The National Insurance Commission (NAICOM), recently announced its plan to release the guidelines on Takaful or Islamic Insurance by the end of next month. Nnamdi Duru writes on the peculiarities of this highly specialised branch of insurance practice and the benefits
The insurance regulator, National Insurance Commission (NAICOM) said it would soon put in place the necessary framework for the take-off of takaful insurance, a platform for the protection of lives and properties based on risk sharing in line with the principles and practice of Islam as against risk transfer as in conventional insurance.
Confirming this, Commissioner for Insurance, Mr. Fola Daniel, said: “By July, our guidelines for takaful will be ready. So, anytime from August and September, we should have a platform to do takaful, we will be in a position to issue licences to people to do takaful insurance not as a window. So before end of September, we should be in a position to issue out licenses for takaful.”
Speaking on takaful, the commissioner said: “Takaful is not a product, it is a concept. It is not about religion really. It is about a way of sharing risks and not transferring risks. Takaful is a kind of community risk sharing, it is fantastic, people will take it. It does not matter whether they are Christians or Moslems.”
Contrary to the situation where a few operators get approval to sell a few takaful products, the commission is thinking of creating a separate platform for companies to do takaful insurance as it is practised in other markets and not as single product offerings.
Unlike conventional insurance, takaful complies with sharia principles of compensation and shared responsibilities in the community. It has been expanded to cover general risks, health and family (life) plans for Muslim communities.
Takaful is commonly referred to as Islamic insurance because of the similarities between the contract of kafalah (guarantee) and insurance. It is founded on the principles of cooperation and separation between the funds and operations of shareholders, thus passing the ownership of the takaful insurance fund and operations to the policyholders.
Muslim faithful believe that insurance should be based on principles of mutuality and cooperation and this means shared responsibility, joint indemnity, common interest and solidarity.
In takaful, the policyholders are joint investors with the insurer (takaful operator), who acts as manager for the policyholders. The policyholders share in the investment pool's profits as well as its losses. A positive return on policies is not legally guaranteed, because in Islam, any fixed profit guarantee is equivalent to paying interest.
How it Works
Policyholders or shareholders agree to guarantee each other and instead of paying premiums, they make contributions into a mutual pool, creating a takaful fund.
The amount of contribution that each participant makes is based on the type of cover they require and their personal circumstances. As in conventional insurance, the policy or takaful contract specifies the nature of the risk and period of cover.
The takaful fund is managed and administered on behalf of the participants by a takaful operator who charges an agreed fee to cover costs. These costs include the costs of sales, marketing, underwriting and claims’ management.
Claims made by policyholders are paid out of the takaful fund and any remaining surpluses, after making provisions for likely cost of future claims and other reserves, belong to the policyholders or shareholders of the fund and not the takaful operator and may be distributed to the participants in the form of cash dividends or distributions, alternatively in reduction in future contributions.
Some of the peculiarities of takaful insurance are outlined below:
In conventional insurance, the customers pay premium in return for the insurance protection. It is not so in takaful insurance. In this case, policyholders make contributions equitable with the risks they are bringing into the pool. This is different from the premium which is based on ratings calculated by underwriters in the case of conventional Insurance.
Investment of takaful funds is done in compliance with sharia law which prohibits gambling and profiteering and consumption of alcohol. In addition, the funds should not be invested into economic activities that negate Islam and sharia, including brewing alcohol, etc.
In takaful, policyholders are owners of the company and in that capacity they are entitled to share part of the profits or losses made by their company. This is contrary to conventional insurance where policyholders are just customers who buy cover while shareholders share profit or loss as the case may be.
Claims in takaful are usually paid to those unfortunate policyholders/shareholders who suffer some insured losses within the period of cover. They are compensated from the pool and reinstated accordingly. Claims experience is not disturbing as the volume is not such that would give any insurer sleepless nights but the problem lies in the frequency of usually small claims.
Retakaful or Reinsurance
Sharia principles apply to takaful as much as it applies to retakaful. The reinsurance contract, for Islamic companies, must be contracted in conformity with the sharia.
There is need for strong and credible retakaful operators to assist the growth and expansion of takaful business globally. The shortage of retakaful capacity and the lack of companies in the market currently present great challenge to operators. The challenge is to have a large enough takaful market to justify retakaful business.
In response to this challenge, sharia scholars allow takaful operators to reinsure conventionally when no retakaful alternative is available, although retakaful is strongly preferred.
One of the greatest challenges that the takaful operators face worldwide is the rating system. There is yet no scientific method or model for rating risks in takaful insurance. In conventional insurance, there are standard rates for fire, motor, life and other lines of business prepared by actuaries. This is not available in takaful.
Also, the high rate of default by beneficiaries of takaful and lack of efficient risk management tools to eliminate fraud and other risks are among the challenges. There is also the absence of an effective risk management tool which can effectively eliminate fraud and other risks in the system as well as the absence of reinsurance capacity for takaful insurance. In addition, there is the absence of credit information in the market and moral hazards.
Speaking on the prospects of takaful insurance, the Assistant Managing Director of Underwriting-Sherikan Insurance and Reinsurance Company, Sudan, Mr. Omer Elfarowg Ahmed said the economy would benefit from the attendant accumulation of huge micro-finance fund and expansion of the micro-finance infrastructure.
The market regulator’s job, according to him, would be simplified when takaful market grows, while legislations on takaful and insurance generally would improve significantly.
Takaful as well serves as a guarantee to credit providers just as policyholders benefit from loss prevention services put in place by service providers and share in the surpluses recorded at the end of the accounting period.
The system is also likely to reduce insurance costs and economic waste and help to alleviate poverty and increase the level of corporate social responsibility of the insurance industry.
Takaful operators have expanded the scope of coverage to livestock insurance, fire and burglary, motor, agricultural and other products. They encouraged beneficiaries to form industrial unions and cooperative societies to be eligible to participate.
The operators have also encouraged the respective Central Banks in African countries to maintain up-to-date information on beneficiaries of takaful and micro-finance credit.
If the necessary platform is put in place and if would be operators do their home-work well, takaful may hold the aces to deepening insurance penetration in the country.