Shari’ah Rulings Governing Re-Takaful Business

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

The challenges posed by both neo-modern and postmodern society and their secular cultures are very far reaching. The impact can be felt in every facet of life be it religious, political, social and economical. Following the rapid and strangulating development of the economy of the super other western powers, the insurance sector inclusive, most developing economies especially in the Muslim world feel a pressing need to re adjust their economies in order to meet up with the rapid development and high rate economic growth taking place in these developing economies. The Muslim world among others is in need of access to large and open markets among the different Muslim countries in order to have a high rate economic growth too.

A survey of recent Muslim scholarship on western theories and epistemologies reveals an attempt to understand western legacy on modern society so as to liberate Muslim societies from secular and foreign control. This is to ensure that political, economic and other preoccupations of Muslims do not become mere distractions of the world from their care and development for the hereafter. Islam is concerned both with material and spiritual advancement. The Islamic worldview can therefore never be compared to any other worldview.

It is against this background that current Muslim scholarship in the field of finance and economics in general should be viewed. It is an attempt at the total Islamization of the banking and financial sector so as to free the Muslim world from the dominant Western civilizational and ideological value-laden economic, financial and banking principles. Presently, most of the Muslim world like third world countries has under-developed economies suffering enormously under the claws and yokes of western economic and financial interest-based system.

One of such key areas of modern financing where the Muslim world need a kind of economic co-operation in order to confront the challenges posed by western interest based financial system is Re-takaful Business which forms the focus of this paper. It is sad that in spite of the abundance of human and natural resources in the Muslim world, the Takaful and Re-takaful Business and the entire Muslim world economic sector can still not compete with conglomerate companies like the American Insurance Group and the likes.

Though the insurance business in principle was accepted by Islam right from the time of the Prophet when he instituted what can be regarded as ma’qil al-ijtima’ or social insurance between the Muhajirun (Muslims who migrated from Mecca) and the Ansar (Muslims who welcomed the emigrants in Medina), yet the insurance business has undergone a lot of developments and innovations since the time of the Prophet.

In view of the Islamic acceptance of insurance in principle as well as the necessity of the insurance scheme in our complex society, there is need to examine for a continuous research into the modern concept of insurance in its entirety so as to bring it in harmony with the rulings and requirements of the Shari’ah. The need to abide by Islamic teachings, guided by Muslim historical heritage and current global insurance and reinsurance indexes cannot be over emphasized. This work therefore is an attempt to examine an aspect of the insurance system in Islam known as the retakaful business.

WHAT IS INSURANCE OR TAKAFUL?

INSURANCE

An insurance policy is basically defined as a written contract between an individual or firm and an insurance company to transfer financial liabilities in the events of some losses to the insurance company in return for a fee.

An insurance company does this as a firm to make profit.

TAKAFUL

This is an Arabic word, from the root kafal, which means to feed, support and provide for someone. It also means to guarantee or sponsor someone. The quadrilateral form, takaful implies a group of people coming together to be jointly responsible for someone or something.It therefore simply means a joint guarantee or a pact among clients who agree to jointly guarantee themselves against loss or damages that may happen to any of them. The basic objective of Takaful is to pay a defined loss from a defined fund made from monthly savings pool together by members of the group to assist the needy ones among them. It is therefore a mutual help and support for members who suffers a catastrophe or disaster that is subject to Islamic contractual law to ensure it is Shari’ah compliance.

FOUNDATION OF TAKAFUL IN ISLAM

In the pre – Islamic Arabia i .e 570 years after Christ (before the advent of Mohammad SAW) there is this kind of fighting competition between the tribes of Arabs which may lead to one fighter from one tribe killing another fighter from the other tribe. Whenever an unintentional killing of this nature occurs, the tribe of the heir that is the killer has to pay a price to the deceased family as Blood money. This money is taken from a pool of money (premium) contributed by each member of the tribe known as Al –aqila to assist the deceased family from financial burden, which might arise due to the loss of their breadwinner. This practice is known as aqila.

Prophet Muhammad (SAW) adopted this method of aqila in one of his judgment when a case of fighting between two women which lead to killing of one who is pregnant due to stone thrown on her stomach by the other woman. The Prophet (SAW) judged that the family of the killer from her father side should pay a certain some in money to the family of the deceased as blood money and free a slave for the death of the fetus in her womb.

TYPES OF TAKAFUL

There is General Takaful and Family Takaful. Under the General Takaful we have the following:

Marine Takaful

Fire “

Accident “

Motor “

A LOOK AT CONVENTIONAL INSURANCE

A casual look at today’s conventional insurance policies leaves no one in doubt that it involves prohibited element hence its not in conformity with some of the rules and requirements of Shari’ah. This is why in 1974; National Religious Council in Malaysia issued a fatwa (Legal opinion) that conventional insurance is null and void in Islam. This led to the introduction of family Takaful in 1985.Three major prohibited elements in the conventional insurance are:

Premiums that are received by conventional insurance company are invested majorly in non-shari’ah compliant shares, bonds, and interest based money and capital market. This is contrary to the teachings of Islam as Allah has permitted in Islam trade and commerce and has prohibited any form of usurious transaction known as Riba. Muslims must therefore shun the conventional insurance industry, as long all the marks of contemporary financial system are basically Riba.

Under the Islamic law of contract, conventional insurance does not fulfill the condition under the mahulul – aqdi that is subject matter of the contract because the client that is the insured is only informed of how much his monthly premium would be but not how much the insurance company would pay him as compensation in case of any loss or disaster. This uncertainty could lead to unfair treatment and injustice to one of the contracting party.

In a like manner, whenever there is breach of “utmost good faith “ on the part of the insured in case he failed to disclose some vital information about the policy to the insurance company, the contract becomes null and void. This is not the case in Islamic Takaful, though the client’s Participant Special Account (Tabarru’ accounts) will not be recognize but is Participant Account (Al murabaha or investment account) shall be recognized. This is the beauty of Islamic Takaful. Islamic law is against all forms of speculative risks though it accepts pure risks. This point is related to the next.

3. Al maysir – Gambling

Some Islamic Scholars believed that since conventional insurance is based on riba and uncertainty, element of gambling arises therein. Their profits or losses arise or accrue from chances and not real work, ‘iwad is thus absent and any profit that accrues from taking chances is gambling which is also haram. For instance, if a life policy holder dies before the period of his policy, his beneficiary shall get part of his premium payment and a certain some in money which hitherto the policy holder was not informed of its source(s).

In Islamic Takaful, the nominee or the beneficiary is not the absolute beneficiary but an executor while in conventional insurance; the insured is the beneficiary and not the insurable interest. This had caused a lot of havoc to some insurable interest when the insured feels he is in need of money and the only solution is to get rid of his insurable interest so as to claim his benefit from the insurer. This is the reason while the beneficiary is not the insured in Islamic Takaful but the insurable interest.

WHAT IS RETAKAFUL

The term Retakaful refers to the Islamic form of reinsurance. The Retakaful business is based on the principles of Takaful in Islam. As stated before Takaful implies a group of people coming together to be jointly responsible for someone or something.ReTakaful therefore means a joint guarantee or pact among clients or cedants who are all the operators of this important work of Takaful based on mutual agreement to jointly indemnify themselves from part of the losses and risks that may happen to any of them. It also may also accrue from the policies they underwrite.

It is therefore an attempt by a group of people who are Takaful operators to pool resources together so as to share among themselves any loss or damage that befalls any of them. The Retakaful business is based on the same human attempt to make provision or protection against any future loss. Just as individuals are motivated to insure themselves with a direct insurer, so also is the insurer also desirous of reinsuring himself against any future loss or damage with a reinsurer. It is this need for reinsurance that brings about Retakaful.

As stated above, the Retakaful business is based on the principles of Takaful in Islam. It can be traced to the early days of Islam when the Prophet himself instituted what can be regarded as ma’qil al-ijtima’ or social insurance between the Muhajirun (Muslims who migrated from Mecca) and the Ansar (Muslims who welcomed the emigrants in Medina). By that act, he laid the foundation of Takaful. This ma’qil al-ijtima’ or the system of ‘aqil is similar to what obtained among the Arabs in the Jahil or pre-Islamic period during which a group of Arabs undertook to alleviate the burden of any member of the group that was liable to pay any form of compensation.

Though the insurance as well as the reinsurance business has undergone a lot of developments and innovations since the time of the Prophet, it can still be brought into harmony with the rulings and requirements of the Shari’ah as explained by Muslim jurists.Unless this harmony is effected, the insurance as well as the reinsurance business will be found wanting in respect of many of its operations in modern society.

NEED FOR RETAKAFUL IN ISLAM

Just as the Prophet recognizedthe need for ma’qil al-ijtima’ or the system of ‘aqil to protect Muslims against any future loss or damage, so also is there the need to protect the operators of this important work of Takaful from part of the losses and risks that may accrue from the policies they underwrite. This will help to spread the losses and risks involved in the Takaful business as well as lighten the financial impact of such risks and losses on Takaful operators and the financial industry at large.

It is clear that no one is immune from losses and damages against property, business venture and even life itself including Takaful operators themselves, hence the need to offer double securities against them. RETAKAFUL is therefore part of the general precautions than can be taken against damages, risks and losses. Islam is not opposed to taking such precautions as long as it does not contradict with any Islamic contractual law.

TAKAFUL AND RE – TAKAFUL OPERATIONS

Mudarabah contract is applied to Takaful and ReTakaful operations as an alternative to interest – based securities in which the conventional insurance investment their surplus funds. This account is referred to as Participant Account (P A). Clients are investors and are referred to as Robbulmal while Takaful operators assume the role of entrepreneur and are referred to as Mudarib. They would invest the pool of funds into Shari’ah compliant investments and specified how the expected profit shall be shared among the clients. Ditto for ReTakaful.

Mutual help among the clients or investors in a Takaful operations is observed through the concept of Tabarru’, which means to donate, contribute or to give away. In Islam, mutual help and co-operation are ethical values that are promoted among the believers. In Surah al-Maidah, Allah commands the believers as follows:

“Help one another in carrying out righteousness and piety, but help not one another in sin and bitterness: Lo! Fear Allah for Allah is very severe and strict in punishment ”

AT TABARRU’

A certain proportion of the client’s installment known as premium is relocated to Tabarru’ Account to repay his fellow participants who suffer from a defined loss. Thus, each client is able to fulfill his obligation of mutual help and joint guarantee. In the same vein, ReTakaful Company requires the Takaful Company to pay a certain percentage of their premium to them, which shall be use in partial coverage of their risk in case the Takaful Company could not cover such risk.

FACULTATIVE

Since ReTakaful Company is jointly sharing the risk that is likely to be faced by any of the Takaful Company there is always a thorough checking on each of the policy before they agree to give coverage. After this examination of the policy has met the necessary requirements, ReTakaful Company then agreed to enter into the contract. At least, 20 % of the Takaful retention that is they set aside as funds for coverage against risk must be transferred to ReTakaful Company according to the minimum requirement of Bank Negara.

TAKAFUL AND RE –TAKAFUL SYSTEM COVERAGE

TAKAFUL OPERATOR PARTICIPANT

REMIUM

PARTICIPANT SPECIAL ACCOUNT PARTICIPANT ACCOUNT

TABARRU’ ACCOUNT AL MUDARABAH INVESTMENT

ACCOUNT

AGENCY MANAGEMENT EXPECTED PROFIT FROM

COMMISSION FEES INVESTMENT

TAKAFUL OPERATORS PSA ACCOUNT

PERCENTAGE PERCENTAGE

20% RETENTION CLAIM INCURED BUT UNEARNED TO RE –TAKAFUL RESERVES NOT REPORTED CONTRIBUTION

SHARI’AH RULINGS AND REQUIREMENTS

In view of the above and the need of the Retakaful business in Islam, it is proposed that the sameShari’ah rulings and requirements governing the Takaful business in Islam should also govern the Retakaful business. Both the Takaful business and the Retakaful business in Islam are in the same business operation, they are both concerned with the management of risks with one insuring against risk and the other reinsuring against it. In line with the resolution of Muslim jurists, Retakaful business should therefore be based on the principle of mutuality and cooperation

Contrary to the conventional contract, the Islamic contract of mutual cooperation will be founded on shared responsibility, charity and indemnity. Islam supports the insurance or Takaful companies coming together to cooperate among themselves for the joint sharing of losses and risks. In conformity with the contract of mutual cooperation, the Takaful companies will help one another with a defined fund from a joint donation or Tabarru’ to pay defined damages and losses based on an agreed scheme.

The Takaful companies and operators so as to eliminate the element of uncertainty in the Re-Takaful business generate the defined fund from joint donations. It will be used to assist any of Takaful companies that requires compensation against loss without obtaining any benefit or gain at the expense of other Takaful operators or companies. It therefore eliminates uncertainty both in the pooling together of joint donation and the compensation of any Takaful operator.

The Re-Takaful business is also based on the Islamic principle of al-mudarabah (Profit/ Sharing). According to this principle Re-Takaful operators serve as the mudarib and accept the premium or in this case the joint donations from the Takaful operators known as ra’s al-mal, which should be, invested in Shari’ah compliant shares, bonds and other money market instruments. The clients, investors and providers of the joint donation, in this case, the Takaful operators are termed the rabbul-Mal. This principle of al-mudarabah (Profit/ Sharing) is applied as an alternative to the interest based reinsurance contract.

Re-Takaful operators assume the role of the entrepreneurs or the mudarib and they must specify in the mudarabah contract how the profits that accrue from the Re-Takaful business investments will be shared. Certain portion of the profits generated from the investments in Shari’ah compliant shares, bonds and other money market instruments can also be accumulated to the defined funds. This relocation will enable the Re-Takaful operators to pay contributors who suffer losses or damages.

In other to protect the smooth running of the Re-Takaful business investments and to ensure that the Shari’ah are always observed, there is need for a Shari’ah board in each Re-Takaful company to monitor its operations. Central banks and the Shari’ah boards or councils can majorly be used to regulate these operations as done in Malaysia.

THE ESTABLISHMENT OF ARIL AS A RETAKAFUL OPERATOR

In 1996, the members of the ASEAN Takaful Group during its second annual meeting in Brunei unanimously agreed on the need to establish a full fledged Re-Takaful entity that would write inward Re-Takaful business from them and whose equity they, would share, that is Takaful Group companies or operators.

The Re-Takaful entity known as ARIL as took off and commenced operation on the 2 nd of September, 1997 with a paid up capital of USD 4 million as an offshore ReTakaful entity in the Labuan Offshore Financial Centre writing both the General ReTakaful and family operations. It was allowed to write inward Re-Takaful business from ASEAN Takaful Group only and may out of necessity obtain outward Re-Takaful support from the conventional reinsurance companies.

ARIL, since inception has been struggling to operate a successful and profitable Re-Takaful business. It writes both the General Re-Takaful business and family ReTakaful business operations. It also serves as the pool manager for the ASEAN Takaful Group (ATG) business, which was introduced in 1995 by members of the ASEAN Takaful Group.

Investments of the various funds of the business are carried out in compliance with the requirements of the ARIL Re-Takaful business’s Shari’ah Supervisory Council. It invests only through the Shari’ah approved banks and by so doing, using only financing instruments approved by its Sh’ariah Supervisory Council. Its operating expenses are sourced only from the Shareholders funds and it recognizes income on cash basis.

As the pool manager for the ASEAN Takaful Group, all ATG business pool is shared at a rate of sharing agreed upon by all members between the cedants and ARIL using the principle of al-mudarabah. All forms of claims and liabilities are based on an accrual basis.

It is clear the ARIL Re-Takaful business operations have so far worked well for the mutual benefits of ARIL and the ASEAN Takaful Group its cedants. The company operations have great prospects for future growth and it has been able to generate a moderate and reasonable rate of returns on the investments of its shareholders in Halal and Shari’ah compliant businesses. It has been generating profits from mainly underwriting surplus from the General Re-Takaful business, and family Re-Takaful business operations as well as investments returns.

At the same time, the services of the Re-Takaful business operations can still be improved upon. Generally speaking, the Muslim Ummah still lacks Takaful and Re-Takaful business expertise. It is true that are many Muslim scholars today who specialize in the conventional insurance and reinsurance business just as there are many Muslim specialists in the Shari’ah principles. Yet only very few Muslims posses or combine both the technical expertise of the conventional insurance and reinsurance business and the Shari’ah together. The world is witnessing an ever increasing and fast growth in the insurance and reinsurance business so much that the Ummah’s Takaful and Re-Takaful industry will be adversely affected if not completely swallowed up or taken over by big conventional insurance and reinsurance conglomerates if its policies are not seriously and continuously reviewed.

Similarly, the Muslim populace in all the Muslim countries must be mobilized and educated to participate heavily in the Takaful and Re-Takaful industry. For instance all the OIC countries should ensure strong capital based Takaful business in their countries. By so doing the capital based of the Re-Takaful business will be increased and capitalized at least to move close if not up to the assets of the conventional reinsurance industry. This is the only means to protect the Takaful and Re-Takaful industry from being mere pawns in hands of the conventional insurance and reinsurance conglomerates.

CONCLUSION

The challenges posed by modernity and its secular culture to Islam in general and financing and economic aspects in particular and the implications in the Muslim world have been discussed extensively in this paper. There is a wide dichotomy for instance between the Islamic concept of the insurance and reinsurance known as Takaful and Re-Takaful business or industry and the western or conventional insurance and reinsurance industry. There is a total disparity in the Islamic principles that govern any Takaful and Re-Takaful contract and the principles of contract in western or conventional insurance and reinsurance.

While the Islamic principles are based on divine and ethical values, the western or conventional principles are based on human-made or mere normative values. This accounts for the way the two industries generate funds, control and utilize the funds. It also reveals the manner in which the two systems the issue of surplus profits such as its ownership and application. For the Takaful and Re-Takaful business or industry, there is an interest-free financing, profit and risk sharing rates and avoidance of speculative risks.