Ali Arsalan

7/31/2019 Ali Arsalan

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What is Insurance

Insurance, in law and economics, is a form of riskmanagement primarily used to hedge against the risk of acontingent loss.

Definition

Insurance is defined as the equitable transfer of the risk of

a loss from one entity to another in exchange for apremium.


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To illustrate the importance of thisrelationship in a life of a Muslim, Islam callsfor the protection of certain basic rights,viz.: -

The right to protect the Religion.The right to protect the life.

The right to protect dignity/honor.The right to protect the property.The right to protect the mind.


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Islamic Insurance

Ibn Abidin (1784-1836) was the first scholar in the Muslimworld to discuss the meaning and legal character ofinsurance Islamicity of insurance has been underdiscussion since then. Opinions regarding legitimacy,adoption, and adaptability of insurance are numerous.Recently, however, a consensus was emerging foradapting insurance in the name of Takaful and solidarity.

As a result, several Islamic Takaful and solidaritycompanies have been established since 1979.


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Takaful

Takaful (an Arabic word meaning guaranteeing each other) is a

shariah compliance mutual risk transfer arrangement which involvesparticipants and operators. Shariah is based on the Quran andAssunah. Takaful as a concept that some extent is similar toconventional mutual risk sharing such as Mutual Insurance andProtection and Indemnity Club ( P and I Club ). It is a mutual sharing

of risk based on the concept of Taawun (Mutual Protection).

The difference between Takaful and conventional insurance rests inthe way the risk is assessed and handled, as well as how the Takafulfund is managed. Further differences are also present in therelationship between the operator (under conventional insuranceusing the term: insurer) and the participants (under conventional it isthe insured or the assured. In risk assessment (underwriting) andhandling, Takaful do not allow what is called Gharar (uncertainty orspeculation) and Maisir (i.e. gambling). In investment or fundmanagement Riba (i.e. usury) is also not allowed.


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A prime purpose of Takaful system and its products is tostrike the right chord with Muslim customers who may find

conventional products unacceptable and buy themreluctantly. The takaful system and product may beappealing to them.

The global takaful premium was US$ 1.3 bn. in 2002,

although this excludes premium in Iran. Including Iran, thefigure was US$ 2.1 bn. It is estimated that about 40% ofglobal of global takaful business relates to family takaful. In2002 there were an estimated 41 companies offering

Islamic Insurance (either as takaful companies or throughIslamic windows) in some 23 countries around the world.The number of takaful companies more than doubled to 87companies in just four years (by mid 2006) across 29countries.


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Problems With the System

There are several challenges facing the life insuranceindustry right now. The industry is facing decreasingrevenues, less training for agents, and an increasingaverage age of agents.

Because life insurance costs are, among otherconsiderations, based on the average number of deathbenefits expected to be paid, the multi-decade increase

in aging baby boomer population has made costs arecontinuing to rise.


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The biggest affect consumers will feel from the challenges faced by theinsurance industry is increasing costs for life insurance. Some analystspredict that life insurance premiums will increase 50-100% over the nextseveral years; other, more pessimistic analysts expect the increases tobe closer to 300%. The best way for you to protect yourself from risingcosts is to buy soon.

In addition to increasing costs, consumers will also suffer from servicecutbacks. Not only is it possible that your local office could close, forcingyou to seek an agent elsewhere, but it will also take longer to processclaims. Customer service levels will most likely suffer as companies are

forced to adjust their operations to deal with skyrocketing costs.Unfortunately, already under-trained agents will receive little, if anysupport, so the risk of being sold a product without the agent fullyunderstanding what he or she is selling is more likely.


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Solutions

Education and awareness

Is it because of Shariah issues? Or is it due to the factthat as a nation, Pakistanis are conservative spenders?Given the low GDP per capita, spending on something

additional with uncertain benefits is not easy. Or perhapsit is because Pakistanis do not know the benefits of usingthese tools and that little effort has been made to educatethe masses about this aspect of the financial industry. Itwould be safe to assume that the answer consists of acombination of the above elements. In order to deal withthe issues, significant investments will be required toreach out to the public and educate them.


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Ambiguity in regulatory statutes

Given how recently the rules wereformulated by the Securities and ExchangeCommission, a lot of aspects need clarity.


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Thin margins

Unlike the insurance companies, the Takaful operators primarysource of revenue is the Wakala fee. This has relatively littleroom to maneuver and so they will need to work very hard toensure that their operations are not just effective but also lean.Thus we see that the challenges are not small by any measure

but they can definitely be overcome. If the present and futureTakaful operators are not just looking at going after thoseindividuals who are religion-centric, they need to look atpositioning their offerings in a slightly different manner. The keyselling proposition would have to be that Takaful products should

be based on the following variables: need-based, appropriatepricing and immaculate customer service. An additional featurewould be that the products are Shariah compliant and so,customers need not compromise on their beliefs to be able to getthe best in financial protection.


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Conclusion

Effectively dealing with the

challenges present and properlypositioning their offering willallow Takaful operators to

achieve levels that even existinginsurance companies have thusfar been unable to reach..


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THANKS FORYOUR KINDATTENTION

Ali Arsalan

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