By Ikram Shakir
Contemporary Western products are considered "unIslamic"
as they contravene many of the Islamic principles. For instance,
it is considered gambling to lose an insurance premium to an insurance
company if the insured event does not take place (and gambling is
prohibited by Islam) and the investment of the policyholders' funds
may not be based on Riba.
the Islamic alternative to contemporary insurance.
products have existed, in one shape or another, for several years
but the real impetus came during the early 1980s when such products
appeared in Western Europe mainly due to the efforts of Dar Al-Mall
Al-Islami, one of the biggest Islamic financial institutions in
the world, through its Takafol subsidiaries. Business conditions
for Islamic financial institutions were very favourable at the time
and Takafol products were well received by the ethnic Muslim community
living in Western European countries. The first generation of emigrant
Muslims to Western Europe had established themselves successfully.
The prejudices and discriminations of the host communities were
coming to surface, Muslims were facing a crisis of identity and
this created a chain reaction. These social problems were expressed
through the establishment of a number of mosques and Halal meat
and Islamic food shops throughout Western Europe. Simultaneously,
non-interest bearing bank deposits and Islamic savings funds became
more popular within Muslim communities.
social and economic environment in Western Europe gave an encouraging
start to Takafol operations in Western Europe. The early types of
Takafol products were unit-linked savings plans where the benefits
of the policy were notionally linked to the value of the underlying
assets in the internal funds of the Takafol company. Those products
were, in general, complying with Islamic sharia principles regarding
the type of investment and risk. In particular, the following principles
were observed in the product design:
- No deception
(i.e. transparent and clear definition of benefits and charges)
- No profit
to the Takafol company from favour able mortality experience
on solidarity principles rather than probabilities (principles
In order to
comply with the above rules, the Takafol policyholders' funds were
invested in short term assets without any fixed interest or guarantee
of capital and the mortality risk was shared on a solidarity basis
so that any loss or profit due to mortality was shared between the
policyholders. However, the Takafol savings products only offered
a small death cover, which limited their appeal to prospective customers.
It was expected
that other Islamic insurance products would be made available to
cater for a variety of insurance needs amongst the Muslim community,
such as term assurance, mortgage protection or old age annuities,
but the process of introducing new Takafol products has been very
slow and, to some extent, non existent.
In order to
be successful and profitable, it is imperative for a Takafol company
to offer a wide range of products and Takafol should not remain
to be seen as a very narrowly based product operation. The Muslim
communities in Western Europe have very high expectations from Islamic
institutions in offering a complete Islamic system for their daily
financial and insurance needs. However, until recently, only a part
of this Islamic financial system was offered. Just imagine how difficult
it would be to explain to a prospective policyholder that he should
take out a Takafol savings plan for savings purposes but should
rely upon the Western insurance industry for other insurance needs.
It is therefore imperative to design and market Islamic products,
which can meet wider insurance needs of the Muslim community.
THE LIKELY PRODUCTS FOR TOMORROW?
insurance products have evolved over the last 2 centuries to meet
the social and economic needs of the population. As Muslims in Europe
are living in the Western social and financial environment, they
have similar social and financial problems and their insurance needs
are therefore very similar. In order to identify which products
may have a wider appeal for Muslims in future in Western Europe,
it may be helpful to first identify the factors which affect the
insurance market. Some of the primary factors are as follows:
in social habits
The most important factors affecting the insurance industry are
perhaps the ageing population, due to the baby boom/baby bust cycle
in the 1950s and 1960s, and longevity due to the improvement in
health care and economic living conditions. Other key factors are
political and fiscal: the EU Member States are facing State budgetary
deficit and constraint due to the introduction of the single European
currency and the increasing cost of pensions and health care.
This suggests that insurance products for which there will be a
higher demand in future are likely to be old age pension, annuity,
medical care and long term care products.
We are all very
familiar with the three pillars of the Western pension system:
pension schemes, and
In the EU Member States, the State is by far the biggest provider
of retirement benefits. However, the system is now being questioned.
Studies indicate that a male joining the State scheme at normal
age and retiring at normal retirement age will receive on average
62% of his contributions, which may not be considered as a good
investment. In addition, the current system is based on "pay-as-you-go",
which means that .the State collects contributions form the working
population and pays it out to pensioners.
works as long as there are more contributors than pensioners but
it will come under tremendous pressure as the number of pensioners
grows. It is a well-known fact that the population in Western Europe
and North America is ageing, i.e. that the ratio of older people
to younger people is constantly increasing. Clearly, as a result
of the excellent health service provided by the State, people are
living longer than ever before (on average life expectancy has increased
by 4 years over the last twenty years). However, this is not the
only cause of ageing. The other cause is to be found in the sudden
increase of fertility rates between 1950 and 1960 (a phenomenon
known as the baby boom) and the subsequent drop in those rates (the
baby bust). The graph below illustrates fertility rates in Western
Europe from the twenties to the eighties-
It can be seen that there was a sharp rise in fertility rates after
World War II, followed by a sudden drop in the late 1960s. Some
people call this phenomenon a time bomb, but it can be better described
as a tidal wave because a time bomb explodes only once whereas this
phenomenon has recurrent long-Iasting consequences. As the baby
boomers aged it created temporary demand for age-specific products
but as the baby boomers were replaced by the baby busters, these
areas of temporary high demand immediately contracted. In the 1950s,
there was a high demand for kindergartens and schools, which had
to close down later on for lack of attendance. In the late 1960s,
the demand was in the higher education sector, which was followed
by a recession with the consequence that many teachers were made
redundant and many schools were closed. In the 1980s it was housing,
appliances and commercial office space. In the year 2020, the demand
will probably be in the medical, pharmaceutical and old care houses
What will happen
when baby boomers reach retirement age? Baby-boomers, who were trying
to save the world in the 60s, will find it very hard to save their
State retirement income. It is expected that by the year 2020, in
Europe, there will be only two workers contributing to the State
scheme for every pensioner.
of pensioners to contributing workers
With the State
schemes being "pay-as-you-go", it becomes obvious that
the State pension system will face serious financial challenges
by the year 2020. There will be a systematic reduction in benefits
with an increase in contributions and one can expect that the demand
for personal pension products and occupational pension schemes will
therefore grow dramatically. This will be equally applicable to
the Muslims living in Western countries. There will be a real opportunity
for Takafol companies and they should be ready to offer private
pension plans to their niche market.
life annuities will be in higher demand, where Takafol companies
will be required to cover the longevity and investment risks. However,
Takafol companies should bear in mind that, due to the increase
in life expectancy, the mortality of pensioners has shown remarkable
improvements in recent years and the actual mortality improvements
are much higher than the projected improvements used in the pricing
of annuity products. An analysis carried out recently shows, in
particular, that the improvement in male rates and in the annuity
amounts is significant and clearly warrants a health warning. Consideration
should therefore be given to those factors when designing pension
and annuity contracts.
Due to old age,
or as a result of an accident or disease, some people lose some
of their mobility and need special assistance to carry out daily
activities. In the worst cases, 24-hour assistance may be required.
The average length of such assistance normally varies between 6
to 12 years but it can be longer in certain circumstances. In the
past, the family used to provide such assistance. However, because
of the changing family structure (single parent families, divorces,
working women, etc.), it appears that the family is no longer in
a position to do so and, therefore, some external assistance is
required. This can be quite expensive and, as State pension benefits
and disability benefits are usually insufficient, extra cover could
be provided through Takafol policies. The current estimate is that
about 25% of retired people will require some long-term care at
one time or another, which offers big potentials to Takafol companies.
Benefits normally cover the cost of any external assistance required
to carry out such activities as feeding, bathing, dressing, transferring
to and from bed or chair, going to the toilet, etc. The target market
for long term care products could be the middle-income group and
the distribution could be through Islamic banks, occupational pension
schemes and normal Takafol distribution channels.
and health care in the European Union has helped to improve the
life expectancy but it has not improved the health and quality of
life at older ages. In a recent research carried out in the USA,
it was found that on average 77% of all health care expenses occur
during the last six months of our life.
As a result
of the ageing population, one can expect that the demand in the
sector will become higher. However, as a result of budgetary constraints,
EU States may not be able to finance medical care expenses and there
is a risk that the benefits paid out by the sickness fund may be
reduced in future. This is already happening in some countries where
hospitals are being closed, the availability of hospital beds is
being restricted for people above a certain age, and medical subscription
charges are being increased.
that private individuals have to find extra cover from the private
industry .As a result, the demand for medical care products is likely
to increase and Takafol companies should be ready to provide such
products to the Muslim communities. Takafol companies could, for
example, offer the following covers:
medical care (where normal medical expenses are paid on an indemnity
medical expenses (where fixed lump sum benefits are provided in
respect of defined medical procedures)
illness products (where the risk of diseases such as heart attack,
stroke and cancer is covered)
health care products (where critical illness, medical care, life
cover and long term care covers are provided under a single cover).
The word "Takafor'
may portray the real meaning of risk sharing on a solidarity basis
in the Arabic language, but it is not commonly used and understood
by the Muslim community living in Western Europe. It is already
difficult for a Takafol salesman to convince somebody that he should
take a Takafol policy and having to explain what Takafol is, adds
even more difficulties in the selling process. It would perhaps
be better to use "Islamic insurance". This method was
successfully used by the Islamic banking industry and a similar
process could be employed by the Islamic insurance industry.
One of the main
difficulties probably experienced by Islamic financial institutions
is to design products, which can meet the insurance needs of the
Muslim community living in Western Europe without contravening the
basic Islamic (sharia) principles.
a new product, considerations should be given not only to its adequacy,
but also to its competitiveness. For that purpose, both the investment
strategies and the product charging structure need to be carefully
defined. For example, it should be noted that funds invested in
short-term assets usually provide lower returns than those invested
in longer term assets -since the liabilities of a Takafol company
towards its policyholders are longer term by nature, it is considered
prudent to invest the policyholders' funds in long term assets.
As regards the charges, the use of single mortality rates puts some
people at a disadvantage, which may reduce the product attractiveness
to some prospective policyholders. Takafol should devise systems
under which it should be possible to invest in longer-term assets
and to use different mortality rates without contravening sharia
are well aware of the insurance needs of their customers but may
not be well experienced in the interpretation and application of
sharia principles, whereas Sharia experts (religious leaders) may
not fully comprehend the commercial requirements of a Takafol company.
Therefore, there is a need to educate both sides into the other
discipline and to maintain a continuous dialogue between them so
as to find pragmatic business solutions under which the Takafol
products are acceptable on sharia principles but offer competitive
terms to the Muslim community for their insurance needs.
Institutions like DMI and the Islamic Institute for Banking and
Insurance are already doing an excellent job in the development
and promotion of Islamic financial systems. They should try to accelerate
this process further by providing a forum where Takafol managers
and sharia experts could communicate with each other.
some estimates, there are over 6 million Muslims living in Western
European countries. That offers a very substantial market size to
Islamic financial institutions. The Western insurance industry is
facing problems in identifying its market and is going through a
phase of consolidation and repositioning. With a defined market
in Europe, Takafol companies do not face this problem. They potentially
have a very prosperous future ahead of them, provided they can offer
efficient Takafol solutions to the Muslim communities.