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    TAKAFUL

    LECTURES

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    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

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    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.

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    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/-

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    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.

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    Types of Insurance

    There are three broad classes of Insurance :

    1. Life Insurance

    2. Non Life ( General ) Insurance

    3. Health Insurance

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    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

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    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.

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    Types of Non Life (General) Insurance

    Fire Insurance

    Marine Insurance

    Aviation Insurance

    Motor Insurance

    Engineering Insurance

    Miscellaneous Insurance

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    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.

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    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.

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    Pakistan Insurance Market

    ClassNo. of

    Companies

    Premium

    (in Billions)

    Life & Health 6 14.6

    Non Life 50 16.8

    Total 56 31.4

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    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.

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    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

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    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.

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    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

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    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.

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    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

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    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.

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    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.

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    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.

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    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.

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    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.

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    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

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    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)

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    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.

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    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.

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    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.

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    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)

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    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.

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    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.

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    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.

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    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

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    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.

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    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.

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    INSURANCE MODEL

    INVESTMENT INCOME

    FUND/POOL CLAIM FUND

    CLAIMS

    PROFIT OR LOSSPREMIUM

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    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

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    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

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    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