Takaful – Opportunities & Challenges Session IV 24 January 2012
Bilal Khan (IFEC, UK) Badrul Hasan (SAH Global)
Presentation Layout Risk mitigation: the Islamic and conventional contractual perspectives Islamic jurisprudential influence on Takaful model development Salient issues in Retakaful
Meaning of Risk (1.1)
Legal: The set of “circumstances” that are potential source of undesirable change or which imply the possibility of undesirable change is called risk. When the risk materialises it become a peril Commercial: An exposure to loss of value
Shari’ah: There are two terms that need further research: Mukhatarah (risk) and Dhaman Hukmi (liability). Mukhatarah is similar to risk whereas the Dhaman Hukmi is a hidden liability which may take place and not always be mitigated
Types of Risk (1.2) Pure Risk: There is only the possibility of loss or no loss Thinks that there is a risk Does not manipulate: Follows the normal cause of events
Result by Pure risk – in case of loss compensation is justified as this is not gambling but is a natural cause of event
Mr A Natural act occurs Result
Result of Pure Risk – if no loss then there is no compensation
Types of Risk (1.3) Speculative Risk: This involves the possibility of loss, profit or no change in value Speculative risk
Mr A
Manipulating risk
Expected outcome
Action occurs as planned
Result Good outcome (as planned)
Both results are unjustified as gambling is involved
Bad outcome (not as planned)
Differences between conventional insurance models (1.4)
Mutual insurance: A mutual insurer is an insurer (a) of whom all members: qualify as such by virtue only of their being owners of policies issued by that insurer; and are entitled to participate in the exercise of control in general meetings of that insurer (b) whose profits are distributable only to owners of policies issued by the insurer, in accordance with the instruments under which the insurer has constituted and carried on business. Balance of premium is returned to the insured. If any shortfall, members should contribute.
Proprietary insurance: Its purpose is to make a profit which is to be distributed among its shareholders and not policyholders.
Takaful: It tends to be a blend of these two in Shar’iah-compliant manner!!
Main legal elements of an insurance contract (1.5)
1. It is a contract whereby for some “consideration” (generally but not necessarily for periodic payments called premium), the insured secures some benefit on the occurrence of an event (Riba element due to exchange contract involving money) 2. The event must be uncertain as to whether it will happen or not, or if the event will happen, there must be uncertainty as to when; (Gharar Fahish and Maysir are manifest) and 3. The event must be adverse to the insured, in that s/he possesses an insurable interest in the subject matter insured (inequality in contract and buying of intangibles)
Haram Elements (1.6)
Riba: “increase” which an owner of valuable property (māl) receives from the debtor for allowing time to repay the debt (Imam Tabari)
Riba is the name of every increase in lieu of which there is no consideration. Since this period is not a valuable property (māl), its return has been declared as unlawful Riba manifests itself in many ways:
investment of premium in Haram avenues, the compensation received are not usually equal to premium paid etc
Haram Elements (1.7)
Gharar is another prohibited element proven form Hadeeth (Prophetic tradition) Lexical meaning: risk; hazard. Taghreer means to expose oneself to or one’s property to jeopardy. Technical meaning : Gharar takes place where the consequences (in dealings) are concealed. (Sarakhsi), i.e. there is uncertainty over the existence of the subject-matter of sale, or what is bought or sold is unknown. No clear definition as it manifests itself in various shades. The quantum of damages to be paid is not clear, the period to pay premium prior to materialisation of risk is unknown, extent of risk calculation can be problematic in non-patrimonial damages etc.
Haram Elements (1.8)
Maysir: It is often compared to a game of chance which involves a zero sum game. One party gets everything at the expense of the other party that loses everything.
Basically conventional insurance is similar to gambling because the insurance company is hoping (gambling) that the insured events will most probably not happen; therefore it will insure the events while the insured is betting that there is high probability that the event will materialise. Both parties expose a sum of money whereby one will win while the other will lose. The element of insurable interest differentiates all insurance with betting but now UK changed its Gambling Act. Will that have the same effect?
Maqasid of Shari’ah and Risk Mitigation (1.9)
The overarching objectives of the corpus of Islamic law is to protect 5 fundamental things: Religion Life Family/progeny Intellect Wealth
Shari’ah has laid much emphasis on risk mitigation to achieve these higher objectives. E.g. Yusuf (AS) and draught; Muhammad (SAW) wearing armour on the battlefield; He also said “tie your camel then place trust in Allah”.
Need for risk mitigation (1.10)
In the absence of
Baitul Mal, Awqaf Tribal or family protection system
Individuals are faced with more risk and less help; the need to find and adopt mitigation techniques is becoming paramount to achieve the objectives of Shari’ah
Takaful and Tabarru’ (1.11)
In modern context insurance policies are the most widely used and accepted means to mitigate the risk exposed to religion, life, family, intellect and wealth
However due to the Haram elements the need arose to find an Islamic alternative. Thus Takaful was developed based on the concept of Tabarru’
Solution to the conventional insurance contract (1.12)
When adopting the concept of Tabarru’ the Takaful contract is converted into a unilateral contract. This implies that there is no reciprocal consideration that raises the issue of contractual promise as found in the general theory of contract. In Shari’ah, this is tantamount to a unilateral contract and not a contract of exchange. A contract of exchange attracts Riba, Gharar, and Maysir but this is not the case in a unilateral contract as there is no counter value (Mu’awadah) to convert it into a commercial transaction. This is due to a legal maxim So Tabarru’ resolves the issue of Riba, Gharar and Maysir that are encountered in the definition of an insurance contract
Potential problems of enforceability (1.13)
A Tabarru’ being a unilateral contract begs for the question of enforceability on both parties. Sheikh Mustapha Zarqa observes that there is an implicit Wa’ad (unilateral promise) that will be binding upon the parties (Wa’ad Iltizami) which has been held to be legally binding by the OIC However how would this work in a secular court? Have to prove tort, or forbearance or under deed under English common law. Another aspect is to consider it as a Dhaman, a guarantee to cover the participants in case of problem which can be built into the joint-guarantee contract of participants. This brings in other legal issues as we do not have a case law nor an Act of parliament for that yet! Another solution could be maritime insurance. In some jurisdictions the Mutual Insurance Act has been applied but is a Takaful contract similar to a mutual insurance policy?
Flow chart (1.14) Profit
General Takaful
£100,000
Investment GTF £1,000,000
GTF £1,100,000
Takaful Malaysia
Operational Cost Of Takaful Claims £500,000
Reserves £300,000
£180,000
60%
Profit £300,000
40% Participants £120,000
Flow chart (1.15) Takaful Malaysia
Family Takaful £1000 Payment/ Installment
FTF
PA £950
PSA
£50
Profit
30=£30
£100
70=£70
Investment
PA
£ 66.50
PSA
£ 3.50
£950
£1000 £50
Differences between Commercial Insurance, Mutual Insurance and Takaful
Need for Retakaful (1.18)
Retakaful does this by acting as back-up against the risk of ruin arising out of any catastrophic event, and by reducing the capital requirements for Takaful companies who would otherwise be required to shoulder the entirety of their risks on their own capital base. Where Retakaful companies are highly rated, this improves confidence among Takaful market operators and encourages them to strengthen their relationships with the Retakaful market in place of the reinsurance market. In this way, Retakaful completes the Shari’ah compliance circle. Retakaful leads the way towards Retrotakaful.
Thank you Questions and answers Contact details for further enquiries
[email protected] 0044 7791 288 347
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