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DAWN

January 23, 2009

Growth of Islamic insurance

By Syed Imad-ud-Din Asad

INSURANCE is a risk-transferring arrangement between two parties: one party agrees, in

exchange for a fee or premium, to indemnify the other against a specified loss. It is a device by
which individuals and organisations shift the burden of a potential hazard to others.

Many Muslim scholars are against conventional insurance as they see elements of maisir, gharar
and riba in it. According to them, Islamic law allows insurance when it is undertaken in the form
of takaful, which is an arrangement based on the principles of cooperation, shared responsibility
and reciprocal indemnification. It is not a transaction in which one party buys protection from the
other.

Takaful is an agreement by a group of people to shield each other from a specified potential loss
or damage through the setting up of a defined pool of money. Any member of the group who
suffers such a loss is compensated in the form of monetary help from the common fund. Also,
money from the common fund can be invested in shariah-approved avenues. This is one of the
main differences between takaful and conventional insurance. This way income can be generated
resulting in the growth of the fund.

It must be mentioned that takaful, as it is based on the notions of mutual help and social
solidarity, is originally seen as a non-profit activity. However, there is no harm in undertaking it
as a commercial venture. There are different models of takaful in vogue. These include tabarru-
based takaful, mudaraba-based takaful and wakala-based takaful. Similarly, there is a wide range
of takaful products available for individuals and organisations. For example, personal takaful,
group takaful, motor takaful, fire takaful, workmen’s compensation takaful, public liability
takaful, etc.

Just like there is reinsurance in the world of conventional insurance, there is re-takaful in the
world of takaful. It involves another arrangement between a takaful operator and a larger
operator where the former is financially incapable of compensating for all possible losses out of
his/her own resources.

The modern takaful industry started in Sudan in 1979 with the establishment of The Islamic
Insurance Company. It was followed by Saudi Arabia where The Islamic-Arab Insurance
Company was set up in the same year. Today, there are takaful operators in more than twenty
countries.

In 2002, the global takaful market was estimated at $2.1 billion of premiums. It is estimated to
increase to premiums of $12.5 billion by 2015. In fact, despite the global financial turmoil, the
Middle Eastern insurance market is expanding. In 2006, as reported by Swiss Re, the market
generated $6.9 billion in premium income. And, according to Standard & Poor’s, the United
Arab Emirates and Saudi Arabia are showing the fastest growth, i.e., 20-25 per cent per annum.
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The amazing growth in takaful has convinced some of the big conventional insurance and
reinsurance providers – AIG, Allianz, Swiss Re, Munich Re, Hannover Re, etc – to start takaful
and re-takaful operations. There are over $1,000 billion worth of infrastructure projects planned
in the Gulf over the next decade. Majority of these projects will be seeking shariah-compliant
funding. This also means a huge need for Shariah-compliant insurance and reinsurance.

Also, there is a potential for takaful in countries and regions having Muslim minorities. For
instance, there are about 20 million Muslims in Europe. Offering takaful to them would be a
substantial market in itself. However, it must be mentioned that it would be wrong to consider
takaful operations as a mature industry just yet. It is still evolving.

For instance, there is no uniform set of rules governing the various procedures, products and
structures. Consequently, there is often a conflict regarding different practices. The most obvious
example is the difference between Malaysia and the GCC. The Malaysian scholars give a more
liberal interpretation to Islamic provisions which is not favoured by scholars in the Gulf. Also,
there is a shortage of professionals equally qualified in conventional insurance and in shariah.

To summarise, while the Quran and the Sunnah enjoin the believers to accept any misfortune that
befalls them as the will of God, Islam also strongly instructs Muslims to take all possible
measures to keep themselves safe from unfortunate events. Takaful reduces the risk of loss
suffered in adverse circumstances.

The writer is a graduate of Harvard Law School, specialising in Islamic finance.

syed_asad@post.harvard.edu

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