P. Ahmed CEO Pak-Qatar Family Takaful Limited 9 th August, 2011, Karachi T A K A F U L Principles and Practices

Flow of Presentation  Risk Mitigation from Shariah’s Perspective  Origin & Development of Takaful Worldwide & in Pakista  Concept of Takaful and Operational Model  The Practice of Takaful  Regulatory Framework in Pakistan

Risk Mitigation from Shariah’s Perspective Is the concept of risk mitigation permissible in Islam? This very concept is not only permissible in Islam but is in fact encouraged What are the available risk mitigation tools? A concept misunderstood as against Tawakul. Avoid using Risk Mitigation Tools Funds may not be sufficient to compensate for losses. Self-Insurance or setting aside contingency money for the rainy day A commercially viable system thatcontains the element of Riba, Gharar, and Qimar/Maysir Conventional Insurance A Shariah compiant, commercially viable system. Takaful

Risk Mitigation in Islam Islamic history is replete with examples featuring risk mitigation activities: Hadith: “Tie the Camel and then Submit to the Will of Allah” Dhaman Khatr al- Tareeq: A person would undertake another person’s risks without any consideration/fee in return Dhaman Al-d’ark: A person would influence a sale by promising to compensate for the loss if the subject-matter proved faulty ’Aqila: A risk sharing mechanism in which community members pooled their share of Diyat (blood money)

Shariah’s Ruling on Conventional Insurance Concept of Insurance? Process of Insurance? ? Shariah has no objections as to the concept or objectives of insurance, but has reservations with the way it is carried out i.e. the process of insurance

Conventional Insurance- Shariah Objections  Conventional Insurance is a risk transfer mechanism which is achieved through a compensatory contract for a consideration (premium).  In the opinion of scholars, the presence of following three elements makes Conventional Insurance non-Shariah compliant.  Gharrar ( Uncertainty)  Riba (Interest) &  Qimar ( Gambling)

What is Allowed?  Risk Sharing between Participants  Basis of Contract: Taburru i.e. unilateral, non-commutative.  Takaful Operator has no ownership claim on contributions paid by participants.  Participants lose ownership rights once contributions are paid as Taburru’.  Contributions becomes property of the Waqf.  Waqf is owned by Allah Almighty What is not Allowed?  Risk Transfer Against Fixed Consideration (premiums)  Basis of Contract: Muawaza i.e. bi-lateral sales and purchase.  Reason: Such a contract involves Riba, Gharar, & Qimar/Maysir

Origin of Modern Takaful  After decolonization, Muslims all over the world started pressing for socio-economic, political and legal systems which were attuned to their world-view and belief system.  As a result, development of Islamic Banking started in 1970s.  First Islamic Commercial Bank, ‘Dubai Islamic Bank’, was established in  There was a legal requirement that underlying assets financed by Islamic Banks need to be insured e.g. Car Ijarah.  Islamic Banks could not avail insurance servives from conventional insurance companies as that would be defeating the very purpose.  As Islamic Banking industry grew, the need for Takaful further increased.  The First Takaful company was established in Sudan in 1979, four years after the establishment of the first Islamic Bank.

Need for Takaful was felt after the development of Islamic Banking 1975 First Islamic Bank 1979 First Takaful Co.

Development of Takaful Industry

Global Takaful Contributions Global gross takaful contributions continue to post healthy growth, reaching US$ 5.3 billion in 2008 Global Gross Takaful Contributions (US$m) CAGR ( ) = 39% 1,988 5, , , , CAGR Levant 18% Indian Sub-135% Continent Africa 1, ,239 3,742 2,846 2,089 South-East Asia GCC 18% 28% 45% (e) Iran - Gross Contributions by Year (US$m) 2,164 2,5612,8963,415 4,096 17% Notes: Iran’s financial services sector is entirely Islamic and as such, has been shown separately from the global analysis. Saudi Arabia requires that all insurance companies operate under a cooperative business model, which is a key feature of takaful. As such, Saudi Arabia has been included in the global analysis. However, not all cooperatives in Saudi Arabia operate fully as takaful companies. Data from the World Islamic Insurance Directory has been cross referenced with published national statistics for takaful where available. Consolidated data was available for Bahrain, Malaysia, Pakistan and Saudi Arabia. For these countries, the 2008 data was found to be within a margin of error of 5%. Numbers may not total correctly due to rounding. Source: World Islamic Insurance Directory 2010 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis 31

(apprx.) (USD) BILLION >135 # of Takaful Operators in 2009 Approx. 36 Window Operators 5 Pakistani Operators > 20 Re-Takaful Operators Global Market Size E&Y Worldwide Takaful Developments & Growth

Re-Takaful Worldwide  Islamic Takaful & Retakaful Co. (IRTCo.) (Bahamas)  Munich Re Re-Takaful (Malaysia)  Hannover ReTakaful B.S.C. © (Bahrain)  Best Re ( Malaysia)  Solidarity Islamic Takaful & Retakaful Co. (Bahrain)  PT Reassuransi Internasional Indonesia (Indonesia)  Amin Reinsurance Company (Iran)  Al Fejr Retakaful Insurance Co. (Kuwait)  Asean Re-Takaful International (Malaysia)  MNRB Retakaful Berhad (Malaysia)  Islamic Takaful & Re-takaful Co. (Saudi Arabia)  Islamic Takaful and Re-Takaful Co. (ITRCo.) (Saudi Arabia)  Tokio Marine Nichido Retakaful Pte Ltd (Singapore)  National Re-insurance Co. (NRICo.) (Sudan)  Sheikhan Insurance & Reinsurance (Sudan)  Sudanese Insurance & Reinsurance Co (Sudan)  BEIT Iaadat Ettamine Tounsi Saoudi Re-insurance (B.E.S.T. Re) (Tunisia)  ACR ReTakaful Holdings Limited (UAE)  Dubai Islamic Insurance & reinsurance Co. (UAE)  Takaful Re Limited (UAE) Source: ICMIF Takaful, > 20 Re-Takaful Operators w orldwide

Insurance Ordinance is issued which includes provision for Takaful; the word “Takaful” is used 2002 IJTIMA’ held in Darul Uloom, Karachi on permissibility of Takaful 2003 A committee to frame Takaful rules was founded 2004 SECP notifies Takaful Rules 2005 First General Takaful Company established ( Pak-Kuwait General Takaful ) 2006 First Family Takaful Company established (Pak-Qatar Family Takaful) First Takaful Group catering both Family (Life) and General Takaful needs established (Pak- Qatar Takaful Group) 2007 Total 5 Operators: 3 for General Takaful & 2 for Family Takaful, since the promulgation of Takaful Rules in 2005 History of Takaful in Pakistan

Definition of Takaful Takaful is an Arabic word, meaning “Mutual Guarantee" It is a system of Islamic Insurance based on the principle of ta’awwun (mutual assistance) and tabarru’ (gifts, give-aways, donations) where the risk is shared collectively by the group voluntarily. This is a pact among a group of members who agree to jointly guarantee each other against losses and damages to any of them as defined in the pact.

Takaful Arrangements can be broadly divided into the following two categories Family Takaful covers all risks associated with human life, like - death, - disability and illnesses, -short-term and long-term investment needs, etc. General Takaful covers physical assets, like - house, - marine, - motor, - Engineering and Misc.

Three Operational Models Pure Mudarbah Practiced in earlier eras, this model is not in vogue anymore. Pure Wakalah This model in not widely practiced. Hybrid – Wakalah + Mudarbah This is the most prevalent model. Hybrid- Wakalah+ Mudarbah+ Waqf This model was suggested by Shariah Scholars in Pakistan.

Wakalah Model  Wakalah denotes the contract between Principal and Agent.  Cooperative risk-sharing occurs among participants whereas the Takaful Operator earns a fee for services (as a Wakeel or Agent).  The Operator earns an upfront deductible fee and shares the profit of investments, without sharing in the results of underwriting. In certain territories, however, Operators can share in surplus as an incentive for prudent underwriting.

Wakalah Waqf  Waqf is a legal entity created for charitable purposes, recognized by Shariah as distinct from other persons/entities.  To resolve ownership and other Shariah issues, Waqf was introduced as a legal entity which could own funds and enter into legal contracts.  A Waqf Fund is established by shareholders of the Takaful Operator by contributing ‘Ceding Amount’ (part of the Capital) to compensate beneficiaries and participants of the Takaful scheme. The ceding amount remains invested.  By signing the proposal form, contributing to the Waqf and subscribing to policy documents, any persoin can become a member of the Waqf fund.

Functioning of Waqf  The Waqf fund shall work to achieve the following objectives: a.To extend financial assistance to its members in the event of losses; b.To extend benefits to its members strictly in accordance with the Waqf Deed; and c.To donate to charities approved by the Shariah Supervisory Board, etc.

Functioning of Waqf  The Waqf Fund lays down the rules for distribution of its funds to beneficiaries and decides how much compensation should be given to a subscriber/member.  The Waqf becomes owner of all contributions and has the right to act as a legal entity as per its terms for investment, compensations and dealing with surplus amounts.  The Takaful Operator, while managing the Waqf Fund, plays two different roles simultaneously: a.Operator/Manager b.Mudarib

Functioning of Waqf  As Operator/Manager, the Takaful Company performs all functions necessary for the operations of the Waqf against a Wakala fee to be deducted from the contributions of Participants.  As Mudarib of the fund, the Takaful Company manages the investment of excess funds of the Waqf into Shariah compliant investment avenues, and has a right to the profit of the fund’s investments at a fixed ratio.  As per Waqf Rules, in the case of the fund being liquidated, the outstanding balance is utilized for charitable purposes after paying all dues and payables.

Some terminologies Contribution in place of Premium Participant in place of policyholder/insured Membership in place of Policy  Benefits in place of claims  Re-Takaful in place of Re-insurance  Takaful Contribution in place of Risk Chagre  Surplus in place of Underwriting Surplus

How does it Function? Waqf Pool Wakala h Takaful Operator Investment Participan t Waqf Pool Risk sharing Between Participants Wakalah Surplus Wakalah Fee, Claims, Re-Takaful

Participant’s Investment Account (PIA) Waqf Fund Operator / Wakeel Participant Contributions Profits from Investment Wakalee Fee(s) for Investment Management Contributions for Takaful Benefit Payment of Claims Surplus Distribution (if any) Wakala Fee for Operating Waqf Fund How does it Function? Family Takaful

Takaful Funds I ncome and expenses of shareholders are managed. Shareholder’s Fund Income and expenses of Tabarru’/Waqf pool are managed. Participant Takaful Fund Participants’ investments are managed. This fund is only required in Family Takaful companies. Participant Investment Fund

Participant Takaful Fund (PTF) - Income Income of PTF consists of following  Contributions received from participants (other than the portion transferred to PIA under Family Takaful Policies)  Claims amounts and commissions received from sRe-Takaful operators  Investment profit attributable to participants in the PTF  Salvage/Recoveries  Qard-e-Hasana by the shareholder fund in case of a deficit  Any donation made by shareholders

Participant Takaful Fund (PTF)- Outgo The outgo of PTF shall consists of the following  Settlement of losses and expenses occurred therein  Cost of Re-Takaful  Takaful Operator’s fee – Wakala fee  Share of investment profits of PTF as Mudarib  Surplus distributed to participants  Return of Qard-e-Hasana to the shareholder’s fund

Participant Takaful Fund

Shareholder’s Fund (SHF)  Family and General Takaful Operators will be maintained in a similar way under the guidelines of Shariah Board and Central Shariah Board.  The SHF consists of :  the paid-up capital; and  undistributed profits to the shareholders.  The income of the shareholder’s fund consists of:  Takaful Operator’s Fee (Wakala Fee); and  Profit on the investment of the SHF & proportion of the investment profit generated by the investment of PTF as per PTF rules and the PMD.

Shareholder’s Fund (SHF)  Expenses of shareholder’s fund consists of:  All expenses related to Takaful Operator, including all marketing as well as administrative, investment and operational expenses including commissions and over riders paid to business intermediaries, benefit payments & related expenses as surveyors’ fee  Shareholders must undertake to declare unconditionally all contracted liabilities of the PTF, but their liability in this regard shall not exceed the SHF.

Shareholders’ Sub-Fund

Participant Investment Account (PIA)  This account is maintained in Family Takaful companies where unit linking policies are offered to the customers.  Following are the investment avenues allowed by the Shari’ah  Shariah compliant Government Securities  Immoveable property  Joint Stock Companies  Redeemable Capital  Mutual Funds  Musharika Certificates, Term Finance Certificates, Participation Term Certificates  Placement of excess funds with Banks and Islamic financial institutions

Re-Takaful  Re-Takaful works on the same principles as primary Takaful.  Instead of pooling individual risks, Re-Takaful combines risks of several distinct pools to make a “pool of pools”.  All major reinsurers in the world have now launched separate Re- Takaful companies to make sufficient capacities available.

Surplus Distribution  After deducting Wakala Fees, Claims, Re-Takaful Contributions, Contingency Reserves and Charities etc. the remaining amount in the pool is to be distributed between participants; it does not go to shareholders.  In case of deficit, the Takaful Operator advances an interest-free loan, as Qard-e-Hasana to make good the shortfall in the fund, repayable from future surpluses in the Fund.  The actual distribution of surplus will be done only to those Participants leaving the pool during the year by way of withdrawal, death or maturity of the membership.  The surplus rate is declared for each line of business separately

Underwriting  Done for the Waqf Pool.  Should be prudent from the perspective of the Pool.  Cannot cover impermissible (haram) business avenues.  Discount given to a participant should be from Wakalah only.  Any Rating on Takaful Contribution does not increase the Operator’s Wakalah.  Takaful Companies cannot underwrite Guarantee business.

Benefits (Claims)  Benefits are not paid from SHF, consequently more prudence is required.  Any Ex-Gratia Claim should be paid from SHF.  In Family Takaful, the PIA part has to be paid even if a claim is rejected.  Pro-rata refund of Contribution is made under Waqf Rules as benefit.

Shariah Compliance  All products have to be approved by the Shariah Board.  Every Investment should comply Shariah Guideline for investment.  All documents like forms and declarations are to be approved by the Shariah Board.  Agreements with service providers, distributors, Re-Takaful Operators etc. are to be approved by the Shariah Board.  In case the Operator’s/Participant’s income is from non compliant sources, it has to go to charity.  At least one comprehensive Shariah Audit is conducted every year.

History  Insurance Act – 1938  Insurance Rules-1958  Insurance Ordinance 2000  Insurance Rules 2002  Committee for Takaful Rules-2003  Draft takaful Rules-2005  Takaful rules-2005

Takaful Rules 2005 Short title and commencement Definitions Classes of Takaful business Composite Takaful Window Products or Takaful operations conventional insurance Requirement for carrying on business as Takaful operator Use of word “Takaful”

Takaful Rules 2005 Takaful operational model Investment component Risk related component Takaful operator’s fees Participants Takaful Fund Shareholders Fund Qard-e-Hasana Relationships Payment of losses

Takaful Rules 2005 Sharing of surplus Deficit Management and marketing expenses Funds Participants Investment Fund Investment management of funds Product design

Takaful Rules 2005 o Deposits o Shareholders funds under capital or equity raised by the sponsor or Takaful operator o Books and records of Takaful business o Establishment and maintenance of Participants Takaful Funds o Requirements as to assets of PTF o Solvency requirement

Takaful Rules 2005 Investment guidelines Investment in Shariah compliant Government securities Investment in immovable property Investment in Joint Stock Companies Investments in mutual funds Investments in redeemable capital Placement of excess funds with banks and Islamic financial institutions Financing under Islamic modes through the Islamic banks and financial institutions Re-Takaful Acceptance of risk by Takaful operator Control of forms of proposal, policies and brochures

Takaful Rules 2005 Shariah compliance audit Accounting regulations Central Shariah Board Shariah Board Meeting between Central Shariah Board and Shariah Boards Agent Training Business in rural areas General

Jazaakum Allahu Khairan May Allah Reward you