Takaful industry (Islamic insurance) needs further support


The global Takaful market has reached US$ 19 Billion in 2017. The market is further projected to exceed US$ 40 Billion by 2023, at a CAGR of 13% during 2017-2023. But it is just a fraction of global insurance of US$ 5 trillion with a CAGR of (2011-17) 1%.

Insurance, no matter what kind, is pooling of risks and applying the law of large numbers. The peril will only affect a small portion of those whose risks are pooled. Hence, if our probability calculation is accurate, a small premium from everyone in the pool will be sufficient to compensate fully the small portion who will suffer during the term of the policy.

The problem with conventional insurance is that it creates an “exchange contract” between the insurance company and the insured in the form of “policy”. It simply says: you pay a premium of $ 100, and you will be covered from the specified risk (fire for example). If your house is destroyed by fire, the company will pay; say $500,000 as compensation. This is problematic from Shari’ah point of view.

An exchange contract (such as sale contract) must be free from Gharar (contractual uncertainty). This means that the rights and obligations of the two parties must not be uncertain. If they are only probable, the contract is void. If we look at the conventional insurance contract we see that the insured will pay a “certain” premium in exchange for a “probable” payoff. Hence, the contract is void.

It is an established rule in Shari’ah that “Gharar” will only void exchange contracts and not benevolent contracts such as “Takaful”. In other words. If I sell a sealed box the content of which is not known, then such sale contract may be void for the content may turn out to be equal, much more, or much less than the paid price. This is Gharar, for one party has received a “certain” price, the other bought an “uncertain” stuff. However, it would be O.K from Shari’ah point of view to give that same box as a gift or as an altruistic contribution or donation even though the Gharar remains but it will not void the contract (in Shari’ah a gift is also considered a contract).

The whole concept of Takaful is based on the idea of moving the insurance program from the realm of exchange contracts to that of benevolent giving. The proposed structure does include that same idea of pooling risks and applying the law of larger numbers.

However, the form of contract is different. The insurance company will now manage this pool, and the insurance policy is simply a certificate through which the holder participates in the pool. What he pays is not a price but a contribution which may be considered a donation to this Takaful scheme. As a manager, the insurance company needs to manage the pool for the benefit of the participants.

Insurance Company is only an agent and not an owner of the pool. It is compensated either by a charge on the net asset value of the pool, or a portion of profit generated from investing the same (or both). Hence, we have two contractual arrangements. One between the insurance company and the totality of the participants represented by this pool. This is an agency contract, the other between the insured themselves being partners in the pool.

Contributions are collected by the manager (insurance company), compensations are paid to those who are victims of the peril and then at the end of every year the manager will see the pool. If there is extra money, it should be paid back to the participants for this is their pool. If funds are not sufficient, then the manager should re-asses these basic contributions and go back to all participants for payment of more in the pool.

Thus Takaful program is capable of serving every insurance need. It can be a substitute for life, auto, and fire etc insurance. This is now marketed by some Islamic banks and Takaful companies in Saudi Arabia and in other Muslim countries.

By Types, the Takaful Market can be Split into, Life/Family Takaful, and General Takaful. By Applications, the Takaful Market can be Split into, Family, Government, Business market segment by Regions/Countries,

The general Takaful operators in the early years failed to adopt a joint approach in promoting the cause of Takaful as a Shariah-compliant risk-coverage mechanism. Overlooking the desired Islamic spirit of transparency in dealings, they harshly competed. This created an unethical image of the Takaful industry.

As regard to human resource factor generally, opportunism has been the deciding factor for individuals with conventional insurance background, to join newly-formed Takaful operators at senior/middle management levels.

Initially the required incitement to acknowledge the Shariah requirements and to obediently contribute for the cause of Takaful on strong and careful commercial practices within the Shariah framework was missing. The fundamental of Islamic principles, were lacking on the part of general Takaful operators to basically incite attraction for devoted Muslims to opt for Takaful as a system to meet their risk-protection needs in a Shariah-compliant manner.

In Pakistan the cause and sprit of Takaful in Takaful Rules 2012 (the Rules) was not sufficiently addressed to up-held the writ of the Shariah. The Rules presented Takaful as a product rather a true reflection of a legal frame work featuring supremacy of Shariah, distinctly distinguishing Takaful from conventional insurance. The non existence of a Shariah Advisory Board, leaving Shariah Advisor of each company at the helm of Shariah matters of respective companies, which understandably created confusion chaos, thereby generating/promoting corrupt practices.

In 2016, the Securities and Exchange Commission of Pakistan (SECP) specifically mandated through an amendment, for regulating and facilitating the growth of Shariah-compliant financial products. A new concept of Shariah Compliant Company has now been introduced through the Companies Act 2017 under the enabling provision of the Companies Act, 2017.
Recently, Securities Exchange Commission of Pakistan (SECP) has accepted a 4-member Shariah advisory board to oversee Islamic financial products in Pakistan, as the regulator looks to address credibility concerns, which still haunt the industry. It is predicted that the new board would be instrumental in harmonizing the Shariah-related business, operations and structure of the tools of the Islamic capital market in the country

In 2018 the Securities and Exchange Commission of Pakistan (SECP) has also introduced a new set of accounting regulations for Takaful Operators or Window Takaful Operators to ensure strict monitoring/scrutiny of regulatory returns and published financial statements filed by operators.

However still Capacity in non-motor Takaful is serious issues as ‘A’ rated Retakaful Operators are few and highly demanding. Further underdeveloped Bond and Sukuk markets, which can provide opportunities to Takaful industry are still not sufficient.

Hence the Islamic insurance, or Takaful, industry still stands somehow in the shadow of the Islamic banking sector, partly because it doesn’t have such prevalence even in Muslim countries, and also because its business strategies and product offerings still have a lot to overtake.