Takaful and Micro-Insurance 1 Tsuneo Katayama Professor Tokyo Denki University 1. What is Takaful? Takaful (Islamic insurance) may be defined as 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. Takaful, therefore, is a concept whereby a group of participants mutually guarantee each other against loss or damage. Each participant fulfils his/her obligation by contributing a certain amount of donation into a fund, which is managed by a third party the Takaful operator/company. It is an insurance concept grounded on Islamic teaching, observing the rules and regulations of Shariah. 2 Hence. the Takaful company cannot be involved in interest-based investment portfolios since Islam strictly prohibits interest and business of uncertainty and gambling tendencies. Takaful which means shared responsibility or shared guarantee is not a new concept in Islamic commercial law. In case of any natural calamity, everybody used to contribute something until the loss was indemnified. Similarly, the idea was based on the concept of Takaful wherein financial burden among the whole tribe is distributed by payments by the entire tribe. It is a scheme in which a group of people pool their efforts to support the neediest among them. Islam accepted this principle of reciprocal compensation and joint responsibility. One interesting feature in Takaful is that the fellow participants are acting both as insurer and insured as they are mutually contributing to and mutually beneficial from the fund. Each policyholder willingly hands over a portion of his/her paid premium to other policyholders who may need the financial assistance. The fellow participants undertake to contribute some money to the fund in view of any calamity or disaster which will create pain and suffering for the victim and the family. Takaful is basically similar to the very concept of insurance in that the fortunate many helps the unfortunate few. As described above, the distinction between the conventional insurance and Takaful business is most visible with respect to investment of funds. While insurance companies invest their funds in interest-based opportunities, Takaful companies undertake only Shariah compliant business and the profits are distributed in accordance with the pre-agreed ratios in the Takaful agreement. Besides being a social-welfare and social security program, Takaful is also an investment tool for the economic advantage of the participants. Takaful operates as a protection and profit sharing venture between the Takaful operator 1 Materials were taken from newspaper articles, mainly from recent Malaysian newspapers. 2 Shariah refers to the "way" Muslims should live or the "path" they must follow. 1
and the policyholders. The Takaful operator/company is entrusted to invest the money in a good and prudent manner, and a profit will be shared based on the performance of the business. The ratio of profit sharing will be determined in advance, such as 50-50, 60-40 or 70-30. Any surplus is paid out only after the obligation of assisting the participants has been fulfilled. The legal relationship between the policyholders and the Takaful company/operator is one of partnership. In the event of loss or damage suffered, the Takaful operator will pay out the funds accordingly to its policyholders. In Takaful, the fellow policyholders do not have to be physically involved in the fight to get his/her money 3, because each policyholder has already collectively pooled their money in advance in anticipation that the money will be channeled to a good cause, i.e. to assist any person in need of help. This portion of the money does not belong to the policyholder, and will be used for any claim by other fellow participants who are suffering from loss or misfortune. In summary, the Takaful partners (policyholders) pay subscription to assist and indemnify each other and share the profits earned from business conducted by the company with the subscribed funds. Money from policyholders is invested and returns are distributed between the policyholders and the Takaful operators. A Takaful contract may consist of clauses for either protection or savings/investments or both the benefits of protection as well as savings/ investments. The protection part of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally. It is emphasized that, when claims exceed contributions, the Takaful operators are not obligated under Shariah to finance the deficit, because their jobs are to manage the fund. Policyholders are in effect required to finance any deficit among themselves. Each participant's contribution toward the loan needed to finance the deficit can be determined in proportion to the participant's agreement in the year the deficit occurs. In reality, however, it requires for the part of Takaful operator to be able to make benevolent loan on a voluntary basis. To the agent this role as the lender of the last resort would require having capital on standby at all time. Takaful system has a built-in mechanism to counter any over-pricing policies of the insurance companies because whatever may be the premium charged, the surplus would normally go back to the policyholders in proportion to their contributions. There are several types of Takaful being offered. The terms Family Takaful or just Takaful are generally used for family solidarity in place of conventional life insurances. Other products available in various countries are General Takaful, Education/Medical Takaful, etc. There are over 60 companies offering Takaful services in 23 countries around the world. It is also suggested that local Takaful players should look into medical 3 A Malaysia-based Takaful company established about 5 years ago has now more than 350,000 individuals and corporations, and to date, it has no back log in claim payments as most cases are approved within 24 hours. 2
and health coverage as well as micro-finance services, particularly the micro-takaful, which is expected to offer tremendous opportunities for growth. 2. Some Statistics 4 The Takaful business has proved its capability in a period of only two decades. It has been growing rapidly and globally appealing to both Muslims and non-muslims. The 1.5 billion Muslims around the world, in particular, represent a growing client segment for the insurance sector. The Takaful industry is characterized by a small number of large companies and a large number of small companies and start-ups. Size is important in this industry and the results for 2009 show that large players are growing faster than the smaller ones and also report stronger earnings. Saudi Arabia is the largest market, accounting for approximately 79% of gross Takaful contributions in 2008. The share of the largest company dealing co-operative (i.e. life) insurance is roughly one quarter of the GCC 5 market. All other players account for less than six per cent of the market. The annual growth rates by different sources are: a) 10-20% (vs. the global average of conventional insurance 5%) b) 25% (adjusted for inflation) between 2004 and 2007 (vs. 10.2% of that in the conventional market) according to Swiss Re. c) Expectedly to grow by 15-20%. d) The global Takaful industry will likely double in size by 2010 with respect to early 2008. e) Takaful assets and net contributions experienced an average annual growth rate of 27% and 19% respectively from 2003 to 2007. f) From 2006 to the third quarter of 2009, the top-eight GCC Takaful firms registered CAGR 6 of 26.5% (compared to 19.2% for the conventional counterparts.) Compared to the global premiums collected by the conventional insurance industry, however, the global Takaful industry as of 2008 is still negligibly small and has not yet penetrated retail markets. Sizes of global Takaful contributions or assets reported in different reports are: a) Although Takaful premiums of about US$ 1.7 billion were written in 2007, the global Takaful market could reach US$ 7 billion by 2015. b) Takaful contributions are expected to reach US$ 7.4 billion by 2015. c) From early 2008, the global Takaful industry will likely double in size by 2010. In two years time, premium income will likely double to $4 billion a year and potentially accelerate over the coming decade. d) The Malaysian Ministry estimates that global gross Takaful contributions will reach US$ 8 billion by 2012. e) Alpen Capital, a leading investment bank in the GCC and Asia, has 4 Since statistics often differ according to different sources, they should only be considered as approximate numbers showing recent trends. In addition, because of my ignorance about the insurance business in general, there may be misinterpretation of the numbers. 5 Gulf Corporation Council 6 Compound Annual Growth Rate 3
estimated nominal growth at $3.133 billion in 2009 and $3.808 billion in 2010. Alpen researchers expect the market to grow approximately at nominal CAGR of 20.7% and a real CAGR of 16.1% during 2009-2012. There also are various kinds of numbers reported with respect to local Takaful industries. a) According to one of the leading investment banks in GCC, in the period from 2006 to the third quarter of 2009, the top-eight GCC Takaful firms registered CAGR of 26.5% compared to 19.2% for their conventional counterparts. b) Takaful is estimated to grow to US$ 3.519 billion by the end of 2010 in the Gulf, and the industry would grow at a faster pace than conventional insurance, while the annual growth rate is expected to be 16.1% during 2009-2012 period. c) As at 2007, total assets of Malaysia s Takaful industry amounted to US$ 2.8 billion, with market penetration of 7.2%. Takaful assets and net contributions experienced strong growth with an average annual growth rate of 27% and 19% respectively from 2003 to 2007. d) A Malaysian Takaful/Re-Takaful company reports that contributions in Malaysia grew by nearly 50 percent to $162 million in 2008, and that the expansion is largely confined to the retail sector, such as fire or motor insurance, since the industry is still young. The GCC is one of the most affluent economies of the world. Islamic banking assets in the GCC reached $285 billion at year-end 2008, amounting to a market share of 22% of total banking assets, compared with less than 10% in 2003. With an average per capita GDP of $43,650 in 2008, it is expected to see a 7.4% growth in 2009. The present trend in the GCC is expected to continue, because the GCC has a young and rapidly growing population, with a median age of 26.3 years. 3. Speculations A Swiss Re. report says, Takaful is set to grow because populations of Muslim countries are rapidly growing and because 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.the international Takaful industry is well positioned to realize its full potential and attract customers from over the world, regardless of their religious affiliation. As the Takaful fund gets bigger, and as more and more people enter into the Takaful program, the administrative activities will become more complicated and cumbersome to the extent that there is need to seek assistance from an outside party to ensure that the Takaful operation is run in the most efficient, productive and professional manner for the benefit of the members. In this modern and complex financial world many skills are required to successfully manage a Takaful participants operation which would include ensuring that the rights of the mutual fund are protected. What follows is a sample list of what a Takaful operator should do so as to run a successful Takaful operation. 4
1) Promote participation of new members (e.g. via advertising See on the next page the material given in the home page of a Malaysian Takaful company.). Takaful is not sold but participation is invited. 2) Explain the concept of a Takaful cooperative to the masses. 3) Set up a proper administrative system to run the Takaful program. 4) Keep records of newly registered members. 5) Maintain records of all participants in the event there is a change in information about a member. 6) Invest the donations in halal investments. 7) Develop new Takaful products to meet the needs of participants. 8) Maintain statistical information and perform experience studies. 9) Determine the appropriate contribution to be made by each member. Such contribution shall be determined actuarially to enable an adoption of an equitable and fair charging to all members. 10) Pay Takaful benefits when a participant makes a claim. 11) Prepare the balance sheet, revenue accounts and other financial statements - to enable public accountability of the management. 12) Perform actuarial valuation to determine the surplus of tabarru' 7 at fund. 13) Distribute the surplus equitably to participants. The Takaful program may not be managed in an organized or structured manner unless a dedicated, professional, highly skilled and financially reputable party is involved. The question is who will carry out such responsibilities with effectiveness, accuracy and efficiency. One option is that it could be performed by volunteers who are members of the Takaful program. Alternatively, it can be sourced out to a third party who possesses the skills, qualifications and experience to handle such a complicated job. Under the first alternative, volunteers who are existing members of the Takaful program may help carry out the above functions on a charitable basis. Thus, an agent with the necessary expertise to run the Takaful program needs to be established. It is said that, in some countries such as Bangladesh, India and Indonesia, the access to Takaful insurance coverage is as low as US$2 per month. No doubt, by keeping the premium rates as low as possible, it would not only create better demand for Takaful products, but also enable many businesses and families to have access to insurance protection, especially for the purpose of poverty alleviation. However, when navigating in the Internet to collect materials for this article, I found a most interesting comment about the Takaful: The employees of Takaful at upper level are all from conventional insurance who join Takaful mainly to get benefit of their worldly gain like higher salary, higher position, etc. Though they post themselves as Islamist, by heart 7 Tabarru means a donation, charity or gift which cannot be taken back. In general Takaful, a percentage of the participants contribution will be considered as tabarru and thus cannot be taken back, as it is the principle of the joint guarantee to help other participants. 5
they still are the same (as Non-Islamist). Further, Takaful offer more money - higher salary plus commissions - to their agents to get a bigger share of the market. But, this produces losses to the contributors (insurers). The main purpose of both Takaful and conventional agents is the same, to seize the money by provoking the innocent into putting their money, and not to save them from possible hazards in life. (March 2, 2010) Ikhlas Savings Takaful IKHLAS SAVINGS TAKAFUL is an investment type plan that participates in profit, which will be distributed back to participants. This is an ideal plan which comprises the elements of savings and returns on investment with individual protection. This plan is designed to optimize the returns on investment to the participants. What does IKHLAS Savings Takaful cover? This plan utilises two key elements that will together meet or satisfy the obligation under the IKHLAS SAVINGS TAKAFUL: Level Term Cover Investment Account IKHLAS SAVINGS TAKAFUL provides the following benefits: DEATH AND TOTAL & PERMANENT DISABILITY BENEFIT This benefit provides protection against death and total permanent disablement of the participant prior to the certificate maturity. The Sum Covered (SC) plus the accumulated amount in the Personal Investment Account (PIA) are payable to the participant, participant s beneficiary(ies) or next of kin. Note: The above benefits exclude pre-existing conditions. MATURITY BENEFIT Upon maturity of the certificate, participant will receive a lump sum payment from the investment income and accumulated amount in the PIA and net surplus from Ta awuni Account Pool in the Risk Fund. CONTRIBUTION AMOUNT Flexible contribution amount depending on the entry age and term of the certificate. Why IKHLAS Saving Takaful? PARTIAL CASH WITHDRAWAL Partial cash withdrawals from the PIA are allowed after the certificate has been inforced for a minimum number of five (5) years. Only three (3) withdrawals are allowed during the lifetime of the certificate. Each withdrawal must satisfy a minimum gap period of two (2) years between withdrawals. A transaction fee of RM15 is chargeable from the PIA for each withdrawal. TOP-UP OPTION Top-up contribution is allowed from the commencement of the certificate. The amount of top-up shall be subject to a minimum of RM50.00 per top-up. This top-up amount shall be solely allocated to the PIA which will earn profit. RIDER ATTACHEMENT OPTION Participant can opt for any rider product to be attached to the basic certificate. 6