takaful_retakaful

8/3/2019 takaful_retakaful

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ARTICLE 2

TAKAFUL AND RETAKAFUL

TAKAFUL (ISLAMIC INSURANCE)

Insurance is not a new concept within Islam. The principle of a person protectinghimself against loss or misfortune is even described in the Quran through stories ofsome of the prophets (pbut). In Arabic this concept is known as takaful. It isacknowledged that the foundation of shared responsibility or Takaful was laid downin the system of Aaqilah, which was an arrangement of mutual help orindemnification In case of any natural calamity, every body used to contributesomething until the loss was indemnified. Similarly, the idea of Aaqilah in respect ofblood money or any disaster was based on the concept of Takaful wherein paymentsby the whole tribe distributed the financial burden among the entire tribe. Islamaccepted this principle of reciprocal compensation and joint responsibility.

It is also a generally accepted view that Islamic insurance was first established in theearly second century of the Islamic era. This was the time when Muslim Arabsstarted to expand their trade to India, Malay Archipelago and other countries in Asia.Due to long journeys/voyages, they often had to incur huge losses because ofmishaps and misfortunes or robberies along the way. Based on the Islamic principleof mutual help and cooperation in good and virtuous acts, they got together andmutually agreed to contribute to a fund before they started their long journey. Thefund was used to compensate anyone in the group who suffered losses through anymishap. In fact the Europeans copied this, which was later known as marine

insurance.

Takaful, means "guaranteeing each other", is the same as insurance. It representsthe concept of insurance based on mutual co-operation and solidarity of people byparticipating in a takaful scheme. Takaful (which is based on the concept of socialsolidarity, co-operation and mutual indemnification) satisfies the need for insurersthat now need to provide Shariah compliant insurance services as an alternative tothe conventional insurance.

Takaful products are based on two main business models:

1. The Mudaraba model : is essentially a basis for sharing profit and lossbetween the takaful operator and the policyholders. The takaful operatormanages the operation in return for a share of the surplus on underwritingand a share of profit from investment. This is commonly used in Malaysia.

2. The Wakala model : is a contract of agency, which replaces surplussharing with a performance fee. The takaful operator in this case acts asan agent (Wakeel) for participants and manages the takaful/retakaful fundin return for a defined fee. This model is used more in the Middle Eastregion.

Under the Al-Mudharabah principle, the profit as universally defined byconventional insurance companies, which in the case of general business is taken to

mean returns on investment plus underwriting surplus, is then shared according to amutually agreed ratio between the participants and the operators. Management


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expenses of the operator including agency remuneration, if any, shall be borne by theshareholders' fund and not from the takaful funds. Hence, there is a distinctseparation between Takaful funds and shareholders' fund.

Whereas, under the Al-Wakalah principle, the paid-up capital is contributed as

donation by the shareholders. Therefore, under this principle the shareholders do notexpect and probably do not mind for not receiving any returns on the capital donated.However, it is understood this standpoint has changed in view of opinion expressedby certain scholars that the shareholders (operators) in their capacity as managersshould also be entitled to share the profit arising from the takaful business.

On a strict interpretation of the Wakalah Model, the surplus of policyholders fundsinvestments (net of the management fee or expenses) goes to the policyholders. Theshareholders charge Wakalah fee from contributions that covers most of theexpenses of business. The fee rate is fixed annually in advance in consultation withShariah board of the company. In order to give incentive for good governance,management fee is related to the level of performance

TAKAFUL CONTRACT

The theory of a takaful contract is based contracts amongst a group of persons whoagree to jointly indemnify the loss or damage that may inflict upon any of them, out ofthe fund they donate collectively. The takaful contract will usually involves theconcepts of Mudarabah, Tabarru (to donate for benefit of others) and mutualsharing of losses with the overall objective of eliminating the element of uncertainty.

The fundamental principles of takaful contracts are:

The policyholders (takaful partners) pay premium to assist and indemnifyeach other and share the profits earned from business conducted by theCompany with the funds.

Takaful companies normally divide the contributions into two parts, i.e.,donations for meeting mortality liability or losses of the fellow policyholdersand the other part for investment. Accordingly, the clause of Tabarru isincorporated in the contract.

As to how much of the contribution is meant for mortality liability and howmuch for investment account is based on a sound technical basis of mortalitytables and other actuarial requirements. Both the accounts are invested andreturns thereof distributed on Mudarabah principle between the participantsand the Takaful operators.

Takaful contracts may comprise clauses for either protection or savings/investmentsor both the benefits of protection as well as savings and investment.

(a) The protection aspect of Takaful works on the donation principle according towhich individual rights are given up to indemnify the losses reciprocally.

(b) The savings aspect ensures that individual rights are protected underMudarabah principle and the contributions along with profit (net of expenses)are paid to the policyholders at the end of policy term or before, if required.

The distinction between the conventional insurance and Takaful business is morevisible with respect to investment of funds. While insurance companies invest their

funds in interest-based avenues and without any regard for the concept of Halal-o-Haram, Takaful companies undertake only Shariah compliant business and the


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profits are distributed in accordance with the pre-agreed ratios in the TakafulAgreements. Likewise they share in any surplus or loss from the pool collectively.Takaful system has a built-in mechanism to counter any over-pricing policies of theinsurance companies because whatever may be the premium charged, the surpluswould normally go back to the participants in proportion to their contributions.

FAMILY TAKAFUL

The terms Family Takaful, Takaful Taawani or just Takaful are generally usedfor family solidarity in place of conventional life insurances. Other products availablein various countries are General Takaful, Education/Medical Takaful, etc. Based onthe nature of relationship there are various models like Wakalah (agency) Model,Mudarabah Model and the combination of agency and Mudarabah models. InMudarabah model the policyholders get profit on their part of funds only if takafulcompany earns profit. The sharing basis is determined in advance and is a functionof the developmental stage and earnings of the company. The Shariah committeeapproves the sharing ratio for each year in advance. Most of the expenses are

charged to the shareholders.

ADHERENCE TO ISLAMIC PRINCIPLES

A Takaful or Retakaful company must strictly adhere to principles of co-operation,protection and mutual responsibility and will avoid acts of interest (riba), gambling (al-maisir) and uncertainty (al-gharar).

The two main principles are the prohibition of Riba and Gharar.

Riba is the main point of distinction between Islamic and non-Islamic financial

means. Riba refers to a creditor exploiting a transaction for unfair gain, for example,paying too little for an item or repaying significantly less of a loan than its originalvalue. Very commonly it can occur through applying interest or usury (extortionatelyhigh rates of interest) in his/her transactions. This is expressly forbidden in Islam.

Gharar is the selling of items which have an uncertain existence or uncertaincharacteristics making the transaction risky and similar to gambling.

It is therefore important to distinguish insurance from gambling.

Allama Yusuf Ali, in his translation of Holy Quran, comments on Sura Al-Baqara, ayat219 -

"Insurance is not gambling, when conducted on business principles. Herethe basis for calculation is statistics on a large scale, from which merechance is eliminated. The insurers charge premium in proportion to therisks, exactly and scientifically calculated".

In gambling, it is possible to win or lose by creating that risk. In insurance, the risk isalready there and the aim is to try to minimise the financial effects of that risk.Insurance shifts the impact of that risk to someone else and relieves the person ofrisk.

It is imperative that the Retakaful or Takaful company will conduct all its affairs in amanner that meets the Islamic Shariah Principles whether it is to do with investing itsfunds, in carrying out its business in all classes of insurance or in any other relatedfinancial field.


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All operations and contracts are set-up to ensure that any element of speculation,uncertainty and gambling is eliminated or minimized from them.

RE-TAKAFUL (REINSURANCE)

Reinsurance of takaful business on Islamic principles is known as retakaful.

Reinsurance is a form of insurance whereby an insurance company or a Lloydssyndicate can transfer to another insurer (the reinsurer) all or part of its liabilities inrespect of claims arising under the contracts of insurance that it writes. This enablesthe an insurance company (reinsuredor direct insurer) to protect itself against therisk that its total claims costs in any one year maybe so large wiping out its profits, oreven cause it to be insolvent. This is the essence of the concept of social solidarity,cooperation and mutual indemnification of losses of members whereby there is jointindemnification of the loss or damage that may occur, out of the fund that iscollectively contributed to.

The main problem worldwide is the lack of retakaful companies that are capitalised tothe levels required by insurers and more particularly the lack of A rated retakafulcompanies. This has resulted in takaful companies having to reinsure on aconventional basis, contrary to the preferred option of seeking cover on Islamicprinciples.

The Shariah scholars have allowed dispensation to takaful companies to reinsure onconventional basis so long as there are no retakaful alternatives available. Takafulcompanies therefore actively promote co-insurance. A number of large conventionalreinsurance companies from Muslim countries take on retrocession. Therefore alarge proportion of risk is placed with international reinsurance companies thatoperate on conventional basis.

The retrocession from takaful companies ranges from some 10% in the Far Eastwhere Takaful companies have relatively smaller commercial risks (so far), to theMiddle East where up to 80% of risk is reinsured on conventional basis.

Retakaful companies need to ensure that they are capitalised sufficiently to enablethem to:

protect the financial stability of takaful companies from adverse underwritingresults

stabilise claims ratios from one year to the next

minimise claims accumulation from losses within and between differentclasses

geographically spread risk increase capacity

increase the profitability of insurers through permitting greater flexibility in thesize and type of risks accepted

secure technical support and help

RETAKAFUL CONTRACT

Even though a typical reinsurance transaction is generally based on the principles of

al-Aqd(contract), the nature of this transaction is quite different from other forms ofcommercial contracts in conventional reinsurance. Whilst the contract must ensurethat the policy is for the purpose of sharing responsibility to provide some material


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security against unpredicted loss or damage resulting from unexpected risks on bothlife and property it must also comply with Shariaah principles..

Reinsurance contracts must essentially be financial transactions that bind both thereinsurance company and the insurance company on the general principles of al-Aqad.

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