril, and ensure them a comfortable life11 (Billah M. M., 2001).

Hence, the Holy Quran is the principle guidance to provide an instrumental justification for the application of insurance contract, as the Holy Quran is a plain statement12 and guidance for mankind in order for them to be successful in this world and in the hereafter (Billah M. M., 2001).

2.2 The Sunnah

According to one hadith as quoted by Kettel (2008) in his book, one day the Prophet (s.a.w) saw a Bedouin leaving a camel in the desert and he asked the Bedouin, “Why don’t you tie down the camel?.” The Bedouin answered, “I put my trust in Allah.” The Prophet then said, “Tie your camel first, then put your trust in Allah.”

7Also known as Sunnah.8 Analogical sources such as Qiyas, Istihsan and Ihtisab.9 See Al-Quran, Surah al-Maidah, 5:2.10 See Al-Quran, Surah al-Maidah, 5:1.11 See Al-Quran, Surah al-Baqarah, 2:201.12 See Al-Quran, Surah al-Imran, 3:138.

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What the Prophet did was to encourage the Bedouin to reduce the risk of losing his camel. Similarly, in many other actions of the Prophet, it is well documented that he took steps to reduce risks (Kettell, 2008).

Another example was the Prophet’s actions during the Hijra13. Feeling danger, he hid in a cave instead of going straight to Medina (Kettell, 2008). He commanded is Companions to migrate to Medina by batches instead of in one large group. Again this was to reduce risks. When he went to war, he put on his armour instead of wearing light clothes (Kettell, 2008).

2.0 Role of Takaful Operators/Agencies in Islamic Financial Institutions

The Ultimate Aim of the Takaful Agency Members14 is to seek the pleasure of Allah Most Exalt, submit entirely to His Will and strive for the final abode in the Hereafter.

All Takaful Agents act as Businessman or Businesswoman. Therefore, as quoted from Al-Qadarawi15 who said:

“Any merchant who remains within the bounds of honesty and fair dealing in such an atmosphere is a fighter against his desires, meriting the status of a warrior in the cause of Allah”.

Takaful Operators takes on the task of Recruiting, Training, and retaining the agencies. This is by no means is an easy task (Yap, 2009). It is also mentioned by the author about the various briefs of the Organizations and Functions of the Takaful Agency.

(a) Takaful Agency Manager 16

Overall expansion of the Takaful agency’s business Plays a strategic role for profitability of his agency Overall responsibility to the development of his agency Markets and sells the Takaful plans Develops a huge customer and client base Services this client base Develops and build up specific markets Recruits train and motivate Takaful Agents Takes on a leadership role for the Industry

(b) Takaful Unit Manager17 Markets and sells the Takaful plans Develops a huge customer and client base

13 The migration of Muhammad s.a.w and his followers to Medina in 622AD.14The range starts from Agency Manager, Unit Manager, Specialist and Agents.15Sheikh Yusof Al-Qadarawi is a public intellectual and immense international influence.16 This is also known as Group General Manager.17 Also known as Agency Manager.

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Services this client base Develops and build up specific market Recruits, train and motivate Takaful agents Takes on a leadership role for the Industry

(c) Takaful Specialist18

Markets and sells the Takaful plans Develops a huge customer and client base Services this client base Specializes in certain Takaful markets

(d) Takaful Agent 19

Markets and sells the Takaful plans Develops a huge customer and client base Services this client base

The actions, behaviors and attitude of the Takaful Agent also matters. The Agency Manager, Unit Manager, Takaful Specialist and Takaful Agent together they form an organization. Each has their special and unique task and contribution (Yap, 2009). They should work in unison towards the economic success of both the agency and their respective family (Yap, 2009).

3.0 How insurance related to Takaful and Why Takaful is mimicking Insurance operations

Takaful is related to insurance in terms of the service given. However, the modus operandi is the biggest difference between Takaful and insurance. Any form of insurance which has the shariah-compliance element in it is deemed permissible.

Takaful is considered mimicking insurance, in my opinion, due to the fact that it is giving the same service to the interested parties. To some, we can argue that Takaful industry is not truly shariah-compliant yet, but to some it is already considered well enough. Whichever our perceptions are, Takaful is done to provide a halal solution to those who are in dire needs to pay for their medical claims and other related expenses which are supported by Takaful. To those who thought of Takaful as just mimicking insurance operations, they might be right at certain extend, however, in the nascent Islamic finance industry, we have to start from somewhere. And starting can sometimes mean looking up at what we already had in the market.

4.0 Issues in Takaful Industry

18 Also known as Charted Takaful Underwriter.19 Acts as Consultant.

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Takaful industry will experience much change20. Mentioned below are a number of strategic issues and challenges that providers will contend with as the industry expands (Khan, 2010).

4.1 Standardization

The global Takaful industry, currently have different operational models, accounting standards and regulatory regimes (Khan, 2010). Countries such as Bahrain, Malaysia and Pakistan are currently the only markets to have issued specific Takaful laws or regulations. However, in spite of the laudable efforts by AAOIFI21, the industry is still wanting in building a set of global regulatory standards that will be binding on all operators, with certain localizations (Khan, 2010).

4.2    Distribution Challenges

The Takaful industry is dominated by local operators. New entrants should create synergies that can be used to leverage existing distribution channels, banc-Takaful and strategic alliances across geographies. This will also enable the operators to increase premium volumes to improve profitability which is a key factor in surviving the ‘start-up’ years (Khan, 2010).

4.3 Developing Innovative Products

Developing attractive and competitive products that meet diverse customer needs will be a major challenge for producers (Khan, 2010). Though Takaful providers cater to a very specific and presently unsatisfied market, they still need to create product offerings that are as sophisticated and innovative as their conventional competitors (Khan, 2010). Their ability to design products that exceed the standards presently set by conventional insurers will be the ultimate test for Takaful as a product (Khan, 2010).

4.4 Improving Marketing and Branding Tactics

The present brand value of Takaful is relatively limited particularly in non-Islamic countries. Analysts have suggested that Takaful has enormous potential for Islamic and non-Islamic populations, offering an ‘ethical’22 insurance alternative (Khan, 2010). Experts also propose that Takaful can potentially be a useful mechanism for poverty alleviation (Khan, 2010). The low penetration of insurance in many Islamic countries where Takaful operators are expected to be most successful indicates that Takaful operators have yet to make significant progress towards this end (Khan, 2010).

20 As with all new product offerings, changes depends on several factors, both internal and external.21 AAOIFI stands for Accounting and Auditing Organization for Islamic Finance Institutions which is based in Manama, Bahrain.22 Emphasize on the economy, ethics, morality, sociality, and religious dimensions, to enhance equality and fairness for the good of society as a whole.

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4.5 Raising the Standards in Customer Service

As the industry grows and becomes more competitive, building customer service skills and developing best practices will become increasingly important. At present, general customer service standards are average among Takaful providers, relative to their conventional counterparts (Khan, 2010).

5.0 Challenges in Takaful Industry

Some of the challenges in the Takaful industry are as mentioned below:

5.1 Shariah - Compliance

Shariah compliance of financial products is essential to ensure credibility of the products and institutions (Khan, 2010). It is, at the end of the day, what differentiates conventional from Islamic financial products (Khan, 2010).

We have already seen the statistics on the potential of Islamic Finance. The number of Muslim investors is increasing (Khan, 2010). They are becoming more sophisticated and will demand more from their bankers. Investors will not only look at investment performance or Shariah compatibility alone (Khan, 2010). They will demand both Shariah compliance and good returns.

In fact, using the label ‘Islamic’ or ‘Shariah- compliant’ would suggest that the product is already adhering to the principles of Shariah (Khan, 2010). Any violation of this rule would mean a loss of confidence in the product, firm or even the system itself. Investors will vote with their feet. Therefore, it is in the industry’s interest to ensure that the Shariah supervision systems in the Islamic financial institutions are managed well (Khan, 2010).

However, ensuring effective Shariah compliance is not a straightforward matter23. There are many issues that confront it (Khan, 2010). A lack of standardization may result in problems such as increased transaction costs, lack of recognition of legal rights and marketability problems across borders (Khan, 2010).

5.2 New Product Development

Aside from Shariah compliance, another factor that is crucial to the development of the industry is the constant innovation and development of new products. Financial markets are increasing in sophistication; the environment is constantly changing and competition is increasing (Khan, 2010). Muslim investors need a range of products to meet their

23 One of the more pertinent problems is the lack of standardization in addressing Shariah issues may even impede the development of the industry.

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desire for diversification of their investments, based on their unique individual needs. There have been many talks about the need to attract the Middle Eastern investors to this region (Khan, 2010). However, we have yet to see different asset classes of investment being created to attract these investors. The ijarah sukuk that we issued five years back is still the only available sukuk in Singapore. We hope to contribute further in generating new products (Khan, 2010).

5.3 Current Improvements

Hence, there are some very important issues that face the Islamic Finance industry (Khan, 2010). And two of the more crucial ones, as we have seen, are regarding Shariah compliance and new product development.  Nevertheless, it is heartening to note that much effort is being made to address these challenges (Khan, 2010).

For example, institutions such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) have made great progress in developing standards, including on Shariah compliance. For example, the Monetary Authority of Singapore is a full member of IFSB, and is taking part in some of the standard setting projects which is a good start (Khan, 2010).

5.4 Developing Talents

But at the end of the day, in order to address these challenges and to achieve further improvements, we cannot run away from the fact that we need talented people. Shariah scholars, in particular, have to play a greater role (Khan, 2010). Shariah Boards may have to operate differently in order to facilitate the innovation process, without compromising Islamic principles.  They have to be involved in the new product development process at the onset (Khan, 2010). They have to integrate Shariah considerations early and fully in any development or strategy.  Plus, they have to provide constant supervision and work in close partnership with management to ensure innovative yet shariah compliant products (Khan, 2010).

Furthermore, they have to understand customers’ needs, safeguard their interests and represent them to the management of the organizations (Khan, 2010). In addition, they have to develop Shariah compliance systems that adhere to the standards developed by AAOIFI and IFSB24. And all of these procedures will have to be transparent in order to avoid problems of information asymmetry and to gain the trust of potential investors. Ultimately, both customers and Islamic financial institutions benefit. Investors will have a range of products to choose from. In addition, institutions will gain greater credibility and an increase in potential customers (Khan, 2010).

6.0 Critical success factors in marketing Takaful

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Considering the realities of and constraints on the growth of Takaful, nine factors had been identified as success factors which are namely:

6.1 Government’s support

Promotion of Takaful is necessary by the governments in respective countries. Without the support of the government, regulatory authorities cannot play their dynamic role for development of Takaful Governmental support is also necessary to protect the policyholders who buy Takaful products because they feel that it is 100% Shariah compliant25 (Mortuza Ali, 2010).

6.2 Conducive environment

Takaful is growing along with the growth of Islamic banking, Islamic capital market, Islamic bonds and securities, and together with sound legal, regulatory and Shariah frame work (Mortuza Ali, 2010). Takaful will continue to grow with the Islamic financial system (Mortuza Ali, 2010). Regulatory authorities of respective countries need to frame appropriate laws, rules and regulations for the day to day operation of Takaful operators. Regulatory authorities of respective countries need to frame appropriate laws, rules and regulations for the day to day operation of Takaful operators (Mortuza Ali, 2010).

Takaful being a new concept has to be brought under a prudent regulatory system (Mortuza Ali, 2010).   It appears that Islamic financial system has attracted many scholars and professionals from East and West. This will grow further in the coming decades, and Takaful will take its place in the Islamic financial map in a big way (Mortuza Ali, 2010).

6.3  Acceptability to non-Muslim

An interesting development in Takaful is that it has attracted the non-Muslim community also. Therefore, the market for Takaful is not limited to 20% of world’s population (Mortuza Ali, 2010). The Takaful market will expand gradually throughout the world because of its unique features of profit sharing, transparency and accountability to all the stakeholders (Mortuza Ali, 2010).

6.4 Better value creation

Takaful will grow at a rapid pace because it can add more value to its customers by way of profit sharing and quality management (Mortuza Ali, 2010).

6.5 Least expense

Management expense of Takaful operation must be kept to a minimum in order to make it more attractive and beneficial for the customers (Mortuza Ali, 2010). As both the marketing agents as well as the prospective customers’ level of morality will be on the

25 Government must ensure that the Takaful system keeps its identity in line with Shariah, otherwise policyholders will be deceived.

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high side, it can be expected that false and/or exaggerated claims will be minimized26

(Mortuza Ali, 2010).

6.6 Risk Management

Takaful operators are supposed to manage the risks of their customers by the mechanisms of risk transfer and risk distribution (Mortuza Ali, 2010). It is, therefore, an important requirement that Takaful operators manage their risks involving every sphere of operation viz marketing, underwriting, investment, internal control, personnel management, asset management and such (Mortuza Ali, 2010).

6.7 Firm commitment

Last but not least, commitment towards the development of a Takaful system and towards maintaining its growth rate is the responsibility of the members of the boards, Shariah scholars and the management team (Mortuza Ali, 2010). It is necessary that all the stakeholders believe that they are engaged in Takaful operations not because of worldly gains, but for getting rewards from Almighty Allah for doing good deeds in this world by following the principles of Shariah (Mortuza Ali, 2010).

6.7 Awareness

Risk consciousness is very low among the Muslims (Mortuza Ali, 2010). Takaful operators need to create a deeper understanding and awareness among policy makers as well as among the general public. We shall have to make it very clear what role Takaful can play to improve the socio economic well being of the Ummah27 (Mortuza Ali, 2010). We must realize that development of Takaful can contribute towards economic prosperity in the context of economic growth (Mortuza Ali, 2010).

6.8 Trust and confidence

People’s trust and confidence in Takaful system is the primary determinant of soundness and stability of the Takaful system. Therefore, Takaful operators must come up with product innovation and ensure excellent customer service.

7.0 Conclusion

In as much as the Takaful system resolves around active participation by members of the community, it is imperative that public awareness be enhanced. The evolution of the Takaful

26 Other ways of doing this is by targeting economies of scale and scope, articulating cost strategy for customer acquisition, servicing and retention, and mprove loss ratios through changed business mix and better claims management (Young, 2010).27 Ummah means the public, the society as a whole.

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industry will accelerate and be well marketed as Muslims and non-Muslims come to understand the real benefits of Takaful and cooperative risk sharing. However, the future of Takaful will largely depend on how the increasing potentials are being exploited by the Takaful operating system, keeping in view the state of affairs in and economic needs of Islamic countries. Therefore, it is vital that the Takaful operators be aware of the issues which are currently facing the industry and steps to improve the industry, one step at a time, atleast.

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Fisher, O. C. (2008). Takaful Markets and Products. Red Money Books.

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