By Andrew Rohanaraj Insurance plays and important role in reducing the risk of loss due to accident or misfortune. The concept has grown so much so that it has become almost impossible to live in this present world without experiencing the effects of insurance. Whether it is buying a house or buying or leasing a car, insurance has become an integral part of our lives, whether we like it or not. Recently, a new form of insurance based on the principles of mutuality and cooperation called Takaful Insurance has made its presence known in providing insurance services to the Islamic community in Sri Lanka. Islamic insurance was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia mutually agreed to contribute to a fund to cover anyone in the group that incurred mishaps or robberies along the numerous sea voyages. Anticipation and management of events, which repeat often enough, is a common practice in any business venture. These events could be forecasted to a certain extent if not with pin point accuracy. Let’s take the example ‘death’. It is practically impossible to predict who would survive from year to year, within a group of people. However, the number of people who would die out of a large enough group can be estimated closely enough (i.e. law of large numbers) based on many other factors. With this estimation, each individual in the group can manage this eventuality by agreeing to pool their resources to help the dependents of its members who die early. This is the concept of Takaful. Joint indemnity Takaful is an Arabic word meaning “guaranteeing each other” or joint guarantee. According to this particular insurance scheme, each participant who needs protection must be present with the sincere intention to donate to other participants faced with difficulties. Therefore, Islamic insurance exists where each participant contributes into a fund that is used to support one another with each participant contributing sufficient amounts to cover expected claims. The objective of Takaful is to pay a defined loss from a defined fund. The whole scheme of insurance is based on principles of mutuality and cooperation encompassing the elements of shared responsibility, joint indemnity, common interest and solidarity. Takaful Insurance or insurance for Muslims is designed to adhere to Islamic laws and is based on the principles of fairness and equity among the participants (policyholders). Modern religious scholars have declared that traditional insurance is unacceptable by majority of scholars due to the type of investment traditional insurance companies’ use as well as the uncertainty involved in traditional insurance contracts. The companies, which offer this type of insurance, avoid investing in interest bearing securities as well as investing in unethical and immoral business (such as alcohol manufacturers, gambling casinos). The rewards in an Islamic investment should be profit or fee based. Typical investments include lease and rental instruments, real estate financing contracts, and venture capital funds. These investment types are largely untapped at the present moment. The relative popularity and commercialisation of Takaful has produced several types of Islamic insurance, each reflecting a different experience, environment and perhaps a different school of thought. Types of insurance The Co-operative Insurance model encourages Islamic values such as brotherhood, unity, solidarity and mutual cooperation. As per the concept, the Takaful Company and the policyholder will only share the direct investment income; the policyholder is entitled to a 100% of the surplus with no deduction made prior to the distribution. This model is applicable to life family Takaful as the fund is entirely distributed to the participants. The non-profit model includes social-governmental owned enterprises and programs operated on a non-profit basis which utilize a contribution that is 100% donation from participants who willingly give to the less fortunate members of their community.The third scheme is called Mudharabah model. In this scheme, surplus is shared between the policyholders and Takaful Operator. The sharing of such profit (surplus) may be in a mutually agreed ratio between the contracting parties. Generally, this particular scheme allows the Takaful operator to share in both the underwriting results from operations as well as the favourable performance returns on invested premiums. In Al Wakala Model, the Cooperative risk-sharing occurs among participants with a Takaful Operator earning a fee for services provided and does not participate or share in any underwriting results as these belong to Participants as Surplus or Deficit. According to this particular scheme takaful operator is eligible for a fee and may charge a fund management fee and a performance incentive fee. It is a general practice for Takaful products either General Takaful products or Family Takaful products to pay an agreed upon premium to the Takaful operator to protect them from unforeseen risk and also extraordinary losses. Then, the Takaful operator will take a portion of money from Takaful fund and pays premium to the Retakaful operator to get reinsurance protection to spread its risks. The contract for reinsurance may protect the person or business from a specific risk or a broad class of risk factors. Sri Lanka In Sri Lanka, Takaful insurance has done quite well to gain considerable market share over the past few years. Though the concept is relatively new, and only a handful of companies are offering the facility at the moment, the increase in momentum among the general public is quite interesting and encouraging. The trend is spreading very fast and more and more individuals and businesses are now turning their attention towards this new concept. A Simple look at the performance of Amana Takaful, the first such company to start business in Sri Lanka will prove the changes in the mindset of the Sri Lankan customers over the last few years. Islamic Insurance is gaining popularity primarily because according to Shariah the commercial insurance contract is prohibited. It is prohibited because conventional insurance is nothing but a “risk-transfer mechanism” (ie the insured transfers his risk to the insurance company in exchange for a premium) which, under Shariah, is considered a “contract of exchange” or a sale contract. Thus, Takaful insurance is well poised to prove itself to be a just, equitable and mutually profitable system that shall also blend ideally with the products being offered by the Islamic banks which are gaining fast popularity and acceptance not only in Sri Lanka, but in the whole world.
source : nationlk