Takaful Assignment
CIFP-Program
Model
TK2002 - Takaful and Actuarial Practices
Facilitator:
Ezamshah Ismail
Topic
Application for a Takaful operating licence
Semester Jan- 2013
Name: Omar Abdikarim Osman
Matric No: 1000 102
Executive summery
The origins of takaful can be traced back more than 1400 years. Takaful originated within the Arab tribes as a pooled liability that indebted those who committed offences against members of a different tribe to pay compensation to the victims of their heirs. The concept widened to several walks of life, including sea trade, in which participants made contributions to a fund for cover to any group member who went through mishap on sea voyages.
Nevertheless, it was not until 1979, in Sudan, that the pioneer takaful firm was established. The use of takaful as the Islamic alternative to conventional insurance began in 1985 when the Grand Council of Islamic Scholars of the Organization of the Islamic Conference formally gave the required permission. Conventional insurance was considered to be unsuited to Islamic law (Shari’ah) and was to be shunned by Muslims, unless there was no substitute. The opposition to conventional insurance was on the premise that Islamic principles do not permit uncertainty or any interest-bearing assets, both of which are intrinsic factors in conventional insurance business.
The Takaful industry in Malaysia started to gain momentum when, in October 1982, the Malaysian government formed a special task force to explore the viability of setting up an Islamic insurance company. Out of that study and based on its recommendations, the Takaful Act 1984 was gazetted and came into force thereafter. At first glance, there does not appear to be much difference between conventional insurance and Takaful. Indeed, in terms of concept, there is none as both subscribe to the long established principle the “pool of the many to help the unfortunate few”. MTA is dedicated in promoting the interest of its members and to supervise the exercise of self-regulation within the Takaful industry. The MTA Road Map introduced in 2006 set the direction and focus of the association. A four-pronged strategy was laid out with the objective of achieving a 20% share in the overall insurance industry by 2010. The focus, among others, is on branding, awareness and communication, shared services through leveraging of technology, investment opportunities and relations with regulators. These strategies are deemed achievable and close co-operation among members to make it work was the key to its success. Furthermore, this report will show the critical success of our company.
Our Keys to Success and critical factors for the coming year are: * Identify "Target Markets." * Institute our Property inspection program. * Begin our "Insurance Partners" program. * Develop a profitable property program. * Provide small businesses with an affordable basic business package.
Mission
XYZ takaful company is dedicated to providing insurance products that provide quality protection with value pricing. We wish to establish a successful partnership with our clients, our staff members, and our takaful companies, that respect our goals and in line with shariah.
Success will be measured by our clients choosing us because of their belief in our ability to meet or exceed their expectations of price, service, and expertise.
Objectives
Establishing good working relationships with our present takaful markets by meeting with their decision makers and plotting a mutual plan for success, Get commitments for support and products that we can market in our trading area, * Investigating new markets that meet our marketing criteria by * Committing to small rural brokerage; * b) providing products suitable to our economic and social climate; and * c) Plans for the upload and download of insurance policies. * Provide sales incentives to staff to meet sales goals of 10%. * Complete inspection of all Pilot homeowners within one month before renewal date.
Keys to Success
We believe the keys to success in a small town takaful business are: * Knowledgeable, friendly staff that can empathize with our consumers’ needs and circumstances, especially in handling a loss. * Policies that meet or exceed the expectations of our clients, and that are affordable, available, and understandable. * Policies and endorsements delivered on time with minimal errors. * A commitment to an annual insurance review for all of our clients. A phone call is more than any direct mass marketer offers. We believe personal contact and service is the cornerstone of our success.
Rational for starting a takaful operation:
The general takaful concept is you contribute a sum of money to a takaful fund in the form of participative contribution (tabarru’). You will undertake a contract (aqad) for you to become one of the participants by agreeing to mutually help each other, should any of the participants suffer any form of misfortune, either arising from death, permanent disability, loss, damage or any other such misfortunes as covered under the takaful you personally undertake.
The takaful protection plan is based on Shariah principles and offers many unique features to policy owners.
Islamic Insurance is founded and based on principles of mutuality and co-operation between Policyholders. And it's not based on profitability as a major principle but it's established for the purpose of facing hazards and in handling all out coming financial liabilities and damages that might confront a Policyholder or his or her possessions. Therefore; based on this principle Policyholders cooperate among themselves in order to compensate any member facing damages, or liabilities.
And since the Policyholders are owners of this insurance operation, they have the right to recover the surplus of insurance transactions in cash, according to the value of each participant's insurance installment paid, after deducting required expenses. Also the company and its stockholders do not retain or withhold any percentage of this excess on the contrary of traditional insurance companies where their profit proceeds from selling Insurance services and their products are provided to shareholders only and not to policyholders.
At the same time, Shareholders (Capital owners) Invest policyholders' collected funds for an approved set percentage of the investment earnings in return for managing these funds. And that's another major distinction between Islamic and traditional insurance.
An Islamic insurance system separates between stockholders and policyholders in a way that gives the second party the opportunity of being real partners!
Company background/overview:
XYZ is a general insurance company. XYZ is engaged in providing insurance products and services in conformity with Islamic Sharia standards and principles. The company offers products and services for life, marine, motor, fire, engineering, general accidents, electronics, bankers, personal and professional liability. The company headquartered is at Djibouti. XYZ offers Takaful products, the Islamic Alternative to Life Insurance. These products are sources of financial planning for individuals and businesses. In addition, the company is also offering property insurance that covers buildings, machinery, plants and stock. The company’s major clients include companies, banks and public sector employers.
Company History
XYZ Insurance was founded as a sole proprietorship in 1970 and was owned and operated by the founder Adnan Ahmed. He originally ran the operation from his home, but moved to the business section when he outgrew his home based operation.
In 1972, the company constructed a new office building in the main business section and over the course of the last 15 years has purchased four other brokerages.
Proposed business and shareholder structure
General takaful:
General Takaful means takaful other than Family Takaful and also caters to the diverse needs of the individual as well as businesses alike, offer protection for losses such as those arising from Property Damage Cover, Marine Cover, Third Party Liability Cover, and Money Related covers, Workmen Compensation/Employers Liability Cover or Infidelity of the employees.
General Takaful also provides Muslims and non-Muslims (individuals and businesses) an alternative to conventional insurance. Conventional insurance contravene the Shari’ah principles with regard to the involvement of elements of riba, gharar and maysir in their operations and investment activities.
As in the case of Family Takaful, General Takaful (non-life insurance) also works like a joint guarantee in which all participants contribute their own shares of premiums into a pool and mutually agreed to indemnify those participants who suffer from an insured peril.
General takaful schemes are “risk-only” contracts of joint-guarantee as compared to investment-oriented nature of family takaful plans. These agreements are essentially short-term in nature (normally one year), between groups of participants to provide mutual compensation in the event of a defined loss. The schemes are designed to meet the needs for protection of individuals and corporate bodies / businesses in relation to material loss or damage resulting from a catastrophe or disaster inflicted upon properties, assets or belongings of participants.
The General Takaful Business is different from Family Takaful, as all the payments are treated as only tabarru, and not divided into two separate accounts. For General takaful business, the savings portion of contribution is nil and mudarabah fee would be generated from managing a protection fund only to protect takaful policyholders in case of insurer bankruptcy.
Regulatory requirements regarding shareholders and capital:
Capital may be defined as the money, property and other valuables which collectively represent the material wealth of an individual or business. Wealth in this context means the material resources (property, cash, etc.) which in excess of that required for consumption, such wealth may be used or invested for productive puroses and thus creates more wealth.
The source of capital in takaful would be firstly, the accumulated capital built up over time from the excess accumulation of participant’s contributions and investment profits over the claim paid and provisions made for eventual claims. The second source of capital for a takaful fund would be from injections of capital by the operator in the form of benevolent loan (qard al-hasan).
The second source is only a temporary source of capital provided by the operator and would need to be repaid eventually. From the operator’s perspective; the qard hasan is a particular use of the operator’s capital (which ultimately comes from the shareholders of the operator).
Regulators require that the takaful fund be sufficient to a given degree of certainty to pay claims as they emerge over the future.
Regulators typically require that a takaful fund has more than sufficient assets to pay claims liabilities as they come due. This requirement of excess assets over liabilities is called the Required Solvency Margin (RSM) or minimum margin of solvency and is normally stated in terms of either an absolute amount or a formula which relates the required margin to one or more factors such as contribution volume, claims volume, the amount of mathematical reserves calculated, the total sum covered, etc.
In the event of a fund deficiency, the takaful operator would be bound by regulatory requirement to cover the deficiency by providing a qard al-hasan.
Solvency margin = Takaful Fund Assets – Takaful Fund Liabilities
Required Solvency Margin is such that solvency margin ≥ RSM.
Takaful business model:
Takaful - Wakalah Model
The term wakalah in Arabic means agency. Therefore under the structure, an agency relationship is agreed between two parties to conduct a certain business undertaking. Based on this premise, the model describes an agency agreement between the operators, acting as the agent or “wakil” to the participant as the principal to manage the participation of the latter in a variety of takaful products provided by the operator. In return for rendering the agency services, the operator is permitted to charge a fee under the agreement. The fee is payable from the takaful contribution paid by the participant. In this sense under the above model, management expenditure can be charged to the takaful fund as upfront charges. By this model, the operator earns its revenue from the agency fee described in the aforementioned as well as returns on the investment of its shareholders‟ fund. However, there are also operators practising the above model who charged performance fees on its roles and services of managing the investment of the takaful fund. In the event of a cancellation or surrender, the participant will be refunded of the net balance of his contribution, if any, after deducting all the upfront charges such the wakalah fees and other management expenses from the takaful fund.
Risk associated with takaful models:
Enterprise risk management is an integral part of today’s business processes. Enterprise risk management can be defined as ‘the overall process that a financial institution follow to define a business strategy, to identify the risk to which it is exposed to, to quantify those risks and to understand and control the nature of such risk’.
Some of the critical success factors in a takaful operation are; * Ensuring adequate investment returns to pay for competitive returns to participants as well as shareholders profit. * Ensuring mortality experience/loss ratios are better than expected/competitive and stable. * Ensuring actual expenses are lower than expense loadings. * Ensuring that its operations are shariah compliance being its differentiating factor.
A business plan:
Expenses management strategy: The way benefits are structured is really left to the imagination and creativity of the takaful operator taking into account competition with other takaful operator and conventional insurers. The actuary plays the role of the inner voice of the takaful operator in ensuring that the way takaful benefits are structured are fair to participants and at the same time viable as a business venture without compromising shariah principles.
Again there is no fixed way in which provisions for expenses are reflected in the pricing of the product. A wakalah type takaful product contract may mention the explicit fee that the operator would be charging to the takaful contributions to recover operator expenses.
The variations in allocating and charging expenses to the participants/takaful fund are many and really depend on the takaful operator as summarized below: * Method 1- charge upfront wakalah fee for commission and management costs. * Method 2- all management expenses are absorbed by the takaful operator. * Method 3- Commission and management expenses are borne by takaful fund on an incurred basis. * Method 4- Upfront wakalah fee as percentage of tabarru’ (risk contribution) charges.
Regardless of the underlying operational model, the anticipated expenses of marketing and operating the takaful product would be reflected in the product pricing process either directly in the form of an explicit expense margin or provision embedded in the contribution formula or implicitly in the cash flow tests (also known as profit tests) carried out to assess the financial viability or profitability of a particular takaful product.
Expenses generally consist of variable costs such as marketing costs, agency commissions, underwriting expense, etc. and fixed costs such as fixed assets depreciation, staff salaries, overheads, etc.
In assessing financial viability of the product from the takaful operator’s perspective, the speed and magnitude at which the operator’s expenses and other sunk costs of infrastructure and product development are recovered over time is an important indicator of the product’s acceptability to the management of the takaful operator.
Tests of acceptable profitability (profit tests) to the operator as well as solvency within takaful fund are carried out by the actuary using cash flow models which are simplified representations of the operation of the takaful fund over time.
In working out suitable contribution rates for a new takaful product, the actuary would need to rely on data which would indicate the takaful operator’s existing and projected costs of operating the business.
Offering products/ types of claims:
Takaful products have evolved over time largely through product development, product adaptation and product innovation process. The operators of takaful, especially in Malaysia and the Middle East, are able to offer competitive policies in term of coverage and features vis-à-vis those of conventional insurance.
General takaful provides protection on short-term basis, normally covering a period of one year. It commonly provides protection for property loss or damage, liability arising from damage caused by the insured to a third party and accidental death or injury to a third party.
A claim can be defined as request to be reimbursed (or compensated) filed by the participant and addressed to the operator. The efficient handling and correct recognition of takaful claims is a key competitive factor. Claims management, whether good or bad, has marketing repercussions for the operators. Claims management is an indication of an operator’s standard of service to its clients. Bad claims management may lead to a decline in the operator’s reputation. The operator’s reputation is its goodwill and with a loss in goodwill it would be difficult for the operator to attract new participants. Ineffective claims management can also affect the operator’s financial position, terms of reserving for future claims correctly and the level of expenses incurred in the administration of claims.
Different types of takaful certificates give rise to different types of claim. Normally the types of claims shall follow the different types of classes of takaful and takaful products.
Under general takaful, the claims, and subsequently the clamis function are divided into motor and non-motor types of claims. This is so since motor claims form the bulk of general takaful claims. Motor claims are usually divided into three types; * Third party bodily injury; * Third party property damage; * Fire, theft and own damage claims.
The non-motor claims functions are usually divided according to the class of business. These are normally: * Fire; * Engineering; * Marine; * Aviation; * Miscellaneous accidents, etc.
Product development process may vary from operator to operator, especially for desiging and creating a family takaful product. Legal documentation of takaful contracts involves distinct provisions, conditions, clauses, warranties and exclusions. Different takaful companies utilize different types of takaful contracts and such contracts vary according to application of mudharabah, wakalah or ju’alah principles
Presently, general takaful products can be divided into two broad areas: * Personal line or retail products are designed to be sold in large quantities. * Commercial line products are usually designed for relatively small legal entities. These would include the standard worker’s compensation, public liability, product liability, commercial fleet and other general takaful products offered to organization.
Motor takaful: The Road Transport Act 1987 Malaysia requires all motor vehicles to be insured before they can be used on public roads. But are all insurance and Takaful covers the same? No, not necessarily. Although Motor is a tariffed class, insurance and Takaful companies are allowed to impose different levels of loadings and deductibles. Furthermore, different companies offer different levels of service and adopt different technology and approaches to claims handling.
It is an offence for any person to use or cause or permits any other person to use a motor vehicle without the necessary coverage. However, cost of cover can be tariff controlled.
Under the motor takaful plan the third party refers to a person who injured or has suffered loss or damage arising from an accident involving the participant’s motor vehicle. A third party may be a pedestrian, a driver or passengers in the other vehicle. The first party to a motor takaful plan is the participant as the vehicle owner and the second party is the takaful operator.
There are several types of takaful cover for motor-vehicles available in the market. Invariably the following three types of cover are provided: * Motor takaful for private car; * Motor takaful for private motorcycle; * Motor takaful for commercial vehicles.
Normally, the standard motor takaful certificate does not cover: * Death or self bodily injury; * Liability against claims from own passengers; * Theft of non- factory fitted vehicle accessories unless otherwise declared; * Consequential loss, depreciation, wear and tear, mechanical or technical breakdown failures or breakages.
The scope of coverage primarily provided under the motor takaful certificate is as follows: Section | Types of cover | Scope of coverage | 1-------------------------------------------------
2 -------------------------------------------------
3 | Own damage-------------------------------------------------
Legal liabilities to third parties-------------------------------------------------
Accidents to participant | Under this section, the operator would indemnify the participant against loss of or damage to the motor vehicle stated in the schedule and its accessories and spare parts whilst there on: * By accidental collision or overturning or collision or over turning consequent upon mechanical breakdown or consequent upon wear and tear; * By fire external explosion self-ignition or lightning or burglary house breaking or theft; * By malicious act; * -------------------------------------------------
Whilst in transit.Under this section, the takaful companies would indemnify the participant against all sums including claimant’s costs and expenses which the participant shall become legally liable to pay in respect of: * Death of or bodily injury to any person, * -------------------------------------------------
Damage to property other than property belonging to the participant or held in trust by or in the custody or control of the participant or any member the participant’s household.Under this section, the operator undertakes to pay compensation to the participant for bodily injury sustained by the participant, usually in direct connection with the motor vehicle; or whilst mounting into or dismounting from or travelling in any motor-car result in death or permanent disablement. |
Scope of cover | Plan types | | Third party (act) cover | Third party (fire & theft) cover | Comprehensive cover | Liabilities to third party for: * Injury * Death * Property loss/damage | Yes | Yes | Yes | Loss/damage to own vehicle due to accidental fire/theft. | No | Yes | Yes | Loss/damage to own vehicle due to accident. | No | No | Yes | Liability to driver and passenger of own vehicle (bodily injury, property, death). | No | No | No |
A common feature of a motor takaful plan is the provision of a No-claim Discount (NCD). This can be regarded as an incentive an individual for not making a claim during the preceding period of motor takaful cover. The discount may given according to the following scale when the participant renews his/her certificate: Takaful period completion | Discount (%) | 1st year 2nd year3rd year4th year5th year onwards | 253538.344555 |
Fire takaful: Another main product offered by general takaful operators is fire takaful product which can cover private dwellings, commercial risks and industrial risks. The basic coverage provided by the takaful companies is loss or damage by fire or lightning to the property concern. The fire takaful certificate is very much similar to the fire insurance policy issued by conventional insurance companies in terms of scope of cover and rating.
A part from the usual fire and allied perils cover, some takaful companies also offer fire consequential loss products. The fire consequential loss product provides for losses in respect of gross profit following reduction in turnover and increase in cost of working, i.e. expenses, necessary and reasonably incurred for the sole purose of avoiding or diminishing the reduction in turnover.
Under the fire takaful certificate, additional coverage (similarly provided by conventional insurance companies) for the following can be obtained for loss or damage:- a) By strike, riot and civil commotion, b) By flood, typhoon, hurricane and earthquake, c) Directly cause by aircraft and other aerial devices and/or articles dropped therefrom, d) Caused by impact by any road vehicle horses or cattle, e) Consequence of earthquakes and volcanic eruptions, f) Occasioned by or through or in consequence of hurricane, cyclone, typhoon, windstorm and flood, etc.
The above standard wording is used to cover properties other than private dwelling. A similar coverage for private dwelling, called “House owner takaful” is provided by most of the takaful operators.
The standard coverage for house owners takaful covers:- 1. Fire, lightning, thunderbolt, subterranean fire; 2. Explosion; 3. Aircraft and other aerial devices dropped therefrom; 4. Impact with any of the buildings by any road vehicle, horse or cattle not belonging to or under the control of the participant or any member of his family; 5. Bursting or overflowing of domestic water tanks, apparatus or pipes, usually subject to an excess clause; 6. Theft but only if accompanied by actual forcible and violent breaking into or out of a building or any attempt thereat; 7. Hurricane, Cyclone, Typhoon, Windstorm, Earthquake, Volcanic eruption and flood subject to excess clauses.
Certain takaful operators also offer “long term” house-owners takaful and long term fire takaful for private dwellings. Under this takaful, a house-owner who obtains a loan/finance from an institution may take takaful cover up to the period of repayment of the loan/financing.
Engineering takaful: engineering takaful covers plants & machinery and can be divided into four types: 1. Boilers and pressure plant; 2. Engine plant; 3. Electrical and mechanical plant; 4. Lifting machinery.
While some takaful operators, only provide limited cover such as explosion and collapse, breakdown, sudden and unforeseen physical damage, fragmentation risk and extraneous cause others may provide comprehensive all-risks cover including self-damage, damage to surrounding property, third party risks and even loss of profits due to machinery breakdown.
Marine takaful: Marine takaful usually consists of marine hull, marin cargo & goods in transit. Marine hull takaful covers structural framework of a vessel, hovercraft or boat, or anything that floats or moves. Marine cargo takaful covers goods in transit by sea and goods in transit. Takaful provides cover for goods in transit by land.
Marine takaful is a contract of protection whereby an insurer undertakes to indemnify an insured against losses arising from maritime perils. Maritime perils are perils consequent or incidental to navigation of ships such as perils of the sea- fortuitous accidental sea, collision, stranding, capsizing, heavy weather etc. and other incidental peril-fire, explosion on board a vessel, war, piracy, barratry, and incidental to navigation.
Type of coverage | Subject matter | Marine Hull | Vessel, and limited collision liability | Marine Cargo | Cargo (goods carried on the vessel) | Marine Freight | Freight (money/fee charged for carriage of goods by the vessel) | Marine Building Risk | Vessel under construction |
Miscellaneous accidents: No | Types | Coverage | 1 | Burglary takaful | Burglary or house breaking” means theft of property from the premises following upon felonious entry of the premises by violent and forcible means or theft by a person in the premises who subsequently breaks out by violent and forcible means provided there shall be visible marks make upon the premises at the place of such entry or exit by tools explosives electricity or chemicals. | 2 | Employers liability | Provide an indemnity to the participant i.e the employer, against liability at law for damages sustained by any person under a contract of service or apprenticeship with the participant whilst employed during the period of takaful and arising out of and in the course of his employment by the participant in the business. | 3 | Personal accident takaful | Covers bodily injury caused by violent, accidental, external and visible means which injury shall solely and independently of any other cause result in death, permanent disablement, temporary disablement and medical expenses. | 4 | Public liability takaful | Covers accidental bodily injury to any person and/or accidental loss of or damage to property caused in the course of the business within specified territorial limits. | 5 | Plate glass takaful | Covers breakage of any of the glass in the specified. The takaful operator would pay or make good to the participant the intrinsic value of the glass together with the cost of any necessary boarding up pending replacement subject to a limit. | 6 | Money takaful | Covers loss, destruction or damage of money while in transit in the charge of in respect of wages and/or salaries until paid to employees or otherwise disbursed and/ or by housebreaking or burglary from lock safe or by hold- up while in the premises. |
Distribution strategy: Product distribution and servicing plays a vital part in the success of any insurance or takaful operators. Having comprehensive distribution channels an advantage to the insurance or takaful operators in such an overwhelmingly competitive market. For each distribution channel, specific marketing strategies must be developed to strategically position targeted products.
Remuneration structure varies from one takaful operator to another. In the agency system, paying one commission rate for new business and lower rate for renewal business is common, whilst a sliding commission rate and a fixed percentage method is also being practiced. Other crucial elements in product distribution and servicing are the intermediary management and administration as well as customer service.
Takaful companies employ five main distribution systems as follows: * Direct marketing system;
The direct marketing system may be of two types; * The salaried sales distribution system; and * The direct response distribution system.
The salaried sales distribution system makes use of salaried staff to market and, occasionally service participants. They usually work with agents as support team or directly distribute the company’s products, usually group family takaful.
The direct response distribution system makes use of advertisements, mails, and telephone solicitation to generate sales. The consumers respond direct to the company’s promotions. The changing needs and lifestyles of consumers have led takaful operators to use direct marketing strategies instead of relying solely on traditional methods of marketing. * Broking system; one of the principle reasons a participant would use a takaful broker is to obtain the benefit of that broker’s professional advice and market knowledge. The broker’s function is to: * Fully understand the client and the client’s business needs; * Advise on those areas where takaful cover is required; * Negotiate coverage within the chosen range of operators; * Handle the servicing and administration of the takaful contracts; * Advise on changes in coverage and improvements in wordings as the client’s exposure develops or the takaful market changes; * Advise and guide the client on how best to manage its risk and prevent, to the greatest extent possible, future losses.
* Bancatakaful system; Banca-takaful is a relatively new distribution system. It is an adaptation of the banc-assurance concept that gained ground and became more prominent in the 80’s as a result of the merger between banking and insurance.
Concurrently, banks saw banc-assurance as one method to increase deposits because insurers own and control relationships with customers whilst insurers see it as an alternative mode of distribution due to high agency costs. Furthermore, both find that the low expense ratio and the ability to cross sell each other’s services significantly increased their market share. * Agency system; the agency system is a common feature in both family takaful and general takaful. However, the use of agents is more extensive in family takaful.
Organization structure and organization chart:
finance finance Distrb Distrb
Internal Audit
Internal Audit
Life Op
Life Op
H R
H R
CEO
CEO
Board of Directors
Board of Directors
IT
IT
Sales
Sales
Invest
Invest
Opera
Opera
Comm
Comm
Legial
Legial
This figure shows that board of directors is followed to the CEO as well the CEO has a sub structures as shown in the table also the internal audit is between the board of directors and CEO
.Shariah governance and management:
Insurance is aim at providing protection from future unforeseen constraints upon the occurrence of an unexpected particular future risk
The following sayings by the Holy Prophet justified the concept of protection for those who are in need. “Narrated by Abu Huraira (r.a.. the Holy Prophet(s.a.w.) said: whosoever removes a wordly hardship from a believer, Allah (s.w.t.) will remove from him one of the hardships of the day of judgement. Whosoever alleviates from one, Allah(s.w.t.) will alleviate his lot in this world and the next."
One should strive hard in overcoming one’s unexpected future risk or perils before leaving one’s destiny in the hand of Allah (s.w.t.)
“Anas bin Malik r.a. narrated that the Holy Prophet (s.a.w) told a Bedwin Arab who left his camel untied trusting to the will of Alah (s.w.t.) to tie the camel first then leave it to Allah (s.w.t.)
Sources of Shariah: * There are four fundamental sources of Shariah : * Quran; * Sunnah; * Ijma; * Qiyas; Apart from the four sources of Shariah that have been agreed upon by Scholars, there are also other sources of namely: * Istihsan;(Juristic Preference) * Maslahah Mursalah;(Public Interest) * Istishab;(Original Legal Position) * Uruf;(Custom)
Legal Maxims: Apart from the sources of shariah, qawaid fiqhiyah are also used in the discussion of takaful; legal maxims are statements of principles that are derived from the detailed reading of the rules of Islamic Jurisprudence;
There are five fundamental legal maxims which are: * “Acts are judged by the intention behind them” (Al-umuru bi-maqasidiha); * “Certainty cannot be overruled by doubt” (Al-yaqinu la yuzallu bish-shakk); * “The End does not justify the Means” (Al-’ghayah la tubarriru wasilah); * “Hardship beget facility” (Al-mashaqqatu tujlab at-taysir); * “Harm must be eliminated” (Ad-dararu yuzal);
Some of the more common corollary legal maxims that have been used in the discussion of Takaful are: * The original legal position of any matter is permissible until there is evidence prohibiting it. * Whatever leads to haram, is in itself haram. * In contracts effect is given to intention and meaning and not to words and phrases. * Difficulty brings ease. * The ends do not justify the means
Law of Transactions: Law of transaction deals with fiqh muamalat which includes exchange contracts (e.g., sale and purchase), profit sharing contracts (e.g. mudarabah and musharakah), contracts of guarantee, agency contracts and others.
The Sale Contract: the sale contract is the most prevalent form of contract and can be said to form the basis of other contracts. The Quran mentioned and legalized the sale contract in the following verse: “And Allah has permitted trade and prohibited riba” (Al-Baqarah 2:275).
The Sunnah further sactioned and endorsed the sale contract as narrated by Al-Hakim: “The work of a man with the hands and the mabrur sale”
Tenets of a Sale contract: in order for the sale contract to be accepted by Islamic law, it has to fulfill certain tenets and conditions, which are; * The contracting parties;(Aaqid) * The subject matter of sale;(Ma’qud Alaih) * The offer and acceptance;(Sighah
Forbidden Elements In Insurance: As rule, Islamic law does not recognize sales transaction that contains prohibited elements such as; * Prohibition of Riba:
Riba is defined as “a monetary advantage without countervalue which has been stipulated in favour of one of the two contracting parties in an exchange of two monetary values”“...Allah (s.w.t) permitted trade while prohibited Riba.” (Al-Baqarah 2:275) “…Allah (s.w.t) those who believe, deal not in usury, doubling and quadrupling the sum lent. Fear Allah, and you would be successful (Al-Imran 3:130)
Insurances sales have typically been driven from a ‘high returns’ perspective (even resulting in misrepresentation). Not meeting this expectation erodes buyers confidence
Insurance companies’ objective is to invest for highest yield and ignores whether or not investments are socially and morally responsible. The dividends from the such investments is regarded non-economical and intangible * Prohibition of Gharar: Gharar is defined as uncertainty which make the transaction or activity un-Islamic as it would result into unjust/unfair outcome.
The Holy Quran has explicitly forbidden all business transactions including injustice in any form to any of the parties, whether in the form of deceit or fraud or undue advantage or peril leading to uncertainty in the business or any dealing. (Quran: 6:151-152).
Hadith of the Prophet as narrated by Anas bin Malik states that the Prophet forbade the sale of fruits till they were almost ripe.
For a ‘buy and sell contract’ the following conditions must be fulfill in order for a sale to be valid:
* The contracting parties must have the capacity to conduct the sale contract i.e. they must be sane, sober and have reached the age of puberty.
* The contracting parties must not be forced to enter into the contract.
* The buyer must have knowledge of the goods specification either through sight or ample description
* The goods must be owned by the seller or that the seller is an agent to the owner. * The seller must be able to deliver the goods. If the goods are not deliverable, the sale is void. * The agreed price must be clear to both parties. In places where many currencies are accepted, e.g. Hotel, the currency must be made known
* Prohibition of Maisir: Maisir literally means getting or profiting something too easily without having to work for it.
“ O you who believe! Intoxicants, gambling, idolatrous practices and soothsaying are abomination of Satan’s handiwork. So avoid it in order that you may be successful.” Surah al-Maidah (5:90).
Conclusion:
Peoples life, livelihood and properties are always risky because any kind of uncertain event can happen anytime which can cause unexpected losses. The process of insurance has been evolved to safeguard the interest of people from uncertainty by providing certainty payment at a given contingency. It provides indemnification against losses arising from the happening of some uncertain events.
Reference; * Takaful and actuarial practices the module tk 2002
* Comparison between the Concept of General Takaful and Family Posted on September 10, 2011
* Malaysian takaful association {http://www.malaysiantakaful.com.my/Consumer-Zone/FAQs/General-Takaful/Praesent-euismod-blandit-sapien,-sed-ultricies-nis.aspx}
* Qatar Islamic Insurance Company Qsc {http://www.insurance-business-review.com/companies/qatar_islamic_insurance_company_qsc}
* Syrian Islamic Insurance { http://www.siic-insurance.com/index.php?art=22&lng=2}
* http://www.islamicbanker.com/takaful-wakalah-model
--------------------------------------------
[ 1 ]. Reference the module tk 2002 takaful and actuarial practices
[ 2 ]. Reference the module tk 2002 takaful and actuarial practices unit 11/3 up to 7
[ 3 ]. http://www.islamicbanker.com/takaful-wakalah-model
[ 4 ]. Reference the module tk 2002 takaful and actuarial practices unit 3/22
[ 5 ]. Reference the module tk 2002 takaful and actuarial practices unit 8/14 &15
[ 6 ]. Reference the module tk 2002 takaful and actuarial practices unit 5/30
[ 7 ]. Reference the module tk 2002 takaful and actuarial practices unit 4/5 to 14
[ 8 ]. Reference the module tk 2002 takaful and actuarial practices unit 6/5 to 9
[ 9 ]. Reference the module tk 2002 takaful and actuarial practices model slid lecture 2
Model
TK2002 - Takaful and Actuarial Practices
Facilitator:
Ezamshah Ismail
Topic
Application for a Takaful operating licence
Semester Jan- 2013
Name: Omar Abdikarim Osman
Matric No: 1000 102
Executive summery
The origins of takaful can be traced back more than 1400 years. Takaful originated within the Arab tribes as a pooled liability that indebted those who committed offences against members of a different tribe to pay compensation to the victims of their heirs. The concept widened to several walks of life, including sea trade, in which participants made contributions to a fund for cover to any group member who went through mishap on sea voyages.
Nevertheless, it was not until 1979, in Sudan, that the pioneer takaful firm was established. The use of takaful as the Islamic alternative to conventional insurance began in 1985 when the Grand Council of Islamic Scholars of the Organization of the Islamic Conference formally gave the required permission. Conventional insurance was considered to be unsuited to Islamic law (Shari’ah) and was to be shunned by Muslims, unless there was no substitute. The opposition to conventional insurance was on the premise that Islamic principles do not permit uncertainty or any interest-bearing assets, both of which are intrinsic factors in conventional insurance business.
The Takaful industry in Malaysia started to gain momentum when, in October 1982, the Malaysian government formed a special task force to explore the viability of setting up an Islamic insurance company. Out of that study and based on its recommendations, the Takaful Act 1984 was gazetted and came into force thereafter. At first glance, there does not appear to be much difference between conventional insurance and Takaful. Indeed, in terms of concept, there is none as both subscribe to the long established principle the “pool of the many to help the unfortunate few”. MTA is dedicated in promoting the interest of its members and to supervise the exercise of self-regulation within the Takaful industry. The MTA Road Map introduced in 2006 set the direction and focus of the association. A four-pronged strategy was laid out with the objective of achieving a 20% share in the overall insurance industry by 2010. The focus, among others, is on branding, awareness and communication, shared services through leveraging of technology, investment opportunities and relations with regulators. These strategies are deemed achievable and close co-operation among members to make it work was the key to its success. Furthermore, this report will show the critical success of our company.
Our Keys to Success and critical factors for the coming year are: * Identify "Target Markets." * Institute our Property inspection program. * Begin our "Insurance Partners" program. * Develop a profitable property program. * Provide small businesses with an affordable basic business package.
Mission
XYZ takaful company is dedicated to providing insurance products that provide quality protection with value pricing. We wish to establish a successful partnership with our clients, our staff members, and our takaful companies, that respect our goals and in line with shariah.
Success will be measured by our clients choosing us because of their belief in our ability to meet or exceed their expectations of price, service, and expertise.
Objectives
Establishing good working relationships with our present takaful markets by meeting with their decision makers and plotting a mutual plan for success, Get commitments for support and products that we can market in our trading area, * Investigating new markets that meet our marketing criteria by * Committing to small rural brokerage; * b) providing products suitable to our economic and social climate; and * c) Plans for the upload and download of insurance policies. * Provide sales incentives to staff to meet sales goals of 10%. * Complete inspection of all Pilot homeowners within one month before renewal date.
Keys to Success
We believe the keys to success in a small town takaful business are: * Knowledgeable, friendly staff that can empathize with our consumers’ needs and circumstances, especially in handling a loss. * Policies that meet or exceed the expectations of our clients, and that are affordable, available, and understandable. * Policies and endorsements delivered on time with minimal errors. * A commitment to an annual insurance review for all of our clients. A phone call is more than any direct mass marketer offers. We believe personal contact and service is the cornerstone of our success.
Rational for starting a takaful operation:
The general takaful concept is you contribute a sum of money to a takaful fund in the form of participative contribution (tabarru’). You will undertake a contract (aqad) for you to become one of the participants by agreeing to mutually help each other, should any of the participants suffer any form of misfortune, either arising from death, permanent disability, loss, damage or any other such misfortunes as covered under the takaful you personally undertake.
The takaful protection plan is based on Shariah principles and offers many unique features to policy owners.
Islamic Insurance is founded and based on principles of mutuality and co-operation between Policyholders. And it's not based on profitability as a major principle but it's established for the purpose of facing hazards and in handling all out coming financial liabilities and damages that might confront a Policyholder or his or her possessions. Therefore; based on this principle Policyholders cooperate among themselves in order to compensate any member facing damages, or liabilities.
And since the Policyholders are owners of this insurance operation, they have the right to recover the surplus of insurance transactions in cash, according to the value of each participant's insurance installment paid, after deducting required expenses. Also the company and its stockholders do not retain or withhold any percentage of this excess on the contrary of traditional insurance companies where their profit proceeds from selling Insurance services and their products are provided to shareholders only and not to policyholders.
At the same time, Shareholders (Capital owners) Invest policyholders' collected funds for an approved set percentage of the investment earnings in return for managing these funds. And that's another major distinction between Islamic and traditional insurance.
An Islamic insurance system separates between stockholders and policyholders in a way that gives the second party the opportunity of being real partners!
Company background/overview:
XYZ is a general insurance company. XYZ is engaged in providing insurance products and services in conformity with Islamic Sharia standards and principles. The company offers products and services for life, marine, motor, fire, engineering, general accidents, electronics, bankers, personal and professional liability. The company headquartered is at Djibouti. XYZ offers Takaful products, the Islamic Alternative to Life Insurance. These products are sources of financial planning for individuals and businesses. In addition, the company is also offering property insurance that covers buildings, machinery, plants and stock. The company’s major clients include companies, banks and public sector employers.
Company History
XYZ Insurance was founded as a sole proprietorship in 1970 and was owned and operated by the founder Adnan Ahmed. He originally ran the operation from his home, but moved to the business section when he outgrew his home based operation.
In 1972, the company constructed a new office building in the main business section and over the course of the last 15 years has purchased four other brokerages.
Proposed business and shareholder structure
General takaful:
General Takaful means takaful other than Family Takaful and also caters to the diverse needs of the individual as well as businesses alike, offer protection for losses such as those arising from Property Damage Cover, Marine Cover, Third Party Liability Cover, and Money Related covers, Workmen Compensation/Employers Liability Cover or Infidelity of the employees.
General Takaful also provides Muslims and non-Muslims (individuals and businesses) an alternative to conventional insurance. Conventional insurance contravene the Shari’ah principles with regard to the involvement of elements of riba, gharar and maysir in their operations and investment activities.
As in the case of Family Takaful, General Takaful (non-life insurance) also works like a joint guarantee in which all participants contribute their own shares of premiums into a pool and mutually agreed to indemnify those participants who suffer from an insured peril.
General takaful schemes are “risk-only” contracts of joint-guarantee as compared to investment-oriented nature of family takaful plans. These agreements are essentially short-term in nature (normally one year), between groups of participants to provide mutual compensation in the event of a defined loss. The schemes are designed to meet the needs for protection of individuals and corporate bodies / businesses in relation to material loss or damage resulting from a catastrophe or disaster inflicted upon properties, assets or belongings of participants.
The General Takaful Business is different from Family Takaful, as all the payments are treated as only tabarru, and not divided into two separate accounts. For General takaful business, the savings portion of contribution is nil and mudarabah fee would be generated from managing a protection fund only to protect takaful policyholders in case of insurer bankruptcy.
Regulatory requirements regarding shareholders and capital:
Capital may be defined as the money, property and other valuables which collectively represent the material wealth of an individual or business. Wealth in this context means the material resources (property, cash, etc.) which in excess of that required for consumption, such wealth may be used or invested for productive puroses and thus creates more wealth.
The source of capital in takaful would be firstly, the accumulated capital built up over time from the excess accumulation of participant’s contributions and investment profits over the claim paid and provisions made for eventual claims. The second source of capital for a takaful fund would be from injections of capital by the operator in the form of benevolent loan (qard al-hasan).
The second source is only a temporary source of capital provided by the operator and would need to be repaid eventually. From the operator’s perspective; the qard hasan is a particular use of the operator’s capital (which ultimately comes from the shareholders of the operator).
Regulators require that the takaful fund be sufficient to a given degree of certainty to pay claims as they emerge over the future.
Regulators typically require that a takaful fund has more than sufficient assets to pay claims liabilities as they come due. This requirement of excess assets over liabilities is called the Required Solvency Margin (RSM) or minimum margin of solvency and is normally stated in terms of either an absolute amount or a formula which relates the required margin to one or more factors such as contribution volume, claims volume, the amount of mathematical reserves calculated, the total sum covered, etc.
In the event of a fund deficiency, the takaful operator would be bound by regulatory requirement to cover the deficiency by providing a qard al-hasan.
Solvency margin = Takaful Fund Assets – Takaful Fund Liabilities
Required Solvency Margin is such that solvency margin ≥ RSM.
Takaful business model:
Takaful - Wakalah Model
The term wakalah in Arabic means agency. Therefore under the structure, an agency relationship is agreed between two parties to conduct a certain business undertaking. Based on this premise, the model describes an agency agreement between the operators, acting as the agent or “wakil” to the participant as the principal to manage the participation of the latter in a variety of takaful products provided by the operator. In return for rendering the agency services, the operator is permitted to charge a fee under the agreement. The fee is payable from the takaful contribution paid by the participant. In this sense under the above model, management expenditure can be charged to the takaful fund as upfront charges. By this model, the operator earns its revenue from the agency fee described in the aforementioned as well as returns on the investment of its shareholders‟ fund. However, there are also operators practising the above model who charged performance fees on its roles and services of managing the investment of the takaful fund. In the event of a cancellation or surrender, the participant will be refunded of the net balance of his contribution, if any, after deducting all the upfront charges such the wakalah fees and other management expenses from the takaful fund.
Risk associated with takaful models:
Enterprise risk management is an integral part of today’s business processes. Enterprise risk management can be defined as ‘the overall process that a financial institution follow to define a business strategy, to identify the risk to which it is exposed to, to quantify those risks and to understand and control the nature of such risk’.
Some of the critical success factors in a takaful operation are; * Ensuring adequate investment returns to pay for competitive returns to participants as well as shareholders profit. * Ensuring mortality experience/loss ratios are better than expected/competitive and stable. * Ensuring actual expenses are lower than expense loadings. * Ensuring that its operations are shariah compliance being its differentiating factor.
A business plan:
Expenses management strategy: The way benefits are structured is really left to the imagination and creativity of the takaful operator taking into account competition with other takaful operator and conventional insurers. The actuary plays the role of the inner voice of the takaful operator in ensuring that the way takaful benefits are structured are fair to participants and at the same time viable as a business venture without compromising shariah principles.
Again there is no fixed way in which provisions for expenses are reflected in the pricing of the product. A wakalah type takaful product contract may mention the explicit fee that the operator would be charging to the takaful contributions to recover operator expenses.
The variations in allocating and charging expenses to the participants/takaful fund are many and really depend on the takaful operator as summarized below: * Method 1- charge upfront wakalah fee for commission and management costs. * Method 2- all management expenses are absorbed by the takaful operator. * Method 3- Commission and management expenses are borne by takaful fund on an incurred basis. * Method 4- Upfront wakalah fee as percentage of tabarru’ (risk contribution) charges.
Regardless of the underlying operational model, the anticipated expenses of marketing and operating the takaful product would be reflected in the product pricing process either directly in the form of an explicit expense margin or provision embedded in the contribution formula or implicitly in the cash flow tests (also known as profit tests) carried out to assess the financial viability or profitability of a particular takaful product.
Expenses generally consist of variable costs such as marketing costs, agency commissions, underwriting expense, etc. and fixed costs such as fixed assets depreciation, staff salaries, overheads, etc.
In assessing financial viability of the product from the takaful operator’s perspective, the speed and magnitude at which the operator’s expenses and other sunk costs of infrastructure and product development are recovered over time is an important indicator of the product’s acceptability to the management of the takaful operator.
Tests of acceptable profitability (profit tests) to the operator as well as solvency within takaful fund are carried out by the actuary using cash flow models which are simplified representations of the operation of the takaful fund over time.
In working out suitable contribution rates for a new takaful product, the actuary would need to rely on data which would indicate the takaful operator’s existing and projected costs of operating the business.
Offering products/ types of claims:
Takaful products have evolved over time largely through product development, product adaptation and product innovation process. The operators of takaful, especially in Malaysia and the Middle East, are able to offer competitive policies in term of coverage and features vis-à-vis those of conventional insurance.
General takaful provides protection on short-term basis, normally covering a period of one year. It commonly provides protection for property loss or damage, liability arising from damage caused by the insured to a third party and accidental death or injury to a third party.
A claim can be defined as request to be reimbursed (or compensated) filed by the participant and addressed to the operator. The efficient handling and correct recognition of takaful claims is a key competitive factor. Claims management, whether good or bad, has marketing repercussions for the operators. Claims management is an indication of an operator’s standard of service to its clients. Bad claims management may lead to a decline in the operator’s reputation. The operator’s reputation is its goodwill and with a loss in goodwill it would be difficult for the operator to attract new participants. Ineffective claims management can also affect the operator’s financial position, terms of reserving for future claims correctly and the level of expenses incurred in the administration of claims.
Different types of takaful certificates give rise to different types of claim. Normally the types of claims shall follow the different types of classes of takaful and takaful products.
Under general takaful, the claims, and subsequently the clamis function are divided into motor and non-motor types of claims. This is so since motor claims form the bulk of general takaful claims. Motor claims are usually divided into three types; * Third party bodily injury; * Third party property damage; * Fire, theft and own damage claims.
The non-motor claims functions are usually divided according to the class of business. These are normally: * Fire; * Engineering; * Marine; * Aviation; * Miscellaneous accidents, etc.
Product development process may vary from operator to operator, especially for desiging and creating a family takaful product. Legal documentation of takaful contracts involves distinct provisions, conditions, clauses, warranties and exclusions. Different takaful companies utilize different types of takaful contracts and such contracts vary according to application of mudharabah, wakalah or ju’alah principles
Presently, general takaful products can be divided into two broad areas: * Personal line or retail products are designed to be sold in large quantities. * Commercial line products are usually designed for relatively small legal entities. These would include the standard worker’s compensation, public liability, product liability, commercial fleet and other general takaful products offered to organization.
Motor takaful: The Road Transport Act 1987 Malaysia requires all motor vehicles to be insured before they can be used on public roads. But are all insurance and Takaful covers the same? No, not necessarily. Although Motor is a tariffed class, insurance and Takaful companies are allowed to impose different levels of loadings and deductibles. Furthermore, different companies offer different levels of service and adopt different technology and approaches to claims handling.
It is an offence for any person to use or cause or permits any other person to use a motor vehicle without the necessary coverage. However, cost of cover can be tariff controlled.
Under the motor takaful plan the third party refers to a person who injured or has suffered loss or damage arising from an accident involving the participant’s motor vehicle. A third party may be a pedestrian, a driver or passengers in the other vehicle. The first party to a motor takaful plan is the participant as the vehicle owner and the second party is the takaful operator.
There are several types of takaful cover for motor-vehicles available in the market. Invariably the following three types of cover are provided: * Motor takaful for private car; * Motor takaful for private motorcycle; * Motor takaful for commercial vehicles.
Normally, the standard motor takaful certificate does not cover: * Death or self bodily injury; * Liability against claims from own passengers; * Theft of non- factory fitted vehicle accessories unless otherwise declared; * Consequential loss, depreciation, wear and tear, mechanical or technical breakdown failures or breakages.
The scope of coverage primarily provided under the motor takaful certificate is as follows: Section | Types of cover | Scope of coverage | 1-------------------------------------------------
2 -------------------------------------------------
3 | Own damage-------------------------------------------------
Legal liabilities to third parties-------------------------------------------------
Accidents to participant | Under this section, the operator would indemnify the participant against loss of or damage to the motor vehicle stated in the schedule and its accessories and spare parts whilst there on: * By accidental collision or overturning or collision or over turning consequent upon mechanical breakdown or consequent upon wear and tear; * By fire external explosion self-ignition or lightning or burglary house breaking or theft; * By malicious act; * -------------------------------------------------
Whilst in transit.Under this section, the takaful companies would indemnify the participant against all sums including claimant’s costs and expenses which the participant shall become legally liable to pay in respect of: * Death of or bodily injury to any person, * -------------------------------------------------
Damage to property other than property belonging to the participant or held in trust by or in the custody or control of the participant or any member the participant’s household.Under this section, the operator undertakes to pay compensation to the participant for bodily injury sustained by the participant, usually in direct connection with the motor vehicle; or whilst mounting into or dismounting from or travelling in any motor-car result in death or permanent disablement. |
Scope of cover | Plan types | | Third party (act) cover | Third party (fire & theft) cover | Comprehensive cover | Liabilities to third party for: * Injury * Death * Property loss/damage | Yes | Yes | Yes | Loss/damage to own vehicle due to accidental fire/theft. | No | Yes | Yes | Loss/damage to own vehicle due to accident. | No | No | Yes | Liability to driver and passenger of own vehicle (bodily injury, property, death). | No | No | No |
A common feature of a motor takaful plan is the provision of a No-claim Discount (NCD). This can be regarded as an incentive an individual for not making a claim during the preceding period of motor takaful cover. The discount may given according to the following scale when the participant renews his/her certificate: Takaful period completion | Discount (%) | 1st year 2nd year3rd year4th year5th year onwards | 253538.344555 |
Fire takaful: Another main product offered by general takaful operators is fire takaful product which can cover private dwellings, commercial risks and industrial risks. The basic coverage provided by the takaful companies is loss or damage by fire or lightning to the property concern. The fire takaful certificate is very much similar to the fire insurance policy issued by conventional insurance companies in terms of scope of cover and rating.
A part from the usual fire and allied perils cover, some takaful companies also offer fire consequential loss products. The fire consequential loss product provides for losses in respect of gross profit following reduction in turnover and increase in cost of working, i.e. expenses, necessary and reasonably incurred for the sole purose of avoiding or diminishing the reduction in turnover.
Under the fire takaful certificate, additional coverage (similarly provided by conventional insurance companies) for the following can be obtained for loss or damage:- a) By strike, riot and civil commotion, b) By flood, typhoon, hurricane and earthquake, c) Directly cause by aircraft and other aerial devices and/or articles dropped therefrom, d) Caused by impact by any road vehicle horses or cattle, e) Consequence of earthquakes and volcanic eruptions, f) Occasioned by or through or in consequence of hurricane, cyclone, typhoon, windstorm and flood, etc.
The above standard wording is used to cover properties other than private dwelling. A similar coverage for private dwelling, called “House owner takaful” is provided by most of the takaful operators.
The standard coverage for house owners takaful covers:- 1. Fire, lightning, thunderbolt, subterranean fire; 2. Explosion; 3. Aircraft and other aerial devices dropped therefrom; 4. Impact with any of the buildings by any road vehicle, horse or cattle not belonging to or under the control of the participant or any member of his family; 5. Bursting or overflowing of domestic water tanks, apparatus or pipes, usually subject to an excess clause; 6. Theft but only if accompanied by actual forcible and violent breaking into or out of a building or any attempt thereat; 7. Hurricane, Cyclone, Typhoon, Windstorm, Earthquake, Volcanic eruption and flood subject to excess clauses.
Certain takaful operators also offer “long term” house-owners takaful and long term fire takaful for private dwellings. Under this takaful, a house-owner who obtains a loan/finance from an institution may take takaful cover up to the period of repayment of the loan/financing.
Engineering takaful: engineering takaful covers plants & machinery and can be divided into four types: 1. Boilers and pressure plant; 2. Engine plant; 3. Electrical and mechanical plant; 4. Lifting machinery.
While some takaful operators, only provide limited cover such as explosion and collapse, breakdown, sudden and unforeseen physical damage, fragmentation risk and extraneous cause others may provide comprehensive all-risks cover including self-damage, damage to surrounding property, third party risks and even loss of profits due to machinery breakdown.
Marine takaful: Marine takaful usually consists of marine hull, marin cargo & goods in transit. Marine hull takaful covers structural framework of a vessel, hovercraft or boat, or anything that floats or moves. Marine cargo takaful covers goods in transit by sea and goods in transit. Takaful provides cover for goods in transit by land.
Marine takaful is a contract of protection whereby an insurer undertakes to indemnify an insured against losses arising from maritime perils. Maritime perils are perils consequent or incidental to navigation of ships such as perils of the sea- fortuitous accidental sea, collision, stranding, capsizing, heavy weather etc. and other incidental peril-fire, explosion on board a vessel, war, piracy, barratry, and incidental to navigation.
Type of coverage | Subject matter | Marine Hull | Vessel, and limited collision liability | Marine Cargo | Cargo (goods carried on the vessel) | Marine Freight | Freight (money/fee charged for carriage of goods by the vessel) | Marine Building Risk | Vessel under construction |
Miscellaneous accidents: No | Types | Coverage | 1 | Burglary takaful | Burglary or house breaking” means theft of property from the premises following upon felonious entry of the premises by violent and forcible means or theft by a person in the premises who subsequently breaks out by violent and forcible means provided there shall be visible marks make upon the premises at the place of such entry or exit by tools explosives electricity or chemicals. | 2 | Employers liability | Provide an indemnity to the participant i.e the employer, against liability at law for damages sustained by any person under a contract of service or apprenticeship with the participant whilst employed during the period of takaful and arising out of and in the course of his employment by the participant in the business. | 3 | Personal accident takaful | Covers bodily injury caused by violent, accidental, external and visible means which injury shall solely and independently of any other cause result in death, permanent disablement, temporary disablement and medical expenses. | 4 | Public liability takaful | Covers accidental bodily injury to any person and/or accidental loss of or damage to property caused in the course of the business within specified territorial limits. | 5 | Plate glass takaful | Covers breakage of any of the glass in the specified. The takaful operator would pay or make good to the participant the intrinsic value of the glass together with the cost of any necessary boarding up pending replacement subject to a limit. | 6 | Money takaful | Covers loss, destruction or damage of money while in transit in the charge of in respect of wages and/or salaries until paid to employees or otherwise disbursed and/ or by housebreaking or burglary from lock safe or by hold- up while in the premises. |
Distribution strategy: Product distribution and servicing plays a vital part in the success of any insurance or takaful operators. Having comprehensive distribution channels an advantage to the insurance or takaful operators in such an overwhelmingly competitive market. For each distribution channel, specific marketing strategies must be developed to strategically position targeted products.
Remuneration structure varies from one takaful operator to another. In the agency system, paying one commission rate for new business and lower rate for renewal business is common, whilst a sliding commission rate and a fixed percentage method is also being practiced. Other crucial elements in product distribution and servicing are the intermediary management and administration as well as customer service.
Takaful companies employ five main distribution systems as follows: * Direct marketing system;
The direct marketing system may be of two types; * The salaried sales distribution system; and * The direct response distribution system.
The salaried sales distribution system makes use of salaried staff to market and, occasionally service participants. They usually work with agents as support team or directly distribute the company’s products, usually group family takaful.
The direct response distribution system makes use of advertisements, mails, and telephone solicitation to generate sales. The consumers respond direct to the company’s promotions. The changing needs and lifestyles of consumers have led takaful operators to use direct marketing strategies instead of relying solely on traditional methods of marketing. * Broking system; one of the principle reasons a participant would use a takaful broker is to obtain the benefit of that broker’s professional advice and market knowledge. The broker’s function is to: * Fully understand the client and the client’s business needs; * Advise on those areas where takaful cover is required; * Negotiate coverage within the chosen range of operators; * Handle the servicing and administration of the takaful contracts; * Advise on changes in coverage and improvements in wordings as the client’s exposure develops or the takaful market changes; * Advise and guide the client on how best to manage its risk and prevent, to the greatest extent possible, future losses.
* Bancatakaful system; Banca-takaful is a relatively new distribution system. It is an adaptation of the banc-assurance concept that gained ground and became more prominent in the 80’s as a result of the merger between banking and insurance.
Concurrently, banks saw banc-assurance as one method to increase deposits because insurers own and control relationships with customers whilst insurers see it as an alternative mode of distribution due to high agency costs. Furthermore, both find that the low expense ratio and the ability to cross sell each other’s services significantly increased their market share. * Agency system; the agency system is a common feature in both family takaful and general takaful. However, the use of agents is more extensive in family takaful.
Organization structure and organization chart:
finance finance Distrb Distrb
Internal Audit
Internal Audit
Life Op
Life Op
H R
H R
CEO
CEO
Board of Directors
Board of Directors
IT
IT
Sales
Sales
Invest
Invest
Opera
Opera
Comm
Comm
Legial
Legial
This figure shows that board of directors is followed to the CEO as well the CEO has a sub structures as shown in the table also the internal audit is between the board of directors and CEO
.Shariah governance and management:
Insurance is aim at providing protection from future unforeseen constraints upon the occurrence of an unexpected particular future risk
The following sayings by the Holy Prophet justified the concept of protection for those who are in need. “Narrated by Abu Huraira (r.a.. the Holy Prophet(s.a.w.) said: whosoever removes a wordly hardship from a believer, Allah (s.w.t.) will remove from him one of the hardships of the day of judgement. Whosoever alleviates from one, Allah(s.w.t.) will alleviate his lot in this world and the next."
One should strive hard in overcoming one’s unexpected future risk or perils before leaving one’s destiny in the hand of Allah (s.w.t.)
“Anas bin Malik r.a. narrated that the Holy Prophet (s.a.w) told a Bedwin Arab who left his camel untied trusting to the will of Alah (s.w.t.) to tie the camel first then leave it to Allah (s.w.t.)
Sources of Shariah: * There are four fundamental sources of Shariah : * Quran; * Sunnah; * Ijma; * Qiyas; Apart from the four sources of Shariah that have been agreed upon by Scholars, there are also other sources of namely: * Istihsan;(Juristic Preference) * Maslahah Mursalah;(Public Interest) * Istishab;(Original Legal Position) * Uruf;(Custom)
Legal Maxims: Apart from the sources of shariah, qawaid fiqhiyah are also used in the discussion of takaful; legal maxims are statements of principles that are derived from the detailed reading of the rules of Islamic Jurisprudence;
There are five fundamental legal maxims which are: * “Acts are judged by the intention behind them” (Al-umuru bi-maqasidiha); * “Certainty cannot be overruled by doubt” (Al-yaqinu la yuzallu bish-shakk); * “The End does not justify the Means” (Al-’ghayah la tubarriru wasilah); * “Hardship beget facility” (Al-mashaqqatu tujlab at-taysir); * “Harm must be eliminated” (Ad-dararu yuzal);
Some of the more common corollary legal maxims that have been used in the discussion of Takaful are: * The original legal position of any matter is permissible until there is evidence prohibiting it. * Whatever leads to haram, is in itself haram. * In contracts effect is given to intention and meaning and not to words and phrases. * Difficulty brings ease. * The ends do not justify the means
Law of Transactions: Law of transaction deals with fiqh muamalat which includes exchange contracts (e.g., sale and purchase), profit sharing contracts (e.g. mudarabah and musharakah), contracts of guarantee, agency contracts and others.
The Sale Contract: the sale contract is the most prevalent form of contract and can be said to form the basis of other contracts. The Quran mentioned and legalized the sale contract in the following verse: “And Allah has permitted trade and prohibited riba” (Al-Baqarah 2:275).
The Sunnah further sactioned and endorsed the sale contract as narrated by Al-Hakim: “The work of a man with the hands and the mabrur sale”
Tenets of a Sale contract: in order for the sale contract to be accepted by Islamic law, it has to fulfill certain tenets and conditions, which are; * The contracting parties;(Aaqid) * The subject matter of sale;(Ma’qud Alaih) * The offer and acceptance;(Sighah
Forbidden Elements In Insurance: As rule, Islamic law does not recognize sales transaction that contains prohibited elements such as; * Prohibition of Riba:
Riba is defined as “a monetary advantage without countervalue which has been stipulated in favour of one of the two contracting parties in an exchange of two monetary values”“...Allah (s.w.t) permitted trade while prohibited Riba.” (Al-Baqarah 2:275) “…Allah (s.w.t) those who believe, deal not in usury, doubling and quadrupling the sum lent. Fear Allah, and you would be successful (Al-Imran 3:130)
Insurances sales have typically been driven from a ‘high returns’ perspective (even resulting in misrepresentation). Not meeting this expectation erodes buyers confidence
Insurance companies’ objective is to invest for highest yield and ignores whether or not investments are socially and morally responsible. The dividends from the such investments is regarded non-economical and intangible * Prohibition of Gharar: Gharar is defined as uncertainty which make the transaction or activity un-Islamic as it would result into unjust/unfair outcome.
The Holy Quran has explicitly forbidden all business transactions including injustice in any form to any of the parties, whether in the form of deceit or fraud or undue advantage or peril leading to uncertainty in the business or any dealing. (Quran: 6:151-152).
Hadith of the Prophet as narrated by Anas bin Malik states that the Prophet forbade the sale of fruits till they were almost ripe.
For a ‘buy and sell contract’ the following conditions must be fulfill in order for a sale to be valid:
* The contracting parties must have the capacity to conduct the sale contract i.e. they must be sane, sober and have reached the age of puberty.
* The contracting parties must not be forced to enter into the contract.
* The buyer must have knowledge of the goods specification either through sight or ample description
* The goods must be owned by the seller or that the seller is an agent to the owner. * The seller must be able to deliver the goods. If the goods are not deliverable, the sale is void. * The agreed price must be clear to both parties. In places where many currencies are accepted, e.g. Hotel, the currency must be made known
* Prohibition of Maisir: Maisir literally means getting or profiting something too easily without having to work for it.
“ O you who believe! Intoxicants, gambling, idolatrous practices and soothsaying are abomination of Satan’s handiwork. So avoid it in order that you may be successful.” Surah al-Maidah (5:90).
Conclusion:
Peoples life, livelihood and properties are always risky because any kind of uncertain event can happen anytime which can cause unexpected losses. The process of insurance has been evolved to safeguard the interest of people from uncertainty by providing certainty payment at a given contingency. It provides indemnification against losses arising from the happening of some uncertain events.
Reference; * Takaful and actuarial practices the module tk 2002
* Comparison between the Concept of General Takaful and Family Posted on September 10, 2011
* Malaysian takaful association {http://www.malaysiantakaful.com.my/Consumer-Zone/FAQs/General-Takaful/Praesent-euismod-blandit-sapien,-sed-ultricies-nis.aspx}
* Qatar Islamic Insurance Company Qsc {http://www.insurance-business-review.com/companies/qatar_islamic_insurance_company_qsc}
* Syrian Islamic Insurance { http://www.siic-insurance.com/index.php?art=22&lng=2}
* http://www.islamicbanker.com/takaful-wakalah-model
--------------------------------------------
[ 1 ]. Reference the module tk 2002 takaful and actuarial practices
[ 2 ]. Reference the module tk 2002 takaful and actuarial practices unit 11/3 up to 7
[ 3 ]. http://www.islamicbanker.com/takaful-wakalah-model
[ 4 ]. Reference the module tk 2002 takaful and actuarial practices unit 3/22
[ 5 ]. Reference the module tk 2002 takaful and actuarial practices unit 8/14 &15
[ 6 ]. Reference the module tk 2002 takaful and actuarial practices unit 5/30
[ 7 ]. Reference the module tk 2002 takaful and actuarial practices unit 4/5 to 14
[ 8 ]. Reference the module tk 2002 takaful and actuarial practices unit 6/5 to 9
[ 9 ]. Reference the module tk 2002 takaful and actuarial practices model slid lecture 2
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