We have a fresh opportunity to reflect about Takaful (Islamic insurance). At this point Zainal Kassim isn’t going to speak about his views only on Takaful (Islamic insurance) but Takaful in the world.
Zainal Kassim
He is an expert in Actuarial Consulting and Takaful (Islamic insurance).
He has been giving lectures and takes part in international Conferences
The following is an interview with Zainal Kassim, the senior partner of Actuarial Partners Consulting in Malaysia, discussing developments in Takaful(Islamic insurance).
Q:In many places in the world, especially since the financial crisis in 2008, consumer protection has become a growing focus for financial regulators. While insurers welcome measures that increase customer trust in insurance, consumer protection measures can sometimes have unintended consequences. I wonder about the difference between takaful Islamic insurance and non Islamic insurance in the insurance business.
ZK : In order to answer your question perhaps it is best to start from considering some of the reasons why commercial insurance is not Sharia compliant (your question 3). Commercial Insurance is a business where the objective is to make a profit. From the perspective of the insurer it is “selling” protection. For a premium the insured would be paid a certain amount should a misfortune befall him and he is financially affected through the loss of the insured asset.
From a technical perspective a financial risk which originally resides with the insured is, through the insurance contract, transferred to the insurer in exchanged for a premium. In the context of the law of Muamalat which governs trade in Sharia law, this contract is invalid as it contains elements of;
i) Gharar (uncertainty). The insurance premium contains a certain amount that covers the insurer’s expenses and profit and the rest to meet claims. In Commercial Insurance this is not disclosed to the policyholder.
In cases where the premium is payable over a duration of more than a year, the actual total premium payable by the insured is also unknown if the premiums remaining unpaid at the time of a claim is forgiven. Sharia requirement for transparency in a contract of exchange stems from a requirement that a trade be conducted fairly and to do this requires that both parties to the transaction having access to such information as is available for him to make an informed decision whether or not to proceed with the purchase/sale.
ii) Mysir (gambling).
If you consider an insurer having only one policyholder the following is evident. If the insured event does not transpire during the term of insurance the insurance company makes a “profit”.
Whilst if the insured event occurs it makes a loss, as the amount paid to the insured far exceeds the premium received. As the risk of a loss to the insurer was created through the execution of the insurance contract this can be akin to the insurance company making a wager.
The insurer minimizes this probability of a loss through appropriate pricing of the premium AND diversifying its risk portfolio through selling many policies.
The same does not apply to the insured as, should a claim occur his financial position is not affected, i.e. the sum paid by the insurer as compensation, exactly equals to the financial loss he experiences. In the early days of the history of commercial insurance it was possible to buy
insurance on the life a celebrity or an asset that does not belong to the insured. Should this happen then both the insurer and the insured are making a wager!
iii) Riba (interest).
In insurance the premium is invested whilst waiting to pay claims. Modern insurance companies invest heavily in interest bearing securities. The income earned from investing this premium contributes towards paying a portion of the claims, thus making the commercial insurance contract not Sharia compliant.
Your question about consumer protection perhaps applies to the lack of transparency in many existing insurance contracts thus leading to the consumer being disadvantaged. An advocate of commercial insurance may argue that competition among insurers would compensate for the lack of transparency.
However, insurance is normally SOLD not BOUGHT and so policyholders are unlikely to shop around before buying insurance. Insurance contracts among insurers are also not necessarily comparable making a simple price comparison invalid.
On your point about unintended consequences, I can give as an example regulators requirement on solvency capital. Solvency capital refers to the excess of assets over liabilities in an insurance company.
The theory is that this solvency capital should be such that it would be sufficient in any one year to cover the difference when claims exceed premiums collected. Unfortunately when more capital is deployed this requires the insurer to target a higher profit margin to service the higher capital.
This then increases the premium payable by the insured making the cost of cover more expensive. As the experience with AIG during the 2008 financial crisis has shown however, capital alone will not necessarily avert an insurer going insolvent.
The rating agencies then judged that the amount of capital held by AIG prior to the crisis was sufficient enough to give it a AAA rating. It turns out the rating agencies were wrong as AIG had to be bailed out by the United States government.
Takaful Islamic insurance should avoid being dependent on capital. In insurance capital can be described as “risk” capital as it is on risk to cover excess claims. Capital in non-insurance and non-banking ventures is for the purchase of services and goods with which to produce the “finished” product for sale.
In insurance and banking it is there to honor guarantees “sold” by the insurer and bank. In a true takaful operation the emphasis is on solidarity
among the participants.
This may mean that the sum assured may need to be reduced if funds are inadequate but there is also the possibility that some of the premiums may be refunded if there is a surplus. This concept of mutual insurance is sometimes difficult to explain to the public and the regulator’s concern is whether the public understands the policy he has entered into. It is because of this concern that in Malaysia Takaful is not a mutual, it is a hybrid. The regulator requires that investors provide capital which then resides in the Operator fund while premiums collected reside in the participant fund(s). This capital is available to provide a loan to participants should claims in any one year exceeds premium collected.
Q: When we consider takaful, it is a modern approach to make the insurance contract comply with the law of Muamalat. Thus perhaps before considering what takaful models would be best, we need to consider why insurance generally is not Sharia compliant. Could you elaborate on that, please?
ZK: I have explained the reasons why commercial insurance is not Sharia compliant in the answer to the previous question. It is perhaps worth bringing up the point though that because commercial insurance was not yet invented during the time of our Prophet (S.A.W), there is no definitive source with which to judge whether commercial insurance is permissible. There are some Sharia scholars who argue that commercial insurance is in fact acceptable in Islam.
I do not wish to discuss the reasons why there is this opinion here, suffice to say that opinions differ among the scholars whether to measure the insurance contract with the same yardstick as used to assess other commercial trade contracts for compliance with the law of Muamalat. Notwithstanding whether the insurance contract itself is permissible however, I do not think there is disagreement among Sharia scholars that the investments of the insurer should adhere to those acceptable in Islam, for example the avoidance of riba and the need to invest only in companies that conduct business that does not go against Sharia principles.
Q:You took part in Global Insurance Conference 2011, Session VI: Islamic Insurance/Takaful by Senior Partner, Actuarial Consulting Sdn Bhd, Malaysia, I want to know more about their reaction in Islamic Insurance/Takaful and how you felt their thoughts in.
ZK: As you know the Conference was hosted by the World Bank and was held in Washington DC. Thus the majority of participants were non-Muslims. My aim in the presentation was to highlight that Islam covers all aspects of life, including the principles on how trade should be conducted, and that you do not have to be a Muslim to subscribe to those same principles. Takaful is not only for Muslims.
In Malaysia a significant percentage of takaful participants are non-Muslims. Transparency and fairness is not only the purview of Islam but also the other religious faiths. Perhaps we should redefine Takaful as ethical insurance.
Indeed modern insurance was first invented in the form of a Mutual in a Church of Scotland in 1744 to provide for widows and orphans of deceased ministers. The original intention of insurance is solidarity among the insured rather than to make a profit from the service of providing insurance.
Q: What about takaful (Islamic insurance) in Arab and Islamic countries?
ZK: Unfortunately only in Malaysia do we see takaful prospering. This has to do with the support the Government has given to the propagation of Islamic Finance in Malaysia. It is important for takaful that there are suitable regulations with which it is conducted. There is also a need for those regulations to be enforceable.
Both are present in Malaysia but not in many other countries. Takaful also needs access to Sharia compliant assets as takaful involves investing participants’ monies. Malaysia has the biggest sukuk market in the world without which we cannot have some certainty in pricing of takaful products. Furthermore Malaysia also now has a pool of experienced takaful practitioners which ensures that takaful companies are run professionally.
Q: How about takaful (Islamic insurance) face global challenges.
ZK: There many challenges facing takaful. For one there is no standard takaful “model”. This makes regulating takaful difficult. For the other the understanding and awareness among the Muslims about insurance generally and takaful in particular is sorely lacking. Also takaful cannot succeed by itself, it also needs to have access to an Islamic capital market and appropriate investments. In Malaysia takaful was introduced only after Islamic banking and the sukuk market started. Last but not least we need a big pool of trained human capital who are knowledgeable about takaful. This includes professionals (e.g. takaful managers and actuaries) and Sharia scholars.
Q: What does takaful (Islamic insurance) suffer from?
ZK: If you want a simple answer to that I would say agreement as what is the best takaful model to implement that will satisfy regulators’ concerns with consumer protection and also satisfy most Sharia scholars as to its compliance with Sharia law. It would also assist the development of takaful greatly if consumers understand the limitations of takaful. If consumers insist on guarantees then a truly Sharia based takaful model is not possible.
Q:What about takaful (Islamic insurance) in global village?
ZK: This is an interesting question. If I can diverge a little from takaful, you would appreciate that how Islamic banking and finance has evolved to date is by concentrating on making the transaction contract sharia compliant. You hear the word “interest” being replaced with “profit” for Islamic mortgage loans for example.
Thus, whilst the contract is Sharia compliant, the experience (the outcome) of the consumer taking out a conventional loan and a Sharia compliant loan does not differ substantially.
This has to do partly out of the need to coexist in the global market. Until there is a strong support for Islamic finance anything substantially different from conventional financial instruments runs the risks of failure due to the possibility of arbitrage between the two financial systems.
The same with takaful, anything substantially different from conventional insurance runs the risk of suspicion from regulators and misunderstanding from consumers. Education is key and unfortunately not much has been expanded to reach out to consumers to educate them about the advantages of risk sharing rather over risk transfer.
Abdur-Rahman AbouAlmajd: Thank you very much.