An Overview of the Takaful Industry
Dato' Mohd Fadzli Yusof
Chief Executive Officer, Sharikat Takaful, Malaysia
Currently, it is understood that there are around 40 takaful operators
worldwide, mostly providing general business. It is at the same
time estimated that the combined total assets and contributions
(premium) of these operators stand at around USD1 billion and USD500
million respectively. Obviously, this amount is negligible and very
insignificant compared with the total number of Muslim population
of Islamic countries, estimated at around 800 million people.
data compiled by Carpenter Bowring London, a company under the Marsh
Mc Lennon Group, the world largest reinsurance broker, insurance
penetration particularly for the life sector in premium terms in
Muslims countries is less than 1% of GDP. It is therefore clear
that takaful has immense potential to be developed with its sheer
market size hitherto remained untapped.
For this reason,
existing as well as would-be operators must intelligently position
themselves in terms of product design that can satisfy the needs
of the market. In this regard, products that would help to improve
savings among the masses, such as family takaful plans which are
essential components for ensuring economic growth should be actively
promoted. As for the penetration of life insurance, perhaps Malaysia
is relatively ahead among most Islamic and developing countries.
At present, Malaysia has attained penetration rate of 28% as against
less than 5% for most Muslim countries, compared to the established
markets of Singapore, Japan and most European countries with rates
ranging from 65% to 150%. The co-relation to the relatively high
market penetration is further reflected from the savings rate of
Malaysia, considered comparatively high at 39% of GDP.
high savings rate would generally be able to sustain economic growth
and would not have to depend upon assistance or aid from outside.
Thus from the economic standpoint, takaful would be useful not only
as a means to inculcate good savings habit and cultivate thrift
at the individual level, but also help to accelerate investment
potential for the ummah as whole. This in turn would be beneficial
for the economic development and well being of Muslim countries
from the small activities undertaken by Takaful Malaysia, Malaysia
has taken the lead in bringing takaful to the international playing
field. Asides the advancement within the Asean region, Malaysia
has helped other parties outside the region to introduce and promote
takaful in their respective countries. For this purpose Takaful
Malaysia has established joint-venture programmes in Sri Lanka,
Saudi Arabia and has also provided technical assistance for takaful
operators in Australia. Request for similar assistance has been
sought from Lebanon, Bangladesh and Algeria.
In another interesting
development, the `Developing-8 (D-8)', at its Second Heads of State
Summit in Dhaka, Bangladesh on 1st and 2nd March 1999, issued a
declaration which amongst others agreed to introduce, promote and
develop takaful in all D-8 countries. In relation to this it was
also resolved that Malaysia be given the task to assume the lead
role in planning, coordinating and providing technical expertise
and other related resources for this purpose.
As a follow-up
action, an "International Workshop On Retakaful" was held
in Kuala Lumpur on 31st May and 1st June 1999, whereby a similar
declaration was issued strengthening the earlier commitment of the
D-8 Summit to hasten the pace of the introduction and development
of takaful amongst D-8 and other OIC countries. At the same time
it was also agreed that the status of ARIL be transformed as the
retakaful operator for the D-8, whose capital shall be expanded
and to be subscribed by the member countries. In line with this
move, ARIL has come out with a five-year strategic plan to increase
its paid capital to USD50 million by 2006. Obviously, this development
augurs well for takaful as a whole and it opens up new opportunities
as well challenges for the takaful operators.
stance as afore-mentioned obviously presents boundless opportunities
for takaful. Coupled with the sheer size of the ummah totalling
to more than 1.2 billion people, takaful therefore has no frontiers.
Indeed the world is a colossal market for takaful products. With
its generally superior features compared with conventional insurance
policies, it is almost impossible for takaful to be out of the mainstream.
For example, in Malaysia apart from individuals, more and more corporations
and multinationals are using takaful products including among the
opportunities do not come by a flick of a finger. A number of crucial
issues have to be addressed to ensure credibility and acceptability
and hence brighter future for takaful. Some of these issues may
be summarised as below:-
be adequately capitalised in order to have a meaningful financial
strength, so that they would be able to meet the demand of the market
conveniently. A relatively weak operator may not only hamper its
business development but may have to depend heavily on the support
of re-takaful operators, meaning relying presently on the mercy
of conventional re-insurers. Without sufficient financial capacity
the ability to retain and absorb more of the risks would be virtually
impossible. Although adequacy of capital is viewed differently from
one country to another, it should however have an acceptable minimum
requirement reflecting the minimum level accepted internationally.
In Asean, the figure is between USD12 million to USD15 million.
In this regard, authorities would have an influence on this matter;
as for example in Malaysia, through the enforcement of the Act,
the requirement for solvency margin and the compliance of minimum
capitalisation can be effectively legislated.
Being a service
industry, the pace of progression for takaful would to a greater
extent depend upon its manpower and competency of its human resources.
Lacking of trained and experienced manpower would hinder the development
of takaful. At present, developing countries in general, of which
most of the Islamic countries are in this category, are facing scarcity
of qualified and trained personnel in the field of insurance. For
this reason, takaful is also affected in view that experienced insurance
personnel are at present form the core staff for most takaful operators.
Special programmes therefore should be initiated to train the manpower
not only on the technical aspect of insurance but also in areas
covering finance and investment as well as appreciation of Shariah.
Towards this end, Malaysia has begun to play its leading role by
organising and conducting special educational programmes for takaful
personnel in the Asean region as well as others through the formation
of Bank Islam Research and Training Institute (BIRT). It is also
felt that bodies like Islamic Research and Training Institute (IRTI)
of the Islamic Development Bank (IDB) would be able to assume similar
role. Coordination of these various bodies is essential to avoid
wastage and overlapping of functions.
The issue of
retakaful or reinsurance in accordance with the requirements and
practices of Shariah will occupy the takaful operators for sometime.
Like insurance, sound retakaful arrangement is a necessity. Although
in a situation where retakaful is still inadequate to meet the needs
of takaful operators, Shariah allows them to deal with conventional
at the same time, serious efforts ought to be undertaken, in particular
by the takaful operators themselves to establish their own retakaful
facility. A proper way obviously would be establishing special retakaful
operator as in the case of ARIL. But without sufficient number of
players, it would perhaps be rather difficult for such retakaful
operator to survive in terms of business support. Ideally, retakaful
should solely depend on the cessions from takaful operators. Practical
commitment of the various Islamic countries and their political
willingness are urgently needed to demonstrate their readiness in
allowing takaful operators to be incorporated in their respective
countries which then would create the necessary playing field for
of public fund, takaful operators must ensure that the takaful funds
are not only soundly but more importantly safely managed. The fact
that the takaful operation is essentially based on profit sharing,
investment of the funds becomes fundamentally important as underwriting.
However in the case of takaful, there is another essential dimension
to be considered in that avenues of investment must be in accordance
with Shariah principles. At present, these avenues are relatively
limited. It is therefore highly timely for all relevant parties,
such as government authorities in Islamic countries, financiers,
bankers including central bankers, takaful operators, economists
and Shariah scholars to study, develop and promote the diversity
of investment instruments and products acceptable to Shariah.
to thrive in an orderly and proper manner, a necessary infrastructure
which would enable the authority to regulate and supervise its operation
must be in place. A form of legislative framework is therefore essential
for the authority to exercise its supervisory function both in terms
of business operation as well as Shariah compliance. In most Islamic
countries there exists a dual financial system side by side. What
is therefore statutorily required of the conventional financial
system such as good governance, compliance of regulations and other
provisions should also be applicable to the Islamic financial system.
In the case
of takaful for example, the legislative requirement for minimum
solvency margin imposed on conventional insurers should also be
applied to takaful. Such requirement can only be effected by law.
With a proper legislative framework, it would also enable the authority
to regulate whole gamut.
to comply with the above issues would ensure a strong and stable
footing for takaful. In the wake of open market and globalisation
under the WTO agreement, takaful, like other financial sectors would
have no alternative but to face competition. At present, the market
for takaful thrives essentially in Muslim countries with the expertise
still in the hands of the Muslims. But what has happened to Islamic
banking may also happen to takaful. Through the process of globalisation
and the pressure of competition with expertise can be easily acquired
it would be possible that international insurance companies from
the Western world will one day introduce takaful to both Muslims
and non-Muslims. Therefore to be ready, the performance standard
used in the conventional insurance should also be used for takaful.
In this respect, the generally accepted key indicators or benchmarks,
such as the CAMEL test, normally used in determining such standard
for conventional companies ought to be similarly applicable to takaful
agreed by Shariah scholars, the form of insurance business acceptable
to Islam in essence must contain the virtues of cooperation, solidarity
and brotherhood. However, these are mere concepts that cannot simply
be equated and therefore cannot be applied as a basis of legal principles
in a contract. In fact the scholars further agreed that the contract
of takaful must be based on certain `tijari' principles that conform
to the basic characteristics of Islamic business transaction. Towards
this end, the scholars concluded that the contract may be based
either on the principles of Al-Mudharabah or Al-Wakalah.
under both principles, the sharing of profit between participants
and operators is an entitlement embedded in the contract, there
is however a structural difference in the way such profit (surplus)
is determined. The difference lies in the fact that under the principle
of Al-Mudharabah, the operator as the mudharib or entrepreneur,
cannot charge its management expenses from the takaful fund. Whereas
under the Al-Wakalah, the operator being the agent of the participants,
can use part of the fund to cover its management costs. Under the
Al-Wakalah too, underwriting surplus of the takaful fund, if any,
shall be distributed back to the participants only, based on the
premise that the funds, actually belong to the participants.
On the contrary,
under the Al-Mudharabah principle, the profit as universally defined
by conventional insurance companies, which in the case of general
business is taken to mean returns on investment plus underwriting
surplus, is then shared according to a mutually agreed ratio, such
as 50:50, 60:40 or 70:30 between the participants and the operators.
Management expenses of the operator including agency remuneration,
if any, shall be borne by the shareholders' fund and not from the
takaful funds. Hence, there is a distinct separation between takaful
funds and shareholders' fund.
Under the Al-Wakalah
principle, the paid-up capital is contributed as donation by the
shareholders. Therefore, under this principle the shareholders do
not expect and probably do not mind for not receiving any returns
on the capital donated. However, it is understood this standpoint
has changed in view of opinion expressed by certain scholars that
the shareholders (operator) in their capacity as managers should
also be entitled to share the profit arising from the takaful business.
From the observation
on the performance of takaful operators using the Al-Wakalah principle
it was found that their returns to the participants have been comparatively
low. On average their rate of profit declared to their participants
below 10% p.a. On the other hand, it is also understood that there
are even operators, especially newly established ones have not been
able to declare any profit to its participants.
Under the Al
Mudharabah principle, shareholders as owners of the operator have
equal opportunity to enjoy a similarly fair return on their capital.
The profit portion attributable to the shareholders is transferred
to the shareholders' fund and together with returns on investment
of the fund itself shall pay for the management expenses. Any balance
therefrom is declared as profit of the operator and dividends are
distributed therefrom. Adopting the Al-Mudharabah principle for
takaful operation as experienced by Takaful Malaysia would ensure
that the cardinal principles of 'al-adl' and 'al-ihsan' under Islamic
contractual obligations are constantly upheld as both participants
and shareholders are enjoying similar benefits.
As both principles
are acceptable to Shariah and currently being used by various operators
all over the world, serious efforts should be taken to harmonise
the practice. By this harmonisation, there would be unity in diversity,
and equally important would remove the confusion, if any, among
the ummah of a common system but with two different modes of practice.
It also paves for convenient practical cooperation among these operators.
Towards this end, moves towards establishing an accounting standard
for takaful operators that at the same time will harmonise the two
practices initiated and undertaken by the `Accounting & Auditing
Organisation For Islamic Financial Institutions (AAOIFI)' should
be lauded and strongly supported.
What has been
attained so far is comparatively small, but as shown from the performance
of takaful operators generally, is growing rapidly. Considering
only a tiny percentage of the ummah have some form of life insurance
cover, the potential for takaful to penetrate deeper into the market
is tremendous. In this context family takaful products would have
a strong chance to grow and expand. Therefore takaful is here to
future of takaful would depend on the ummah. Whether takaful would
develop into an industry and eventually become the real insurance
alternative for the ummah would depend on the commitment and political
willingness of the Muslims at the individual, community, national
and international levels. What is urgently needed is the practical
translation of these commitment and political willingness by all.
The time for
polemic is past; it is no more discoursing on the basic issue of
`halal' or `haram'. The way forward is on improving, correcting
and developing the existing operational structure, which has been
generally accepted to be essentially based on either the principles
of Al-Mudharabah or Al-Wakalah. It is clearly demonstrated that
in countries where there is commitment and strong political willingness
plus the application of modern management practices in its approach,
countries have seen their takaful operation grow into a viable and
profitable business venture.