Conventional insurance, which is based on an exchange of premium payments now for future indemnities in case of specified events, is not valid under Shari’ah law due to the uncertainty (gharar) of the value of the future indemnities, informs ‘Takaful Islamic Insurance’ (www.wiley.com).
Part of the solution to the juristic problem lies in the adoption of a mutual structure for underwriting insured risks, with the insureds (participants) mutually insuring one another on a non-profit basis according to the principle of takaful (the Arabic word for ‘solidarity’).
Another aspect of the solution – as the authors Simon Archer, Rifaat Ahmed Abdel Karim and Volker Nienhaus outline – consists of characterising the policy contributions (premiums) to the risk fund as incorporating an element of conditional and irrevocable donation (tabarru’), the donor making the contribution to the risk fund subject to being entitled to benefit from mutual protection against insured losses.
However, the adoption of a mutual structure runs into two kinds of institutional obstacles, the authors observe. The first hurdle is the non-acceptance by many countries of mutual or cooperative forms of company without share capital. And the next hurdle, even where such forms of company are accepted for insurance undertakings, is the need to raise enough capital from policyholders to meet the adequacy and solvency norms.
“To surmount these two obstacles, the vast majority of takaful undertakings have a two-tier, hybrid structure in which the risk funds operate on a mutual basis but are managed by a takaful operator, which is a company with shareholders.” The authors note that this hybrid structure involves complexities and raises juristic and legal issues which are yet to be satisfactorily resolved.
The Islamic Financial Services Board (www.ifsb.org) has issued IFSB-8 ‘Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings,’ with the aim of providing benchmarks, addressing regulatory issues such as risk management and financial stability; providing appropriate levels of consumer protection in terms of both risk and disclosure; and supporting the orderly development of the takaful industry in terms of acceptable business and operational models, and the design and marketing of takaful products.
There is also an Exposure Draft, ED11 on ‘Solvency Requirements for Takaful Undertakings,’ which calls for ‘a comprehensive risk management framework and its reporting process, including appropriate board and senior management oversight, to identify, measure, monitor, report and control relevant categories of risks and, where appropriate, to hold adequate capital against material risks.’
The authors foresee that jurisdictions taking the lead in developing an appropriate regulatory and supervisory framework for takaful will reap the benefits by attracting high-quality takaful undertakings, including Shari’ah-compliant subsidiaries of major international insurers and reinsurers. They make a mention of Bahrain, Dubai and Malaysia, as having made important first steps in this direction.