Summary of Presentation Origins Development

Summary of Presentation • Origins & Development • Global Takaful Industry • The Takaful Concept • Key Differences • Practicals of Takaful • Q&A 3/17/2018 Takaful Insurance of Africa 1

DEFINATIONS OF TAKAFUL • AOIFI defines Takaful as follows: “ Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants. ” 3/17/2018 Takaful Insurance of Africa 2

Global Takaful Industry ORIGIN & CURRENT STATUS 3/17/2018 Takaful Insurance of Africa 3

Contributions by Region 4 Source: World Islamic Insurance Directory 2012

Number of Islamic/Takaful companies 185 companies * GCC: 72 companies including all licensed companies in KSA 5 Source: World Islamic Insurance Directory 2012

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

A new dawn emerges in East Africa 3/17/2018 Takaful Insurance of Africa 8

Definition of Takaful • AAOIFI defines Takaful as follows: “ Islamic insurance is a system through which the participants donate part or all of their contributions which are used to pay claims for damages suffered by some of the participants. ”

Islam As A 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 / INSURANCE Azman Ismail www. iifin. net

Roles and Responsibilities of Shariah Supervisory Council (SSC) Certification of permissible Financial Instruments through fatwas (ex-ante. Shariah Audit) & verification of Transactions’ compliance With Issued fatwa (ex-post Shariah Audit) Issue report to certify the conformity of all transactions with the Shariah principles The calculation & payment Of Zakah Disposal of Non. Shariah Compliant earnings Advice on the distribution of income & expenses among s/holders

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. • 1985, OIC Fiqh academy, in its resolution No. 9 (2/9) rules that commercial insurance is haram as it contains gharar etc.

What is gharar? • • • Uncertainty, deception, risk, hazard, ignorance. Gharar is where the buyer does not know what he bought, or the seller does not know what he sold (Ibn Hazm).

ARGUMENTS FOR GHARAR • 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.

Investment • Premiums are invested in non-shariah compliant instruments – what about shariah investment link? • Can the legal maxim “whatever leads to haram, is haram itself” be applied here? • Degree Azman Ismail www. iifin. net azmanwong@yahoo. com Topic 2

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.

ELEMENTS OF GHARAR, RIBA MAYSIR IN TAKAFUL? • These 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.

Key Differences Between Takaful & Conventional Insurance 3/17/2018 Takaful Insurance of Africa 20

Insurance Payments Unfortunate Loss Customer Takaful Unfortunate Loss 3/17/2018 A y n Customer ? ce n Claim Paid Insurance Company re fe if D Payments Risk Fund Claim Paid Takaful Insurance of Africa 21

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 3/17/2018 Takaful Insurance of Africa 22

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 3/17/2018 Contributions Refund of Surplus Takaful Insurance Concept of Mutual of Africa Assistance 23

TIA Ushirika Model 3/17/2018 Takaful Insurance of Africa 24

Operations CONTRIBUTION MANAGEMENT FEE 3/17/2018 CLAIMS & REINSURANCE (-) INVESTMENT INCOME (+) PROFIT / SURPLUS TAKAFUL OPERATOR INSURANCE COMPANY TABARRU (DONATIONS) (-) (=) Takaful Insurance of Africa 25

• When there is a will, there is way 3/17/2018 Takaful Insurance of Africa 26

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 especially acceptable to 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 An equal opportunity employer.

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, 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. 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