MOSCOW HALAL BUSINESS FORUM All-Russia Exhibition Centre June 2013 Moscow

Transcription

1 MOSCOW HALAL BUSINESS FORUM All-Russia Exhibition Centre June 2013 Moscow Talk on Takaful 13 June 2013 Alberto G Brugnoni - ASSAIF

2 CONTENTS OF THE TALK INTRODUCTION The meaning of Takaful Shariah perspective Takaful and conventional THE CONTRACTS AND THE ACTUAL PRACTICE Contractual relationships Business forms and models THE PRESENT STATE OF THE TAKAFUL INDUSTRY An appraisal of the market Where to source information, major world events REGULATORY ISSUES Regulatory bodies and standards Some regulatory and accounting challenges 2

3 INTRODUCTION The Meaning of Takaful and a General Definition The Shariah Basis of Takaful The Shariah Perspective on Conventional Insurance From the Shariah Perspective the Key Issue is Gharar Some Additional Reflections on Conventional Insurance The Islamisation of Insurance: Tackling gharar with tabarru Insurance and Takaful: a Comparison 3

4 THE MEANING OF TAKAFUL & A GENERAL DEFINITION Takaful means a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose (Laws of Malaysia, Act 312, Takaful Act 1984 Part 1 Preliminary) A strategy of risk mitigation by way of a collective risk taking that distributes risks and harms to large numbers of participants. This mitigates the otherwise very damaging harm that can be caused to a person if the risk is to be borne individually. The purpose of Takaful is not profit, but to uphold the principle of bear you one another's burden (dr Engku Rabiah Adawiah Engku Ali & Hassan Scott Odierno). Hence, Takaful embraces the following elements of cooperation, shared responsibility and mutual protection: policyholders cooperate among themselves for their common good every policyholder pays his subscription to help those who need assistance losses are divided and liabilities spread according to the community pooling system uncertainty is eliminated concerning subscription and compensation it does not derive advantage at the cost of others 4

5 THE SHARIAH BASIS OF TAKAFUL The world Takaful التكافل is the masdar of the 6 th form the Arabic root-verb kafala with the meaning of cooperation, shared responsibility and mutual protection. The Shariah basis of which, can be deduced from the Qur an, Hadith and a legal maxim (qa idah fiqhiyyah): Cooperation: Help one another in virtue and piety (al-birr wa al-taqwa), but do not help one another in sin and transgression (Qur an,5:2). And God will always help his servant for as long as he helps others (Ahmad bin Hanbal and Abu Daud) Shared responsibility: The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected (al-bukhari and Muslim). And One Believer and another Believer are like a building, whereby every part in it strengthens the other part (Imam al-bukhari and Imam Muslim) Mutual protection: By my life (which is in God s power), nobody will enter Paradise if he does not protect his neighbour who is in distress (Ahmad bin Hanbal) The concept is also grounded in Islamic mu amalat, observing the rules and regulations of Islamic law. Muslim jurists acknowledge that the basis of shared responsibility in the system of aqila (payment of blood money or diyyah) laid the foundation of mutual insurance Finally, the legal maxim al-darar yuzal (damage or harm is removed) entails that once any damage is caused or occurred, efforts must be made to remove it 5

6 THE SHARIAH PERSPECTIVE ON INSURANCE Despite having the same noble objective of providing protection and coverage to the policy holders, conventional insurance suffers from fundamental problems in its modus operandi, mainly due to the occurrence of the Shariah non-compliant elements of gharar (uncertainty, deceit, risk, hazard), ribà (interest, usury) and maysir (gambling) The consensus of the fuqaha on the three key non-compliant elements is general and unchallenged. For ex.: 1972 fatwa by National Council for Islamic Religious Affairs of Malaysia that life insurance is not lawful as it contains gharar, riba and maysir in 1985, the Council of the Islamic Fiqh Academy under the auspices of the OIC in its resolution n 9(9/2) resolved that the commercial insurance contract with a fixed periodical premium contains major elements of gharar which void the contract and therefore is prohibited Ribà: its occurrence in conventional insurance is through the investment of the premia payments in ribà-based financial instruments Maysir: its element in conventional insurance is attributed to the act of purchasing the policy with the hope of getting more in term of compensation if any of the perils were to occur GHARAR 6

7 THE SHARIAH PERSPECTIVE ON GHARAR The existence of gharar may deny the contracting party/ies from equal bargaining power, resulting in the inability to make informed decisions as they do not adequately understand the attributes or consequences of the contract. This is the reason why gharar is prohibited under Islamic Law The Qur anic reference is: O ye who believe! eat not up your property among yourselves in vanities (batil): but let there be amongst you traffic and trade by mutual goodwill nor kill (or destroy) yourselves: for verily Allah hath been to you Most Merciful (4:29) Vanities (batil) is interpreted as all illegal and defective elements in contracts including those involving uncertainty Trade by mutual goodwill is reinforced by the requirement imposed by jurists for a formal offer and acceptance (indicating consent and eliminating mistakes, fraud, etc.) by the contracting parties in order to have a valid contract Hence: under Islamic legal principles, the subject matter of any exchange contract (e.g. sale) must be certain, i.e.: specific identification of the subject matter and its attributes and the certainty of its existence and deliverability in order to meet the obligation under the contract 7

8 THE SHARIAH PERSPECTIVE ON GHARAR In a sale contract the subject matter includes the assets (goods) and the consideration (price). In conventional insurance the main contract between the parties is an exchange (sale) contract where the goods are the policies (indemnity or protection) and the price is the premium From a Shariah perspective the problem in this sale transaction is the subject matter of the sale. Policy and premium (the subject matters) are not certain because the actual value or amounts of both are tied or conditional to the occurrence of uncertain events (the perils and hazard) The actual amount of coverage payable under the policy depends on the occurrence, timing, extent and type of peril or hazard, which are not known until the actual occurrence of the event Similarly, the total amount of premium payable is also uncertain because it depends on when the peril occurs In such a contract, the insurance company is aiming at making profits from the uncertainties inherent in the contract, making it illegal from the Shariah point-of-view Note that the prohibition of gharar does not strictly apply to charitable (gratuitous) and unilateral contracts where no counter-values are expected in return. Thus, its existence in these contracts does not render them void or voidable 8

9 SOME ADDITIONAL REFLECTIONS ON INSURANCE 1. Risk-transfer against risk-sharing. Conventional insurance is based on profit-motive and is owned by shareholders of the insurer company. Takaful itself is non-profit and is owned by policyholders. The insurer is now called the operator and receives a fair compensation 2. In conventional insurance, insurer s profits include underwriting surplus. Essentially, its profit comprises underwriting surplus plus investment income. The distribution of profits or surplus is a managerial and as a result there is a conflict of interest between the shareholders and the policyholders. In case Takaful the operator,, has no claims in underwriting surplus. Further, it is the Takaful contract, not the management of the operator company that specifies in advance how and when profit will be distributed 3. In conventional insurance, the sources of laws and regulations are set by state and are man-made. In Takaful, the laws and regulations are based on divine revelations 4. In case of dissolution of the conventional insurer, reserves and excess/surplus belong to the shareholders. In case of dissolution of the Takaful operator however, they could be returned to participants, or donated to charity. Most scholars would prefer the latter course of action 5. The Islamic insurance company has an additional obligation of annual payment of zakat 6. Even with cooperative insurance there are issues with Shariah compliant investments, shareholders surplus participation and shareholders governance 9

10 The Islamisation of Insurance: Tackling gharar with tabarru As we have seen, Islam is not against the concept of insurance itself. In fact, the concept of mitigation of risks by adopting the law of large numbers was widely used in Islam and especially in the practice of al- aqilah In my view, insurance against hazard can be modified in a manner which would bring it closer to the Islamic principle by means of a contract of donation with a condition of compensation (dr Yusuf al-qardawi, The Lawful and the Prohibited in Islam, 276) From the above quote, it is clear that the most essential modification is to substitute the contract of sale and purchase of the policy that give rise to the gharar issue with a contract of donation (tabarru ) with a condition of compensation Tabarru : contract of gratuity/charity, i.e. to relinquish a portion from the contribution as a donation for fulfilling obligation of mutual help, used to pay claims submitted by eligible claimants. Tabarru changes the nature of the insurance policy from an exchange contract (mu awadat), which is bilateral in nature, to a charitable contract, which is unilateral in nature This allows the existence of gharar to be tolerated, the logic being those paying the tabarru contributions are not aiming to profit from the uncertainty 10

11 INSURANCE AND TAKAFUL: A COMPARISON Contract Responsibility of participants/ policyholders Liability of the operator/ insurer Access to capital by operator/insurer Investment of Funds Takaful A combination of tabarru (donation) and wakalah or mudharabah contracts Make contributions to the scheme Mutually guarantee each other Acts as the administrator of the scheme and pays the benefits from the funds In the event of deficiency in the funds will provide qardh hasan to rectify the deficiency Share capital but not debt Funds invested in Shariah-compliant instruments only Insurance An exchange contract (sale and purchase) between insurer and insured Pay premium to the insurer Liable to pay the insurance benefits as promised from its assets (insurance funds and shareholder s funds) Share capital, debt, subordinated debt No restriction but use of prudential reasons 11

12 THE CONTRACTS AND THE ACTUAL PRACTICE Framing Takaful: Building Blocks Contractual Relationship Amongst the Participants Contractual Relationship The Participants & the Operator Five Possible Contracts: Three in Use and Two Not Adopted Two Takaful Business Forms First Takaful Business Form: Not-for-Profit: The Pure Cooperative Model Second Takaful Business Form: Commercial Mudharabah: The Mudharabah Pure Model The Mudharabah Modified Model Second Takaful Business Form: Commercial Wakalah: The Wakalah Model Second Takaful Business Form: Commercial Hybrid: The Hybrid Wakalah and Mudharabah Model 12

13 FRAMING TAKAFUL: BUILDING BLOCKS A Takaful scheme essentially involves two main parties: a group of participants (policyholders in conventional insurance) and the Takaful operator. An important principle for all profit-based models is the segregation between the participants contributions (participants Takaful fund) and the capital contribution of the Takaful operator representing the paid-capital of the company (shareholders fund) provided to develop the business The main sources of income for the Takaful operator are: (i) income from the investment of the shareholders fund; (ii) wakalah fees in accordance with agency arrangement of wakalah for underwriting operations, and/or (iii) share of income from investing the participants Takaful funds (on the basis of pre-agreed ratios according to mudarabah) The net underwriting surplus belongs, at least in principle, to the participants (AAOIFI Shariah Standards n 26 (5/5) 2007) an AAOIFI announcement in May 2011 indicated that performance fees to the operator could be paid out of surplus though the beneficiaries can only be the management and not shareholders Takaful is the Islamic counterpart of conventional insurance, and exists in both life (or family ) and general forms. It is based on concepts of mutual solidarity, and a typical Takaful undertaking will consist of a two-tier structure that is a hybrid of a mutual and a commercial form of company (Islamic Financial Services Board IFSB and International Association of Insurance Supervisors IAIS) 13

14 FRAMING TAKAFUL: BUILDING BLOCKS Islamic insurance is an agreement between persons who are exposed to risks to protect themselves against harms arising from the risks by paying contributions on the basis of commitment to donate (iltizam bi l-tabarru ) following from that, the insurance fund is established and it is treated as a separate legal entity (shakhsiyyah i tibariyyah) which has independent financial liability the fund will cover the compensation against harms that befall any of the participants due to the occurrence of the insured risks in accordance with the terms of the policy (Accounting & Auditing Organization for Islamic Financial Institutions, Shariah Standard 26 (2) of 2007) Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants the company s role is restricted to managing the insurance operations and investing the insurance contributions (AAOIFI - Financial Accounting Standard n 12, Appendix E) 14

15 CONTRACTUAL RELATIONSHIP PARTICIPANTS The participants are insuring themselves: the tabarru (donation) contract is the pillar in the Takaful scheme that allows the gharar element to be tolerated without affecting the validity of the contract. The donation can be either in the form of outright gift (hiba) or endowment (wafq) Note that if the participants also intend to invest some of their money as their savings then their governing contract is a musharakah Takaful participants Mutual indemnity Tabarru (donation) Mutual indemnity Takaful fund 15

16 CONTRACTUAL RELATIONSHIPS THE PARTICIPANTS & THE OPERATOR Note that there is no insurer-insured relationship between the participants and the Takaful operator. The Takaful operator is engaged by the participants as a group to manage the Takaful scheme for them. That s all. The operator is expected to: manage the underwriting of Takaful contributions and payments of claims manage the investment portfolio. The logic is to invest any available funds before and after payment of claims and other expenses to allow them to grow Depending on the type of underlying contract (mudharabah, wakalah, hybrid), the operator may receive a fee and/or a share of the investment profit as a reward for its activities Takaful participants Investments Donations Takaful fund jointly owned by the participants Manage Takaful operator Islamic finance contracts: mudharabah, wakalah, hybrid, others Pay Claims 16

17 FIVE POSSIBLE CONTRACTS: THREE IN USE AND TWO NOT ADOPTED Mudharabah: once the money has been contributed by the participants into the Takaful fund on the basis of tabarru the money belongs to them collectively. Hence, they act as rabb almal and appoint the Takaful operator to be their manager by way of mudharabah contract. Hence, the operator becomes the mudharib. Rules of mudharabah (profit sharing and loss bearing) apply Wakalah: the participants as a group appoint and authorize the Takaful operator (hence, they act as principal) to manage the Takaful fund (hence, it becomes the wakeel) for both insurance as well as investment activities. Rules of wakalah (remuneration with a fee) apply Hybrid: the contract of mudharabah is used for investment purposes of the fund, whilst the contract of wakalah for insurance activities of the fund ISLAMIC CONTRACTS NOT ADOPTED ju alah: similar to wakalah but with a commission/reward system tied to the performance wadi ah yad damanah: the participants deposit the fund to be safe-kept (wadi ah) by the operator. Profits from the investments belong to it (it may give some of them as hibah to the participants) but it bears the risks on any losses as well as any claims or expenses incurred. In addition, any net underwriting surplus, belongs to the Takaful participants 17

18 TWO TAKAFUL BUSINESS FORMS There is no single best form or model that exists for Takaful. The Shariah scholars worldwide concur on fundamental components that characterize a Takaful scheme, yet in their fatwas operational differences are tolerated as long as they do not contradict essential Islam religious tenets. This gives Takaful an unparalleled resiliency in adapting to local Shariah requirements For instance, in models and forms the Shariah scholars have expressed differences in opinions relating to charging of expenses (marketing v. administration) and also the fee structure, etc. Two business forms and three commercial models (based on the three contracts in use) are nowadays employed by the Takaful industry 18

19 FIRST TAKAFUL BUSINESS FORM: NOT-FOR-PROFIT Operations and profits are completely self contained Regardless of the formal legal structure, the business is run on a purely mutual and cooperative basis for the participants in the Takaful scheme. There are no shareholders in the commercial sense The participants (founders and promoters) pay their contribution as 100% tabarru and do not intend to receive any commercial return arising from the business Any surplus may be distributed for charitable purposes. Non-profit models include social governmental owned enterprises and programmes as well as endowment-like trusts operated on a non-profit basis There is little room for entrepreneurial spirit here and there are significant difficulties in raising capital 19

20 THE PURE COOPERATIVE MODEL PARTICIPANTS/ POLICYHOLDERS Contributions Takaful fund Policy benefits Investment Profits Participant Account (personal) Investment Profits Participant Special Account (common) Underwriting Surplus Operator Actual Management Expenses 20

21 SECOND TAKAFUL BUSINESS FORM: COMMERCIAL MUDHARABAH Two versions were developed: the pure mudharabah: whereas the participants are entitled to receive any distributable surplus generated from the underwriting operations and a share of the income from their funds invested by the operator. The operator expects to receive a return on its investment in the Takaful business through sharing in the profit in the income from investing the participants funds note that the tabarru element still exists, the mudharabah being just a side activity to optimize the use of the funds until claims are made or other expenses incurred the modified mudharabah which included the sharing of underwriting surplus note that the underwritings surplus should not in principle be shared with the operator because they are not mudharabah profits but residue of the Takaful fund which belongs to the participants together as a group the crux of the criticism centers around the definition of mudharabah profit, i.e. whether the net underwriting surplus can be treated as such mudharabah is defined as a surplus above the original capital. However, in this situation there is no such a surplus because of the reduction due to claims and expenses. What remains is the net underwriting surplus, which is lower than the original mudharabah capital even after the addition of any profit generated from the investment activities nonetheless, in the conventional insurance understanding this is considered as net underwriting surplus and treated as profit. 21

22 THE MUDHARABAH PURE MODEL PARTICIPANTS/ POLICYHOLDERS (100 - X)% Shareholders Fund/ Contributions Operator Claims Shariah compliant Investments = Mudharabah profits Takaful Fund - owned by the participants Reinsurance/ Retakaful Reserves Expenses investments and management Underwriting expenses Underwriting surplus Qardh Hasan x% Surplus 100% 22

23 THE MUDHARABAH MODIFIED MODEL PARTICIPANTS/ POLICYHOLDERS Management Expenses Contributions Claims Shareholders Fund/ Shariah compliant Investments Takaful Fund - owned by the participants Reinsurance/ Retakaful Operator Reserves Qard Hasan Underwriting expenses Investment Profits Underwriting surplus Surplus/(Deficit) X% of Surplus 100% - X% of Surplus 23

24 SECOND TAKAFUL BUSINESS FORM: COMMERCIAL WAKALAH Participants appoint and authorize the operator to be their agent to manage the Takaful fund. Generally, this is for both insurance as well as investment activities It should be noted that even in this model the issue on how to treat the net underwriting surplus remain as some operators claim a portion of it on the basis of performance fee. The argument being that good management in the underwriting, assessment of risks and claim management has contributed to the availability of the surplus. This has lead to the existence of a modified wakalah model along the lines of the modified mudharabah note that prior consent of the participants must be obtained before any payment of performance fees from the net underwriting surplus 24

25 THE WAKALAH MODEL PARTICIPANTS/ POLICYHOLDERS Management Expenses Contributions Wakalah Fee Shareholders Fund/ Claims Operator Shariah compliant Investments Takaful fund - owned by the participants Reinsurance/ Retakaful Reserves Qard Hasan Underwriting expenses Investment Profits Underwriting Surplus Surplus/(Deficit) 100% of Surplus 25

26 SECOND TAKAFUL BUSINESS FORM: COMMERCIAL HYBRID Some operators use a combination of mudarabah and wakalah with the latter being the predominant contract: wakalah for insurance activities : underwriting of contributions, risk assessment, claim management. Wakalah conditions apply mudharabah for investment management activities. Mudharabah conditions apply As for underwriting surpluses, the operator may: for family Takaful distribute them back to the participants for general Takaful use it as a rebate or NCD / NCB in favor of the participants when renewing their policy; keep it in the Takaful fund; distribute it back to the participants or other charities as agreed in the policy 26

27 THE HYBRID WAKALAH AND MUDHARABAH MODEL PARTICIPANTS/ POLICYHOLDERS Management Expenses Contributions Wakalah Fee Claims Shareholders Fund/ Operator Shariah compliant Investments Takaful Fund owned by the participants Reinsurance/ Retakaful Reserves Qardh Hasan Underwriting expenses Investment Profits Underwriting Surplus X% of Investment Profits 100% - X% of Investment Profits Surplus/(Deficit) 100% of Surplus 27

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29 THE PRESENT STATE OF THE TAKAFUL INDUSTRY Global Takaful Contributions Growth Global Takaful Forecast Potential Takaful Markets Major World Annual Industry Events 29

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33 MAJOR WORLD ANNUAL INDUSTRY EVENTS The World Takaful Summit (WTC), held in Dubai each April since 2006 ( The International Takaful Summit (ITS), held in London each July since 2007 ( The Middle East Takaful Forum (METF), held in Bahrain in October from 2012 The World Takaful Conference: Asia Leaders Summit, held in Kuala Lumpur each June 33

34 REGULATORY ISSUES Regulatory Bodies and Standards Some Regulatory and Accounting Challenges 34

35 REGULATORY BODIES AND STANDARDS Two bodies set the Islamic finance industry standards including Takaful: Bahrain-based AAOIFI (Accounting and Auditing Organization for Islamic Financial Institutions): Kuala Lumpur-based IFSB (Islamic Financial Services Board): Standards are issued by: IFSB & IAIS (International Association Of Insurance Supervisors), Issues In Regulation and Supervision of Takaful (Islamic Insurance), August 2006 IFSB, Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings, Dec 2009 IFSB, Standard n Solvency Requirements for Takaful (Islamic Insurance) Undertakings, Dec 2010 AAOIFI, General Presentation and Disclosure in the Financial Statements of Islamic Insurance Companies AAOIFI, Disclosure of Bases for Determining and Allocating Surplus or Deficit in Islamic Insurance Companies. AAOIFI, Provisions and Reserves in Islamic Insurance Companies AAOIFI, Contributions in Islamic Insurance Companies AAOIFI, Shariah Standards on Islamic Insurance and Islamic Reinsurance 35

36 SOME REGULATORY AND ACCOUNTING CHALLENGES Segregation of the shareholders fund and the participant s fund raises issues for solvency, accounting purposes and risk management: Solvency II will explicitly look at the capital of a company and estimate reserve requirements based on a best-estimate plus risk margin basis. However, within a Takaful business, although the best-estimate reserves will be retained within the participant s funds, any working capital required to cover the risk margin will be within the shareholders fund. This causes complications if trying to model the Takaful entity using a risk based capital approach IFSB solvency standard require the company as a whole to be solvent. This is on the ground that through a mandatory or constructive obligation of payments of qard al-hasan, the operators eventually become subject to a similar risk level, as of a conventional insurance company. Furthermore the policyholders fund also needs to become solvent. A balance between the two is probably amongst the most important regulatory challenges that regulators are facing note that Shariah scholars throughout the world are discouraging the increasing use of qard al-hasan 36

37 SOME REGULATORY AND ACCOUNTING CHALLENGES IFRS 4 (insurance contracts) Phase II. Under IFRS, Takaful businesses publish their accounts at a combined corporate entity level, with the participants fund and shareholders fund combined. This leads to questions of transparency: how will potential shareholders be able to assess the results of the company? How to compare the performance of Takaful businesses with conventional insurance. note that the AAIOFI standards show the accounts for the two funds separately Risk Management is complicated by the fact that the operator is managing the risks on behalf of the participants. An operator cannot generally look to participants funds to meet risks that are its alone, though as a matter of commercial reality the operator fund are standing behind the participants' risk fund, because of regulatory requirements for qard al-hasan Governance issues arise because of the unique relationship between an operator and the participants. Good governance mechanisms are essential to address these issues. AAOIFI s and IFSB s governance and Shariah governance standards provide guidance. Formal representation of participants (as in Sudan) may be beneficial 37

38 SOME REGULATORY AND ACCOUNTING CHALLENGES Shariah compliance. A Takaful business has two regulators : the state regulator, who ensures that policyholders are protected and the Shariah Board, who ensure that the Takaful business is operating in an Islamically appropriate manner note that regulators are not necessarily formally tasked with supervising Shariah compliance in Takaful companies. However, from the point of view of stakeholders, Shariah non-compliance is a serious matter and potentially damaging to the sector. Hence, regulators may reasonably be expected to require a company to have a proper governance framework for Shariah compliance, even if the regulator does not have explicit responsibility for supervising Shariah compliance 38