An introduction to Takaful - Islamic insurance

The term (re)Takaful applies to (re)insurance business that is conducted in accordance with Islamic (Shariah) principles. Islamic insurance has become a prominent, viable and appealing alternative to conventional insurance throughout the Muslim world over the last decade as increased importance is attributed to establishing financial systems compatible with Islamic teaching and cultural identity. And the rate of growth, in terms of the number of participants (insureds), the number of (Re)Takaful operators (insurers and reinsurers) and the overall contributions (premium) generated, is considerably greater than in the "conventional" insurance market.

The objective of conventional and Islamic insurance is the same - they both aim to protect an individual/business from unforeseen circumstances. The fundamental difference between Islamic and conventional insurance is that conventional insurance aims to transfer risks, whereas Islamic insurance shares risks*. The main driver behind this approach is to remove two out of three fundamental components of conventional insurance which contravene Shariah principles. These are uncertainty (Gharar) and gambling (Maysir).

Firstly, Islamic insurance aims to remove uncertainty from the policyholder by adopting a mutual concept of insurance. In conventional insurance, if no claim is made on the policy, the insurance company retains all profits whereas the policyholder does not get any return. By adopting a mutual concept, Islamic insurance aims to remove excessive uncertainty by returning some profits to the original policyholder. Secondly, to remove the risk of gambling, the mutual concept reduces an individual's incentive to make large returns at the expense of others.

The third component of conventional insurance which contravenes Shariah principles is interest/usury (Riba). All Islamic insurance operators must keep contributions (premiums) and underwriting funds in non-interest bearing accounts. This removes the risk that an Islamic insurance operator will gain at the expense of others**.

Who can buy Islamic insurance?

Islamic insurance is not only aimed at Muslims or Islamic businesses - it can be purchased by anyone as long as their business does not contravene Shariah principles (e.g. alcohol production, pork farming or casinos).

What are the benefits?

Conventional and Islamic insurance are both risk mitigation tools that aim to remove risks from businesses. Barring any non-Shariah compliant risk exposures, both conventional and Islamic insurance provide the same coverage to clients. Islamic insurance offers the client an opportunity to make a financial return if, at the end of the underwriting year, there is a surplus in the contribution (premium) fund.

How is it relevant to your business?

The global (re)insurance community is starting to take greater notice of Islamic insurance. Interest and take up by insurers is growing as governments look to foster financial systems that adhere to Islamic teaching and cultural identity. In an ever changing world, global (re)insurers must remain relevant by finding innovative ways to cater for their clients' demands. Islamic insurance is a demonstration of how our industry can help mitigate risks across different geographies and communities

Cameron Murray is head of Middle East and Africa, Lloyd's

*KPMG

**islamicbanking.com