TAKAFUL
Principles and Practices
P. Ahmed
CEO Pak-Qatar Family
Takaful Limited
9th August, 2011, Karachi
Flow of Presentation

Risk Mitigation from Shariah’s Perspective

Origin & Development of Takaful Worldwide & in Pakista

Concept of Takaful and Operational Model

The Practice of Takaful

Regulatory Framework in Pakistan
Risk Mitigation from Shariah’s Perspective
Is the concept of risk mitigation permissible in Islam?
• This very concept is not only permissible in Islam but is in fact
encouraged
What are the available risk mitigation tools?
Avoid using Risk Mitigation
Tools
• A concept misunderstood as against Tawakul.
Self-Insurance or setting aside
contingency money for the
rainy day
• Funds may not be sufficient to compensate for
losses.
Conventional Insurance
• A commercially viable system thatcontains the
element of Riba, Gharar, and Qimar/Maysir
Takaful
• A Shariah
system.
compiant,
commercially
viable
Risk Mitigation in Islam
Islamic history is replete with examples featuring
risk mitigation activities:
Hadith:
Dhaman
Khatr alTareeq:
“Tie the Camel
and then Submit
to the Will of
Allah”
A person would
undertake another
person’s risks
without any
consideration/fee
in return
Dhaman
Al-d’ark:
A person would
influence a sale by
promising to
compensate for
the loss if the
subject-matter
proved faulty
’Aqila:
A risk sharing
mechanism in
which community
members pooled
their share of Diyat
(blood money)
Shariah’s Ruling on Conventional Insurance
Concept of
Insurance?
?
Process of
Insurance?
Shariah has no objections as to the concept or objectives
of insurance, but has reservations with the way it is
carried out i.e. the process of insurance
Conventional Insurance- Shariah Objections

Conventional Insurance is a risk transfer mechanism which is
achieved through a compensatory contract for a consideration
(premium).

In the opinion of scholars, the presence of following three
elements makes Conventional Insurance non-Shariah compliant.

Gharrar ( Uncertainty)

Riba (Interest) &

Qimar ( Gambling)
What is Allowed?

Risk Sharing between Participants
 Basis of Contract: Taburru i.e. unilateral, non-commutative.
 Takaful Operator has no ownership claim on contributions paid
by participants.
 Participants lose ownership rights once contributions are paid as
Taburru’.
 Contributions becomes property of the Waqf.
 Waqf is owned by Allah Almighty
What is not Allowed?

Risk Transfer Against Fixed Consideration (premiums)
 Basis of Contract: Muawaza i.e. bi-lateral sales and purchase.
 Reason: Such a contract involves Riba, Gharar, & Qimar/Maysir
Origin of Modern Takaful

After decolonization, Muslims all over the world started pressing for
socio-economic, political and legal systems which were attuned to
their world-view and belief system.

As a result, development of Islamic Banking started in 1970s.

First Islamic Commercial Bank, ‘Dubai Islamic Bank’, was established in
1975.

There was a legal requirement that underlying assets financed by
Islamic Banks need to be insured e.g. Car Ijarah.

Islamic Banks could not avail insurance servives from conventional
insurance companies as that would be defeating the very purpose.

As Islamic Banking industry grew, the need for Takaful further
increased.

The First Takaful company was established in Sudan in 1979, four years
after the establishment of the first Islamic Bank.
Need for Takaful was felt after the development of
Islamic Banking
1975
First Islamic Bank
1979
First Takaful Co.
Development of Takaful Industry
Global Takaful Contributions
Global gross takaful contributions continue to post healthy growth, reaching US$ 5.3 billion
in 2008
Global Gross Takaful Contributions (US$m)
5,318 28
299
CAGR (2005-2008) = 39%
4,122
276
3,068
256
1,988
1,384
14
5
474 121
770
2004
17
8
181
18
11
22
76
CAGR 2005-2008
104
1,146
901
Levant
18%
Indian SubContinent
135%
Africa
695
18%
3,742
2,846
544
South-East Asia 28%
2,089
1,239
GCC
2005
2006
2007
45%
2008 (e)
Iran - Gross Contributions by Year (US$m)
2,164
2,561
2,896
3,415
4,096
17%
Notes: Iran’s financial services sector is entirely Islamic and as such, has been shown separately from the global analysis. Saudi Arabia requires that all insurance companies operate under a cooperative
business model, which is a key feature of takaful. As such, Saudi Arabia has been included in the global analysis. However, not all cooperatives in Saudi Arabia operate fully as takaful companies.
Data from the World Islamic Insurance Directory has been cross referenced with published national statistics for takaful wher e available. Consolidated data was available for Bahrain, Malaysia, Pakistan and
Saudi Arabia. For these countries, the 2008 data was found to be within a margin of error of 5%. Numbers may not total correctly due to rounding.
Source: World Islamic Insurance Directory 2010 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis
31
4.3
36
5
1.4
Pakistani
Operators
Approx.
3.4
Window
Operators
>135
(USD) BILLION
2
# of Takaful
Operators in
2009
12 (apprx.)
Worldwide Takaful Developments & Growth
Re-Takaful
Operators
>20
2004
2006
2007
2010
Global Market Size E&Y
2012
Re-Takaful Worldwide


>
20
Re-Takaful
Operators
worldwide


















Islamic Takaful & Retakaful Co. (IRTCo.) (Bahamas)
Munich Re Re-Takaful (Malaysia)
Hannover ReTakaful B.S.C. © (Bahrain)
Best Re (Malaysia)
Solidarity Islamic Takaful & Retakaful Co. (Bahrain)
PT Reassuransi Internasional Indonesia (Indonesia)
Amin Reinsurance Company (Iran)
Al Fejr Retakaful Insurance Co. (Kuwait)
Asean Re-Takaful International (Malaysia)
MNRB Retakaful Berhad (Malaysia)
Islamic Takaful & Re-takaful Co. (Saudi Arabia)
Islamic Takaful and Re-Takaful Co. (ITRCo.) (Saudi Arabia)
Tokio Marine Nichido Retakaful Pte Ltd (Singapore)
National Re-insurance Co. (NRICo.) (Sudan)
Sheikhan Insurance & Reinsurance (Sudan)
Sudanese Insurance & Reinsurance Co (Sudan)
BEIT Iaadat Ettamine Tounsi Saoudi Re-insurance (B.E.S.T. Re)
(Tunisia)
ACR ReTakaful Holdings Limited (UAE)
Dubai Islamic Insurance & reinsurance Co. (UAE)
Takaful Re Limited (UAE)
Source: ICMIF Takaful, www.takaful.coop
History of Takaful in Pakistan
2002
• Insurance Ordinance is issued which includes provision for Takaful;
the word “Takaful” is used
2003
• IJTIMA’ held in Darul Uloom, Karachi on permissibility of Takaful
2004
• A committee to frame Takaful rules was founded
2005
• SECP notifies Takaful Rules
2006
• First General Takaful Company established ( Pak-Kuwait
General Takaful )
2007
• First Family Takaful Company established (Pak-Qatar Family Takaful)
• First Takaful Group catering both Family (Life) and General Takaful needs established (PakQatar Takaful Group)
Total 5 Operators: 3 for General Takaful & 2 for Family Takaful, since
the promulgation of Takaful Rules in 2005
Definition of Takaful
• Takaful is an Arabic word, meaning “Mutual Guarantee"
• It is a system of Islamic Insurance based on the principle of
ta’awwun (mutual assistance) and tabarru’ (gifts, give-aways,
donations) where the risk is shared collectively by the group
voluntarily.
• This is a pact among a group of members who agree to jointly
guarantee each other against losses and damages to any of
them as defined in the pact.
Takaful Arrangements can be broadly
divided into the following two categories
Family Takaful covers all risks associated with human life, like
- death,
- disability and illnesses,
-short-term and long-term investment needs, etc.
General Takaful covers physical assets, like
- house,
- marine,
- motor,
- Engineering and Misc.
Three Operational Models
Pure Mudarbah
Practiced in earlier eras, this model is not
in vogue anymore.
Pure Wakalah
This model in not widely practiced.
Hybrid –
Wakalah +
Mudarbah
This is the most prevalent model.
HybridWakalah+
Mudarbah+
Waqf
This model was suggested by Shariah
Scholars in Pakistan.
Wakalah Model
 Wakalah denotes the contract between Principal and Agent.
 Cooperative risk-sharing occurs among participants whereas
the Takaful Operator earns a fee for services (as a Wakeel or
Agent).
 The Operator earns an upfront deductible fee and shares the
profit of investments, without sharing in
the results of
underwriting. In certain territories, however, Operators can share
in surplus as an incentive for prudent underwriting.
Wakalah Waqf
 Waqf is a legal entity created for charitable purposes,
recognized by Shariah as distinct from other persons/entities.
 To resolve ownership and other Shariah issues, Waqf was
introduced as a legal entity which could own funds and enter
into legal contracts.
 A Waqf Fund is established by shareholders of the Takaful
Operator by contributing ‘Ceding Amount’ (part of the
Capital) to compensate beneficiaries and participants of the
Takaful scheme. The ceding amount remains invested.
 By signing the proposal form, contributing to the Waqf and
subscribing to policy documents, any persoin can become a
member of the Waqf fund.
Functioning of Waqf
 The Waqf fund shall work to achieve the following objectives:
a.
To extend financial assistance to its members in the
event of losses;
b.
To
extend
benefits
to
its
members
strictly
in
accordance with the Waqf Deed; and
c.
To donate to charities approved by the Shariah
Supervisory Board , etc.
Functioning of Waqf
The Waqf Fund lays down the rules for distribution of its funds to
beneficiaries and decides how much compensation should be
given to a subscriber/member .
The Waqf becomes owner of all contributions and has the right
to act as a legal entity as per its terms for investment,
compensations and dealing with surplus amounts.
The Takaful Operator, while managing the Waqf Fund, plays
two different roles simultaneously:
a.
Operator/Manager
b.
Mudarib
Functioning of Waqf

As Operator/Manager, the Takaful Company performs all
functions necessary for the operations of the Waqf against a
Wakala fee to be deducted from the contributions of
Participants.

As Mudarib of the fund, the Takaful Company manages the
investment of excess funds of the Waqf into Shariah
compliant investment avenues, and has a right to the profit
of the fund’s investments at a fixed ratio.

As per Waqf Rules, in the case of the fund being liquidated,
the outstanding balance is utilized for charitable purposes
after paying all dues and payables.
Some terminologies
•
Contribution in place of Premium
•
Participant in place of policyholder/insured
•
Membership in place of Policy

Benefits in place of claims

Re-Takaful in place of Re-insurance

Takaful Contribution in place of Risk Chagre

Surplus in place of Underwriting Surplus
How does it Function? Waqf Pool
Participan
t
Surplus
Wakalah Fee, Claims, Re-Takaful
Participan
t
Takaful
Operator
Waqf Pool
Wakala
Wakala
h Wakalah
Wakalah
h
Wakalah
Risk sharing
Between
Participants
Participan
t
Investment
Participan
t
How does it Function? Family Takaful
1
Participant
Contributions
Profits from Investment
Participant’s
Investment
Account (PIA)
5
3
7
Wakalee Fee(s)
for Investment
Management
Contributions for
Takaful Benefit
2
Payment of
Claims
Surplus
Distribution (if
any)
4
6
Waqf Fund
Wakala Fee for
Operating Waqf
Fund
Operator /
Wakeel
Takaful Funds
• Income and
expenses of
shareholders are
managed.
Shareholder’s
Fund
• Income and
expenses of
Tabarru’/Waqf
pool are
managed.
Participant
Takaful Fund
• Participants’
investments are
managed. This
fund is only
required in Family
Takaful
companies.
Participant
Investment
Fund
Participant Takaful Fund (PTF) - Income
Income of PTF consists of following

Contributions received from participants (other than the portion
transferred to PIA under Family Takaful Policies)

Claims amounts and commissions received from sRe-Takaful
operators

Investment profit attributable to participants in the PTF

Salvage/Recoveries

Qard-e-Hasana by the shareholder fund in case of a deficit

Any donation made by shareholders
Participant Takaful Fund (PTF)- Outgo
The outgo of PTF shall consists of the following

Settlement of losses and expenses occurred therein

Cost of Re-Takaful

Takaful Operator’s fee – Wakala fee

Share of investment profits of PTF as Mudarib

Surplus distributed to participants

Return of Qard-e-Hasana to the shareholder’s fund
Participant Takaful Fund
Statutory Funds
Aggregate
Individual Family Group Family Group Health
Current
Preceding
Period
Period
---------------------------------------------(Rupees)---------------------------------------------
Participants' Takaful Fund (PTF)
Income
Contribution less of re-takaful share
Other income
Net investment income
Total net income
20,247,015
4,337,571
675,359
25,259,945
38,335,775
71,948,622
1,042,406
39,378,181
Claims and expenditures
Claim net of re-takaful recoveries
Takaful Operators' fee & other charges
Total claims and expenditure
2,278,820
7,971,329
10,250,149
Excess of income over expenditure
420,191
72,368,813
130,531,412
4,337,571
2,137,957
137,006,940
66,464,124
163,209
2,077,636
68,704,969
9,174,876
18,949,710
28,124,586
46,162,038
17,710,918
63,872,956
57,615,734
44,631,957
102,247,691
44,061,558
20,590,878
64,652,436
15,009,797
11,253,595
8,495,857
34,759,249
4,052,533
Add: Technical reserves at beginning
Less: Technical reserves at end
5,935,046
5,408,952
21,493,696
27,205,765
20,473,820
31,928,948
47,902,562
64,543,665
44,737,736
43,025,836
Surplus / (Deficit) before distribution
15,535,891
5,541,526
(2,959,271)
18,118,146
5,764,433
Shareholder’s Fund (SHF)

Family and General Takaful Operators will be maintained in a
similar way under the guidelines of Shariah Board and Central
Shariah Board.

The SHF consists of :



the paid-up capital; and
undistributed profits to the shareholders.
The income of the shareholder’s fund consists of:

Takaful Operator’s Fee (Wakala Fee); and

Profit on the investment of the SHF & proportion of the
investment profit generated by the investment of PTF as per PTF
rules and the PMD.
Shareholder’s Fund (SHF)

Expenses of shareholder’s fund consists of:

All expenses related
to Takaful
Operator, including all
marketing as well as administrative, investment and operational
expenses including commissions and over riders paid to business
intermediaries, benefit payments & related expenses as
surveyors’ fee

Shareholders must undertake to declare unconditionally all
contracted liabilities of the PTF, but their liability in this regard shall
not exceed the SHF.
Shareholders’ Sub-Fund
Statutory Funds
Individual Family Group Family Group Health
Aggregate
Current
Preceding
Period
Period
---------------------------------------------(Rupees)---------------------------------------------
Shareholders' sub fund
Income
Takaful Operators Fee
BancaTakaful (Net proceeds)
Mudarib fee from PTF
Total net income
Expenditures
Commission expenses
Other acquisition expenses
Management Expenses
Excess of income over expenditure
Contribution from shareholders' fund
Surplus / (Deficit) after appropriation
170,861,950
9,175,868
450,239
180,488,057
18,949,710
17,710,918
280,128
17,991,046
207,522,578
9,175,868
1,425,305
218,123,751
140,686,314
5,132,643
1,332,340
147,151,297
694,938
19,644,648
91,216,387
65,884,737
49,009,408
206,110,532
522,088
3,163,052
12,803,313
16,488,453
808,329
3,879,618
12,713,183
17,401,130
92,546,804
72,927,407
74,525,904
240,000,115
74,478,438
57,894,309
80,912,595
213,285,342
(25,622,474)
3,156,195
589,916
(21,876,364)
(66,134,045)
25,622,474
(3,156,195)
(589,916)
21,876,364
66,134,045
-
-
-
-
-
Participant Investment Account (PIA)

This account is maintained in Family Takaful companies where unit
linking policies are offered to the customers.

Following are the investment avenues allowed by the Shari’ah
 Shariah compliant Government Securities
 Immoveable property
 Joint Stock Companies
 Redeemable Capital
 Mutual Funds
 Musharika Certificates, Term Finance Certificates, Participation
Term Certificates
 Placement of excess funds with Banks and Islamic financial
institutions
Re-Takaful

Re-Takaful works on the same principles as primary Takaful.

Instead of pooling individual risks, Re-Takaful combines risks of
several distinct pools to make a “pool of pools”.

All major reinsurers in the world have now launched separate ReTakaful companies to make sufficient capacities available.
Surplus Distribution

After deducting Wakala Fees, Claims, Re-Takaful Contributions,
Contingency Reserves and Charities etc. the remaining amount in
the pool is to be distributed between participants; it does not go
to shareholders.

In case of deficit, the Takaful Operator advances an interest-free
loan, as Qard-e-Hasana to make good the shortfall in the fund,
repayable from future surpluses in the Fund.

The actual distribution of surplus will be done only to those
Participants leaving the pool during the year by way of
withdrawal, death or maturity of the membership.

The surplus rate is declared for each line of business separately
Underwriting

Done for the Waqf Pool.

Should be prudent from the perspective of the Pool.

Cannot cover impermissible (haram) business avenues.

Discount given to a participant should be from Wakalah only.

Any Rating on Takaful Contribution does not increase the
Operator’s Wakalah.

Takaful Companies cannot underwrite Guarantee business.
Benefits (Claims)

Benefits are not paid from SHF, consequently more prudence is
required.

Any Ex-Gratia Claim should be paid from SHF.

In Family Takaful, the PIA part has to be paid even if a claim is
rejected.

Pro-rata refund of Contribution is made under Waqf Rules as
benefit.
Shariah Compliance

All products have to be approved by the Shariah Board.

Every Investment should comply Shariah Guideline for investment.

All documents like forms and declarations are to be approved by
the Shariah Board.

Agreements with service providers, distributors, Re-Takaful
Operators etc. are to be approved by the Shariah Board.

In case the Operator’s/Participant’s income is from non compliant
sources, it has to go to charity.

At least one comprehensive Shariah Audit is conducted every
year.
History







Insurance Act – 1938
Insurance Rules-1958
Insurance Ordinance 2000
Insurance Rules 2002
Committee for Takaful Rules-2003
Draft takaful Rules-2005
Takaful rules-2005
Takaful Rules 2005
•
Short title and commencement
•
Definitions
•
Classes of Takaful business
•
Composite Takaful
•
Window Products or Takaful operations conventional insurance
•
Requirement for carrying on business as Takaful operator
•
Use of word “Takaful”
Takaful Rules 2005
•
Takaful operational model
•
•
•
Investment component
Risk related component
Takaful operator’s fees
•
Participants Takaful Fund
•
Shareholders Fund
•
Qard-e-Hasana
•
Relationships
•
Payment of losses
Takaful Rules 2005
•
Sharing of surplus
•
Deficit
•
Management and marketing expenses
•
Funds
•
Participants Investment Fund
•
Investment management of funds
•
Product design
Takaful Rules 2005
o
Deposits
o
Shareholders funds under capital or equity raised by the sponsor or
Takaful operator
o
Books and records of Takaful business
o
Establishment and maintenance of Participants Takaful Funds
o
Requirements as to assets of PTF
o
Solvency requirement
Takaful Rules 2005
•
Investment guidelines
•
•
•
•
•
•
•
Investment in Shariah compliant Government securities
Investment in immovable property
Investment in Joint Stock Companies
Investments in mutual funds
Investments in redeemable capital
Placement of excess funds with banks and Islamic financial institutions
Financing under Islamic modes through the Islamic banks and financial
institutions
•
Re-Takaful
•
Acceptance of risk by Takaful operator
•
Control of forms of proposal, policies and brochures
Takaful Rules 2005
•
Shariah compliance audit
•
Accounting regulations
•
Central Shariah Board
•
Shariah Board
•
Meeting between Central Shariah Board and Shariah Boards
•
Agent Training
•
Business in rural areas
•
General
Jazaakum Allahu Khairan
May Allah Reward you
[email protected]
www.pakqatar.com.pk