The Growth Of The Takaful Industry Economics Essay
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Takaful is derived from an Arabic word “Kafala” which means mutual guarantee, whereby a group of participants agree to mutually guarantee among themselves against a defined loss. This simple concept of takaful is the foundation of the takaful business, which is the present Shari'ah-compliant insurance
Takaful is “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”
The contemporary jurists acknowledge that the foundation of Takaful was laid down in the system of “Aaqilah”, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Prophet (peace be upon him). Takaful provides solidarity in respect of any tragedy in human life and loss to the business or property.
The elements present in the conventional insurance viz; Gharar (uncertainty), Riba (interest) and Maisir (gambling) are against the tenets of Islam. Muslim Scholars do not object to insurance per se but only to certain weaknesses in the insurance contract (which weaknesses render the insurance contracts fasid). It is for this reason, 1972 Fatwa by National Council for Islamic Religious Affairs of Malaysia that life insurance is not lawful as it contains gharar, Maisir and riba.
Hence, takaful tries to remove all these facets present in the conventional insurance and works within the guidelines of Shari'ah. The concept of tabarru makes the transaction permissible and valid according to Islamic law. It changes the basis of contract from an exchange contract (mu'awadat) which is bilateral in nature, to a charitable contract, which is unilateral.
2.0 Takaful - Industry overview
Globally, the takaful industry has been growing rapidly, appealing to both Muslims and non-Muslims. Currently, there are more than 110 takaful operators worldwide. As per the Ernst & Young's World Takaful Report 2009, global Takaful contributions have risen to $3.4bn in 2007 as compared to $2.5bn in 2006 (36% Growth). The new projections for 2012 for Takaful Market are US$ 7.7 bn and US$ 11.0 bn by 2015. Saudi Arabia was the biggest market in the Gulf Cooperation Council (GCC), with contributions totaling USD 1.7 bn in 2007, and Malaysia the largest takaful market in Southeast Asia with contributions of USD 800 mn.
Malaysia has achieved significant milestones in the development of its takaful industry. With the enactment of the Takaful Act 1984, the first takaful company was established in 1985. Since then, the industry has been gaining momentum and increasingly recognized as a significant contributor to Malaysia's overall Islamic financial system. There are currently eight takaful operators and two re-takaful operators, with five foreign participations from the UK, Bahrain, Germany and Japan. These takaful operators conduct both domestic and foreign currency business.
2.1 Current Trends and Future prospects
With the expanding demographics of Islamic countries and that of the Islamic population globally, the prospect of takaful looks promising. The Accounting & Auditing Organization for Islamic Financial Institutions (AAOIFI) has been playing a key role in framing and reviewing the regulatory standards governing takaful companies. With improved standards of living and increasing awareness of Takaful, the market is expected to see steady growth in per capita spend on Takaful premiums and also in terms of market share in comparison with conventional insurance.
2.2 Strategic Issues and Challenges
With projected growth as described above, the industry will experience much change. As with all new product offerings, success will depend on several factors, both internal and external. Highlighted below are a number of strategic issues and challenges that providers will contend with as the industry expands.
New entrants should create synergies that can be used to leverage existing distribution channels, banc-Takaful and strategic alliances across geographies. This will also enable the operators to increase premium volumes to improve profitability; a key factor in surviving the ‘start-up' years.
Developing Innovative Products
Developing attractive and competitive products that meet diverse customer needs will be a major challenge for Takaful operators. Though Takaful operators cater to a very specific and presently unsatisfied market, they still need to create product offerings that are as sophisticated and innovative as their conventional competitors.
Improving Marketing and Branding Tactics
The present brand value of Takaful is relatively limited particularly in non-Islamic countries. Analysts have suggested that Takaful has enormous potential for Islamic and non-Islamic populations, offering an ‘ethical' insurance alternative. Experts also propose that Takaful can potentially be a useful mechanism for poverty alleviation.
Raising the Standards in Customer Service
As the industry grows and becomes more competitive, building customer service skills and developing best practices will become increasingly important. At present, general customer service standards are average among Takaful providers, relative to their conventional counterparts.
IT Solutions for Takaful
Issues such as innovative product development, time to market, servicing of policies and claims within acceptable time lines, accuracy of calculations, cost containment, and improvement in service standards can all be facilitated by the implementation of robust and flexible IT solutions. Takaful compliant IT solutions serve an important purpose from a regulatory compliance standpoint and can help operators avoid susceptibility to unfavourable regulatory decisions and the possibility of increased regulatory compliance costs.
3.0 Takaful - Models
A takaful model depicts the relationship between the company and the participants. Based on the nature of relationship between the company and the participants, there are various models like Wakalah (agency) Model, Mudarabah Model and the combination of agency and Mudarabah models.
In Mudarabah model that is practiced mainly in the Asia Pacific region, the policyholders get profit on their part of funds only if Takaful Company earns profit. The sharing basis is determined in advance and is a function of the developmental stage and earnings of the Company.
In Wakalahmodel, the surplus of policyholders' funds investments - net of the management fee or expenses - goes to the policyholders. The shareholders charge Wakalah fee from contributions that covers most of the expenses. In order to give incentive for good governance, management fee is related to the level of performance.
4.0 Takaful - Categories
4.1 General takaful
The general takaful provides protection on a short-term basis, normally covering a period of one year. It commonly provides protection for property loss or damage, liability arising from damage. In general Takaful, the company raises a fund, which called as ‘tabarru' fund or account, where the participants pay to the fund. The company will invest the remainder of the fund after deducting the operational cost of the scheme. Any profit or return from the investment will be returned back to the fund. If there is any participant who faced loss or damage to his property or belonging, then the particular participant will be compensated from this fund.
4.2 Family takaful
The family takaful is a combination of protection and long-term savings, usually covering a period of more than one year. It provides benefits if the insured is inflicted by a tragedy as well as potential profits. Risks covered include premature death, illness and permanent disability, and regular income during retirement.
5.0Shari'ah issues in Takaful:
As is the case with any industry in its nascent stages, the takaful industry too is facing its own set of teething problems. Whenever we go to conferences (or) read the literature and article related to takaful, the general and the most common allegation (or) complaint is that, “Inconsistency in the interpretations of certain Shari'ah rules or standards is said to be an issue of the Takaful Industry”.Some of the commonly discussed Shari'ah issues relating to takaful are: which is the right model to follow?, who are the real owners of the takaful fund?, the methodology and the process to be adopted to share the surplus between the participants, the issue of hibah (gift) in a takaful policy, the issue of insurable interest and whether underwriting in concordant with the principles of maqaasid as-Shari'ah etc.
So, let us analyse these issues in the light of Shari'ah to understand the arguments for and against each of these issues to get a clear idea on the issue. Finally, we will also try to analyze if the issue of inconsistency is as serious as it is being projected and what are the areas which need to be standardized, if at all it is required.
6.0 Issue #1: The dilemma of choosing the right takaful model
In many of the takaful conferences and literature available, the question that is manifested is regarding the different takaful models existing in the world market. Some people express a desire towards a standardisation of takaful products as this will avoid confusion, facilitate regulation etc. Before we analyze the pros and cons of this thought, let us understand the modus operandi of the mudarabah model. Some people, usually criticize the mudarabah model since the operator too shares the underwriting surplus which should ideally belong to the participant.
6.1The modus operandi of the mudarabah model
Generally, many Takaful companies (especially those using the Mudaraba principle) claim that their operations are based on the concept of mutual or co-operative insurance as approved by the Muslim jurists. This claim is on the basis that:
- They receive the premium or contribution from the insured on the basis of the Mudaraba principle, whereby the company becomes the entrepreneur (Mudarib) and the insured party the capital provider (Rab al-Mal).
- The insured party agrees to donate a certain percentage (or in some cases as in General Takaful the whole of the amount paid) of the premium/contribution to a special fund used to pay compensation or benefits to contributors.
- Any surplus left in the fund after settlement of all claims is shared by the company and the insured as profit in a ratio as agreed in the contract. An insured party who has received compensation, the amount of which is greater than what he could have received as a share of the surplus had he made no claim, is not entitled to share such a surplus. The company uses normal actuarial principles to calculate risk and premium.
6.2The industry practice
Until recently, the Mudaraba model adopted by Malaysian takaful operators refers to profit as the underwriting surplus, which is the excess of premiums over claims, plus investment returns. This arrangement marks a departure from the original Mudaraba model, which will entitle the takaful operator a ratio in the investment returns, without sharing in the underwriting surplus.
The modified Mudaraba model justified the sharing of the underwriting surplus on the grounds that such an arrangement would allow takaful operators to withstand competition and avoid overpricing, which may eventually sway takaful participants from takaful, and be attracted to conventional insurance, with all its non-Shari'ah compliant elements. This is further justified by the fact that there is nothing haram in sharing the underwriting surplus, in the view of the absence of any textual or general Shari'ah principle disapproving such a practice.
6.3Modes of surplus distribution
Generally the surplus which is generated after paying all the claims and other expenses is distributed in the following ways.
Pro-rata mode: Whether the surplus is underwriting surplus plus profit or underwriting surplus only, it is distributed in proportion to the premium paid by the participants, without differentiating between claimable and non-claimable accounts.
Selective mode: This mode tends to indemnify non-claimable accounts only. Takaful operators tend to deprive claimable accounts, so that they become more prudent in the future.
0ff-setting mode: This mode tends to offset the rate of underwriting surplus from the amount claimed. This is applicable only on accounts whose underwriting surplus less than the claims. If the underwriting surplus is equal or more than the claims, then the participant does not share in the surplus.
6.4Do Takaful models need to converge?
While the positive desire towards a standardisation of takaful products to avoid confusion, facilitate regulation etc, are welcome, the other side of the coin is that takaful is an Islamic phenomenon and should be viewed through the prism of fiqh and socio-cultural context.
We should realise that takaful per se is not a product, and thus should not be equated with insurance. It is described as a system, rather than a product, which aims at the joint-guarantee between the contributors in a risk-covering scheme. We should not lose focus of the source of the inspiration of takaful. It is primarily to spread a risk to alleviate financial burden when it inflicts a person in a spirit of humanism.
Unlike in the past, presently money is contributed in advance. This element of philanthropy should also be reflected in takaful to differentiate it with insurance, which is a pure tug of war between maximising premium to be paid and minimising the compensation to be paid. If one adulterates the spirit of takaful and treats it as a pure standardised commercial venture then the Shari'ah spirit may be lost.
The different models in fact create a space to reactivate the juristic acumen. For any legal system to survive, especially in an era of globalisation and universalism, one should allow the system to evolve. This evolution is in turn influenced by many external factors such as politics, schools of law, tax implication etc, which differ from country to country. For instance, many multinational banks offer different home financing products in different jurisdictions. May be in one country Ijarah (lease) will best suit everybody while in another country the Murabaha (differed payment). This shows the versatility of Islamic law. The same spirit should prevail for takaful.
One cannot replicate these products on the basis of Islamic law and then try to standardize the Islamic products developed on the premise of conventional products. This should not be the case, a change in mind set is required because Islamic financial products should have its own features ultimately. Standardization is good in a way as it brings in more certainty. However, one should ponder on Imam Malik's attitude towards standardization of Islamic law when Ibn Muqaffa asked the caliph of that time to standardize Islamic law. But he refused on the basis that the jurisprudence developed by other imams also had their proofs from Shari'ah. Hence one cannot accept only Maliki school of law.
In other words Islamic law must preserve its legal elasticity. By standardizing Islamic finance one will lose the legal beauty inherent in Shari'ah. Therefore by accommodating various models different branch of fiqh is revived.
7.0 Issue #2:The issue of surplus distribution
The most critical issue in takaful is the issue of surplus distribution. Being a ta'awuni instrument to provide a mutual guarantee for possible risks, surplus arises as an issue of what to do with it if such risks are dealt with through risk transfer or indemnification. A recorded surplus at the end of the financial year of a particular takaful operator is an issue that invokes both Shari'ah and legal scrutiny.
As far as surplus distribution is concerned, two juristic views have surfaced and dominated the takaful industry in the Middle East and Malaysia. The first one categorically prohibits the sharing of the underwriting surplus between the takaful operator and the participants, but the other view validates the sharing, based on ratios that differ according to the line of products offered. The opponents of sharing the underwriting surplus back their contention by decisions taken by highly acclaimed institutions, such as AAOIFI, whose standard on takaful reads: “The Takaful operator does not share in the (underwriting surplus)”.
The AAIOFI Standard on takaful states: “The underwriting surplus and its returns, less expenses, and payment of claims, remain the property (milk) of the policyholders, which is the distributable surplus. This is not applied in commercial insurance, where the premiums become the property of the (insurance) company, by virtue of contract and acquisition, which would make it revenue and a profit for commercial insurance”
This statement by AAOIFI raises the issue of ownership claimed on the premium paid. On one hand, the participant has donated the premium as tabarru', hence, losing title over it, as prescribed by the rules of hibah in the Shari'ah, but on the other hand, he still holds claim over it in the form of getting the whole underwriting surplus or a part thereof. Hence, let us analyse the ownership issue element in hibah and the extent of its Shari'ah compliancy.
There are a number of jurists who emphasized that pure hibah leads the wahib to relinquish his ownership over the object of hibah. Ibn Qudamah asserts that “al-hibah tamalik”- a hibah which requires the wahib to enable the beneficiary to claim title of the object of hibah. Al Imam al- Shirazi points out that “Al-hibah tamlik bighayri ‘iwadd “- a hibah which enables the beneficiary to own the object of hibah without an exchange. In such a case, the juristic implications of hibah, as Ibn Nujaym al- Hanafi asserts, will be the transfer of hibah to the beneficiary, entitling him to hold title over the object of hibah (thubut al-Milk lil mawhubi lahu).
Generally speaking, the Shafi‟is view hibah as transferring the ownership of an asset without exchange during one's lifetime, on a voluntary basis. The other mazahib (schools of jurisprudence) refer to the same meaning, with a special emphasis on the element of “no exchange”, i.e.: bi ghayri ‘Iwadd. This transfer of ownership would be effective, either by way of acquisition (qabd) on the part of the beneficiary, which is the view of the Shafi‟is and Hanafis, or by way of ijab and qabul (offer and acceptance),, which is the view of the Malikis. This juristic approach is an evidence that tabarru' requires the relinquishing of ownership over the object of hibah. Since the latter entitles tamlik to the beneficiary, we can rightly say that the mutabarri' (donor) does not hold any legal right or claim over the asset donated. Having said so, the takaful operators are at liberty to stipulate conditions on how the underwriting surplus should be distributed, invoking the doctrine of shurut (conditions) in contracts, as articulated in Islamic jurisprudence. The only shroud of right that the donor may still enjoy to hold title of his hibah is when he donates it in exchange for a counter value, a principle known as “hibah al-thawab”
Contemporary scholars like al-Qurdaghi are of the view that the principle of hibah al-thawab (a gift for on exchange) is a good premise to justify the confinement of surplus to the participants only. It is true that some of the Prophetic hadiths referring to hibah al-thawab have secured some right of ownership to the donors after donation. Abu Hurairah narrated that the Prophet (s.a.w.) said: “The donor holds an exclusive right of ownership over his hibah, provided he is not rewarded for it”. This hadith is the only piece evidence attesting to a conditional ownership of the hibah by the wahib, allowing him to retract his hibah if he is not rewarded or satisfied with the reward. However, as clearly understood from the hadith, this evidence only gives conditional retraction of the same gift, not a surplus of it. In the case of Islamic insurance (takaful), this hadith is not applicable to surplus distribution, rather it is about retraction of hibah.
Another hadeeth which is given as an argument for confining the surplus distribution to the participants only is the hadith of Nahd/Nihd. It has been mentioned in Saheeh Al-Bukhari, (Book of Sharikah) that “Muslims did not see any harm in Nahd”. The latter, as Ibn Hajar explains, is “The allocation of a fund in proportion to the number of participants (in the fund)”. Although this arrangement was more useful and practical in journeys to provide mutual coverage of expenses, it has been viewed as a mechanism to transfer risks, whether in a journey or otherwise. After citing the same hadith, the appendix of AAOIFI Standard on Takaful provides an explanation to Ibn Hajar‟s definition of Nahd. The Standard states that Ibn Hajar's definition of Nahd refers to the underwriting surplus, which should be redistributed to the participants, so that it could be used in another journey. Revising Ibn Hajar's view in his Fath al-Bari, it can be hardly understood that Ibn Hajar's definition and explanation of Nahd does not refer in any way to surplus redistribution to the same participants. The hadith, is thus, completely silent about surplus, opening the doors for ijtihad to be exercised, in view of the maqasid al-Shari'ahand general Islamic financial principles.
Another issue raised by those who oppose the sharing of surplus to the takaful operator is that Sharing in the underwriting surplus is a kind of taking peoples' property unjustly. This contention is held by prominent scholars like Hussein Hamid Hassan and Al-Qurgaghi. The contention seems to go beyond the accepted parameters of justice. Although there could be plausible grounds for such a view, in light of the practices of some takaful operators that seize the lion's share of the underwriting surplus, there should not be any shred of doubt that, in light of our earlier juristic analysis, sharing the underwriting surplus is Shari'ah-compliant as long as it falls within the parameters of accepted conditions (shurut), as well as the principle of the rida (satisfaction), featuring such contracts. With the existence of sound regulatory framework that caps the percentage of the distributable surplus, takaful operators will not be in a position to take people's property unjustly.
8.0 Issue #3: Distribution of death benefit in family takaful
Another Shari'ah issue (or) concern raised is in family takaful on to whom should be the death benefit is paid after the death of the participant. One group of scholars and Takaful operators say that it should be given entirely given to the beneficiary as in the case of conventional insurance and the other group feels that the beneficiary should act as a executor of the deceased and the benefit should be distributed to the legal heirs of the deceased. So, let us analyse the arguments put forth by the two sides in the light of Shari'ah.
8.1The concept of mal in the light of Takaful benefit
The Arabic word māl, or property, originates from the root word mawala that literally means to finance. Zuhaylī defines mal literally as being anything a man owns that is in his actual possession and this includes corporeal and usufruct. The classification of māl by Dr. Muhammad Daud Bakar, which is suitable to the modern context, appears to adopt the majority's definition. According to him, māl or property can be classified into three types:
- Tangible assets like landed property, present items and stock including Islamic bonds that are asset-based such as ijārah, musyārakah and mudarabah bonds.
- Intangible assets such as copyright and royalty, trade name, trademark etc
- Financial rights (haqq māliyy) such as rights to receive (receivable) that include Islamic bonds, deferred dowry & maintenance, right to damages, the right to takaful compensation, etc.
In the modern application, takaful benefit is also treated as mal (property). According to Sec.2 Takaful Act 1984, takaful benefit includes any benefit, pecuniary or not which is secured by a takaful certificate, and “pay” and other expressions.
In family takaful, there are two accounts, namely the Participant Account and the Special Participant Account. The premium is paid into both accounts based on a ratio agreed by the takaful operator and the participant. The Participant Account is considered to be the deposit account of the participant whereas the Special Account is for the sole purpose of making donations. When a participant dies, there is no question regarding the heritability of the money in the Participant Account as it is part of the deceased's estate. However, the money payable by the takaful operator taken from the Special Participant Account for the death benefit is still questionable.
It is a standard practice in Malaysia that the payment of the money by the takaful operator to the nominee appointed by the deceased participant is subsequently distributed among the participant's legal heirs in accordance with the farā`id law. The distribution of the proceeds among the legal heirs of the deceased participant has seemingly become standard practice in Malaysia. Section 65(1) of the Malaysian Takaful Act, 1984 stipulates that the payment of takaful benefits is made to the proper claimant. Section 65(4) explains that the ‘proper claimant' is a person who claims to be entitled to the sum in question as executor of the deceased or who claims to be entitled to that sum under the relevant law.
8.2The concept of ownership in Takaful benefit
Islamic law provides four legitimate means for acquiring absolute ownership:
(i) The contract of exchange such as trading and leasing contracts, and unilateral contracts such as wasiyyah, hibah and waqf, (ii) the replacement, or khalafiyyah, i.e. inheritance, the payment of diyyah and compensation, (iii) the control over permissible things such as fish in the sea and birds in the sky and (iv) The growth and the production of things owned such as eggs, milk, etc.
Takaful benefit falls under the second part of the first category, i.e. unilateral contract (tabarru'at). It could be contended that without the participation of the policyholder, the takaful operator would never pay the money. In other words, it is the contract entered into by the policyholder for family takaful, which generates the benefits. This contention is based on the fact that one's effort becomes a justification for ownership. As a result, the money is divisible among the heirs of the policyholder according to the law of farā`id.
8.3The takaful benefit to sole beneficiary vs. to the legal heirs
Takaful contracts realize the obligation upon the company to pay. They do not create wealth in the insured's ownership, but rather they create an obligation to ease the burden suffered due to the losses of fellow participants. The participant's contribution is his or her donation for the good of others, not for himself. The proceeds payable belong to the fund of the participants, not the takaful operator.
Therefore, even though it is the deceased's effort, the money is more appropriately to be regarded as an obligation upon the takaful tabarru' fund to pay on behalf of other participant as financial assistance to the insured's family in case of death. This is the importance of considering a legal and financial entity for the fund. This monetary obligation is directly based on the agreement or promises of mutual assistance stated in the contract. In other words, the tabarru fund managed by the takaful operator on behalf of the participants agrees to pay the proceeds, and the matter of to whom they are paid should be freely and totally left to the agreement or the stipulation made by the policyholder to the company. This is similar with the condition made by the performer of wakf as he stipulated condition is binding.
The primary objective of takaful is to provide financial assistance to the participant's family. If the payment is payable strictly only to the heirs of the participants or insured, it implies that it is the property of the deceased. If this is so, the money is subject to the fulfilment of certain rights that must be carried out before distribution to the heirs, such as the payment of burial expenses, the deceased's debts. This would mean that the compensation is not being used to ease the burden of the family but rather it seems that other fellow participants are under an obligation to settle the debts of the dead participants. In this regard, the creditors would have prior rights over the participant's dependants. The dependants would only receive the benefits after the creditors' claims have been satisfied.
As such, inserting a clause legally and strictly imposing a duty on the appointed nominee to distribute the money among the legal heirs of the dead participant seems to contradict the objective of both the takaful. Inserting such a clause as currently practiced in Malaysia is not based on valid arguments. Furthermore, by considering it an estate for inheritance purposes, the takaful and insurance activity becomes a source of income. This is contradictory to the purpose of takaful i.e. mutual cooperation to ease a burden. Interestingly there are a number of contemporary fatwas allowing the distribution of takaful benefit to a particular beneficiary which is the common practice in the conventional insurance. The SAC of Bank Negara in its 34 meeting held on 21st April 2003 resolved:
- Takaful Benefit can be used for hibah since it is the right of the participants. Therefore the participants should be allowed to exercise their rights according to their choice as long as it does not contradict with Shari'ah.
- The status of hibah in takaful plan does not change into will (wasiah) since this type of hibah is a conditional hibah, in which the hibah is an offer to the recipient of hibah for only a specified period. In the context of takaful, the takaful benefit is both associated with the death of the participant as well as maturity of the certificate. If the participant remains alive on maturity, the takaful benefit is owned by the participant but of he dies within such period, then hibah shall be executed.
- A participant has the right to revoke the hibah before the maturity date because conditional hibah is only deemed to be completed after delivery is made (qabd). The Participant has the right to revoke the hibah to one party and transfer it to other parties or terminate the takaful participation if the recipient of hibah dies before maturity
- The takaful denomination form has to be standardized and must stipulate clearly the status of the nominee either as a beneficiary or an executor (wasi) or a trustee. Any matter concerning distribution of takaful benefit must be based on the contract. Participants should be clearly explained on the implication of every contract being executed.
However, there are a number of issues over assigning a sole beneficiary viz;
- How to make hibah of something which not yet realized, i.e. there will be no death benefit if the policy holder is alive until the maturity of the policy? If it is a hibah, can the policy holder retract the hibah because he/she takes the policy for his/her own benefit upon maturity?
- In a valid hibah, the ownership is transferred to the recipient. What if the recipient dies? It becomes his/her estate. Can the recipient be replaced?
- If a husband is paying a policy for his wife, can he be the recipient of the benefit or he can only be a trustee/executor and takaful benefit should be treated as her estate which shall be distributed according to rules of mirath/faraid?
- Hibah which is tied up with death is a will (wasiyyat). It is not allowed to make wasiyyat to inheritor (waris). Another issue is that it may not serve the purpose of taking protection to a particular recipient.
8.4The alternative methods proposed and practiced by the takaful operators
In order to overcome the above mentioned Shari'ah issues, the takaful operators have come up with some alternatives listed below:
- To regard takaful benefit as the deceased's estate: As such, for Muslim participants the first nominee is the recipient of hundred percent takaful benefits as prescribed under Section 65 Takaful Act 1984. The first nominee is responsible to distribute the benefit in accordance to faraid. If the first nominee shall predecease the participant, hundred percent of the benefit shall be paid to the second nominee and so forth. The nominees shall distribute the benefits in accordance to faraid.
- Absolute Assignment: In this case the hibah is a real hibah where the policy holder will not recall the hibah and the ownership of policy is regarded to have been transferred to the beneficiary. The hibah includes whatever proceeds in the policy whether it is the policy holder personal saving or the donation account. There will be no issue of recalling the hibah or replacement of the assignee by the policy holder in the case of death of the assignee. The assignee however can reassign the policy to other party.
- Proposed Beneficiary: The policyholder only proposes the beneficiary to the takaful fund. It is the takaful operator on behalf of takaful who is giving hibah the takaful death benefit to the beneficiary. However there is another form for the participant's personal account where the nominee is regarded as the wasi or executor.
Hence, from the above discussion, it is very clear that there is no Shari'ah and legal dispute to regard takaful benefit as the deceased's estate and to treat a nominee as an executor. But, there are many unsettled Shari'ah and legal issues pertaining to hibah (give) the takaful benefit to a sole beneficiary.
According the industry practice in Malaysia, to resolve this, some takaful operators consider “absolute assignment” (absolute hibah) to give away the takaful benefit and it's proceed to the recipient where it becomes irrevocable. However, as to the deceased's saving portion, it shall be distributed according to the rules of fara'id where nominee is only and executor.
9.0 Issue #4: The issue of insurable interest
The next issue in which there is inconsistency in the interpretations is that of insurable interest. There are some diversified views among the Islamic scholars on the recognition of Insurable Interest in Takaful (Islamic Insurance) Practices. Some are in favor of it, subject to one's harmonization with the Shari'ah Principle. Meanwhile, some are objecting it, claiming that, there is no basis to justify the idea of Insurable Interest in the teaching of Shari'ah.
9.1 Existing Provision under the Insurance Act 1996 - Section 152
“…(1) A life policy insuring the life of any one other than the person effecting the insurance, or the life of a person mentioned in subsection (2), shall be void unless the person effecting the insurance has an insurable interest in that life effecting at the time the insurance is effected and the policy moneys payable, or where the policy moneys are payable in installments the discounted value of all future installments under the life policy, shall not exceed the amount of that insurable interest at the time the event resulting in payment of policy moneys occurs.
(2) A person shall be deemed to have insurable interest in relation to another person if that other person is -
his spouse, child or ward being under the age majority at that time the insurance is effected, his employee; or notwithstanding paragraph (a), a person whom he is at time the insurance is effected, wholly or partly, dependent”.
9.2 Is this provision applicable in Takaful Operation?
The provision provided under section 152 of Insurance Act 1996 on the issue of insurable interest may not be applicable in takaful practices due to the following:
- Less security for the life of insured (spouse, child, ward, employee, etc) as this may give an opportunity to the participant to gain something through using the life of others.
- Contravening the provision relating to hibah (gift) and wasiyah (will).
- The ownership of the benefit over the policy is uncertain (gharar). A transaction which involves the element of gharar is unlawful in Islamic law as ruled out in the Prophetic sanction:
Although the modern existing provisions affecting insurable interest may not be justified for takaful market, but it does not mean that the entire idea of insurable interest should be rejected. As it is understood that the issue of insurable interest is essential to sustain the consequential benefits over the scheme therefore, the Shari'ah justified insurable interest should be designed so to ensure, that the takaful operations function with meaningful spirit.
10.0 Issue #5: Underwriting - Is it concordant with maqasid as-Shari'ah?
The next issue is that of the process of underwriting, since some sections feel that it is not concordant with the maqaasid as-Shari'ah. Underwriting refers to the process that insurance (or) a takaful operator uses to assess the eligibility of a customer to receive their products. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk. The underwriter's job essentially is to make a judgment call as to whether the company should accept the applicant and risk paying a claim. He or she will utilize all the information gathered from numerous sources to determine whether or not to accept a particular applicant.
It is the general practice of the insurance and the takaful industry to process only those applicants who have the least risk profile. This would help the companies to distribute a least amount in claims thereby increasing the underwriting surplus and hence the overall profits. From the Shariah perspective - a question arises as to how could the Takaful industry nowadays implement such pure concepts of al-Ta'awun and al-Tabarru' if the takaful operators underwrite to select participants. Underwriting is perceived to be discriminatory especially to those who are in need of cover.
However, if we contemplate and get a bit deeper, underwriting can very well be justified. The concept of al-Ta'awun is to promote mutual protection of the members. A stronger, more economic-efficient and self reliant organization in turn possibly can help to lower contribution rates, create loss prevention techniques and promote or enhance greater public acceptance of Takaful.
If there is no proper underwriting, the takaful operators may experience higher claims, and in turn the increase costs for all members of the takaful pool. Lower risk individuals are discouraged to seek coverage and takaful operators may not be able to compete with the insurance companies. The juristic principles of Islamic law states that, "The general welfare takes priority over individual welfare." From this basis is derived the principle that “A private injury is accepted to avert a general injury to the public." In Islam harm and damage has to be avoided. This is based on the legal maxim “al-darar yuzal” or harm should be eliminated. Hence, underwriting is opined to be permissible under Shariah.
However, in order to protect those participants who have serious ailments and in need of takaful, Prof.Ezamshah (2010) suggests that the distribution of the underwriting surplus back to the participants should also be discouraged and the surplus from the risk fund could be earmarked or channeled to an Islamic Trust (waqf) for a secondary scheme to cover those likely to be categorized as substandard applicants. By doing this, he categorically emphasizes that the people in real need will also be benefit from the takaful scheme and it will reflect the real concept of Ta'awun (mutuality)and Tabarru'(donation).
11.0 The issue of standardization - Is it blown out of proportion?
If one word has been bandied around by Islamic bankers and financiers over the past couple of years, it is standardization. It seems to have become market practice for industry professionals and conference brochures to claim that standardization is the urgent order of the day, without any of them explaining what exactly requires standardization in Islamic finance and whether it is really a desirable outcome. For instance, standardizing products in asset management could lead to a lack of innovation in the differentiated features of funds that make them the unique value proposition.
In the subsequent sections, let us analyse the concept of difference of opinion and what should be our approach towards difference of opinions and how to deal with it and the possible areas where there is scope for standardization.
11.1 The concept of differencesin opinion
Differences of opinion in some of the Shari'ah issues are quite natural. There were certain differences which existed during the period of Sahabaas too. For example, after the battle of trench, the Prophet (sal) commanded the Sahabaas to lay siege to the fortress of Banu Quraidha which belonged to the Jews who did treachery. While sending them, the Prophet said, “Do not Pray Asr until you reach the fortress of Banu Quraidha”.
Some the Sahabaas set out. On their way the time for Asr came, so one group of the sahabaas said, “Let's pray Asr”, while the others said, “We will not pray Asr because Prophet (sal) ordered us not to pray Asr until we reach Banu Quraidha”. The first group argued that what the prophet meant was to march fast and they prayed Asr and advised the second group by reciting the verse of the Qur'an which says, “Prayer has to be offered at fixed times”. The second group refuted by quoting another verse of the Qur'an which said, “If you really love Allah, then obey Me (Prophet)”. The second group went ahead and reached Banu Quraidha but it was time for magrib. So, they prayed Asr after that. They narrated the incident to the Prophet later, who neither told you are right and the other is wrong and the Sahabaas didn't start to criticize others and indulge in name calling.
If we look at the lives of the Sahabaas, two general courses of action was followed if there is a difference of opinions:
- If different rulings were made on an issue and if an authentic text was quoted, they would drop all their differences. For ex: The Sahabaas differed on where to bury Rasool (sal) after his death. Some suggested that he be buried in Jannatul-Baqee whereas others differed. Finally, when one of them told that, “I have heard the Prophet (sal) saying that Prophets are buried where they die”. All of them dropped their differences and buried him in the same place where he died..
- If neither authentic proof nor unanimity was arrived at, they used to respect each other's opinions. This option is particularly important in the case of Islamic finance, since many of the rulings are given based on individual ijtihad, since the textual evidences in this field are predominantly very generalistic in nature.
12.0 The way forward - Recommendations:
The following are the recommendations which would be helpful in addressing the issue of differences in interpretation of the rulings, which people allege of creating inconsistencies.
Differences among Madh-hab's rulings fall into two main categories; firstly, contradictory differences (Ikhtilaaf Tadaadd), totally opposite rulings which cannot logically be simultaneously correct, for example rulings in which one Madh-hab defines something as Halaal and another defines it as Haraam, and secondly, variational differences (Ikhtilaaf Tanawwu'), conflicting rulings which are logically acceptable variations which can co-exist, for example, various sitting positions used by the Prophet (s.w.) in Salaah.
In many cases where differences arise due to meanings of words and grammatical constructions, there are authentic hadith which specify the intended meanings and these should be given preference over all other interpretations. Similarly, legal rulings which were made according to conditions which eliminated authentic narrations should be regarded as invalid and should be replaced by the rulings of other jurists which were made on the basis of authentic Hadeeths. As for rulings based on controversial principles or unrestricted Qiyaas, these should be objectively examined in the light of the fundamental principles of the Qur'an, the Sunnah and the Ijmaa' of the Sahaabah; rulings agreeing with these fundamentals should then be accepted and those contradicting them should then be rejected.
Outside this, there remain a number of issues on which there is more than one ruling equally supported by the Qur'an, the Hadeeth, the Ijmaa' of the Sahabaas or Qiyaas. The different rulings in such cases should be treated as viable options to be applied according to circumstances and these are a part of the logically acceptable variations mentioned as the second category of differences in Madh-hab rulings.
In Islamic finance, what is important to consider is the concept of the sanctity of the contract, which is the spinal cord of commercial transactions. As long as the takaful documents are contractually sound there should be no confusion and apprehension. Furthermore, the experts working in takaful companies should know the technical aspects that need to be standardised. For ex; tax issue or accounting principle on a given model can be standardised irrespective of the model one adopts.
Nevertheless, for the industry to grow in an orderly and uniform manner while retaining transparency and avoiding regulatory capture, further efforts need to be expended in standardizing key documents and providing specific measures of investor protection. The AAOIFI could play a crucial role in standardizing the pro-forma documentation, layout, disclosures required for the most commonly utilized contracts.
Some of the areas, where some sort of standardization can be applied are to Takaful products to ensure that Takaful members receive a uniform level of disclosures and sign the same type of contract (with minimal differences) for the most commonly utilized retail Takaful products such as motor Takaful, home and contents Takaful and Family Takaful.
As the famous scholar in Islamic finance, Nizam Yaqubi says, “We have become an Ummah of lost opportunity”. Instead of presenting to the world that we are the solution and a better alternative, we are still discussing and disputing about issues which should have resolved long back. We should grow up and come out of this small circle that we have put ourselves in and try to seize the moment and try to bring a positive change to this Ummah.
For this Ummah which was ready to face the calamities and bear losses than to be a party to the haram conventional insurance, takaful has given them hope as a halal, Shari'ah compliant and an economically viable alternative. No doubt, the intention behind the creation and establishment of takaful is to reflect the real concept of Ta'awun (mutuality)and Tabarru' (donation), which becomes the duty of this Ummah, as stated in the Glorious Qur'an.
Unlike the capitalist conventional insurance companies which need to satisfy only the stakeholders, the takaful companies are accountable to the Almighty and also to their stakeholders. Hence, there come a lot of restrictions in the operations of the takaful companies, for them to be in compliance with Shari'ah.
As with any industry in its nascent stages, the takaful industry too has some teething issues to resolve. This paper attempted to highlight some of the issues which are affecting the takaful industry and in which there are varied difference of opinion. It also dwelt on the oft repeated paraphrase on the need for standardization in takaful. Hence, it is incumbent on the Ulema and the Fuqaha to delicately address these issues comprehensively, which will in turn make the takaful industry more resilient and robust in the generations to come.
And with Allah alone lies all Success!
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