During the past two or three years we have seen reports in the international media on the development of Shariah compliant insurance more commonly known as Takaful. It may only be recently that these developments have been reported but it is based upon Islamic practices going back many centuries. The modern version of Takaful was developed in Sudan in the late 1970’s and in the past couple of decades has spread as wide as Malaysia, Indonesia, Iran, Bahrain, Saudi Arabia and the UAE.
Conventional insurance is said to involve elements of uncertainty which contravene writings of The Koran. The Takaful system is an approved alternative to insurance, written in compliance with Islamic Shariah principles. Some people have said that Sunni rather than Shia followers are taking out Takaful but in as much as both of these groups comply with the teachings of the Koran and Hadiths, it applies to both.
In Arabic means joint guarantee: a pact among a group of members who agree to guarantee jointly against loss or damage which may inflict any of them. As with insurance, there is a period of cover/validity. At the end of this period of takaful any net surplus in the company’s general takaful fund is shared between those participants who had no claims or incurred any other benefits and the company in accordance with the principle of Al-Mudharabah (a form of trustee profit sharing whereby the participant is the capital provider and the company is the entrepreneur/risk taker).
In as much as insurance has its origins in the murky past (the Amsterdam Bourse and Lloyd’s really got it going as we know it now), followers of the Prophet practised a form of takaful more than 1400 years ago. As late as 1985 the takaful system of Shariah compliant insurance was formally approved.
In the world of commerce, insurance and takaful have a greater penetration than for private individuals. There are various reasons for this such as poverty, extended family system, lack of awareness and suitable products. The growth of personal lines insurance, especially life assurance, in Muslim countries, has been restricted by cultural and religious blocks in society. Now that more takaful companies are being set up and run professionally, technology is assisting the administration and sale of products and more information is becoming available, about 25% of the world’s population will be seriously considering joining one of the fastest growing segments of the industry.
Advantages to the participant are: cost savings, pooling of better quality risks, utilisation of a more equitable risk transfer system and the availability of funds at the end of the period.
Is, as the term suggests, an arrangement where there is a leader and following companies.
The arrangement where the takaful entrepreneur lays off portions of its risk in a process similar to direct takaful.
Usually relates to life assurance.
The development of takaful is increasing quickly in a widening number of countries and also the penetration in the markets where it is used is growing at quite a pace. In the Middle East, Moody’s is outlining the approach to analyse the financial strength of takaful operators. The U.K.’s Prudential is one of the latest to launch a takaful venture – in Saudi Arabia. There will be more said about takaful and if we can help with any further understanding of this, we would be pleased to do so.
In preparing this Spotlight article we received invaluable assistance from the leading broker, Anika Insurance Brokers Sdn Bhd in Malaysia for which we are grateful.
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