Lesson from MH370 Tragedy from Takaful perspectives

1. The missing of MH370 and the search and rescue operation are making headlines in almost all major media be it the print media, electronic media and new age media.   It is no longer a domestic controversy  debated exclusively in  Malaysia but all over the world.  Numerous speculations and theories were suggested, mainly by netizens, nevertheless we can only confirm which one is correct once the black box is found and recovered from the now mystery location.  I am not interested to add more to the speculations and theories which I personally feel are already aplenty. Instead, I wish to put forth some lessons for all to ponder upon from Takaful perspectives.

2. Who are the stakeholders of MH370 or any other plane which ferry passengers as well as aircrews from one location to its final destination?  Obviously, first layer stakeholders  are the airline owner i.e. Malaysia Airlines for MH370, the air crews and the passengers themselves. The next layer would be the relevant regulators, families of the aircrews and that of the passengers.  My discussion will only focus on the first layer of stakeholders.

3. The airline owner owns the plane and shall ensure that the plane is fit as prescribed by the aviation authorities to provide the required services for the designated passengers.  Despite of having world class Standard Operating Procedures (SOPs) and the best resources to execute the SOPs, nobody can refute that the probability of loss due to exposure to various kind of risk still exists.  In simple words, we cannot  guarantee 100% that there will never be any misfortune or accident during the course of the flight.  Potential risks like engine malfunction, system  software  errors,  bad weather, human errors or hostile action, etc might still occur.

4. Thus, in the event of an accident or misfortune, there would be potential significant losses to the asset or plane as well as injuries or losses of lives of those people travelling on board.  In terms of monetary values, we are looking at hundreds of millions (US$) worth of potential losses, whether to the hull (body) of the plane or liabilities to the lives on board.

5. The airlines, therefore, should ensure that adequate Takaful coverage for the hull and liabilities are  obtained from a suitable Takaful operator or consortium of operators.  In this respect, engaging services from a professional Takaful broker is advisable as the broker is able to advise on the appropriate coverage to be taken, as well as the sum to be covered.  Besides, the broker may also negotiate the best terms and conditions with the lead takaful operator to ensure that the client, i.e. the airline, can obtain the most reasonable protection at a competitive pricing.

6. Today, none of the Takaful operators are ready to offer a complete and comprehensive Takaful coverage to the aviation industry due to its limited capacity in terms of coverage as well as lack of technical expertise about the industry itself. However, they should form a consortium to share the risk among themselves and slowly build the necessary expertise internally.  Active and aggressive participation by  retakaful companies will definitely speed up the learning and growth process of the takaful industry in this sector.

7. Individually, each passenger as well as  crew should obtain adequate Takaful coverage for their travelling.  Should the covered risk happens, this coverage is usually settled much earlier as compared to liabilities compensated via the airline certificate which takes longer to settle due to legal processes.  As in the case of MH370, the search and rescue operation still continues until now (time of this article written) and even after more than a month there is still   no significant lead.  Thus, the families of the victims may encounter difficulties or hardship to meet monthly dues if they do not have any other income as compensation from the airline has yet to be received.

8. The fact is, travel takaful coverage is very affordable for everyone as the duration of coverage is strictly coincide with the travelling period.  During my one week trip to Europe recently, I had obtained the most comprehensive travelling takaful coverage which cost me for only RM14.  It covers death and total permanent disability, in-patient and out-patient medical, repatriation cost, loss of baggage, delay of flight, etc. Despite of the very affordable coverage, I believe  most travellers are ignorant about the availability of such takaful coverage or the importance of having a coverage while you are travelling.

9. For those who require higher coverage for death and disability, they may add personal accidental Takaful coverage which usually span for a minimum period of 12 months.  This protection is also very affordable where a RM100,000 sum of coverage for a period of 12 months will usually cost about RM100.

10. It is strongly recommended that employers  obtain the necessary and adequate Takaful coverage for all their employees who are required to travel for business reasons.

11. Besides having adequate Takaful coverage, another lesson to be learnt is pertaining to good risk management practices. In order to minimize the potential of sudden loss of several key executives,  many multinational corporations have practiced the unspoken rule to disallow  their key executives to travel together in the same transport.  This measure is  taken to minimise the potential loss of several key executives should any unforeseen misfortune happen if they were to travel together.  Losing several key executives would mean  significant interruption to the business operation and ultimately impact their bottomline.

12. Due to the same reason,  I was told  that a few corporate figures hardly travel together with their families in the same transportation.  Instead, they will schedule a different transportations, like a different flight  going to the same destination, for the family members to take.

13. In conclusion, we shall always ensure that our travel is a pleasant and enjoyable journey with minimum difficulties encountered during the trip or in the event of any misfortune.

Remembering and pray for the best for MH370

Misconception on Takaful

1.            I was asked by a friend recently about the motor Takaful product which according to him is less superior in terms of pricing, flexibility and meeting with the customers need as compared to the conventional product.  Accoding to this friend, a Takaful operator offered him a motor Takaful coverage for a total sum cover of about RM290,000 for a cost of approximately RM4,000, while another conventional insurer was willing to offer a total cover of only RM160,000 which would cost him about RM2,300.  After an intense discussion, the Takaful operator  was willing to reduce the sum of coverage to RM160,000, provided that he signs an undertaking letter with respect to the  average clause as provided in the certificate.  This situation is not uncommon in the insurance/takaful industry and some consumers might have already faced the same experience.  It may also happen among the conventional insurance companies.

2.            At a glance, we might be tempted to conclude that Takaful is not fair and expensive.  The additional contribution (premium) of  RM1,700 (RM4,000-RM2,300) was definately more than double the cost charged by the conventional insurer.  This contradicts the concept of fairness and equitable as promoted by Takaful operators as well as any other Islamic Financial Institutions (IFI) nowadays.

3.            Ok, let me clarify the above situation based on two perspectives, namely Shariah and technical.  As Shariah justification may not be appealed to non-Moslem, they may consider the technical explaination.  Nevertheless, I will try to explain the Shariah concept in the universal context as well.

4.            What is the major different between Takaful and conventional insurance?  Takaful is based on the concept of helping one another where all participants (policyholders) contribute a certain amount of money to a pool, with the main objective to help those who might meet with defined misfortunes as outlined in the contract.  This is indeed a righteous act and commendable act strongly encourage by all religions.  In the Quran (2:261), Allah says “The parable of those who spend their substance in the way of God is that of a grain of corn: it growth seven ears, and each ear hath a hundred grains.  God giveth manifold increase to who He pleaseth: and God careth for all and He knoweth all things.”

5.            Thus, Allah promises at least 700 times of reward for those who contribute their wealth for the sake of Allah.  The more you give, the more return you will reap from Allah swt.  Based on the Takaful practices, most of the contributions are pooled into a fund under the concept of Tabarru’at which literally means donation.    Under the concept of Tabarru’at (donation), paying RM4,000 would yield more reward as compared to RM2,300, as the quantum going into the way of Allah is significantly higher.  Based on the multiplying effect, don’t we want to invest for our hereafter as much as possible? The richest of the rich, just to name a few, like Bill Gates and Warren Buffett were reported to have given away a large chunk of their wealth to charity, with Gates donating money amounting to US60 billion to help those in need and Buffett giving shares worth nearly US20 million to eight unnamed charities. And they are still among the richest men in the world bestowed with more wealth.

6.            Now, let’s look at from technical point of view.  Ask yourself, why would you purchase an insurance policy or participant in a Takaful plan?  Obviously, for protection against any unexpected misfortunes,  in the event of which, our asset (insured under the general insurance/takaful) is exposed to the maximum probable loss which is equivalent to the cost of replacing the asset based on the current market value. 

7.            Back to my friend's story, when a takaful operator offers to cover his vehicle for a total coverage of RM290,000, it is based on the current market value of the vehicle.  Meaning that, in the event of a misfortune which may lead to the total loss of the vehicle, the takaful operator will compensate him, as  participant, with an amount of RM290,000 to enable him to purchase a vehicle of similar condition as a replacement. On the other hand, the conventional insurer would only compensate him with the maximum amount up to RM160,000 which will definitely upset him and put him at the disadvantaged as he won’t be able to purchase another vehicle of similar condition as replacement.  He might be able to save RM1,700 at the inception of the business transaction but he exposed himself to a maximum total shortfall of RM130,000 compensation should misfortune befalls him. 

8.            Some may say that their chances of total loss is very slim or insignificant thus making them reluctant to seek a coverage for their asset equivalent to  the market value.  The lower probability of total loss has been factored into the pricing where he is only charged approximately RM4,000 for a potential benefits of RM290,000.

9.            In summary, Takaful business is the most fairness and equitable as the fundamental objective is to help each other to protect against unexpected misfortunes.