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Summary of Presentation • Origins & Development • Global Takaful Industry • The Takaful Concept • Key Differences • Practicals of Takaful • Q&A 3/18/2018 1
MOSES MURUNGI KIRIMA PROFILE 3/18/2018 2
PROFILE Bachelor of Commerce (Insurance Option) ACII MBA (Strategic Management) Associate, Chartered Institute of Arbitrators Pioneering Underwriting & Reinsurance Manager – Takaful Insurance of Africa. • Head of Claims & Underwriting – Intra Africa Assurance • Insurance Industry since 1993 • • • 3/18/2018 3
DEFINATIONS OF TAKAFUL • AOIFI defines Takaful as follows: “ Islamic insurance system through which the participants donate part or all of their contributions to their own pool which are used to pay claims for damages suffered by some of the participants. ” • Various scholars have other fitting definitions for this self preservation system. 3/18/2018 4
DEFINATIONS • The term Takaful is derived from several Arabic words: • Ta’awun meaning Mutual Assistance • Kafal meaning ‘To take care of one’s needs’ • Kafalah meaning Joint Guarantee or Guaranteeing each other • Takaful is an Islamic insurance concept observing rules of shariah akin to Muamalat – the islamic banking transactions. 3/18/2018 Takaful Insurance of Africa 5
DEFINATIONS • Takaful is a Sharia compliant risk sharing system where haram business are excluded • Takaful is akin to group Self Insurance minus (Gharar, Riba & Mysir) and haram pursuits. • Sharia is a religious and historic system of determining right actions for Muslims • Takaful aims to diversify or distribute the risk in a structured manner-an improvement from practices that pre-dated Islam. 3/18/2018 6
ORIGINS • Takaful in the organised commercial form we know it today, took shape between the 7 th and 13 th Centuries. • Before then, Al Aaqilah, Kafalah, Ju’hala, Hilf, Diya, Aqd muwalat, Daman Kkhatar, etc evidenced existence of protection practices among arabs. • These practices promoted peace, economic well-being and development by protecting life and property against misfortunes. 3/18/2018 7
ORIGINS • The practices were mainly of a welfare nature with priority being given to areas of • 1. Dharura – Unavoidable necessities • 2. Hajiyat – General / basic human needs • 3. Tahsinat – Need to lead a descent life. • As muslim trader ventured into other lands structured Takaful began to creep in alongside the traditional protective practices. • 3/18/2018 8
ORIGINS & STATUS OF TAKAFUL • Effects of world becoming a global village did not spare muslim world. Trade partnerships & expansions, education & exchange programs. • Multinationals and home firms expanding into other economies encountered Insurance. Had to insure even their home operations. • Overseas learners aware of the benefits of insurance introduced it once back home. • Entrepreneurs saw business opportunities 3/18/2018 9
SCHOLARS REACTIONS TO INSURANCE • Murmurs abounded as to the existence of an Haram business practice in muslim economies • Some rooted for illegitimating insurance • Others reasoned muslims cannot be left out in such beneficial arrangements. • No one though had ready clear cut solutions. • All agreed the arrangement was beneficial but awash with Sharia non compliant elements 3/18/2018 10
VIEWS ABOUT ISLAM 3/18/2018 11
ISLAM AS WAY OF LIFE ISLAM AQIDAH Faith & Belief Shariah Practices & Activites IBADAH Man-to-God Worship AKHLAQ Moralities & Ethics MUAMALAT Man-to-Man Activities Political Activities ECONOMIC ACTIVITIES Social Activities Risk Management & Takaful 3/18/2018 12
TAKAFUL RULED UNDER SHARIA • Considering Islam is a way of life, scholars in Islam had to search and give guidance on issues Takaful. • They isolated Takaful as falling under PRACTICES & ACTIVITIES (Sharia) aspect of this way of life. Sharia can be briefly described as ‘A religious and historical system of determining right action for Muslims’ 3/18/2018 13
SOURCES OF SHARIA LAW 1. Quran – Direct & inspired word as revealed to and transmitted by prophet Muhammad. Supreme source. Other sources subject to it. Only when Quran does not DIRECTLY speak on a subject are other sources considered. 2. Sunnah – Traditions & known practices of prophet Muhammad – utterances, actions & rulings recorded verbatim and are referred as undisputed truths–‘Self Preservation’ 3/18/2018 14
SOURCES OF SHARIA LAW 3. Ijma (Consensus) – Where no specific ruling from Quran or Sunnah is available consensus of the community is sought mainly through Islamic scholars and it becomes bidding 4. Qiyas (Analogy & Reasoning). Specially where general principles have to be applied inemerging situations leading to clear unanimous legal opinions popularly known as Fatwa. No 100% consensus-sect/regions. As all religions 3/18/2018 15
SOURCES OF SHARIA LAW 5. Ijtihad / Aql – This literally means exerting oneself – effort reasoning by Shiite scholars 6. Al-maslahah al-mursalah – Jurists consider the general public interest when deciding. 7. Istihsan – Juristic Discretion as means to ease and convenience, adopting tolerance & if need be overrule analogical reasoning 8. Urf – Local customs 9. Istidlal - Inference 3/18/2018 16
HAVE SHARIA COMPLIANT INSURANCE • Discussions on legitimacy of insurance were henceforth restricted to Sharia aspect of Islam with statements of Muhammad being quoted: • He variously advocated ‘self pre-servationcaution’ • ‘My followers will never agree upon an error or what is wrong’ • ‘God’s hand is with the whole community’ • ‘Where there is no revealed injunction I will judge amongst you according to reason’ 3/18/2018 17
DEVELOPMENT OF ISLAMIC FINANCE Private Initiatives Government Directives People’s Driven
Government Directives 1980 s Revolutionary (Full Islamisation) Pakistan Gradualist (Partial Islamisation) Iran Malaysia Sudan
NON COMPLIANCE ELEMENTS IN CONVENTIONAL INSURANCES 1. 2. 3. 4. 5. Insuring Haram businesses and pursuits Gharah - Uncertainty Riba - Interest Maysir - Gambling The 3 elements do not exist in Takaful as long as it is a contract of taburru’ (gratuitous contract), not a contract of exchange (‘aqd mu’awadah) as in conventional insurance
Roles & Functions of Shariah Supervisory Council SSC. Sharia scholars in relevant sector. Certification of permissible Financial Instruments through fatwas (ex-ante. Shariah Audit) & verification of Transactions’ compliance With investors adopted model through ex-post Shariah Audit Issue report to National SSC on conformity of all transactions with the Shariah principles The calculation & payment of Zakah & Surplus Disposal of Non. Shariah Compliant earnings Advice on the distribution of income & expenses among s/holders & Fund
Fatwas and resolutions on conventional insurance • 1972 Fatwa by National Council for Islamic religious affairs of Malaysia that life insurance is not lawful as it contains gharar, maysir and riba. ‘No one can guarantee life’. *A misnomer of sorts as there is no ‘Life Insurance’ per see. • 1985, OIC Fiqh academy, in its resolution No. 9 (2/9) rules that commercial insurance is haram as it contains gharar, Maysir & Riba and also covers Haram pursuits.
What is gharar? Uncertainty of what is bought and expected. Deception as what buyer feel at expiry Risk, hazard of being ruined if event happens Ignorance as the buyer does not know what he bought, or the seller does not know what he sold (Ibn Hazm). • Today we have such good terms as ‘Peace of Mind’, Endowment, Educator, cushion, etc • •
GHARAR IN INSURANCE • Identify the gharar element in conventional insurance. • Will insured get the compensation as promised? • How much will the Insured get? • When will the compensation be paid? • Can the above be considered gharar? If yes, what extent of gharar, minor or major?
Riba • Investment of premium in riba-based financial instruments (e. g, interest bearing accounts and conventional bonds). • May impose charges for late payment of premiums and premium financing. • Can the legal maxim “whatever leads to haram, is haram itself” be applied here? • What is the degree – percentage income
Maysir (gambling) • How does conventional insurance involve gambling? • By purchasing the policy with non -proportionate premium in the hope of getting much higher compensation should peril occur.
ENSURING SHARIA COMPLIANCE 1. Do not cover Haram pursuits 2. Make it an own fund (Contract of Tabarru) not a sell – purchase deal Takaful = Insurance - Haram pursuits – (Gharar, Riba & Maysir) Cnt of Tabarru A Tabarru risk management system where Haram ventures are excluded.
Insurance Payments Unfortunate Loss Customer Takaful Unfortunate Loss 3/18/2018 A y n Customer ? ce n Claim Paid Insurance Company re fe if D Payments Risk Fund Claim Paid Takaful Insurance of Africa 28
Operation of ‘Insurance’ Risk Trading Concept (Financial Risk) Unfortunate Insured sells his Risk / Insurer Buys the Risk (financial risk) Loss Insured Insurance Company Indemnify Premiums 3/18/2018 Takaful Insurance of Africa 29
Operation of ‘Takaful’ Risk Pooling Concept Participants /Members Indemnify (Financial Risk) Unfortunate Loss Tabarru Fund (Contribution Fund) Company Fund Manager Management Fee Pooling of Risks 3/18/2018 Contributions Refund of Surplus Concept of Mutual Assistance 30
CURRENT TAKAFUL MODELS Though all Takaful arrangements are Sharia compliant, they differ in the manner in which contributions and investment proceeds are shared between participants and investors. Initially there were 2 unique models of Wakala and Mutharaba. Later the Ushirika (A Hybrid of Wakala and Mutharaba models) was developed. Wakala and Mutharaba have lately undergone modifications making total number of models 5 3/18/2018 31
WAKALA MODEL • Here the Takaful Operator (insurance firm) is only an agent or fund manager. • They are remunerated by getting a portion of the contributions say 50% to manage the fund on behalf of the participant (owners). • Management entails developing & promoting products, issuing policies & other documents, paying claims, investing funds, distributing surplus, etc 3/18/2018 32
WAKALA MODEL • That percentage fees or commission is used for all office, marketing & distribution, staff and other related operational costs. • Investors expect a return from this fees especially in subsequent years • The CEO and team have to prudently manage costs and make this return for investors. • Rest of contributions goes to risk fund to pay claims, reinsurances, Invest & share Surplus. 3/18/2018 33
MODIFIED WAKALA • In addition to a share of the contribution the Operator gets a share of the surplus – sharing with the participants and the risk fund • Ju’hala concept where one is seeking consideration over and above the usual due to hardships experienced. • May have to pump funds for long years without a return yet risk fund is very healthy 3/18/2018 34
MUDHARABA MODEL • As in Wakala the Takaful Operator (firm) is in real sense a fund manager. • They use the fund paying all expenses , claims and reinsurances. • Takaful operator is enumerated by a share of investment proceeds and the trading profits / surplus with the participants on an agreed ratio. 3/18/2018 35
MODIFIED MUDHARABA • In addition to sharing in surplus & investment proceeds the Operator seeks a Ju’hala consideration on the percentage contributions as well. • Similar economic considerations as in modified Wakala. 3/18/2018 36
USHIRIKA / HYBRID MODEL • Here the Takaful operator is enumerated using both a share of the contribution and the investment proceeds. • Gained popularity for eliminating laxity in both investment and risk management • 3/18/2018 37
HYBRID / USHIRIKA MODEL 3/18/2018 38
Operations CONTRIBUTION MANAGEMENT FEE 3/18/2018 CLAIMS & REINSURANCE (-) INVESTMENT INCOME (+) PROFIT / SURPLUS TAKAFUL OPERATOR INSURANCE COMPANY TABARRU (DONATIONS) (-) (=) 39
Contributions by Region 40 Source: World Islamic Insurance Directory 2012
NUMBER OF TAKAFUL COMPANIES BY REGION - 2012 3/18/2018 41
• When there is a will, there is a way 3/18/2018 42
Q&A ? s
PRACTICALS OF TAKAFUL • After concept and development what practical actions make each insurance stage compliant: v Promotion / Marketing Stage v. Products Development v. Risk Assessment / Underwriting v. Finance / Accounting v. Reinsurance & Claims v. Concept in Family Takaful
AT PROMOTION/MARKETING Ø Explain/Demystify Takaful Concept Ø For all but Sharia compliance makes it more acceptable to hitherto excluded Muslims. Ø Offers same classes under different – Compliant - Business Model: • Contribution into own fund instead of premium payment • Possibility of Surplus Share at end of year – Bond beyond premium payment • Unethical and harmful pursuits excluded
AT PROMOTION/MARKETING Ø There is dual governance – by Internal Auditor to the Board of Directors and by Head of Sharia Department to Sharia Supervisory Council Ø Quarterly Sharia audits and rulings Ø Despite additional costs to ensure Sharia Compliance we ensure competitive pricing. Ø Participate in and abide by industry regulations and Insurance law of the country Ø Open to all investors irrespective of religion Ø An equal opportunity employers.
WHILE DEVELOPING PRODUCTS Ø Ensure CLARITY - Strive to remove any apparent ambiguities to reduce contentions at claim Ø Develop Membership Certificate and Cover Summary in addition to usual working docs – PF, PD, Schedules, Cover Notes, Clauses, etc. Same with Client Code? Ø PF & PD to contain the Sharia Compliant Declaration. Ø PF & PD to contain the key non compliant exclusions – Pork, Gambling, Alcohol, pornography, Khat, Riba, unethical businesses and pursuits harmful to society Ø Use compliant terms such as Contribution instead of Premium, Participant instead if Insured ** Sum covered
COMPLIANT DECLARATION Ø Recognises the agency relationship between Participant and (appoints) Operator to run fund Ø Participant vouches info given is true to the … Ø Sets out the premium segregation ratio– 40/60 Ø Allows investment in compliant instruments Ø Authorises purging of uncompliant income and channeling it to charity. Ø Agrees sharing ratios for investment income Ø Entrenches the sharing of any surplus from the risk fund.
QUOTING & COMPLETING P. FORM Ø Capture sufficient participant and risk info to facilitate bonding beyond insurance and availing shared surplus Ø Quotation to contain key non compliant exclusions. Not exhaustive and Participant to be guided by the ejusdem generis rule for others. Ø Highlight need to continuously advise change of use or business to reduce contention at claim Ø Affirms importance of completing proposal form – Info capture & Compliant Declaration
RISK ASSESMENT / UNDERWRITING Ø Ensure completeness of Documentation and details – Subject of Sharia Audit. Also IRA & KRA audits Ø Accept only compliant risks and reject others. Where in doubt consult Sharia Department. Ø Being ethical, adhere to industry guidelines including Motor terms, Listed Risks, WIBA Tariffs Ø Exercise Equity in rating – avoid huge subjective rate disparities. NCD, fleets & volume discounts allowed Ø Issue Cover Summary as you book any new business. Ø For Comprehensive motors valuation letter at inception and renewal to minimise contention at claim
FINANCE – PREMIUM DISTRIBUTION Ø Segregation of funds - 5 different accounts Ø Premium Receiving Account. From here distributed to respective accounts. Commissions, Levies, Stamp duty and purchases of Yellow Cards & Motor Certs drawn from here. Ø Other accounts are Operator, Risk Fund, Charity Account. Ø Operator Account – office Rent, stationery, salaries, marketing & promotion, transport, office running Ø Risk Fund – Direct Claims expenses, Reinsurance. Ø Surplus Account – If and once Surplus amount is determined it is moved from the Risk Fund to this account for sharing among qualifying participants
CLAIMS Ø Claims payment is considered one of the justifications for the existence of Takaful – not a wasted expense. Reality of covered events and need to cushion oneself realised then. Ø There are no ex- gratia considerations. A claim is either payable or not. Equity demands that what you do to one, be ready to do to the entire group Ø Payments are out of the risk fund and must be sanctioned by the Sharia Department upon satisfying themselves Ø The highest body of appeal on any claims issue is the Shariah Supervisory Council whose ruling is final unless one wishes to pursue in a court of law Ø To cushion the Fund some of the Surplus at the end of the period is retained in the Risk Fund and rest is distributed among qualifying participants.
REINSURANCE / RETAKAFUL Ø Reinsured/Cedant becomes Takaful Operator and Reinsurer becomes Retakaful Operator Ø The Retakaful Operator must be Sharia Compliant – we expect surplus from them as we share surplus with our participants Ø Led Inward facultative support to other players but obtain outwards facultative only from compliant operators who will support the Surplus already shared Ø Give the Mandatory cessions to Kenya Re, Zep Re and Africa under their Sharia compliant windows / operations
PECULIARITY OF LONG TERM TAKAFUL Ø Promotion, Product Development, Underwriting and Reinsurance are more less as in General Ø Group Life and Credit Protection surplus share not to individuals but companies and lenders who are in actual sense the participants. Are annual Ø Pension & Annuities and Endowment Plans are long term investments. Funds are not segregated. Ø No Surplus Share is envisaged. Only substantial growth each year and end term bonuses. Ø PA Rider may be considered for Surplus Share
END ? s QUESTIONS & ANSWERS