Download - Takaful Print
-
7/28/2019 Takaful Print
1/40
TAKAFUL
LECTURES
-
7/28/2019 Takaful Print
2/40
Outline of Presentation
Introduction to insurance Definition, example
Why to get insured
Types of insurance
History Of Insurance
How insurance started
Fire,
Marine Motor
Life
-
7/28/2019 Takaful Print
3/40
WHAT IS INSURANCE
It is a risk transfer mechanism in which financialcompensation is provided by the insurance company to her
client if a defined loss occurs. OR Loss of one, shared by
many
The loss may be accident of a car, destruction of factory
machinery due to fire and death of a person.
-
7/28/2019 Takaful Print
4/40
AN EXAMPLE
If someone insures his/her car of value Rs. 500,000/- and
pays Rs. 10,000/-(premium) to the insurance company then
Rs. 500,000/- is sum covered and Rs. 10,000/- is the yearly
premium.
Premium = Rs.10, 000/-
Sum covered = Rs. 500,000/-
-
7/28/2019 Takaful Print
5/40
Premium: It is the amount paid by the insured to the
insurance company.
Sum Covered: It is the amount agreed by the insurance
company with the insured and it is paid by the insurance
company when the insured event occurs.
-
7/28/2019 Takaful Print
6/40
Types of Insurance
There are three broad classes of Insurance :
1. Life Insurance
2. Non Life ( General ) Insurance
3. Health Insurance
-
7/28/2019 Takaful Print
7/40
EXAMPLES OF
GENERAL INSURANCE
LIFE INSURANCE HEALTH
VEHICLES TERM INSURANCE OPD
BUILDINGS ENDOWMENT INSURANCE COVERAGE ONCE A
PERSON GETS ADMITTED
IN A HOSPITAL
STOCK TWO PERSONS INSURANCE
MACHINERY
CASH
GOODS WHILE IN TRANSIT
BY AIR, RAOD, TRAIN AND
SEA
BONDS
-
7/28/2019 Takaful Print
8/40
Life Insurance
Life insurance is a coverage that people buy from a lifeinsurance company, which can be the basis of protection
and financial stability after one's death. It has two broad
types:
Endowment Insurance:
It provides death coverage and savings as well.
Term life insurance:
It provides coverage for relatively short period like one year.
It provides only death benefit i.e. no cash valueaccumulates in it.
-
7/28/2019 Takaful Print
9/40
Types of Non Life (General) Insurance
Fire Insurance
Marine Insurance
Aviation Insurance
Motor Insurance
Engineering Insurance
Miscellaneous Insurance
-
7/28/2019 Takaful Print
10/40
General Insurance (Non Life Insurance)
Insurance other than Life Insurance falls under the
category of General Insurance and it includes insurance of
vehicles, aeroplanes, buildings, machinery, stock etc against
the risks of fire, earthquake, riots and strike, accidents,
terrorism, floods, burglary, theft etc.
Marine:
It is a type of general insurance in which coverage against
different risks is provided when goods are transported from
one place to another either by ship, air, train or road.
Miscellaneous:
It includes insurance of cash, accidental death, mobile
phone, ransom etc.
-
7/28/2019 Takaful Print
11/40
Health
Health coverage compensates for the expenses incurred in
the treatment of a disease or accidental injury. It has two
categories:
OPD: It covers the expenses incurred in consultation, medical
tests and prescribed medication.
Hospitalization:
Under this coverage, if a covered member gets ill or gets
hurt and is hospitalized, the insurer covers medical
expenses incurred up to the specified limit.
-
7/28/2019 Takaful Print
12/40
Pakistan Insurance Market
ClassNo. of
Companies
Premium
(in Billions)
Life & Health 6 14.6
Non Life 50 16.8
Total 56 31.4
-
7/28/2019 Takaful Print
13/40
HISTORY OF INSURANCE
Insurance has often been responsive to some problem
faced by society.
MARINE INSURANCE
Chinese merchants used to insure their goods beingtransported through ships to other parts of the world.
In England, in 17th century merchants used to sit atvarious coffee houses transacting the insurancecontracts. One of such coffee shops was owned by
Edward Lloyd situated near River Thames.
Signing under that line introduced the terminology ofunderwriter and underwriting.
-
7/28/2019 Takaful Print
14/40
Lloyds Coffee House
Coffee houses emerged as primary source of news
Edward Lloyds coffee house was very famous amongtraders
Edward published Lloyds list in 1696 which provided infoon arrival/departures of ships and sea conditions
There were risk takers who use to take risks againstspecified sum of money and confirm the same by writinghis name under the terms of the contract. This is how theword UNDERWRITER came into existence
-
7/28/2019 Takaful Print
15/40
FIRE INSURANCE
Fire insurance started when great fire of London broke out
in 1666. In that fire, near 13200 houses, 89 churches anddozens of public buildings got destroyed.
Resultantly, The first mutual fire insurance company was
established in 1696.
With the passage of time, one by one, coverage for the nineallied perils (earthquake fire and shock, atmospheric
disturbance, riot and strike damage, impact damage,
malicious damage, electrical clause B, aircraft damage,
burglary & explosion) supplemented with the basic firecoverage.
-
7/28/2019 Takaful Print
16/40
MOTOR INSURANCE
As compared to marine and fire insurance, motor insurance
started a bit later. The first mechanically propelled vehicleappeared on British roads in 1894 and by 1898, motor
insurance took its start.
In Pakistan, insurance companies normally offer
comprehensive motor insurance covering own damage(partial loss and total loss) and theft
-
7/28/2019 Takaful Print
17/40
LIFE INSURANCE
Life insurance originated from Italy where the people
formed burial societies and those societies to collectpremium from its members and would bear the burial
expense from that premium collected. First life insurance
policy was signed on 1583.
Insurance mechanism was developed initially for thecompensation of poor people but later on with entry of
commercial insurance companies, it became a product for
well off people.
-
7/28/2019 Takaful Print
18/40
Outline of Presentation FUNCTIONS OF INSURANCE
Risk transfer mechanism
Creation of common pool
Equitable premiums
BENEFITS OF INSURANCE
Peace of mind
Loss control
Social benefits
Investment of funds
Promotion of savings
-
7/28/2019 Takaful Print
19/40
BENEFITS OF INSURANCE1. PEACE OF MIND:
The knowledge that insurance exists to meet the financialconsequences of certain risks, provides a form of peace of
mind. This is important for private individuals when they
insure their car, house, life and other possessions but it is
also of vital importance in industry and commerce.
Why should a person put money into a business venture
when there are so many risks which could result in the loss
of his money.
But businessman invests in business as he transfers some
of the vital risks to the insurer and attains peace of mind
for carrying out his business.
Resultantly, more jobs and more production.
-
7/28/2019 Takaful Print
20/40
BENEFITS OF INSURANCE2. LOSS CONTROL:
Insurance is primarily concerned with the financialconsequences of losses but it would be fair to say that
insurers are doing much more than only compensating the
insured in case of a loss.
Insurers do have an interest in reducing the frequency andseverity of losses by promoting and encouraging the loss
prevention and loss reduction techniques, with which insurers
not only enhances their own profitability but also contribute
in reduction of general waste which results from losses.
In 18th century, in UK, insurers used to maintain their own fire
brigade departments equipped with fire-fighting equipment.
-
7/28/2019 Takaful Print
21/40
BENEFITS OF INSURANCE3. SOCIAL BENEFITS:
By providing financial compensation if a loss occurs to abusiness results in continuation of that business which means
no loss of jobs, goods and services which could have been
resulted if system of insurance was not in place.
4. INVESTMENT OF FUNDS: Insurers receive money in the form of premiums from their
policyholders. There is always a time gap between receiving of
premium and occurrence of claim. The premium may be
received in January and the claim may occur in November.
The insurer has all this money at their disposal which they can
invest.
-
7/28/2019 Takaful Print
22/40
BENEFITS OF INSURANCE
5. Promotion of savings :
Insurers invest in a wide range of investments. They provideloans to the banks and leasing companies which onward
provide financing to the entrepreneurs and businesses which
make the economy running. Such investments are the result
of savings of thousands of people in the form of premiums
paid to the insurers which brings an element of savings in the
people.
-
7/28/2019 Takaful Print
23/40
Principles of Insurance
1. Utmost Good Faith
2. Insurable Interest3. Indemnity
4. Subrogation
5. Proximate Cause
6. Contribution
1. UTMOST GOOD FAITH : The insured must provide full and
accurate information to the insurance company
2. INSURABLE INTEREST: There must be a relationship between the
insured and the beneficiary. Further, the beneficiary must besomeone who would suffer if it werent for the insurance.
-
7/28/2019 Takaful Print
24/40
3. INDEMNITY: The insured is not to profit as a result of
insurance coverage. Indemnity doesnt apply on life insurance
contracts
4. SUBROGATION: By compensating the client, non life
insurance company entitles to the rights of the client
5. PROXIMATE CAUSE: In insurance, it is the actual cause which
results in damage. For e.g. if earthquake has caused short
circuiting in a house and resultantly catches fire, then the
proximate cause is earthquake not the short circuiting. In such
case, the claim will be entertain able only if the insurance
coverage of the house includes coverage against earthquake.
6. CONTRIBUTION: If a third party compensates the insured forthe loss, the insurance companys obligation is reduced by the
amount of the compensation
-
7/28/2019 Takaful Print
25/40
Outline of Presentation
Introduction to Takaful
No to insurance by Islamic Scholars
Objections on Insurance
Risk transfer Vs Risk sharing mechanism
Riba
Uncertainty
Gambling (Maisir, Qimar)
-
7/28/2019 Takaful Print
26/40
Meaning of Takaful Takaful comes from the Arabic root-word kafala -------
guarantee.
Takaful means mutual protection and joint guarantee.
Operationally, Takaful refers to participants mutuallycontributing to a common fund with the purpose of havingmutual indemnity In the case of peril or loss.
Reference --- Hadith: tie the camel first =, then submit (Tawakkal) to the will of
Allah
The hadith implied a strategy to mitigate/reduce risk.
Takaful provides a strategy of risk mitigation/reduction byvirtue of collective risk taking that distributes risks and lossesto a large number of participants. This mitigates the otherwisevery damaging losses, if borne individually.
-
7/28/2019 Takaful Print
27/40
WHY NO TO SUCH A SYSTEM BY ISLAMIC SCHOLARS
Consensus stands developed among contemporary Islamicscholars that Takaful is a shariah compliant alternative toconventional insurance.
This perspective is upheld by numerous meetings andresolutions including the following:
The Islamic conference, Makkah, 1976.
Resolution by Council of Saudi Ulama in 1977 In 1985,Fiqh Council of the Organization of Islamic
Conference declared conventional insurance Haraam andrecommending Takaful as the Shariah compliant alternative.
-
7/28/2019 Takaful Print
28/40
Fiqh Academy Resolution 1985
Islamic Fiqh (science of Shariah) Academy, emanating fromthe Organization of Islamic Conference, meeting in its SecondSession in Jeddah, KSA, from 10 to 16 Rabi-ul-Thani, 1405A.H.(Dec 1985) issued a Resolution which in summary stated
the following: The commercial Insurance contract is prohibited (Haraam)
according to the Shariah.
The alternative Takaful contract which conforms to theprinciples of Islamic dealings is Halaal, being the contract of
cooperative insurance, which is founded on the basis ofcharitable donation and shariah complaint dealings.
-
7/28/2019 Takaful Print
29/40
OBJECTIONS TO INSURANCE AND REMEDIES BY
WAY OF TAKAFUL
INSURANCE V/S TAKAFUL
Risk Transfer mechanism V/S Risk sharing mechanism
Riba based investments V/S Riba free investments
Gambling V/S Avoiding Gambling by way of
distribution the surplus if any.
Uncertainty(Gharrar)
-
7/28/2019 Takaful Print
30/40
Interest -- Riba
. Allah has permitted trading and forbidden
riba (Al Baqarash 2: 275).
Insurance funds are invested in financial
instruments which contain the element of
Riba.
-
7/28/2019 Takaful Print
31/40
Gharrar
Forms of Gharrar :
Any bilateral transaction in which the liability of the party
in the transaction is either uncertain or contingent.
Consideration of either is not known.
Ultimate outcome of any one party is uncertain. Delivery is not in the control of the obligor.
Payment form one side is certain, but from the other side is
contingent.
-
7/28/2019 Takaful Print
32/40
Uncertainty -- Gharrar Gharrar in insurance contracts pertains to deliverability of
subject matter, i.e. uncertainty as to:
Whether the insured will get the compensationpromised?
How much the insured will get?
When will the compensation be paid?
Thus, it involves an element of uncertainty in the subjectmatter of the insurance sales contract, which renders itvoid under the Islamic law.
Contract of Takaful is contract of Tabarru instead ofConventional insurance where contract is basically a
contract of exchange (muawadat) i.e. buying and selling. Uncertainty to a certain level is allowed in contract of
Tabarru but Uncertainty is not allowed in sale and purchaseagreement.
-
7/28/2019 Takaful Print
33/40
Gambling -- Maisir
Making profits at the cost of loss of other party withoutgiving him any product or service is gambling. For
gambling following three conditions are required:
There must be two parties who gamble with each other.
Outcome of the events should be beyond their control. None of them give any service or product to each other.
Gambling can be termed as Result of uncertainty
-
7/28/2019 Takaful Print
34/40
Indication of Presence of Qimar in a
transaction
If in any transaction one partys profit is dependent on the
loss of the other then this is an indication that the
transaction involves Qimar.
In the permissible modes of business any profit or loss isequally shared & is fair to every party.
For example, in partnership (Musharakah) both the parties
share profit & loss. Similarly in other trades like sale,
purchase, hiring or leasing each partys considerations arecertain.
-
7/28/2019 Takaful Print
35/40
Gambling -- Maisir
Insurance is a contract upon speculation. Good faith
forbids either party from concealing what he privatelyknows, to draw the other into a bargain, from his ignoranceof that fact, and his believing to the contrary (LordMansfield in Carrer v. Boehm-1766).
The insured losses the money paid for the premium whenthe insured event does not occur.
The company will be in deficit if claims are higher thanpremium.
In takaful, if any surplus occurs in the pool fund, it isrefundable to those pool members who didnt claim in thatperiod while in conventional insurance, the surplusbecomes the profit of the company.
-
7/28/2019 Takaful Print
36/40
-
7/28/2019 Takaful Print
37/40
INSURANCE MODEL
INVESTMENT INCOME
FUND/POOL CLAIM FUND
CLAIMS
PROFIT OR LOSSPREMIUM
-
7/28/2019 Takaful Print
38/40
TAKAFUL SYSTEM
WAQF FUND INVESTMENTS INCOME
CLAIM FUND
CLAIMS
SURPLUS
OR
DEFICIT
CONTRIBUTIONS
WAQALAFEE
REFUNDABLE( IN
CASE OF SURPLUS)
W k l W f M d l
-
7/28/2019 Takaful Print
39/40
InvestmentIncome
OperationalCost of Takaful/ ReTakaful
Claims &Reserves Surplus
(Profit)
P A R T I C I P A N T S T A K A F U L F U N D (P.T.F.)
MudaribsShare of PTFs
InvestmentIncome
WakalahFee
InvestmentIncome
ManagementExpense ofthe Company
Profit/Loss
S H A R E H O L D E R S F U N D (S.H.F.)
Participant
WAQF
TakafulOperator
ShareHolder
Wakala-Waqf Model
Investment by
the Company
-
7/28/2019 Takaful Print
40/40
Comparing Takaful to Conventional Insurance
Issue Conventional Insurance Takaful
Organization Principle Profit for shareholders Mutual for participants
Basics Risk Transfer Co-operative risk sharing
Value Proposition Profits maximization Affordability and spiritual
specification
Laws Secular / Regulations Sharia plus regulation
Ownership shareholders Participants
Management status Company Management Operator
Form of Contract Contract of Sale Cooperative, Islamic contracts of
Wakala or Mudarbah withTabarru (contributions)
Investments Interest based Sharia complaints, Riba-free
Surplus Shareholders, account Participants, account