2010

Takaful Insurance
I came to realize how food stores and restaurants were near empty during the recently
concluded Ramadan Kareem. That only confirmed the large population of us that
believe in the Islamic faith. This publication briefly looks at TAKAFUL, an Insurance
product tailored and compatible with the Islamic faith.

Jolaolu Fakoya ACII, APRM.

9/20/2010
Roughly a quarter of the world’s population
belongs to the Islamic faith. Although they live all
over the world, many Muslims live in the fast
growing emerging market economies. Insurance
penetration, particularly life insurance, is low in
Muslim countries - countries with Muslim
population of more than 50%.
Premiums written amounted to 1.3% of GDP in
2007. One reason for low insurance penetration is
that conventional insurance is not compatible
with Islamic faith as declared by the grand
council of Islamic Scholars (Majama al-Figh;
Academy of the organization of Islamic
conference).
Muslims conduct their lives according to the
Islamic principles laid out in Shariah.
Consequently, all transactions must be Shariah-
compliant, including the type of insurance
coverage purchased. The following must be
avoided:
 Riba: payment/ receipt of interest
 Maisir: excessive risk taking
 Gharar: Uncertainty and unclear terms in
contracts
 Haram: Investment in anything
unacceptable- e.g pork, alcohol, gambling
and pornography.
In 1985, the grand council of Islamic scholars
reached an agreement on insurance:
 The commercial insurance contract, as
practiced by commercial insurance
companies, contains substantial
uncertainty, which renders the contract
defective. Consequently, it is forbidden.
 The alternative contract, which respects
the principles of Islamic transactions, is
the cooperative insurance contract. It is
built on the principles of voluntary
contribution and mutual cooperation.
 The academy calls for Islamic countries to
establish mutual cooperative institutions
for insurance and reinsurance.
However, virtually all scholars agree on two forms
of insurance.
 Social Insurance
 Mutual Insurance
Given the varying interpretations of Islamic law,
different insurance models have emerged. The
models considered include non-profit mutual
insurance and models that closely resemble
conventional insurance, with funds invested in
Shariah-compliant assets.
What is Takaful Insurance?
“Normally, we do not so much look at things as overlook
them” Alan Watts
Takaful refers specifically to insurance models that
use segregated funds for policyholders and
shareholders. Takaful is a system based on the
principle of mutual assistance (ta’awun) and
voluntary contribution (tabarru), where the risk is
shared collectively and voluntarily by a group of
participants. Through payment of a voluntary
donation and clear definition of type of loss,
uncertainty (gharar) and excessive risk taking
(maisir) are removed from the contract. Today
various models of takaful exist.
Takaful involves:
 The creation of a Shariah supervisory
board in addition to the conventional
board of directors that oversees insurance
operations and compliance with the
Shariah
 The separation of shareholder funds from
policyholder funds
 The commitment to distribute technical
profits to policyholders
  The avoidance of investment in non- Highlights of Malaysia
shariah-compliant assets
 Between 100-150 takaful companies exist
in the world.

The takaful operator, typically called a joint stock  Approximately $1.7bn in takaful
company, is paid a fixed proportional fee premiums were written in 2007
(wakalah fee), a performance-based fee
(mudarabah) or a combination of the two. If  Malaysia is the most developed takaful
there’s an underwriting deficit, the takaful market with advance regulations that
operator is not allowed to cover it. Instead, it must encourage takaful growth; for example,
provide a non-interest bearing loan (qard al- tax incentives for takaful operators;
hasnah) that is to be repaid by future surpluses Islamic banking, paid-up capital is 1/10th
from the underwriting pool. of conventional insurance hence, lower
entry barrier; acts as a hub for Islamic
Takaful products are sold by companies set up as finance.
fully Islamic firms, where the entire business
operations are undertaken in accordance with the  The population of Malaysia in 2007 was
Shariah. Alternatively, takaful products can be sold estimated as 26.6m while the GDP was
by conventional financial institutions through an estimated at $191.7m. GDP per $1000
Islamic window that allows customers purchase capita was estimated at 7.2. Total
Shariah-compliant products and services. Such premium written was estimated at 9.5bn.
institutions may sell conventional products. The average GDP growth rate over the
period [2004,2007] was put at 5.5%
Today the most popular models are the agency
model (wakalah), the profit-sharing model  Takaful premiums written in 2007 in
(mudarabah) or a combination of the two (hybrid Malaysia amount to $526m which is about
model). A fourth model (waqf, endowment 5.55% of the total premiums written in
model) can be found in Pakistan. Malaysia and 31.73% of the total takaful
premiums written - represents the largest
The major difference between the wakalah and
portion.
mudabarah models is that in the former only a
pre-fixed underwriting fee is collected by the  Takaful premiums has grown in Malaysia
operator while the latter does not collect at a rate of 21% per year over the past 3
underwriring fee but shares in the profits earned years (reference year is 2007) and at an
on policyholders’ funds. average of 17% per annum between 1998
– 2007
Under the waqf model, the operator makes an
initial contribution to a waqf fund. Policyholders
make additional contributions to the fund, which 7000 25%
is then used to settle claims. The operator earns 6000
Annual growth rate
20%
Premiums written

wakalah but the funds left in the pool after all 5000
claims are paid are received by policyholders. 4000 15%
3000 10%
2000
5%
1000
0 0%
Life Non-Life Takaful
  The overall net claims incurred ratio in
2007 was 71.5% for takaful and 65.7% for
conventional insurance signifying higher
incidence in takaful business.
Opportunities for the rest of the world:
 The top Muslim countries have strong
economic fundamentals and growth
prospects
 Population of Muslim countries are
rapidly growing ; the demographs are also
favorable
 Shariah scholars agree that Muslims
should refrain from buying conventional
insurance if a takaful operator is selling
the same product, and offering similar
benefits and services.
 Increasing Islamic consciousness has
resulted in Muslims switching from
conventional insurance to takaful
products; there’s tendency to rely less on
necessity (dharurat) to justify the use of
the conventional insurance.
 Islamic banking has boomed over the
past thirty years, while takaful is still in its
early stages. The success of Islamic
banking is expected to benefit takaful
 Takaful may benefit and attract non-
Muslim buyers.
Challenges:
 Persuading the consumer of the key
benefits of a takaful is key
 Price and services have to live up to
consumer expectations as well
 Lack of standardization
 Shortage of tradable shariah-compliant
assets
Jolaolu is a specialist in Actuarial matters especially in the areas of Pension & Employee Benefits
and Insurance. He is a Member of the Institute of Actuaries, UK
Comments, suggestions and topics are welcomed.
e-mail: jollyfakey@yahoo.com
 Qualified staff with insurance and shariah
know-how are needed
 Distinct corporate governance issues
Conclusions:
 Muslims are underserved by the insurance
industry
 Takaful premiums were $1.7bn in 2007
 Young, growing populations provide a
solid base for the future growth of takaful
 Free choice of takaful model is
encouraged
 More big insurers are entering the takaful
market examples are HSBC by setting up
HBSC Amanah Takaful in Malaysia; AIG
by setting up AIG Takaful also known as
ENAYA with its headquarters in Bahrain
and setting up branches in the Middle
East / South Asia (Kuwait, Pakistan,
U.A.E, Saudi Arabia), Europe (France),
South East Asia (Malaysia, Indonesia) and
the United States; Zurich financial
services group by investing/controlling
51% in a joint venture company with Abu
Dhabi National Takaful Company in
Dubai.
References:
Paper is based on previously conducted research
work the author on the subject.
A.M. BEST’s Rating Methodology: Takaful
Insurance Companies
SWISS RE’s SIGMA: Insurance in emerging
markets: overview and prospects for Islamic
insurance.