FAQ #1

It seems like Takaful is merely using different terminologies compared to insurance such as “contribution” instead of “premium” and “profit rate” instead of “interest rate”.  Most other aspects are quite similar for both takaful and conventional insurance business.  Thus, what are the key differences between Takaful and conventional insurance?

Takaful business is using a different concept compared to insurance.  When an insurance agent approaches a prospect, he will usually say for instance, “Would you like to buy a medical insurance policy?”  He is absolutely correct as the insurance contract is based on sales and purchase (S&P) agreement.  However, a takaful agent shall approach his prospect by saying for instance, “Would you like to participate in a medical takaful scheme or fund?”

Below is a detail comparison between takaful and conventional insurance:

Subject Matter	Takaful	Insurance
Fundamental Law & Contract	Source from Al-Quran & Hadith Contract is based on: ü  Tabarru’ – donation ü  Mudharabah – profit sharing ü  Wakalah – agency relationship 2 types of contracts: ü  Contract among participants – tabarru’ ü  Contract between operator & participants – wakalah/mudharabah	Source from Law & Regulation of local authority Contract is based on sales and purchase agreement (Shariah disputes on the transaction) One contract between operator & policyholder only
Basic Principles	Permissible Interest Utmost Good Faith Indemnity Subrogation Contribution Proximate Cause Tabarru’	Insurable Interest Utmost Good Faith Indemnity Subrogation Contribution Proximate Cause
Profit motive	Community well-being optimizing operations for affordable risk protection as well as fair profits for the operator	Profit-motive, maximizing returns to shareholders
Management (Good Corporate Governance)	Shariah Committee is required – looks into Shariah matters and public interest at large. SC is at least at par with BOD. GCG is based on Shariah and governing law	No Shariah council.  BOD is the highest body. GCG is based on governing law only.
Profit and bonus distribution	Takaful contract specifies in advance (pre-determined) how and when profit/surplus and/or bonus units will be distributed.	Profits and/or bonus units to be distributed to policyholders as determined by managers and BOD of insurer.
Intention/interest of parties involved	Coincidence of interests between certificate holders and operator which is  appointed by participants.	Separation of policyholder and insurer with differing interests.
Accounting system	Separation between tabarru’, participant and shareholders’ funds Zakat (tithe) is compulsory Contribution paid is clearly separated according to it’s components Income to operator (shareholders): ü  Upfront fee (ujrah) ü  Profit (investment) sharing – performance fee ü  UW Surplus sharing Normal accounting and auditing standards and conforms with Shariah guidelines and AAOIFI,  where applicable	No clear separation of funds Zakat is not compulsory Premiums is not separated Income to operator (shareholders): ü  Expense loading ü  Interest rate differential ü  Reinsurance commission ü  Mortality gain ü  Surrender gain Normal accounting and auditing standards
Operational	Product design eliminates element of gharar, maisir and riba Insurable object must be halal and acceptable to Shariah Risk management is based on sharing of risk among participants Investment only in Shariah acceptable instruments Claim is paid from tabarru’ fund which is it’s sole purpose UW Surplus belongs to participants and distributable accordingly.	Product involves gharar, maisir and riba No restriction to insurable object Risk management is based on risk transfer to operator No restriction to investment – optimize returns only Claim is paid from insurance fund UW Surplus belongs to shareholders
Treatment of losses	Losses retained within classes of business written and sole obligation of participants (Based on the concept of tabarru’). However, IFSA requires the deficit be rectified via qard from shareholders.	Transfer of losses among insurance pools  from policyholders to shareholders
Proceeds ownership	Proceed ownership  is determined by Islamic principles of Fara’id (Inheritance)	Proceed ownership in the Nominee absolutely in life insurance.
Investment of contribution/ Premiums	Takaful operator invests contributions in accordance with Islamic values and Shariah guidelines	Insurer invests premiums consistent with profit-motive with no divine guidelines; hence existence of Riba and Maisir.
In the event of dissolution	Reserves and excess/surplus could be returned to participants, although consensus opinion prefers donation to charity	Reserves and excess/surplus belong to the shareholders.

Takaful Today

Takaful or Islamic insurance has been growing significantly since the last three decades when the first takaful established in Sudan in 1979 following several “fatwa” by Shariah scholars that insurance contracts contradict the Islamic business principles and contains the elements of gharar, maisir and riba.

With a steady double digit growth in the last several years and an estimated of 14% growth in 2014 to reach US$14 billion, global takaful industry is expected to record US$20 billion by 2017, according to EY Global Takaful Insights 2014.  Even though takaful assets comprise a small proportion of global Islamic finance assets of about US$2 trillion, it plays an important and significant role in determining the future of global Islamic finance.

Takaful business has been established is many parts of the world today however there are only three key markets which contribute significantly namely, Saudi Arabia, Malaysia, and United Arab Emirates (UAE)  with total contributions of US$6.8b, US$3.0b and US$1.3b, respectively in 2014.  In Saudi Arabia, there is no takaful company as per those operated in other countries like in Malaysia however the insurance and takaful industry is bound under the cooperative business model which is acceptable to the Shariah principles. 

Global Gross Takaful Contribution by Region, 2009 – 14f

Source: EY, Global Takaful Insights 2014

Indonesia as the biggest Muslim population in the world of about 200 million people recorded merely about US$1 billion takaful contribution in 2014.  Besides, there are few other countries with significant number of Muslim population for instance Turkey, China, African countries, and CIS regions (former Soviet Republics) such as Kazakhstan, Tajikistan, Turkmenistan and Uzbekistan, had yet to establish Islamic finance including takaful extensively.  Thus, there are huge growth potential for takaful in the near future.  In fact, there are several initiatives to introduce Islamic finance including takaful in Rusia, Eastern Europe, and African countries recently.

In terms of takaful regulatory framework, Malaysia takes the lead in introducing the relevant laws and guidelines to promote financial stability and growth in the country.  Islamic Financial Services Act (IFSA) was introduced in 2013 which consolidates few acts including Takaful Act with several enhancements in provisions. Among broad range of guidelines introduced or enhanced by Malaysian authority which directly impacting takaful are Risk-Based Capital Framework for Takaful Operators, Guidelines on Takaful Operational Framework, and Shariah Governance Framework for Islamic Finance Institutions.

Takaful industry is expected to continue the growth momentum in the near future with new emerging markets in certain parts of the world.  Thus, this book is intended to address several pertinent frequently asked questions pertaining takaful business based on current market practices as a quick source of references for new and existing interested parties.

Takaful 2.0 - Making it a reality!

During the opening of Takaful Rendezvous 2014 recently in Kuala Lumpur, Director of Islamic Banking and Takaful Department of Bank Negara Malaysia, Wan Nazri, had urged the takaful operators to take the next leap forward to achieve a Takaful 2.0 status.  He had even put forward three possible strategies that could promote the sector to the next level of development, namely, designing products that meet the critical needs of today, empowering consumers, and enhancing industry collaboration.

Takaful 2.0 can be seen as a new chapter to Takaful industry in the next 30 years period compared to the past 30 years since existence.  It shall be among others, unique, different, and with a world class standard.  In the past 30 years, we can generally notice a situation of “takafulizing” conventional insurance to comply with shariah requirements.  In fact, many claim that the industry is merely an Islamic insurance instead of pure takaful business.  Whatever it is, we shall salute those who had contributed to the takaful industry (or Islamic insurance) successfully from day one of its existence despite of numerous obstacles including shariah, regulatory, technical, human capital as well as marketing concern.  As a result, Moslem communities had no more excuse to opt for conventional insurance.

Setting the right direction is paramount to ensure that all stakeholders remain focus with end in mind.  Nevertheless, I am of the opinion that having the right people is vital prior to setting the right direction.  We may develop the best business or strategic plan with clear direction but lacking of the right people to drive and execute the plan may lead to nowhere.  Thus, the aspiration of achieving Takaful 2.0 shall be supported by highly qualified leaders of the industry.  The question to address now is whether the industry is ready with sufficient supply of the right talent to lead the industry.

Whilst quantity is a concern, we shall not ignore the quality aspect of it.  Therefore, I personally feel that there shall be a robust assessment process in selecting the leaders of the industry.  They shall be qualified leaders instead of merely managers of the company.  During the process of appointing CEO and CEO-1 team for takaful, the incumbents MUST meet with at least one of the following criteria, namely;

1.  Ten (10) solid years in insurance / takaful industry at managerial level and above; AND/OR
2. Completed relevant professional qualification to insurance / takaful business; AND/OR  
3. Undergo specially designed coaching program by recognized relevant institutions such as IBFIM.

The main objective is basically to strengthen the industry with leaders with the right knowledge and capable of making the right decision for takaful business.  This may also be extended to members of BOD as well as SC with appropriate adaptation as they are part and parcel of key decision making process.  For those who had sufficient extensive working experience in insurance with minimal exposure in takaful business shall undergo a special familiarization and understanding program to takaful organized by recognized entities by Islamic institutions such as IBFIM.  This program will assist the incumbent to have a better idea on takaful and prepare their mindset to manage takaful business differently from insurance approach. This includes the concept of tabarru’at against sales and purchase contract, no marketing approach using surplus distribution, risk sharing against risk transfer, etc.

In takaful company, currently, we can easily find professionally qualified actuaries and accountants as they are stipulated in the regulation.  A question arise whether we need other core functions of takaful operation to be supervised by relevant qualified professionals.  Core functions of takaful operation commonly comprise of Underwriting, Claims, Servicing and perhaps Marketing. If we, for instance, conduct a random surveys pertaining the so-called Underwriters of takaful companies, we will generally discover that they have been appointed as Underwriters mainly due to their involvement in underwriting functions for significant number of years.  Nevertheless, we may also come across several incumbents who have been working in underwriting department for significant number of years but yet to be “conferred” as an Underwriter status.  There is no absolute barometer to gauge their level of professionalism as to their readiness to assume the responsibility as an Underwriter which is one of the core activities of a takaful company and highly correlated to the end result or bottomline.  Therefore, there is a strong demand and urgency to develop a Takaful Professional certification for core functions of the business which is unique, different and world-class standard and most importantly guided by Shariah principles.  Authority may, in near future, impose a requirement to have at least one professionally qualified personnel for each core activities in takaful company. Currently, there are few professional bodies such CII, MII, LOMA/LIMRA which provide such relevant certifications however the learning objectives are not fulfilling the aspiration of takaful business and shariah principles.  As a talent development agency specialized in Islamic Finance, IBFIM shall take the responsibility to innovate such certification and support the takaful industry in generating more qualified professionals to supervise core functions of the business.

In the last two years, IBFIM had embarked on a specially designed coaching program for leaders of takaful industry.  It is similar to a ‘Mentor – Mentee’ program and the mentors are mainly senior personnel of takaful industry with extensive relevant working experience and knowledge.  Such program can be adopted as one of the pre-requisite criteria prior to the appointment of CEO and CEO-1 team as mentioned under item (3) above.  Based on the individual background and experience, the coaching program can be carefully crafted to ensure that the gap is minimize and relevant technical know-how is properly transferred from Mentor to Mentee.

Upon implementation of the above initiatives, I strongly believe that takaful industry is ready to transform itself towards a new generation known as Takaful 2.0 and significantly differentiate itself from insurance operation.