Download Islamic Micro-Insurance * Micro-Takaful: Basic Exposition

Islamic Micro-Insurance – Micro-Takaful:
Basic Exposition
By
Dr. Osman Babiker Ahmed
(IRTI-IDB)
ADFIMI – FFSAJOINT WORKSHOP
ISLAMIC MICRO-FINANCE AND MICROTAKAFUL
12th to 13 November 2015
Almaty-Kazakhstan
Islamic Micro-Insurance – Micro-Takaful: Basic Exposition
Insurance Services:
As a financial institution, Insurance industry plays an important role for the development of social
and economic sectors of an economy by minimizing risk of all economic activities, on the one
hand and producing long-term financial resources, on the other hand. An efficient and productive
insurance sector also indirectly contributes to economic growth of a country by converting savings
into investment projects through the financial institutions. Insurance companies offer different
services to households and businesses for their well-being.
The primary service of insurance company is to provide risk coverage against any loss of property,
business and life, etc. Thus, an insurance firm encourages the risk-averse individuals and
entrepreneurs to undertake high return activities, of course with higher risk than they would be in
the absence of insurance.
Risk and Insurance:
Risk and uncertainty are fundamental facts of life. All human activities are subject to risk, which
may lead to financial or physical losses to him. Every individual try to protect himself against
future potential losses. Insurance is a modern time method to cover the losses arise due to
occurrence of some undesired event.
Definition of Insurance:
Insurance is an economic method whereby the individual/entity substitutes a small certain cost
(premium) for a large uncertain financial loss (the contingency insured against) that would exist if
it were not for the insurance.
Socio-Economic Benefits of Insurance:
Social and economic advantages of insurance are immeasurable. However, the most important of
insurance benefits could be summarized in the following: (i) risk coverage, (ii) habit of
prudence/carefulness, (iii) safe and profitable investment, (iv) secure working environment for
businesses planning for life stage needs and, (v) capital formation in the economy.
Shariah Position of Insurance:
Opinion of Shariah scholars is divided on insurance. Mainly classified into three major opinions:
Opinions Rejecting Insurance: According to Shariah scholars and Fiqhi Academies conventional
insurance is unlawful because of involvement of prohibited elements like: Riba (Interest), Qimar
(Gambling), Gharar, (Uncertainty, Doubt, Risk), Unlawful appropriation of others’ property,
Violation of law of inheritance in case of life insurance.
[1]
Opinions in favor of Insurance: The proponents of insurance tried to establish analogy between
insurance and many institutions, considered permissible in Islam like: Mudarabah, A’qila, Aqd-eMuwalat, al-Wa’ad al-Mulzim, Services of security guard, Pension scheme etc.
Takaful is the Islamic Substitute: All fiqhi schools and academies have suggested that a scheme
based on the concept of mutual cooperation and Joint responsibility may be considered as Islamic
Substitute for Conventional Insurance. That alternate is introduced under the title of Takaful in the
recent past.
Islamic Insurance (Takaful): Takaful (Arabic: ‫ )التكافل‬is an Islamic insurance concept which
observes the rules and regulations of Islamic law – Shari’ah. This concept has been practiced in
various forms since 7th Century. Muslim jurists acknowledge that the basis of shared responsibility
is in the system of aquila as practiced between Muslims and this laid the foundation of mutual
insurance.
Takaful in Practice: Islamic insurance started some 30 years ago in Sudan and Middle East in
1979 with the establishment of: (a) the Islamic Arab Insurance Co. (IAIC) in the UAE and, (b) the
Islamic Insurance Co. of Sudan. It took some time to take shape and mature. Later in 1984,
Malaysia played a pioneering role in setting the first Legal framework specific to Takaful.
Other markets such as Bahrain, Saudi Arabia, UAE and Pakistan have Islamic regulatory
environments and became naturally Takaful markets. In other countries specific Takaful
legislations are coming through. Large Muslim markets such as Egypt, Libya, Bangladesh,
Indonesia and Brunei are opening to Takaful.
Takaful Driving Forces:
Takaful has entered a maturing stage of development, and the focus is no longer on its potential
but on how to convert the potential into real growth and then sustain the momentum. This emerging
experience is driven by:
i.
ii.
iii.
iv.
a strong demand from a public who would not insure otherwise (because of religious
beliefs);
the successful development of Islamic banking institutions providing capital and Islamic
financial instruments for asset management and investment.
Islamic banks and financial institutions play a strategic and important role in the
distribution of Takaful products (especially Life Takaful Products).
Just as Bancassurance played an important role in the distribution of personal lines
insurance products BancaTakaful is an important driver for Takaful.
Concept of Takaful: what it is?
The members of the group agree to guarantee jointly that should any of them suffer a disaster, he
would receive certain sum of money to meet the loss or damage. All members of the group pool
together their efforts to support the needy.
[2]
Thus, Takaful, based on the concept of social solidarity, co-operation and mutual indemnification,
satisfies the need for insurers that now need to provide Shariah compliant insurance services as an
alternative to the conventional insurance. In other words, Takaful is the Shari’ah-compliant
alternative to conventional insurance:
1. A conventional insurance company accepts premiums to cover claims and produce a profit.
This activity is regarded as maysir (speculation), which is forbidden under Islamic law
(Shari’ah)
2. The payment of premium in return for an indemnity against risks that may not occur is also
seen as akin to gharar (uncertainty) under Islamic law and therefore forbidden.
3. Takaful is based on the concept of social solidarity, cooperation and mutual
indemnification.
4. While Takaful insurance revolves around mutuality and has a noncommercial basis, the
operations and funds are commonly managed by a Takaful operator on a commercial basis.
Takaful Key Elements: Takaful has the following five key elements:
 Mutual guarantee: the basic objective is to pay a defined loss from a defined fund;
 Policyholder ownership of the fund: because they donate their contributions to the Takaful
fund, policyholders own it and are entitled, in general, to profits based on different models
(wakala, mudaraba, etc.);
 Elimination of uncertainty: this is achieved by donations to offer mutual help in the case of a
policyholder’s loss without any predetermined monetary benefit;
 Shariah-compliant fund management: this is achieved by the operator using two Shari’ahcompliant contracts, mudaraba or wakala, or a combination of the two;
 Shari’ah-compliant investment: all investment must be Shari’ah-compliant. Investment in
haram (prohibited)industries is therefore eliminated and the use of instruments free of riba
(usury)is required.
Takaful Business Models: two basic models
Mudaraba Model: is essentially a basis for sharing profit and loss between Takaful operator and
policyholders. Takaful operator manages the operation in return for share of the surplus on
underwriting and share of profit from investment. The model commonly used in SEA, especially
Malaysia.
Wakala Model: is a contract of agency: replaces surplus sharing with a performance fee. Takaful
operator here acts as an agent (Wakeel) for participants and manages the Takaful fund in return
for a defined fee. (widely used in the Middle East).
Profit Under Mudarabah: Under Mudharabah model: profit (returns on investment plus
underwriting surplus) is then shared according to a mutually agreed ratio between participants
and operators.
[3]
Management expenses of the operator including agency remuneration, if any, shall be borne by
the shareholders' fund and not from the Takaful funds. Hence, there is a distinct separation between
Takaful funds and shareholders' fund.
Surplus Under Wakalah:
Under Wakalah Model, the surplus of policyholders' funds investments (net of the management
fee or expenses) goes to the policyholders. The shareholders charge Wakalah fee from
contributions that covers most of the expenses of business. Fee rate is fixed annually in advance
in consultation with Shari’ah board. To give incentive for good governance, management fee is
linked to the level of performance.
TAKAFUL and Insurance Contract: a Comparison
Takaful contracts may comprise clauses for either protection or savings/investments or both the
benefits of protection as well as savings and investments. Takaful Protection aspect works on
donation principle so that policy-holders give up their individual rights to indemnify losses
reciprocally. Savings aspect ensures that Mudarabah contract protects individual rights and
contributions along with net profit are paid to policyholders at the policy maturity or before, if
required.
Differences between Takaful &Insurance: Areas where main differences between Takaful and
insurance exist are:
Insurance
Exchange Contract
Insurance Company
Takaful
Donation Contract
Participants (policy-holders)
Company
Responsibility
Pay Claims from
underwriting funds and
Share-holders Equity
Pay Claims with underwriting
funds and Qard-hasan in case of
Shortfall
Participants responsibility
Capital Utilized
Pay Premium
Share Capital
Pay Contribution
Participants’ Funds
Investment Considerations
No restrictions except
prudential
Can provide insurance
cover to any business
Shariah Compliant
Contract utilized
Ownership of Premium
Business Concerns
Can provide Takaful cover to only
Permissible Business
Takaful Industry: Some Challenges
As an industry, Takaful witnesses rapid development that benefited from the ongoing economic
development in its core regions. Having grown from a niche product servicing limited demand,
[4]
the Takaful industry has reached a critical mass in the last decade and is now firmly established
within the global risk management markets.
The potential for sustained growth in this market is significant, held up by the still low insurance
penetration and growing recognition and acceptance of the concept of insurance and its benefits.
Takaful sector is likely to continue growing in the next years. The long-term viability of Takaful
industry remains supported by high expected levels of growth and an increase in profitability,
particularly in the GCC region and Malaysia. Nonetheless, some challenges face this growing
industry:
Sustainability: However, while these positive factors should support growth of the sector, the
high competitive and, in some cases, developing, nature of the local market-place, as well as the
impact of global investment markets on returns, continue to place an ongoing strain on sustainable
development.
Severe competition: Also, competitive pressures from within the sector, and from conventional
insurers, means that success in this market requires careful map-reading.
Though Takaful industry is at its infancy stage as compared to conventional insurance firms,
Takaful operators have the strong opportunity to capture those customers that are not adopting the
conventional insurance, hence increase their customer base and the Takaful penetration rate in
countries where they operate.
High cost: Takaful operations tend to have a still-developing business model and high start-up
costs. Thus, in contrast to window operations of conventional insurers, the window operations
benefit from the ability to leverage existing infrastructure and costs.
Expenses remain an issue for Takaful operators. Two main factors affect this: (a) the upfront nature
of wakala fee explains why Takaful companies have higher expense ratios. (b) economies of scale
are still developing among the Takaful players.
This is particularly important for those competing in the higher volume/lower margin lines such
as motor and medical insurance which require operational efficiencies and sound underwriting in
order to generate profits.
Efficiency and Customer Excellence: Takaful operators still have to improve operational
efficiency, Shari’ah compliance and thus acceptance by targeted customers and competitiveness
through potential increased capacity operators can offer.
In an increasingly competitive insurance market, many insurance industry leaders are embracing
innovative tools to deepen existing relationships and improve new customer acquisition rates,
realizing that efficiency can be achieved through investment in systems and operational and service
infrastructure.
[5]
Limited Capital Adequacy: Capital management remains an issue for Takaful operators.
Especially, lack of consistent and risk-based regulatory supervision of Takaful sector, means
Takaful and conventional insurance sectors lack the growing sophistication of risk management
and capital demand found in developed economies. This lack will put pressure for control of risks.
Further, a tighter and all-encompassing risk management regime will require additional resources,
which would place further strain on already stretched resources.
Limited Shari’ah-compatible Investment Opportunities: Halal investments remain an issue of
focus for Takaful operators, partly because they are more limited in terms of assets that they are
able to invest in. As a result, Takaful companies have a bias for equity investments.
Limited Professional Expertise: Although unlikely to have an impact in the immediate future,
the limited supply of appropriate, qualified and experienced staff could constrain the long-term
development of Takaful industry. This is particularly crucial given expectations that demand for
staff will remain high due to growth prospects of Takaful industry.
Takaful Product Development and the Right Offerings: Growth in current and new lines of
business creates necessity for product development. Product development together with benefits
of economies of scale and greater stability will enable Takaful operators generate more surpluses
for policy-holders. Product innovation is one way of differentiation in Takaful business. So that
Takaful operators should develop simple and transparent Takaful products that address the specific
needs of Takaful customers.
Distribution Channel and Pricing Management: It's evident that product development is a key
growth driver for Takaful, but even with the best products around, it's crucial to have effective and
efficient distribution channels that will ensure that these products reach the right customers.
BancaTakaful has been gaining ground in the GCC, and has been leading the distribution of
Takaful products, particularly family Takaful offerings that are embedded within wealth
management. However, Takaful products have still to compete for shelf space with other bank
products including conventional bancassurance products. Extensive efforts are still needed to
develop product delivery applications designed to enhance customer convenience and overall
service quality.
Pricing too remains a challenge. In certain markets where pricing is not dictated by the regulator,
commission arbitrage comes into play. So pricing is important because Takaful providers gain
market share by pricing their products competitively or offering special deals. Of course, that can
be beneficial only for a limited period, because at the end of the day it will have an impact on the
Takaful operator's bottom line.
Sharii’ah Compliance: To address business and investment constraint, Takaful operators need to
grasp a more sizeable share of Shari’ah compliant investible universe. Streamlining and
harmonization of Shari’ah fatawa (religious rulings) and enforcement is also an issue that Takaful
sector has to resolve.
[6]
Benchmarking Takaful Businesses: To benchmark with peer conventional competitors,
Takaful operators must adopt and intensify development of international best practices. Applying
established best practices would prop up comparability of Takaful as Shari’ah compliant
mainstream protection product that co-exists alongside conventional insurance.
Some benchmarking exercises revealed Takaful industry is underperforming in terms of: (a) long
time for settling claims from intimation date, (b) little explanation about product nature – merely
hala/haram argument as selling point.
Low Return on Takaful equity: The Takaful challenge remains the maintenance of profitable
growth in the severe economic conditions and to some extent, the sector has been successful and
Takaful companies continue growing though they still struggle to generate shareholders’ return.
The return on equity for the Takaful industry is lower than for conventional insurance, in core
regions of Takaful industry: South East Asia and the GCC. The industry now has significant market
share compared with conventional insurance in most GCC countries, as well as South East Asia
markets. Conventional insurance companies continue to yield higher returns, with an average
return on equity of 8% in GCC, compared with the Takaful business’s return of just 4%.
Awareness Issues: There continues to be some confusion and lack of knowledge about the Takaful
operating models and product features as well as the differentiation between Takaful and
conventional insurance. The lack of awareness in certain markets is adversely affecting the growth
of Takaful, family Takaful in particular, as many Muslims remain hesitant about the concept of
life protection.
To raise the awareness of Takaful and to promote full transparency, education is extremely
important for consumers to be in a better position to select insurance or Takaful products that best
meet their needs as well as to understand their rights and responsibilities as consumers.
Hence, finding the right value proposition for Takaful, especially in markets with well-established
conventional players as well as raising Takaful awareness amongst individual consumers remain
the major challenges.
Takaful Challenges: Focus Areas:
As stated earlier, Takaful sector is potential for pretty significant expansion. To let it be a dynamic
Shari’ah-compliant business that can serve and support expansion in trade and investment
activities within the region or even globally, the sector should focus on certain key areas such as:
Product development: to have attractive portfolio of product and services that meet current market
standards and is highly diversified. This implies having Takaful value-added products/services.
Branding and marketing: Takaful operators should have acquired strong reputation and create
goodwill and trust of customers. This is certainly an outcome of better-quality services and
competencies that grasp customer loyalty.
[7]
Powerful underwriting capabilities: Takaful operators have to get hold of strong underwriting
capacities and skills in asset allocation. Technical ability is necessary to underwrite all types of
businesses (mega projects/micro projects, etc.). Here Takaful industry needs comprehensive and
yet efficient data base and analytical techniques.
Wider outreaching: as legitimate operators, Takaful companies should follow efficient networking
channels adapted to customers’ preferences. Key elements in this regard are operational merit,
cost-effectiveness and multi channeling and partnership.
Micro-insurance: Global Outlook:
Insurance for low-income populations, or micro insurance, is now firmly accepted as an integral
tool for poverty alleviation and building resilience in communities against natural and manmade
disasters. With the support of national governments, donors and insurers, micro insurance has grow
rapidly from covering 78 million risks in 2007 to an estimated 500 million risks in
2012.
With around half a billion people covered under micro insurance, there is a growing consensus
that ensuring client value and effective consumer protection measures will become key
determinants for the sustainable growth of the industry.
Mutual Insurance: client-centered approach:
Micro insurance is now widely practiced in the form of mutual insurance which is substantially
Takaful insurance. While a large number of private insurers are trying to understand the
components of client value and how to improve their products and processes, the Takaful insurance
model has for centuries demonstrated the success of a client-centered approach to serve the
underserved populations in both established and emerging markets. Mutual and cooperative
insurers uniquely have the ability to align the incentives of insurer and insured, as clients
simultaneously are the owners of their insurance activity as well as the policyholders.
Overall, the mutual sector represented 27% of the global insurance market in 2013 with USD 1.26
billion in premiums and served 915 million policyholders. Mutual insurance works for all income
groups in a society. In addition, it is inherent in the DNA of the mutual model to provide access to
necessary services to those that have been excluded by the formal insurance sector. Mutual insurers
have the long-term, value-based and needs driven approach which makes them an appropriate
platform for sustainable poverty alleviation and local empowerment.
Key features of mutual insurance in comparison to commercial insurance
Needs-centered approach to risk Enhancement Profit-centered approach to risk Enhancement
Insured person as a member of a group Insured person as a consumer
undertaking
[8]
Relationship between insurer and members Relationship with insurer based on customer
based on engagement and participation
service interaction
Mutual
insurance
solutions
developed from within
communities/societies
primarily Micro insurance increasingly delivered by
external players
Mutual insurance is part of a wider process of Micro insurance is part of the development of
empowerment and education
an effective market Economy
Mutual Insurance: Critical Challenges:
In emerging markets, there are some very good examples of mutual insurers offering valuable
services to poor households. However, the majority of these have been hindered in achieving their
potential scale compared to their commercial counterparts. This is partly due to:
(I)
(II)
(III)
(IV)
a focus on a commercial led approach by the donor and micro-insurance community;
a changing regulatory environment which does not take into consideration the mutual
model;
limited capacity and will to support the long-term development of grassroots
organizations and,
a lack of awareness of what actually works for poor people.
The Way Forward for Mutual Insurance: Developing Inclusive Mutual Insurance:
Inclusive mutual/Takaful insurance, which is essentially Takaful practice, is broader and includes
all types of marginalized groups which may not fall under the conventional micro-insurance
definition.
In Islamic Finance, we can develop and adopt the concept of Inclusive Mutual Insurance (MicroTakaful) which is defined as pro-active efforts at providing insurance services to low income or
marginalized groups in a manner where they participate in the design, development, management
and governance of such product, services or institutions.
The future strategy for mutual insurance must introduce the inclusive micro-insurance to address
the challenges mentioned above and help inclusive mutual insurance reach its full potential scale
in emerging markets and positively impact the lives of millions of low income households.
In Islamic finance, strategy toward mutual insurance (Takaful), could be in the form of:
1. providing technical assistance to mutual insurers in some emerging economies.
2. Setting up new mutual insurers
3. supporting the growth of existing mutual insurers through capital and resource
provisions.
[9]
4. Strengthening of cooperation among larger mutual insurers and encourage support mutual
insurers operating in difficult Markets.
5. help the established mutual insurers to take a more proactive role in developing inclusive
mutual insurance.
Features of the New Micro-Takaful Strategy:
Must be impact-based: focusing on mutual/Takaful insurance in countries there are large numbers
of underserved populations and high incidence of poverty;
Give special attention to existing mutual insurers who have a strong on-the-ground presence and
are leading in providing inclusive mutual insurance.
Build the capacity of mutual insurers to be able and willing to contribute in developing and
carrying out micro-Takaful program in countries where they operate.
Pre-requisites for the New Micro-Takaful Strategy:
The Strategy should certainly be preceded by studies to assess mutual insurance markets and
develop accordingly work plan then lay out the relevant intervention plan to develop the Takaful
markets in different economies.
However, this prerequisite for the Strategy needs a strong local research capacity and institutions
for collaboration on assessing the Micro-Takaful markets.
Theme of the Pre-Strategy Study:
The pre-Strategy Study shall be spotlighting (i) the mutual insurance landscape and, (ii) the case
studies.
The landscape will aim to provide a comprehensive picture of mutual insurance in emerging
markets by analyzing the demand for and supply of inclusive mutual insurance as well as the
impact of regulation on the sector.
The case studies will feature prominent mutual micro-insurers in the targeted countries and
highlight their products, business model, impact on risk management and their key concerns.
A set of common parameters will be developed to select these case studies across countries in order
to make them comparable. Based on these analyses, the country diagnostic will identify the
challenges faced by the mutual insurance sector in that particular market and make
recommendations for future development of the inclusive mutual insurance sector.
[10]