Takaful

Insurance – the Islamic Way

A Presentation by:
Capt. M. Jamil Akhtar Khan
ACII, MCIT, Master Mariner
 Outline of Presentation

 Introduction to Takaful
 Objections to Conventional Insurance
 Difference b/w Conventional Insurance & Takaful
 Misconceptions about Takaful
 Takaful Through Time
 Takaful Worldwide
 Takaful Models
 Takaful Products
 Takaful Accounting
 ReTakaful
 Foundations of Takaful in Pakistan
 Takaful Prospects in Pakistan
Introduction to
Takaful
 Meaning of Takaful
 Takaful comes from the Arabic root-word
‘kafala’- guarantee.
 Takaful means mutual protection and joint
guarantee.
 Operationally takaful refers to participants
mutually contributing to the same fund with
the purpose of having mutual indemnity in
the case of peril or loss.
 Reference - Al Quran:
 ‘Help (ta awan) one another in furthering
virtue (birr) and Allah consciousness (taqwa)
and do not help one another in furthering evil
and enmity” al maidah: verse 2 (5:2)
 Takaful is a form of mutual help (ta’awun) in
furthering good/virtue by helping others who
are in need / in hardship
 Reference – Hadith:
 “tie the camel first, then submit (tawakkal) to
the will of Allah”
The hadith implied a strategy to
mitigate/reduce risk.
 Takaful provides a strategy of risk
mitigation/reduction by virtue of collective
risk taking that distributes risks and losses to
large numbers of participants. This mitigates
the otherwise very damaging losses, if borne
individually.
 Origins of Takaful
 Members of the first Islamic community 14
centuries ago practiced successful schemes of
co-operative risk sharing.
 Early precursors were developed in response to
perils and risks associated with long-distance
trade via caravans or sea voyage and included:
 Hilf (undertaking)
 Aaqila (pooling of resources for arranging payment of
blood money)
 Damaan khatar al tarik (surety)
 …… origins of Takaful
 In the first constitution in Madinah of 622 CE, there
were codified references to social insurance relying
upon practices like:

 Al – diyah and Al – aqila (wergild or blood money to rescue

accused in accidental killing).
 Fidyah (ransom for prisoners of war)

 Dawania – Mutual indemnification amongst officers working

in the same department during the rule of the 2nd Caliph
Umar Ibn Al Khattab.
 Cooperative schemes to aid the needy, ill and poor.
 Judicial Opinions and Fatwas
confirming validity of Takaful

 Fatwa issued by Higher Council of Saudi

Arabia in 1397 AH.
 Fatwa Issued by the Fiqh Council of Muslim
World League in 1398 AH.
 Fatwa issued by the Fiqh Council of the OIC
in 1405 AH.
 Approval of the Grand Counsel of Islamic
scholars in Makkah, Maja Al – Fiqh, in 1985.
 Takaful – Regulatory
Framework

 Takaful Act – 1984 of Malaysia.

 Saudi Arabian Monetary Agency (SAMA)
Regulations of Saudi Arabia - 2004.
 Bahrain Monetary Authority (BMA) Rules –
2005.
 Takaful Rules – 2005 of Pakistan.
 Basic Elements of Takaful

 Mutuality and cooperation.

 Tabarru (contribution)
 Eliminates the elements of Gharrar, Maisir and Riba.
 Wakalah/Modarabah basis of operations.
 Joint Guarantee / Indemnity amongst participants –
shared responsibility.
 Constitution of separate “Participants’ Takaful Fund”.
 Constitution of “Shariah Advisory Board.”
 Investments as per Shariah.
 Main drivers of Takaful

 Piety (individual purification)

 Brotherhood (mutual assistance)
 Charity (Tabarru or contribution)
 Mutual Guarantee
 Community well-being as opposed to profit
maximization.
Objections to
Conventional
Insurance
 Declaration by Shariah scholars
rendering conventional insurance
un-Islamic
 Fatwa issued in Judicial Conference held in
Makkah in Shaban 1398 AH.
 Verdict of Supreme Court of Egypt on Dec.
27, 1926.
 Unanimous resolutions and fatwa by Ulama in
the Muslim League Conference in Cairo in
1965.
 Unanimous decision by Muslim Scholars in
seminar held in Morocco on May 6, 1972.
 Objections to Conventional Insurance
 Elements of:
• Uncertainty – Gharar
• Gambling – Maisir
• Interest – Riba
• Risk Transfer Mechanism
• UW + Investment Profit belongs to the Company
 Uncertainty – Gharar
 Conventional insurance contract is basically a
contract of exchange (mu’awadat) i.e. buying and
selling whereby policy (indemnity) is sold as goods,
with the premium as the price or consideration.
 The consideration must be certain for an exchange
contract.
 The amount to be paid is not known.
 The time it will occur is not known.
 Thus, it involves an element of uncertainty in the
subject matter of the insurance sales contract, which
renders its void under the Islamic law.
 Gambling – Maisir
 The insured 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 premium.
 Interest – Riba
 “ …. Allah has permitted trading and
forbidden riba” (Al Baqarah 2 : 275)
 Insurance funds invested in financial
instruments which contain element of Riba.
 Comparing Takaful to Conventional Insurance
Issue Conventional Insurance Takaful

Organization Principle Profit for shareholders Mutual for participants

Basis Risk Transfer Co-operative risk sharing
Value Proposition Profits maximization Affordability and spiritual
satisfaction
Laws Secular/Regulations Sharia plus regulations

Ownership Shareholders Participants

Management status Company Management Operator

Form of Contract Contract of Sale Cooperative,

Islamic contracts of Wakala or
Mudarbah with Tabar’ru
(contributions)
Investments Interest based Sharia compliant, Riba-free

Surplus Shareholders’ account Participants’ account

 Misconceptions about Takaful
Misconception – 1

• Risk Protection (insurance) is against Tawakkul (total dependence upon

Allah (SWT)).

Response
• In a Hadith narrated by Anas bin Malik, one day Prophet Muhammed
(PBUH) noticed an Arab Bedouin leaving his camel untied. He asked
the Bedouin, “Why don’t you tie down your camel”?
The Bedouin answered, “I put my trust in Allah (SWT)”. To which the
Prophet (SAW) replied, “Tie your camel first, then put your trust in
Allah (SWT)”. <Tirmidhi>
 . . . Misconceptions about Takaful
Misconception – 2

• All risk Protection (insurance) is Haram (prohibited)

Response

• Fiqh Council of World Muslim League resolution and Fiqh Council of

Organization of Islamic Conference in Jeddah resolved that,
conventional insurance as presently practiced is Haram, and that,
cooperative insurance (Takaful) is permissible and fully consistent with
Shariah principles.
 . . . Misconceptions about Takaful
Misconception – 3

• All insurance contracts seek to maximize profits, which takes benefits

away from the policy holders

Response

• Takaful operators are mutual or cooperative entities and they aim for
Community well being and self-sustaining operations.

• Under the Takaful Wakalah Model, the surplus in the fund is returned
entirely to the policy holders.
 . . . Misconceptions about Takaful
Misconception - 4

• All types of insurance are a form of Gambling or Wagering, which is

forbidden in Islam

Response

• Risk or Uncertainty can be divided into two classes:

• Pure Risk (involves the possibility of loss or no loss)
• Speculative Risk (involves the possibility of loss, no loss or gain)
• Takaful insures only Pure Risks and the claims are paid in the event of
Loss to cover repairs, damage, replacement of property, or an agreed
fixed sum.
Takaful Through Time

A chronology of developments
 ……. Takaful Through Time
S. NO. EVENTS DATE

Prophet Muhammad (PBUH) validated a system of community At the start of Hijri

1 self help and financial assistance which later developed into (During
Takaful. the 7th Century CE)

Unanimous decisions by Muslims & Fatwa issued by National

2 1972
Religious Council of Malaysia.

First International conference on Islamic Economics was held in

3 1976
Makkah.

Fatwa issued by Higher Council of Saudi Arabia in favour of

4 1977
Islamic Insurance model.

Development of Takaful in modern times by establishing the first

5 1979
Takaful Company in Sudan.

6 First National Reinsurance in Sudan. 1979

 ……. Takaful Through Time
S. NO. EVENTS DATE

Establishment of The Islamic Arab Insurance Company in

7 1979-80
Saudi Arabia which was later relocated in UAE.

8 Dar Al Mal Al Islami Trust, Switzerland. 1981

9 Saudi Islamic Takaful and Re-Takaful Company, Bahamas. 1983

10 Islamic Takaful Company in Luxembourg. 1983

Development of Takaful in modern times by establishing the

11 1984
first Takaful Company in Malaysia.

Takaful Act, an act passed to provide for the registration and

12 1984
regulation of Takaful business in Malaysia.
 ……. Takaful Through Time

S. NO. EVENTS DATE

Takaful Islamic Insurance and Takaful Islamic Re-Insurance

13 1985
in Saudi Arabia and Bahrain respectively.

Saudi Takaful Ltd., the first dedicated Re-Takaful in

14 1985
Tunisia.

International Cooperative & Mutual Insurance Federation

15 ( ICMIF ) started interacting with Takaful operators in a 1990's
proactive manner.

16 Takaful Bangunan IBB, Brunei Darussalam. 1993

17 PT Syarikat Takaful, Indonesia. 1994

 ……. Takaful Through Time
S. NO. EVENTS DATE

18 Syarikat Takaful, Singapore. 1995

19 Islamic Insurance Company, Qatar. 1995

ASEAN Takaful Group evolved into ASEAN Retakaful

20 1997
International (ARIL) in Labuan, Malaysia.

21 Establishment of Dubai Takaful Insurance Company, UAE. 1997

22 Establishment of Trinidad-Tobago Takaful Friendly Society. 1999

23 Establishment of Amana Takaful in Sri Lanka. 1999

 ……. Takaful Through Time
S. NO. EVENTS DATE

A code of Ethics was developed for the Takaful Industry by

24 2000
Takaful Malaysia and Takaful Nasional.

25 Al Aman Takaful, Lebanon. 2002

Incorporation of Pak-Kuwait Takaful Company Ltd., the first

26 2003
Islamic Insurance operator in Pakistan.
International Takaful conference held in London to promote
27 2003
Takaful business.
A paper was published by Bahrain Monetary Agency (BMA)
28 which proposed rules to regulate the Takaful and 2004
ReTakaful industry.
Takaful Insurance forum organized by Egyptian Insurance
29 Supervisory Authority (EISA) was held for the 2005
recognition of a growing interest in Takaful scheme.

30 SECP notifies Takaful Rules in Pakistan. 2005

 Takaful Worldwide
 The first ever Takaful company was established in
1979 - the Islamic Insurance Company of Sudan.
 70+ Takaful Companies in over 20 countries.
 Takaful premium is 0.1% (USD 3 Billion in 2004)
of the Global insurance premium and is expected
to increase to USD 12.5 Billion by 2015.
 Average growth rate higher than conventional
insurance companies.
 Non – Muslims increasingly opting for Takaful
products for commercial benefits.
Takaful Models
 Mudaraba Model
 The surplus is shared between the participants with a
takaful operator. The sharing of such profit (surplus)
may be in a ratio 5:5 , 6:4 etc. as mutually agreed
between the contracting parties. Generally, these risk
sharing arrangements allow the takaful operator to
share in the underwriting results from operations as
well as the favourable performance returns on
invested premiums.
 Profits
attributable
Mudaraba Model to
Shareholders

Company’s
Admin. &
Company Mangt.
Expenses

Investment Profit
By From
Company Investments

Company’s
Share from
Surplus
Takaful
General General Operational
Contribution Surplus
Participant Takaful Takaful Cost of
paid by Takaful
(Profit)
Fund Fund
Participant

Participant’s
Share
from Surplus
 Wakala Model
 Cooperative risk sharing occurs among participants
where a takaful operator earns a fee for services (as a
Wakeel or Agent) and does not participate or a share
in any underwriting results as these belong to
participants as surplus or deficit. Under the Al-
Wakala model the operator may also charge a fund
management fee and performance incentive fee.
 Wakala Model
Mudarib's’
Wakala Profit Share Management Profit/Loss
Company Fee From of PTF’s
Expense attributable to
Investments Investment
(Capital) (30% to 35%) of the Company Shareholders
Income

Takaful
Contribution Investment by Investment Income Sharing
paid the Company on Mudaraba Basis
by Participant

General Operational Surplus

Participants’ Investment Cost of Surplus Distribution
Takaful Income Takaful/
Reserves
(Profit) to
Takaful Fund Fund ReTakaful Participants
 Wakala -Waqf Model
It is a WAKALAH model with a separate legal entity of WAQF in-between.

 The relationship of the participants and the operator is directly with the WAQF
fund. The operator is the ‘Wakeel’ of the fund and the participants pay
contribution to the WAQF fund by way of Tabarru.

 The contributions received would also be a part of this fund and he combined
amount will be used for investment and the profits earned would again be
deposited into the same fund which also eliminates the issue of Gharar.

 Losses to the participant are paid by the company from the same fund.

 Operational expenses that are incurred for providing Takaful services are also
met from the same fund.
 Wakala-Waqf Model
Mudarib's’
Wakala Share Management Profit/Loss
Investment
Company Fee of PTF’s
Expense attributable to
Income
(e.g. 30% to 35%) Investment
(Capital) of the Company Shareholders
Income

Initial Donation
Investment by Investment Income Sharing
to create
the Company on Mudaraba Basis
WAQF Fund

Contribution Operational Surplus

Investment Cost of Surplus Distribution
by WAQF Fund Income Takaful/
Reserves
(Profit) to
Participant ReTakaful Participants
Models – The beauty of Islam lies in its
plurality & diversity … !
 Takaful Products
 General Takaful – offers all kinds of non-life
risk coverages products like motor takaful,
marine takaful, fire takaful, home takaful, shop
takaful, etc.
 Family Takaful – offers life coverage.
 Banca-Takaful – tailored coverages for
banks.
 Takaful Accounting
 Two separate accounts are created:
1. Participants’ Takaful Fund.
2. Shareholders’ Fund.
 Separate Accounts are created for:
1. Operational activities.
2. Investment activities.
 Dual audit of all transactions:
1. Financial Auditors.
2. Shariah Auditors. (criteria: Accounting & Auditing
Organization of Islamic Financial Institutions,
AAOIFI).
 P & L Account - Participants’ Takaful Fund
(Based on Wakala Fee @ 35% (say) (PKR)

Particulars Year

Gross Written Contribution 300,000,000

Movement in UCR (60,000,000)

Wakala fee (105,000,000)

Total Revenues 135,000,000

LESS:  

Claims Cost (Including IBNR Claims) (100,000,000)

Claims recovered 65,000,000
Retakaful Cost (80,000,000)

Total Expenses (115,000,000)

Underwriting result 20,000,000

Investment Income 2,000,000

LESS: Modarib's Share (From Investment Income) (500,000)

Pre-Tax Profit/(Loss) 21,500,000

 P & L - Shareholders’ Fund
(Based on Wakala Fee @ 35% (say) (PKR)

Particulars Year

Share Capital 200,000,000

Wakala fee 105,000,000

Modarib's Share 500,000

Total Revenues 105,500,000

LESS:  

Business acquisition cost (Commissions) (33,000,000)

Administration and general expenses
(70,000,000)

Total Expenses (103,000,000)

Operating Profit 2,500,000

Investment Income 20,000,000

Net profit / (loss) before taxation 22,500,000

 ReTakaful
 Currently few ReTakaful companies worldwide offering a
relatively small capacity:
 Sudan (1979) National Reinsurance.
 Sudan (1983) Sheikhan Takaful Company.
 Bahamas (1983) Saudi Islamic Takaful and ReTakaful
Company.
 Bahrain/Saudi Arabia (1985) Islamic Insurance and
Reinsurance Company.
 Tunisia (1985) B.E.S.T. Re
 Malaysia (1997) ASEAN ReTakaful International.
 Dubai (2005) TakafulRe by ARIG.
 Lloyds of London to form a ReTakaful Syndicate.
 SwissRe to form a separate ReTakaful Pool
 MunichRe to form a separate ReTakaful Pool
 Provision in Takaful Rules – 2005.
 Foundations of Takaful in Pakistan
 1949 - Declaration made in the Objectives Resolution adopted by
the Constituent Assembly of Pakistan “Sovereign state of
Pakistan is established to enable Muslims individually and
collectively to order their lives in accordance with the injunctions
of the Holy Qur’an and Sunnah”.
 1973 - The Constitution of Pakistan declares Pakistan as “Islamic
Republic of Pakistan and Islam as the official religion of the state”.
 1985 - Objectives Resolution was made ‘substantive’ part of the
constitution.
 1983 to 1989 - The Council of Islamic Ideology held its sessions in
order to survey the Islamic Insurance System.
 1992 - The Council of Islamic Ideology submitted its report on
Islamic Insurance System.
 2000 - The Insurance Ordinance defines the term “Takaful” in
Section 2 and provides for establishment of Takaful companies in
the country.
 Sept., 2005 - Takaful Rules notified .
 Takaful Prospects in Pakistan
 97% Muslim population.

 Demand for insurance increasing with increase in per

capita income.

 Personal lines insurance business (leasing, health,

Medicare) growing at a higher rate than other conventional
classes.

 Islamic banking on sound footing with support of the Govt.

 Conclusion
 Takaful defined.
 Difference with conventional insurance.
 Takaful Models
 Takaful Worldwide
 Prospects and Outlook.
Thank you for your attention