By Rizwan Ahmed Farid
(An extract from a series of articles on Insurance in Islamic thought by Rizwan Ahmed Farid, from his upcoming book on Challenges of Life Insurance Marketing)
El-Gamal, Mahmoud A., of Rice University writes:
“Interestingly, while the Islamic insurance industry has adopted a name suggestive of a mutual cooperative system, takaful companies have generally been structured as for profit shareholder-owned companies, or subdivisions thereof. In other words, the corporate form of those takaful companies is identical to that of the commercial insurance companies whose contracts the Ulama forbade. Takaful companies invoke non commutativity by stipulating that the shareholders pay policyholder claims as a form of voluntary contribution (tabarru`), where the operator is usually set up in the form of silent partnership (mudaraba), with the exception of few recent attempts at using agency (wakala) – while still falling short of mutual forms. In both structures, there are unresolved fiqhi issues about bindingness of promises in such voluntary tabarru`. It would appear, thus, that in the Islamic insurance (risk intermediation) industry as well as in the Islamic banking (credit intermediation) industry, mutuality can align rhetoric with reality and resolve simultaneously a number of corporate governance, religious, and financial problems.”
The element of ribā – the receiving of interest – as well as the forbidden ventures, such as gambling, dealing in alcohol, and night club activities, ambiguity or deception, etc. leaves many financial products, including conventional insurance, in opposition to Shari’ah. Thus one billion eight hundred and twenty-three million in 2009, which number is increasing at the rate of 1.84% annually, have but few options when shopping for products that conform to their faith.
After years of efforts and representation, the provision of Policy Holders Directors in the Insurance Act, 1938, was increased from one fourth to one third through the Insurance Amendment Ordinance in 1970. Rule. 48(1) of the Insurance Act, 1938, which was repealed on 19th August 2000 through the promulgation of the Insurance Ordinance, 2000, stated that:
“Where the insurer is a company incorporated under the Companies Act, 1913, and carries on the business of life insurance, not less than one third of the directors of the company shall not withstanding anything to the contrary in the Articles of Association of the company be elected in the prescribed manner by the holders of policies of life insurance issued by the company.”
However, as I have written earlier that local and foreign powerful lobbies and vested interest groups who were behind the scene, influenced the consultants to delete and totally drop the provision of Mutual insurance companies and the important provision of the Policyholder Directors on the Board of the company, to watch the interests of the life insurance policyholders from the new legislation, Insurance Ordinance, 2000.
It is high time that the government and the parliamentarians make an immediate amendment in the Insurance Ordinance 2000, and insert a specific provision for ‘mutual insurance company’ operations as well as representation of not less than two-third Policyholders’ Directors on the Board of a commercial Family Takaful Operator to watch and safeguard the interests of the policyholders.
Takaful Models are based on mutual cooperation, responsibility, assurance, protection and assistance among groups of participants. Its principles are similar to those that underpin mainstream mutual insurance contracts. Besides, a Takaful product needs to strictly follow the norms of Shari’ah compatible principles. The Board of Islamic Shari’ah Scholars’ role has been specifically assigned to vet business decisions.
Each Takaful operator under Ruletion 34 (1) of the Takaful Rules 2005 is required to appoint a Shari’ah Board (SB) of not less than three members which shall be responsible for the approval of products, documentation as well as approval of all operational practices and investment of funds. The Takaful operator shall appoint only high caliber scholars who are specialized jurists in fiqh almu’amalat (Islamic commercial jurisprudence) to such Boards. In addition, they shall have knowledge of modern financial dealings and transactions.
So far, two Family Takaful Operators (life insurance companies) Pak-Qatar Family Takaful Limited, and Dawood Family Takaful Limited, launched their Family Takaful products, respectively in 2007 and 2009. Pak-Kuwait Takaful Company Limited, Pak Qatar General Takaful, and Takaful Pakistan Limited are also registered for causality insurance business.
Under the conventional structure of insurance the insured shifts the risk to the insurer, but under takaful mode by incorporating risk bearing condition the insured is also the insurer. The golden principle of ‘bear ye one another’s burdens’ applies as on the occurrence of a loss the members share the risk themselves. The participants’ (voluntary) contributions towards the pool to mitigate losses expunge the element of gharar from the contract. Conditions of risk-bearing, indemnity in kind and shari’ah compliance investments change the character of insurance in vogue and free it from the odium of contractual riba, qimar and, to some extent, gharar.
Conventional insurance falls down because it involves the taking of a financial risk that the policyholder will make a loss if a claim does not occur. This uncertainty of happening of the insured event, which many Shari’ah scholars pronounce constitutes a qimar i.e. gambling. Unlike conventional insurance, where risk is transferred from the policyholder to the insurance company, takaful mode requires all participants to share risk among them. They pay contributions for the quantum of risk as that with conventional insurance practice, and are calculated on the basis of the published morbidity and mortality tables. These tables are being developed regularly and validated for the last two hundred and thirty years to ascertain the probable number of years any man or woman of a given age and of ordinary health will live. A mortality table expresses on the basis of the group studied the probability that, of a number of persons of equal expectations of life who are living at the beginning of any year, a certain number of deaths will occur within that year.
These contributions are then pooled in ‘Participants Takaful Fund’ which is invested strictly in Shari’ah approved ventures, under Ruletion 19 of the Takaful Rules 2005. The Investment of participants’ contributions within the Participants Takaful Fund (PTF) as well as in the Participants Investment Fund (PIF) shall be managed under a Wakala contract, a Mudarabah contract or a combination contract as determined to be sound and workable by the Shari’ah Board of the Takaful operator. The Takaful operator shall set the fee structure and the profit sharing ratio on the investment management based on the advice of the Shari’ah Board and the Appointed Actuary, if any.