Islamic Life Insurance The World of Takaful By Shivash Bhagaloo

Contents Market Overview What is Takaful Insurance? How is Takaful Insurance Different? Takaful Models Regulation Challenges

Market Overview Market born in Sudan in 1979 Global Presence Largest market in the GCC and South East Asia Global contributions of $2-3bn (2006) (60% GI, 40% LA and Pensions) Annual growth of 15-20% over the past 3 years African Presence Largest markets in Sudan, Egypt, Tunisia, Algeria, Senegal Smaller presence in South Africa, Gambia Industry driven High economic growth Increased awareness Increase in Sharia compliant financing From an HIV / AIDS perspective, Sub-Sahara Africa and North Africa are two extremes. Sub-Sahara Africa and especially Southern Africa are the worst affected by the pandemic. North Africa, on the other hand have prevalence rates similar to East Asia and the Middle East, and therefore count among the least affected regions. In addition one should note that the rate of progression of HIV AIDS in North Africa is also very slow. Therefore the prevalence rates of HIV in Southern Africa is unlikely to be reached in the future.

What is Takaful Insurance ? Compliant with Sharia principles (Islamic law) Literally translated means “ joint guarantee” Similar to co-operative or mutual insurance Policyholders underwrite the risk Policyholders own the company Allowance for a charitable donation of surplus Terminology General Takaful – general insurance Family Takaful – life assurance and pensions From an HIV / AIDS perspective, Sub-Sahara Africa and North Africa are two extremes. Sub-Sahara Africa and especially Southern Africa are the worst affected by the pandemic. North Africa, on the other hand have prevalence rates similar to East Asia and the Middle East, and therefore count among the least affected regions. In addition one should note that the rate of progression of HIV AIDS in North Africa is also very slow. Therefore the prevalence rates of HIV in Southern Africa is unlikely to be reached in the future.

How is Takaful Insurance Different ? Certain aspects of normal insurance conflict with Sharia principles Maysir (Gambling) - insurers make bets on the loss occurrence and this is deemed to be gambling Gharar (Risk & Uncertainty) timing and amount of the loss are uncertain - Riba (Interest) - investments in interest bearing securities and possible interest on loans Haram (Forbidden / Unlawful) investments in commodities or involvement in activities that are forbidden (alcohol, pork etc). -

How is Takaful Insurance Different ? Important Practical Implications of Uncertainty – No term or endowment assurance products allowed Interest – Bond investments not allowed, equity investments permissible since market risk replaces credit risk. Haram – Trading in futures is forbidden

Takaful Models Differ in the way funds are shared between policyholders and the Takaful operator Wakalah (Fee based) Model Operator acts as an agent, administers funds on behalf of participants Receives a fee for operating expenses Mudharabah (Profit share) Model Operator acts as Mudarib (entrepreneur) with participants as the capital providers Losses paid by participants with a pre-agreed profit sharing agreement Wakalah/Mudharabah (Fee based/Profit share) Hybrid Wakalah for insurance activities and Mudharabah for investment profits

Wakalah Model PARTICIPANTS Management Expenses Contribution Wakalah Fee (eg 30%) Shareholders’ Fund Takaful Fund Claims Shariah compliant Investments Reinsurance/ Retakaful Reserves Qard Hassan Investment Profits Underwriting Profit Surplus/(Deficit) 100% surplus Charitable Donation

Mudharabah Model PARTICIPANTS Management Expenses Contribution Shareholders’ Fund Takaful Fund Claims Shariah compliant Investments Reinsurance/ Retakaful Qard Hassan (interest free loan) In case of a deficit in the fund to be repaid from surpluses in future years Reserves Investment Profits Underwriting Profit Surplus/(Deficit) X% of Surplus 100% - X% of Surplus Charitable donation

Wakalah / Mudharabah Hybrid PARTICIPANTS Management Expenses Contribution Wakalah Fee (eg 30%) Shareholders’ Fund Takaful Fund Claims Shariah compliant Investments Reinsurance/ Retakaful Reserves Qard Hassan Investment Profits Underwriting Profit X% of Investment Profits Surplus/(Deficit) 100% - X% of Investment Profits Charitable donation 100% of Surplus

Regulation First set of regulation was 1984 Takaful Act, Malaysia Mandatory compliance in certain countries (Saudi Arabia, Sudan) Regulation is still in its infancy Takaful compliance is overseen by a Sharia Advisory Board comprising Sharia scholars Lack of fiscal involvement Lack of harmonisation of rules globally

Challenges Not as developed as conventional insurance Lack of global awareness Shortage of skilled resources in the Takaful market Limited Shariah compliant investments Lack of harmonised regulation of Takaful industry

Summary Takaful Insurance is based on Sharia principles Market is developed in Far East and Middle East but less of a presence in Africa Similar to a mutual or co-operative, where policyholders underwrite risk Gambling, uncertainty, interest and forbidden activities are removed Models differ in the way funds are shared between policyholders and the Takaful operator Compliance is overseen by a Sharia Advisory Board Still require a harmonised global regulatory framework

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2008 Best Takaful Reinsurance Intermediary Aon named 2008 Best Takaful Reinsurance Intermediary at the 2nd International Takaful Summit in London, recognised for its reinsurance and consultancy work in the Takaful and Retakaful sectors