topic 1:Development & prospect of takaful industry

PP1 3153
PENGURUSAN
PEMBANGUNAN TAKAFUL

TOPIC 1:
DEVELOPMENTS AND PROSPECTS

OF THE TAKAFUL INDUSTRY





WHAT IS TAKAFUL?

• Takaful, or Islamic insurance, is a cooperative scheme, where in
which the participants pay a premium in the form of donation or
tabarru‟ in a common pool in return for the ability to draw upon that
pool upon a valid claim.

• Takaful is a promise between members of a group whereby the
members firstly agree to establish a mutual fund and donate money
into the fund, and secondly to provide a joint guarantee or protection
among themselves against defined loss and/or damage.
Consequently, if any member of the group suffers any of the defined
loss and/or damage the member would receive compensation usually
in the form of money or benefits drawn from the mutual fund.

• The word takaful originates from the Arabic world kafalah, which
means "guaranteeing each other" or "joint-guarantee."

Definition

• The Islamic Financial Services Act 2013 definition:

“takaful” means an arrangement based on
mutual assistance under which takaful
participants agree to contribute to a common
fund providing for mutual financial benefits
payable to the takaful participants or their
beneficiaries on the occurrence of pre-agreed
events;

Definition

• The AAOIFI definition is as follows:

“Islamic insurance is a system through which the
participants donate part or all of their
contributions which are used to pay claims for
damages suffered by some of the participants.”

Definition

• Section 2 of Act 312, Takaful Act 1984 (Takaful Act, 1984),
interprets takaful and takaful business respectively as;

„takaful is a scheme based on brotherhood, solidarity, and
mutual assistance which provides for mutual financial aid
and assistance to the participants in case of need
whereby the participants mutually agree to contribute for
that purpose.‟

„takaful business is a business of takaful whose aims and
operation do not involve any element which is not
approved by Shariah.‟

Insurance

• An arrangement by which a company or
the state undertakes to provide a
guarantee of compensation for specified
loss, damage, illness, or death in return
for payment of a specified premium.

Reference: Al-Quran

• „… and co-operate you one another in righteousness and
piety…‟ (Qur‟an, Al-Maida: 2).

• The principles that make takaful Shariah compliant are; (i)
tabarru‟ (donation), and (ii) ta‟awun (mutual co-operation).

• The tabarru‟ from the takaful participants represents
donation to the mutual fund and ta‟awun when the group
utilizes the mutual fund to compensate members in need.

Reference:Hadith

• “tie the camel first, then submit (tawakkal) to the will of
Allah”

• The hadith implied a strategy to mitigate/reduce risk.
• Takaful provides a strategy of mitigation/reduction by

virtue of collective risk taking that distributes risks and
losses to large numbers of participant. This mitigates the
otherwise very damaging losses, if borne individually.

The evolution of Takaful theory

• The origins of the concept of Islamic insurance are traced
back to the second century of the Islamic era, when
Muslim Arabs started to expand their trade to India, the far
east, and other countries in Asia. The foundation of this
insurance was laid down in the system of Aqilah.

• Development of the Aqilah concept, in turn, goes back to
the tradition of blood money or Diyat and financial
compensation for bodily injury called Arsh; which predates
Islam. The concept was endorsed by Muslims after the
Prophet Muhammad used it in a verdict to solve a tribal
dispute.

• In later centuries, Muslims from the Ottoman Empire used
similar mutual help or indemnification practices in their
trade relationships with Spanish merchants.

The evolution of Takaful theory

• Modern insurance began in the late 17th century when the
first fire insurance company was established in England
following the Great Fire of London.

• The development of insurance institutions in the 18th
century was spurred by the advances in mathematical
theories upon which the practical models of insurance are
based. The leading insurance companies of the West
began to offer their services on Ottoman soil in the 19th
century, where Muslims utilized them in their trade
relationships with Europe.

The evolution of Takaful theory

• Some Muslim scholars held the view that the recognition of
insurance was inevitable in the modern world (Bekkin, 2007).

• Others had serious reservations regarding the morality of the
practice but could not think of any alternatives to suggest to their
fellow Muslims.

• As a result, for more than a century, Muslim businessmen used
Western conventional contracts to manage their risks (Abdel
Karim & Archer, 2002).

• This state of affairs created a stigma for concerned Muslim
intellectuals and scholars, urging them to search their past
critically to find alternative products which were more compatible
with Islamic financial principles.

• The Takaful contract was born later out of this necessity.

Takaful Milestones

Milestones of takaful Early Islamic
history
Prophet Muhammad s.a.w validated a system of community self help and
financial assistance, later institutionalised by Caliph Umar al-Khattab 12th Century

Seljuk Sultan Ghiyas al-Din Khusraw introduced a form of state insurance 17th Century
reimbursing traders if their merchandise were stolen or robbed within the
Seljuk state of Anatolia

Ibn Abidin, a Hanafite jurist allowed a form of insurance for marine venture

Fatwa of Sheikh Muhammad Abduh legalising insurance 18th Century

Fatwa issued by National Fatwa Council of Malaysia 1972

Resolution by First International Conference on Islamic Economics held in 1976
Makkah 1979

Incorporation of the first modern Takaful Company in Sudan

Establishment of The Islamic Arab Insurance Company in Saudi Arabia 1979 – 80

Takaful Milestones 1983

Milestones of takaful

Establishment of Islamic Takaful Company in Luxembourg

Establishment of Islamic Insurance and Reinsurance Company (IIRCO), 1983
Saudi Arabia 1984
1985
Takaful Act 1984, a legislative framework for Takaful business in Malaysia,
the first stand-alone Act in the world dedicated to takaful operation

Establishment of Syarikat Takaful Malaysia Sendirian Berhad

The Asean Takaful Group was established, being the first grouping of 1996
takaful operators in the world, later transformed into Global Takaful Group 1997
to include takaful operators globally

Establishment of Asean Retakaful International (L) Ltd (ARIL)

The Islamic Financial Services Act (IFSA 2013) of Malaysia was passed, 2013
repealing and replacing the Takaful Act 1984

The development of Takaful in Malaysia

• The development of the Takaful industry in Malaysia in the early
1980‟s was inspired by the needs of the Muslims in Malaysia for
a Shari‟ah-compliant alternative to conventional insurance due to
some prohibitions in Islam regarding the conventional insurance.

• The Malaysian National fatwa committee issued that
conventional insurance is haram due to the presence of the
elements of gharar (uncertainty), riba (interest), and maysir
(gambling).

• The Takaful industry in Malaysia started to gain momentum
when, in October 1982, the Malaysian government formed a
special task force to explore the viability of setting up an Islamic
insurance company.

• Pursuant to the National Fatwa Committee of the Malaysian
Islamic Affairs Council‟s declaration in 1972 that the
conventional insurance is not in compliance with the Shariah Act
312 [8], Takaful Act 1984 was enacted.

The development of Takaful in Malaysia

• In more than thirty years, Takaful industry in Malaysia has
experienced rapid growth and transformation.

• From a single player with limited products to becoming an
industry which has several players inside.

• The successful of Takaful industry in Malaysia could be
achieved by the support from the Malaysia's government
by publishing guidelines for international Takaful
Operators (ITOs) in late 2006.

• The development of Takaful industry can be seen through
several phases.

• In the early 1980‟s, which was the birth of Takaful
company in Malaysia, it was focusing on the
establishment of the basic infrastructure for the industry. I

• n the early 1990‟s, several companies of Takaful in
Malaysia was emerging which can be marked as the
introduction of the competition and cooperation among
other Takaful operators.

• Furthermore, in the early 2000s, began the introduction of
the financial sector master plan (FSMP) in 2001 which,
among other objectives, is to enhance the capacity of the
Takaful operators and strengthen the legal, Shari‟ah and
regulatory framework.

The Chronology of Events of the Malaysia Takaful Industry

Dates Events
October 1982 Setting up of special Task Force to explore the viability of setting up
an Islamicinsurance company.
November 1984 Incorporation of Syarikat TakafulMalaysiaSdn. Bhd. (STMB).
December 1984 Takaful Act 1984 gazette.
STMB commenced operations.
August 1985 Bank Negara Malaysia entrusted with the regulatory and supervisory
May 1988 role over the insurance and Takaful industries.
MNI Takaful Sdn. Bhd. commenced operations.
October 1993 Setting up of ASEAN Takaful Group.
October 1995 Incorporation of ASEAN ReTakaful International (L) Ltd. in the
international offshore Financial Centre, Labuan
May 1997 MNI Takaful changed its name to Takaful Nasional Sdn. Berhad.
Establishment of Islamic banking and Finance Institute Malaysia.
November 1998
February 2001

Dates Events
July 2002
July 2003 Establishment of the Malaysian Takaful Association (MTA).
November 2004
July 2003 Takaful Ikhlas Sdn. Bhd commenced operations.
2005 – 2007
Approval in principal granted to commerce Asset Holding to conduct
2008 – 2010 Takaful business

2011 Start of operational Takaful licenses - Sun Life Malaysia Takaful,
2012 HSBC Amanah Takaful, MAA Takaful, Hong Leong, MSIG Takaful,
Prudential, BSN Takaful
2013
2014 Establishment of four Retakaful operators: ACR RetakafulBhd, MNRB,
2015 RetakafulBhd, Munich Re, RetakafulBhd, Swiss Re, Retakaful Bhd.

BNM unveiled Financial Sector Blueprint 2011-2020.

Enforcement of Takaful Operational Framework and the revised
Shariah Governance Framework

The new Islamic Financial Services Act 2013

Enforcement of Risk-based Capital for Takaful

Internal Capital Adequacy Assessment Process (ICAAP) for Takaful
operators

Source: (Malaysian Takaful Dynamics , 2015)

Licensed takaful operators in Malaysia

NO TAKAFUL OPERATOR Year formed
1 Syarikat Takaful Malaysia Berhad
2 Takaful Ikhlas Sdn Bhd 1984
3 Prudential BSN Takaful Berhad
4 HSBC Amanah Takaful (M) Sdn Bhd 2002
5 Hong Leong Tokio Marine Takaful Berhad
6 Hong Leong MSIG Takaful Berhad 2006
7 MAA Takaful Berhad
8 Sun Life Malaysia Takaful Berhad 2006

9 Etiqa Takaful Berhad 2006

10 AIA PUBLIC Takaful Bhd 2006
11 Great Eastern Takaful Berhad
2006

Formerly known as CIMB Aviva
Takaful Berhad; incorporated in
January 2013

Formerly Takaful Nasional Sdn
Bhd, assumed new name in
2007

2011

2010