Institute of Business Administration March 13 13, , 2007. 2007.

Difference Between Takaful & Conventional Insurance

A Presentation by:

Rohail Alikhan
General Manager Marketing

TAKAFUL PAKISTAN LIMITED

Khutbatul Haajah
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Translation of Khutbatul Haajah

All thanks and praises are due to Allaah, Whom we thank and seek for help and forgiveness forgiveness. . Whomsoever Allaah guides, will never be misled and whomsoever He misguides, will never find someone to guide them. them. I testify that none has the right to be worshipped, except Allaah, Alone without partners, and that Muhammad is Allaah's slave and Messenger Messenger. . "O you who believe! Fear Allaah as He should be feared and die not except in a state of Islaam. Islaam." (Soorat Aali 'Imraan, 3:102) 102) "O mankind! Be dutiful to your Lord, Who created you from a single person (Adam), and from him (Adam) He created his wife [Hawwaa (Eve)], and from them both He created many men and women; women ; and fear Allaah through Whom you demand (your mutual rights), and (do not cut the relations of) the wombs (kinship). (kinship) . Surely, Allaah is Ever an All All-Watcher over you. you." (Soorat unun-Nisaa', 4:1)

...Translation of Khutbatul Haajah

"O you who believe! Keep your duty to Allaah and fear Him, and (always) speak the truth. truth. He will direct you to do righteous good deeds and will forgive you your sins. sins. And whosoever obeys Allaah and His Messenger (Muhammad), he has indeed achieved a great achievement. achievement." (Soorat ul ulAhzaab, 33 33: :71 71-72 72) ) Verily, the best speech is Allaah's Kalaam (Speech), and the best guidance is that sent with Muhammad (sall(sall-Allaahu 'alayhi wa sallam) sallam). . Verily, the worst matters are matters of innovation (in religion), and every innovation is a Bid'ah, every Bid'ah is Dalaalah (sin, heresy) and every Dalaalah is in Hellfire Hellfire. .

Outline of Presentation
Definition of Insurance Fatwa regarding Insurance Objections to Conventional Insurance Shariah Perspective on Takaful Definition of Takaful Proofs for the concept of Takaful Historical Precedents Takaful through time How Takaful Works Comparing Takaful to Conventional Insurance Frequently Asked Questions

Definition of Insurance
Definition of an Insurance Contract Subject Subject-matter of an Insurance Contract An agreement whereby one party, the insurer, in return for a consideration, the premium, undertakes to pay to the other party, the insured, a sum of money or its equivalent in kind on the happening of a specified event, which is contrary to the insureds financial interest

what is it that is insured in a fire policy? Not the bricks and materials used in building the house, but the financial interest (i. (i.e. money) of the insured in the subjectsubject -matter of insurance (Lord Justice Brett in Castellian v. Preston 1883) 1883)

Fatwa Regarding Conventional Insurance

The Islamic Fiqh Academy emanating from the Organization of Islamic conference, meeting in its Second Session in Jeddah, Saudi Arabia, from 10 to 16 Rabiul Thani, 1406 H (corresponding to 22 22-28 December, 1985) 1985) issued a resolution which in summary stated the following: following:  After reviewing the presentations made by participating scholars during the session on the subject of Insurance/ReInsurance/Reinsurance; insurance ;  And after discussing the same; same;  And after closely examining all types and forms of insurance and deeply examining the basic principles upon which they are founded and their goals and objectives objectives; ;  And having looked into what has been issued by the Fiqh Academies and other institutions in this regard; regard; Resolves The commercial insurance contract contract is prohibited (Haram) according to the Shariah. Shariah.

Objections to Conventional Insurance

Why NO to Conventional Insurance?

Is there something wrong with the concept? I.e. Risk aversion, assuring others, risk sharing? Is there something wrong with the practice? There is nothing wrong with the concept of insurance but rather its practice.

Problems with Conventional Insurance

The contract between the insurer and the insured is technically wrong from the Shariah point of view because it contains at least one of the following 3 elements: Gharar -Uncertainty Maysir Gambling Riba Interest

1. 2. 3.

Note that the Scholars do not object to insurance per se but only to these weaknesses in the insurance contract.

Gharar
Lexically gharar may be defined as uncertainty. uncertainty. Technically, gharar is the uncertainty of the consideration or the subject matter or the period in a commutative contract. contract. The uncertainty in the case of conventional insurance relates to the subject matter Because conventional insurance works as a contract of exchange i.e. through the buying and selling of insurance, it must therefore conform to the rules of the Shariah governing sales. sales.

Gharar
The subject matter of sales must satisfy the following conditions: conditions : The subject matter must be something that can be given in trade i.e. something tangible (peace of mind is not tangible) The time of surrender/delivery must be known The quantity of the object must be known The place of surrender/delivery must be known

Maysir
The effect of maysir is very similar to gharar such that it involves the chance of total loss to one party. party. The basic difference between the two terms is that while one (gharar) is uncertainty, the other (maysir) is the result of uncertainty (gharar). (gharar). E.g. the insured pays a small sum of money in the expectation of gaining a much greater amount and may lose all the money paid by way of premiums when the uncertain event that has been insured against does not occur. occur .

Riba
Indirect Riba the interest earned on interest interest-based investments. investments . Riba exists in commercial insurance from the profits earned through investments of the premiums/funds in interest interest-bearing financial instruments such as stocks, bonds, and savings accounts, an unknown part of which is then used for the payment of claims to policy holders holders. .

Shariah Perspective on Takaful

The Islamic Fiqh Academy emanating from the Organization of Islamic conference, meeting in its Second Session in Jeddah, Saudi Arabia, from 10 to 16 Rabiul Thani, 1406 H (corresponding to 22 22-28 December, 1985) 1985) issued a resolution which in summary stated the following:  After reviewing the presentations made by participating scholars during the session on the subject of Insurance/ReInsurance/Re-insurance;  And after discussing the same;  And after closely examining all types and forms of insurance and deeply examining the basic principles upon which they are founded and their goals and objectives;  And having looked into what has been issued by the Fiqh Academies and other institutions in this regard; Resolves 1. The commercial insurance contract contractis is prohibited (Haram) according to the Shariah. 2. The alternative contract which conforms to the principle of Islamic dealings is the contract of cooperative insurance, which is founded on the basis of Tabarru and Shariah compliant dealings.

What is Takaful?
An Islamic alternative to a conventional insurance program based upon a Shariah compliant, approved concept. The word Takaful is derived from the Arabic verb Kafala, which means to guarantee; to help; to take care of ones needs.

What is Takaful?
Takaful is a system of Islamic insurance based on the principle of Taawun (mutual assistance) and Tabarru (voluntary contribution), where risk is shared collectively by a group of participants, who by paying a contribution to a common fund, agree to jointly guarantee themselves against loss or damage to any one of them as defined in the pact. Takaful is operated on the basis of shared responsibility, brotherhood, solidarity and mutual cooperation. Takaful operations must be within the spirit of the Shariah and there is no justification to involve therewith any element which contravenes Shariah principles.

Proof for the Concept of Takaful in Quran and Sunnah

There are numerous references to Ta'awun and Takaful in the Quran in the context of co co-operation and solidarity for the good of society society. . One widely quoted reference is from Surah alal-Maidah, as follows: follows: "And help one another in righteousness and piety and do not help one another in evil deeds and enmity (Al Quran: Quran: Al Maidah 2) A Believer is like a brick for another believer, the one supporting the other. other. (Sahih Muslim) Islam aims at establishing a social order under universal brotherhood. brotherhood . The underlying concept is that of mutual co cooperation and help help. .

Precedents for Takaful (Islamic Insurance)

There are several examples in pre pre-Islamic history whereby families, tribes or related members throughout the Arabia peninsula pooled their resources as a means to help the needy on a voluntary and gratuitous basis. basis. There practices were validated by Prophet Muhammed (PBUH) and incorporated into the institutions of the early Islamic State in Arabia around 650 C.E.

Precedents for Takaful (Islamic Insurance)

Examples of these early Islamic practices include: include: Merchants of Mecca formed funds to assist victims of natural disasters or hazards of trade journeys. journeys. Surety called Daman khatr alal-tariq was placed on traders against losses suffered during a journey due to hazards on trade routes. routes. Assistance was provided to captives and the families of murder victims through a grouping known as A'qila A'qila. . Contracts, called 'Aqd muwalat, were entered into for bringing about an end to mutual amity or revenge. revenge. Confederations were brought about by means of a Hilf, or agreements for mutual assistance among people. people.

Takaful through Time

Origins in the First Constitution of Madina. Madina. It evolved and continued in one form or the other throughout the Abbaside period period. . Serious efforts were made in modern times, in 1970 1970s s to come up with an Islamic alternative to the conventional insurance insurance. . The first Takaful company was set up in Sudan in 1979 1979, , almost simultaneously followed by another one set up in Bahrain Bahrain. .

Takaful through Time

There are now 84 84+ + Takaful companies in over 25 countries. countries. The total insurance premium of OIC countries for 2004 was USD 50 Billion; Billion; of this, Takaful contribution accounts for 5% (i. (i.e. USD 2.5 Billion). Billion). This is expected to increase to USD 15 Billion by 2015. 2015. Poor Insurance penetration in the Muslim countries (<1 (<1% of GDP). GDP) . Average growth rate higher companies (around 25 25% %). than conventional insurance

How Takaful Works:

Takaful Flow Chart

Basic Elements of Takaful

Mutuality and cooperation cooperation. . Takaful contract pertains to Tabarruaat as against muaawadaat in case of conventional insurance insurance. . Payments made with the intention of Tabarru (contribution) Eliminates the elements of Gharrar, Maisir and Riba Riba. . Wakalah/Modarabah basis of operations. operations. Joint Guarantee / Indemnity amongst participants shared responsibility. responsibility. Constitution of separate Participants Takaful Fund Fund. . Constitution of Shariah Supervisory Board Board. . Investments as per Shariah. Shariah.

Wakala-Waqf Model
Share Holder

SHARE

H O L D E R S

F U N D (S.H.F.)

Wakalah Fee

Investmen t Income

Mudaribs Share of PTFs Investment Income

Management Expense of the Company

Profit/Loss

Takaful Operator Investment by the Company

WAQF

Operational Cost of Takaful / ReTakaful

Investment Income

Claims & Reserves

Surplus (Profit)

P A R T I C I P A N T S T A K A F U L F U N D (P.T.F.)
Participant

Comparing Takaful to Conventional Insurance

Issue
Organization Principle Basis Value Proposition Laws Ownership Management status Form of Contract

Conventional Insurance
Profit for shareholders Risk Transfer Profits maximization Secular/Regulations Shareholders Company Management Contract of Sale

Takaful
Mutual for participants CoCo-operative risk sharing Affordability and spiritual satisfaction Sharia plus regulations Participants Operator Cooperative, Islamic contracts of Wakala or Mudarbah with Tabarru (contributions) Sharia compliant, RibaRiba-free Participants account

Investments Surplus

Interest based Shareholders account

Frequently Asked Questions

Is Risk Protection (insurance) against Tawakkul (total dependence upon Allah (SWT)?
No human actions change the Will of Allah (SWT) for our destiny. destiny . Whether a person has insurance/Takaful or not has no effect on future events. events. However, we are instructed to take precautions and then fully trust and depend upon Almighty Allah (SWT) (SWT): : in a Hadith narrated by Anas bin Malik when an Arab Bedouin asked Prophet Muhammed (PBUH), Shall I leave my camel untied and seek Allahs protection on it, or should I tie it? The Prophet replied, Tie your camel and then depend upon Allah (SWT) (SWT). . [As quoted in Sunan At At-Tirmidhi, 1981 1981. .]

Doesnt all Insurance seek to maximize profits, which takes benefits away from Policyholders?
Most conventional insurance companies are stock companies that seek to maximize profits. profits. Since the interests of shareholders conflict with policyholders, by raising prices, denying claims, etc. etc. these insurers can boost profits for shareholders. shareholders. Takaful operators, by contrast, are mutual or cooperative entities. entities. The goal of Takaful is community wellwell-being and self self-sustaining operations - not high profits profits. . Under the Takaful Mudarabah Model, surplus (or profits) is shared fairly between shareholders and policyholders. policyholders . Under the Takaful Wakalah Model, surplus is returned entirely to policyholders. policyholders.

Is Takaful just a change of label?

The end result in both the cases is same. same. The means, however, to achieve the same end are different. different . In case of Takaful, the whole mechanism has been devised in full conformity with the Shariah. Shariah.

Is Takaful for Muslims only?

Islam is a universal religion open to all. all. So Takaful is open to all, whether Muslims or NonNonMuslims. Muslims . Even non non-Muslims are now increasingly opting for Takaful due its commercial viability and more transparency. transparency.

What advantages does Takaful offer?

Wide product range. range. Competitive rates. rates. Excellent client service. service. The unique option of Surplus Sharing Sharing. . Above all, a way to help other community members in need a deed whose reward has been promised by ALLAH. ALLAH.

Are Takaful contributions higher than the respective insurance premia?

No; No; Takaful companies are as competitive as their insurance counterparts. counterparts. Opting for Takaful will not make you pay the Cost Of Being Muslim (COBM) (COBM). . On the contrary, the element of Surplus Sharing makes Takaful more attractive than conventional insurance insurance. .

Can Takaful offer comprehensive cover for my car in the same way as conventional insurance?
Yes, the scope of cover for car, as for any other class of business, is exactly the same as that offered by conventional insurance insurance. . Takaful companies offer a variety of products that are at par with the products offered by any conventional insurance company. company . Certain properties and businesses, however, are not covered if they are not in conformity with Shariah e.g. breweries, casinos, etc. etc.

What is meant by Surplus Sharing?

The Takaful Operator acts only as the Wakeel of the Waqf Fund. Fund . If at the end of the year there is a surplus in the Fund, such surplus belongs to the Participants. Participants. Surplus is distributed proportionately after taking into account any claim benefits already availed. availed.

When will I get my share in the surplus?

The surplus will be computed on a monthly basis. basis. Surplus rate for the preceding month will be applicable, for refund purpose, on policies lapsing during the current month. month . Participants have the option to advise the Takaful Operator to donate their surplus share in charity charity. .

Will I be asked to pay additional contribution in case there is a deficit in the PTF?
In case there is a deficit in the PTF, the same will be made good by way of interest interest-free loan Qard Qard-e-Hasna from the Shareholders Fund (SHF) (SHF). . The Qard Qard-e-Hasan will be paid back to the Shareholders Fund from the future surpluses of the PTF. PTF. Thus there will never be the need to pay additional contribution in case of any deficit. deficit.

How is it ensured that all activities of Takaful companies are Shariah compliant?
Takaful companies in Pakistan are governed by the Takaful Rules 2005 2005 that require the Takaful operators to constitute a Shariah Board comprising of Shariah Scholars of repute repute. . Furthermore, all Takaful companies have to undergo a Shariah audit on a regular basis in addition to the customary Accounting audit. audit. The very fact that a separate Participants Takaful Fund is created, provides for added transparency and accountability. accountability .

Jazaak Allaaho Khayran