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Takaful: Opportunities for Financial Institutions

A Realistic View of the Indian Market

Research Sponsor:

Reporter: Dr K C Mishra, Director, National Insurance Academy, Pune 411045, India. Views expressed and reported are by the reporter; these are not
necessarily subscribed by the organisation.
Copyright 2009: SP Media Pvt Ltd. All Right Reserved
About the Reporter

Dr K C Mishra

Director, National Insurance Academy, India

Dr K C Mishra is currently the Director of National Insurance Academy, India.

He holds the following qualifications: M.Sc. (Solid State), MBA, PGDHRM, CAIIB
(Distinction), D.Litt. (Management), Post Doctoral Program (Wharton's Aresty
Business School, Philadelphia).

Dr Mishra holds the following assignments along with Directorship of NIA:

 Member of Insurance Regulatory and Development Authority (IRDA)

Advisory Committee in India for past 10 years
 Member of SEBI Market Development committee in India for last 3 years
 Director of Unit Trust of India Asset Management Co. Ltd. (UTIAMC), Chairman Audit Committee and Risk
Committee for last 3 years
 Director of UTI Venture Capital Ltd, Bangalore
 Independent Director of Doha Bank Assurance Company, Doha, Qatar
 Coordinator of Insurance Envisioning Committee appointed by the Insurance Industry in India
 Director CAG (Comptroller of Auditor General) of India as banking & insurance sector expert
 Academic Council Member of Punjab National Bank IIT subsidiary, Lucknow, India
 Advisor to Government of India, Ministry of Labour, Ministry of Forest & Environment, Ministry of Health ,
Ministry of Commerce (ECGC) & Ministry of Information Technology
 Member of K. P. Narasimham Committee on Insurance (tenure completed) and Justice Somasekhar
Committee (on e-Governance)
 Director of LPA (Loss Prevention Association) of India Ltd.
 Retained by World Bank to undertake insurance and reinsurance research for five countries viz
Bangladesh, India, Pakistan, Sri Lanka and Nepal
 Counselling assignments in USA, Germany, UAE, Oman, Nigeria, Gambia and U.K., Thailand and Ghana

Dr Mishra has published the following books:

 The Game is Changing: Insurance Reloaded - (published by ICFAI, Hyderabad)

 Insurance Demystified: Reading Beyond the Lexicon - (published by ICFAI, Hyderabad)
 Medical Informatics and Exploration - (published by ICFAI, Hyderabad)
 Change Management in TAC (Organisational Behaviour) - (published by ICFAI, Hyderabad)
 Enjoying IIT-Jee (published by ICFAI, Hyderabad)
 Insurance Business Environment & Company Operations - (published by Vikas Publishing Company, Delhi)
 Basics of Personal Financial Planning - (published by Vikas Publishing Company, Delhi)
 General Insurance - (published by Vikas Publishing Company, Delhi)
 Life Insurance: Principles & Practice - (published by Vikas Publishing Company, Delhi)
 Elements of Actuarial Science - (published by Vikas Publishing Company, Delhi)
 Life Insurance Underwriting - (published by Vikas Publishing Company, Delhi)
 Legal & Regulatory Aspects of Insurance - (published by Vikas Publishing Company, Delhi)
 Financial Management and Insurance Accounting - (published by Vikas Publishing Company, Delhi)

Views expressed and reported are by the reporter; these are not necessarily subscribed by the National
Insurance Academy. 3
Takaful: Opportunities for Financial Institutions January 2009


Takaful is the Islamic counterpart of conventional insurance, and exists in both life
and general forms. It is based on concepts of mutual solidarity, and a typical
Takaful undertaking will consist of a two-tier structure that is a hybrid of a mutual
and a commercial form of company. This in itself poses significant issues for
regulation and supervision. In addition, all the functions of a Takaful undertaking
should conform fully to Islamic Shari'a law and this has implications in other areas
of regulation and supervision. Takaful is based on principles of Ta-awun or mutual
assistance that is Tabarru or voluntarily. In a way Takaful is similar to conventional
cooperative insurance whereby participants pool their funds together to insure one

The concept of mitigation of risks by adopting the law of large numbers was widely
used in Islam and especially in the practice of "al-aqilah". Under the custom of "al-
aqilah", it is mutually agreed that if a person is killed unintentionally by another
person, the paternal relatives will take the responsibility to make a mutual
contribution for the purpose of paying the blood money to the victim's relatives.
This practice of having a fund that pools contributions from a group of people to
assist others in need is akin to insurance. However, to be acceptable to Islam, any
form of insurance should avoid the elements of riba or interest payment, maisir or
gambling and gharar or uncertainty, though elements of gharar may be forgivable
depending on the circumstances.

Takaful is derived from an Arabic word which means solidarity, whereby a group of
participants agree among themselves to support one another jointly against a
defined loss. In a Takaful arrangement, the participants contribute a sum of money
as wholly or partially tabarru' meaning donation into a common fund, which will be
used mutually to assist the members against a defined loss or damage. Takaful has
evolved into a viable alternative to conventional insurance and is able to attract a
wide range of customers, Muslim and non-Muslim alike.

The fiqh al-mu'amalat is the sub-arm of Islamic jurisprudence that sets forth the
requirements for economic transactions to comply with shari'a. Within Islam, the
rules are clear on certain issues, eg the charging or receiving of interest (riba) is not
permitted. However, there are various judicial opinions (fatwa) on other questions,
eg how shari'a-compliant insurance is to be conducted. All of these rules are
considered important and strengthen the diversity of the Islamic belief system.

Muslims conduct their lives according to the Islamic principles laid out in shari'a.
Consequently, all transactions must be shari'a-compliant, including the type of
insurance coverage purchased. The following must be avoided:

 Riba: payment/receipt of interest

 Maisir: excessive risk taking
 Gharar: uncertainty and unclear terms in contracts
 Haram: investment in anything unacceptable - eg pork, alcohol, gambling and

In 1985, the grand council of Islamic scholars Majama al-Fiqh; Academy of the

Takaful: Opportunities for Financial Institutions January 2009

Organisation of Islamic Conference reached an agreement on insurance:

1. The commercial insurance contract, as practiced by commercial insurance

companies, contains substantial uncertainty, which renders the contract
defective. Consequently, it is forbidden.
2. The alternative contract, which respects the principles of Islamic transactions,
is the cooperative insurance contract. It is built on the principles of voluntary
contribution and mutual cooperation. The same applies to reinsurance, which
should also be built on the principles of mutual cooperation.
3. The academy calls on Islamic countries to establish mutual cooperative
institutions for insurance and reinsurance.

The Fiqh Academy of the Muslim League also ruled:

 Commercial insurance is a form of gambling, since the insured pays a

premium and either receives no compensation or one far exceeding what he
Virtually all scholars agree that two forms of insurance are permissible, as long
as the investments are in shari'a-compliant assets:
 Mutual insurance - because it is based on voluntary contributions and mutual
assistance in the interests of righteousness.
 Social insurance - because it involves social cooperation and mutual protection
without profit motives; due to this, the arguments of uncertainty do not render
these types of insurance contract invalid.

It has been argued that life insurance is permissible according to shari'a. Scholars
now agree that, by modifying certain terms eg benefits may only be paid to heirs,
and excluding some products with embedded guarantees eg whole life products,
life insurance can be shari'a-compliant.

Shari'a arbitrage is an issue in the sense that it is possible to forbid some financial
transactions, but permit them in a slightly different form, even though the
substance is unaltered. The objections to excessive uncertainty and risk taking or
gharar do not apply given the common use of insurance in economic life. Gharar
only exists if the insurance contract is viewed on the individual level. At the
aggregate level, every person knows what he pays and what he receives in exchange

Takaful is now practised by over 60 companies in 23 countries and has now evolved
into a rapidly growing industry. More recently, re-takaful, the equivalent of
conventional reinsurance, has been developed, initially in Malaysia. At present,
most Takaful operators reinsure to conventional reinsurers, and this is considered
acceptable so long as there is no practicable Shari'a compliant alternative.

At present, Takaful is offered through non-profit but commercial business forms.

Regardless of the formal legal structure, the business is run on a purely mutual or
cooperative basis for the participants in the Takaful scheme. The board runs the
business on behalf of all participants and there is no separate entity managing the
business. A commercial entity called Takaful operator is entrusted with managing
the Takaful fund. Depending on the specific rules in each jurisdiction, the fund may
be embedded within the operator as life funds commonly are in conventional

Takaful: Opportunities for Financial Institutions January 2009

insurers, with a clear separation between shareholders' and participants' funds, or

the fund may be set up as a company separate from the operator. In some countries
a Takaful scheme may be offered through a "window" of a conventional insurer. In
Family or Life Takaful, the participant's contribution is typically divided into two
portions, one forming part of the Takaful pool to cover mortality risk, and the other
in effect constituting a personal investment account as a sub-account of the
investment fund.

Five Pillars of Takaful Insurance

1. Mutual Guarantee - The basic objective of Takaful is to pay a defined loss from
a defined fund. The loss is borne by a fund created by the donations of
policyholders. The liability is spread amongst the policyholders and all losses
divided between them. In effect, the policyholders are both the insurer and the
2. Ownership of Fund - Donating their contributions to the Takaful fund,
policyholders are owners of the fund and entitled to its profits; this varies
slightly between the adopted models which are described later.
3. Elimination of Uncertainty - Donations, causing transfer of ownership to the
fund, are voluntary to mutually help in the case of a policyholder's loss without
any pre-determined monetary benefit.
4. Management of the Takaful Fund - Management is by the operator who,
depending on the adopted model, utilises either or a combination of two
Shari'a compliant contracts, namely mudaraba or wakala or any combination
5. Investment Condition - All investments must be Shari'a compliant, which
prohibits investment in haram industries and requires the use of instruments
that are free of riba.

Developing Takaful Models

Takaful is a system based on the principle of mutual assistance or ta'awun and

voluntary contribution or tabarru, where the risk is shared collectively and
voluntarily by a group of participants. Through payment of a voluntary donation
and the clear definition of the type of loss, uncertainty or gharar and excessive risk
taking or maisir are removed from the contract. Takaful has been practised for
centuries as a system of risk sharing. Today, various models exist. The main takaful
operation models

There are several forms of contract that govern the relationship between the
participants or policyholders and the Takaful operator. Takaful products can be sold
by conventional financial institutions through an Islamic window that allows
customers to purchase shari'a-compliant products and services. Such institutions
may also sell conventional products. Today, the most popular takaful models are
the agency model or wakala, the profit-sharing model or mudaraba, a combination
of the two or hybrid model, initial contribution or waqf model.

Takaful process involves:

 The creation of a shari'a supervisory board that oversees insurance operations

Takaful: Opportunities for Financial Institutions January 2009

and compliance with the shari'a

 The separation of shareholder funds from policyholder funds
 The commitment to distribute technical profits to policyholders
 The avoidance of investment in non-shari'a-compliant assets

A Takaful operator has an obligation to ensure that all aspects of the insurance
operations are compliant with Shari'a rules and principles. To do so, it will draw on
in-house religious advisers, commonly known as a Shari'a board.

The Takaful operator will be representing to policyholders, either explicitly or

implicitly, that its operations are in accordance with Shari'a rules and principles.
Regulators have a responsibility to ensure that such representations are well-

In a Family Takaful plan there are generally no guarantees i.e. they operate on a
'defined contribution' rather than a 'defined benefit' basis. This implies that the risk
profile is different from the standard insurance product, where guarantees are
normally given in terms of maturity benefits, surrender benefits and death benefits.
This has implications both for capital adequacy and for disclosure to consumers.

Takaful, a Hybrid of Mutual and Stock Companies

On the surface, takaful appears to be similar to the conventional mutual insurer

concept. Upon closer inspection, however, the vast majority of takaful companies
today operate as stock companies. Unlike traditional mutual companies, takaful
companies are hybrid companies that are profit-oriented and capitalised like any
other ordinary stock company. The element of mutuality is restricted to the takaful
fund, where the policyholder contributions and investment income are collected. By
providing an interest-free loan to the takaful pool in the event of an underwriting
deficit, however, takaful companies behave as stock companies in that they use
capital to cover their liabilities.

Takaful companies that are not profit-oriented are almost identical to mutual
companies. The key difference is that takaful companies must have a shari'a
supervisory board, cannot earn or charge interest on loans and must avoid investing
in non-shari'a-compliant industries.

It has been shown that mutuals are better than stock insurance companies at
addressing agency conflicts between owners and customers. In the predominantly
hybrid takaful companies today, the distribution of the functions of manager, owner
and customer fall between those of mutuals and stock insurance companies. Like
mutuals, the conflicts of interest between owners and customers at a profit-oriented
takaful company should be mitigated because the functions overlap and both
benefit when profits rise. However, managers of takaful companies like those of
stock insurance companies are still exposed to market pressure, which creates an
incentive to manage the company efficiently.

Takaful Contract: A combination of tabarru' contract or donation and agency and/or

profit sharing contract between the individual insured and the pool of insureds as
represented by the Takaful.

Takaful: Opportunities for Financial Institutions January 2009

Responsibility of policyholders/ participants: Participants make contributions to the

scheme. Any underwriting surplus belongs to the policyholders, who are also liable
for any deficit. Practices regarding disposition of annual underwriting surpluses or
deficits vary. In some Takaful, operator manages underwriting under a Mudaraba
contract and shares in underwriting surplus as a Mudarib fee

Liability of the insurer/operator: Takaful operator acts as the administrator of the

scheme and pays the Takaful benefits from the Takaful underwriting fund. In the
event of deficiency in the Takaful fund, the Takaful operator is expected to provide
an interest-free loan to the Takaful fund to cover the deficiency.

Access to capital: Access to share capital by Takaful operator but not to debt,
except for interest-free loan from operator to underwriting fund.

Investment of Fund: Assets of the Takaful funds are invested in Shari'a-compliant


Given the varying interpretations of Islamic law, different insurance models have
emerged. The models considered include non-profit mutual insurance and models
that closely resemble conventional insurance, with funds invested in shari'a-
compliant assets. While Islamic insurance refers to all concepts of Islamic insurance,
takaful refers specifically to insurance models that use segregated funds for
policyholders and shareholders.

Regulatory and Solvency Regime

The solvency regime needs to reflect the location of risk. For example, if there is a
deficit in the underwriting fund, how strong is the obligation on the operator to give
an interest-free benevolent loan, and what account should be taken of this in the
solvency regime. This raises the issue in practice of whether liability can be
extended to policyholders' investment accounts.

Because policyholders share in any surpluses and, in principle, meet any deficits in
the underwriting pool, there is a need to determine how their shares should be
determined. At present different companies follow different policies in this respect.

Because investments must be Shari'a compliant, a Takaful firm cannot invest in

conventional interest-paying bonds, or in certain types of equity like alcohol
companies. There are also limitations on the use of derivatives, for example to
hedge currency risk. The asset risk profile will therefore be different from that of a
conventional insurer.

There is a need to develop standards and interpretations to provide benchmarks for

use by Takaful supervisors in all jurisdictions adapting and improving existing
regulatory regimes or, where necessary, establishing new ones; to address
regulatory issues, such as risk management and financial stability, for the Takaful
industry; to provide appropriate levels of consumer protection in terms of both risk
and disclosure; and to support the orderly development of the Takaful industry in
terms of acceptable business and operational models, design and marketing of
Takaful products.

Takaful: Opportunities for Financial Institutions January 2009

Takaful Industry Enablers

The Takaful industry is poised for significant growth as demand increases and
industry enablers are further aligned.

The global Takaful industry demand:

 Economic growth
 Increase in GDP per capita
 Youthful demography
 Increasing awareness of Takaful
 Greater desire for Shari'a compliant offerings
 Increase in asset based, Shari'a compliant financing

The global Takaful industry supply:

 Fragmented landscape
 Limited re-Takaful capacity
 Problematic asset management
 Local solution offerings
 Local distribution channels

The global Takaful industry facilitation:

 Compulsory protection
 Licensing and increased competition
 Better regulation
 Greater role for private sector participation
 Increased market-led initiatives

Five Key Reality Checks

1. Islamic finance and insurance is recognised as a one of the fastest growing
areas of international finance today.
2. Greater world-wide awareness of this exciting sector means that new players
and products are being continuously introduced, bringing new challenges and
3. Banking, mortgages and insurance are inextricably linked leading to
harmonisation of Takaful operations between financial institutions.
4. This sector needs new products and services, modifying or branding existing
ones is not good enough
5. Takaful insurance has been quietly launched in many countries.

Global dispersion of Takaful Insurance

1. The UK - facilitative regulatory initiatives and mature insurance market,
considered a gateway to Muslim populations in continental Europe.
2. Malaysia - an established Islamic financial services industry with a high density
of life business.
3. Indonesia - large Muslim population with very low insurance density.
4. Indian sub-continent - region characterised by large Muslim populations and

Takaful: Opportunities for Financial Institutions January 2009

low insurance density. India will become attractive once the Islamic finance
framework is defined.
5. North Africa - future growth market with majority Muslim populations;
however, lacks facilitative regulatory framework
6. Sudan - facilitative regulatory environment that has allowed the Takaful
industry to flourish.
7. Middle East - majority Muslim population with rapid economic growth. KSA
(Kingdom of Saudi Arabia) and Kuwait the two largest GCC markets in terms of
Takaful premiums

Current Growth Markets

Future Growth Markets

Due to varying bases, the growth rates are different in different regions as follows:

Source: Takaful Re Limited and Middle East Insurance Review (2008), Ernst & Young Analysis

The global Takaful industry is growing by 20% (as cumulative average growth rate -
CAGR) per annum and accepted new contributions worth US $ 2 billion in 2006 and
$2.7 billion in 2007. Capital invested in takaful companies: US$ 3.9 billion. Global

Takaful: Opportunities for Financial Institutions January 2009

Takaful premiums: US$ 7.29 billion (2008, estimated). Global Insurance premiums:
US$ 4.1 trillion (2008, Sigma). Insurance premium in takaful markets: US$27.7
billion. Hinter market takaful share: 20%. Takaful share in the Middle East: 30%
($4.6 bn takaful out of $11.8 bn total insurance and takaful). Takaful Premiums
Worldwide 2008: Middle East 85%, Africa 4%, Asia 11%.

The market for Takaful and other insurance based on Islamic principles, has
recorded impressive premium (donation) growth rates and should reach more than
$7 billion by 2015 in new donations from present estimate of $2.7 bn. (Moody's
Investors Service).

The Indian Market

Population: M 1168

GDP: US$ 1167 Billion

Average real GDP growth (04-07): 7.2%


India has the fifth largest economy in the world. It is also a market with dominant
domestic economy. The economy has expanded solidly over the past few years, with
real GDP growing at an average annual rate of above 7%. The main driving force has
been the booming service and particularly IT sector, which accounts for major
economic output. In the coming years, India's economy is expected to continue
growing, albeit at a slightly slower pace. The manufacturing and financial sectors
should generate better revenues to supplement It and ITES, resulting in a possible
current account surplus. Agriculture in India is languishing despite green revolution
but soon the sector may receive technological attention and there is both potential
and expectation of break away growth at dispersed level leading to higher mass

Regulatory Framework

International Association of Insurance Supervisors (IAIS) provides benchmarks for

use by IRDA, which will be the Takaful supervisors in India and IRDA may adapt and
improve existing regulatory regimes or, where necessary, establish new ones. IRDA
will address regulatory issues, such as risk management and financial stability, for
the Takaful industry. IRDA will provide appropriate levels of consumer protection in
terms of both risk and disclosure. IRDA will also support the orderly development
of the Takaful industry in terms of acceptable business and operational models,
design and marketing of Takaful products.

A sound regulatory and supervisory system is necessary for maintaining efficient,

safe, fair and stable insurance markets and for promoting growth and competition
in the sector. Such markets benefit and protect policyholders. The IAIS Insurance
core principles (ICPs) provide a globally accepted framework for the regulation and

Continued on page 16

January 2009

Kalpesh Desai is the founder and CEO of Agile Financial
Technologies, a leading technology company providing
Software Products, Technology Services, BPO (Business
Process Outsourcing) and KPO (Knowledge Process
Outsourcing) for the BFSI (Banking, Financial Services &
Insurance) industry.

He envisioned the creation of an unparalleled enterprise

that would be a technology partner to leading players in
the BFSI sector enabling business agility. He formed Agile
FT by acquiring and merging strategic software Kalpesh Desai
products and technology companies in the space of CEO, Agile
software solutions, technology services, BPO and KPO.

Agile FT distinguishes itself by offering business agility to its clients which is achieved by providing a
combination of its software and business enablement (outsourcing) services as a holistic vendor, thus
allowing them to focus on their core operations.

Kalpesh has over two decades of experience in spearheading technology companies to achieve and
sustain a position of market leadership and organic growth. He has earned a reputation of creating and
building successful, scalable enterprises by defining and converting corporate vision into strategic
intent and coordinated action. A firm believer of producing results through people, he has attracted and
retained talented people. His ability to build an entrepreneurial corporate environment, allows his
teams to take chances and innovate. He leads from the front, drives himself and his teams hard, but
manages with honesty and respect at all times, fostering an unparalleled loyalty that delivers results.

He brings a deep understanding of businesses having held multiple roles in executive management,
product development, operations management, sales and marketing management.

At a young age, he founded Xmediaries - a new economy software company that developed a hugely
successful enterprise relationship management product, CrossRoads, which was ranked by IDC as
amongst the top 10 CRM vendors in the MENA region in 2001. After acquiring a footprint of over 35
clients and a base in India, UAE and South Africa, Xmediaries was acquired by 3i Infotech (a publicly
listed BFSI Software Company, promoted by the ICICI group). Kalpesh went on to lead 3i Infotech's EMEA
operations as their Chief Operating Officer where he demonstrated significant organic growth in
revenues and profits. He forged new territories for the company, achieving significant market share in
each region that they operated in.

Prior to Xmediaries, Kalpesh was the Chief Operating Officer of Insyst where he drove a product-led
sales strategy globally for their ERP & Insurance products, creating a significant customer footprint in
the US, Middle East, Africa and APAC.

January 2009

What opportunities and challenges do you foresee for Takaful financial

institutions in the medium to long term?

Takaful products are structured on the principles of mutual protection, enforcing a

fair and equitable policy for all stakeholders channeling funds into ethically and
socially acceptable businesses and industries.

Takaful institutions primarily have 3 operative models, namely Mudarabah (sharing

of underwriting profit with the operator), Wakalah (agency contract with a
performance fee element to replace surplus sharing) and Waqf (endowment fund

Takaful companies are seeing an increasing market share in their home markets
coming in from increased credibility, transparency, conservative approach, legality
and the approach to being ethical and adding value. They have achieved
mainstream relevance by becoming the embedded capital of the local marketplace
and reaching out to other communities, hence becoming the role model for
conventional financial institutions.

In the absence of a common framework for Takaful across borders, the industry is
facing and has to address the following challenges :

 Lack of customer awareness

 Inability to innovate and create distinctive products
 Create a variety of Islamic financial instruments
 Risk and rating systems for Islamic Finance and
 Limited re-Takaful capacity

Penetration is still far below the enormous market potential offered by the Muslim
community worldwide (23% of the total world population), and hence the
opportunity for Takaful companies to explore technological innovations in terms of
distribution and educating even the non-Muslim populace to look at Takaful
products as an alternative to conventional insurance.

Another complication in the interpretation of the Takaful business model is that the
structure of a Takaful company requires it to distinguish between the Shareholder's
funds and the Participant's Takaful fund and manage the same distinctly. Different
business models will have different norms of fee sharing, investment and operating
management and surplus distribution.

Effective solvency and investment management systems are required to be tightly

integrated with the core insurance software to effectively track and enable the
mechanism of surplus profit distribution to the participants.

What recommendations do you have for Islamic financial institutions to

overcome such challenges and tap the opportunities, in terms of redefining
processes and technology?

The Islamic Finance industry historically had lacked an enabling framework. In

January 2009

order to create the infrastructure for Islamic finance in IDB member countries and
other markets with Muslim communities, Takaful industry bodies and organisations
(Islamic Financial Services Board, ASEAN Takaful Group, Accounting and Auditing
Organisation of Islamic Financial Institutions) are coming together to reach a
consensus internationally on a common and standard Takaful business model and
best practices

The opportunity for the industry is to come forth with a level playing field in terms
of a common framework, an educative process and operating in a regulatory
framework where the regulators need to be educated on the principles of the
Islamic Finance.

Technology plays a significant role in the adoption of best practices. Selection of

insurance software applications that imbibe the principles of Takaful and enable
the adoption of the various business models, allow Takaful companies operate
effectively and comply with the principles. Takaful companies need to adopt
practices of distribution adopted by conventional insurance firms and this has led
to the opening of channels such as BancaTakaful.

Adoption of platforms that enable transparency and seamless business to business

and business to customer interaction between all the constituents of the
enterprise's ecosystem - clients, agents, brokers, re-insurers and banks are key to
the growth of this sector and consolidation of cross-border capacity.

Do you believe that there are any best practices that insurers should follow in
order to have an integrated view of the business across customers, employees
and agents?

These are traumatic times for financial institutions who are currently looking at
striking a balance between growth, survival, preservation of capital and increasing
regulatory norms of capital adequacy/liquidity, compliance and transparency.

Insurers are now looking at stakeholder value centricity in adoption of business

best practices and the ability to provide a 360 degree perspective of the business
interaction, and enable business interaction between the carrier and its
constituents - clients, agents, brokers, distribution channels/banks, service
providers, TPAs and reinsurers.

However, the adoption of technology in the above environment is hindered by

boundaries that exist -

 Between software applications

 Between systems
 Between software and people
 Between organisations

Adoption of a core insurance software platform that eliminate the above

inefficiencies will be key to an insurer's ability to not only focus on their growth but
also manage operational risk, solvency and an efficient enterprise.

January 2009

Can you share some of the benefits that insurance companies globally have
enjoyed by virtue of partnering with Agile Financial Technologies?

Agile FT's ethos is to deliver business value to its customers. We service clients by
providing our insight in having delivered projects across markets, jurisdictions and
diversified business models of our clients.

It is this rich experience that can enable our clients shorten the learning cycle once
we understand their business objectives.

We combine our deep understanding of the domain which is a feed into our own
product roadmap, and the ability to innovate using technology and provide a cash
efficient model for our clients.

Our approach is synergistic and our focus is to enhance our client's credibility to
their stakeholders, enable synergy with the partners in their ecosystem and provide
rich applications which are convenient to use and enhance the brand value of our

What are Agile's key strengths as a company, and what is your vision for it
moving forward?

Agile Financial Technologies, is uniquely structured to offer a blend of our core

insurance software (Agilis) which automated our client's processes, and our
capability to outsource their back-office, accounting and analytical needs, allow us
to deliver an end to end service level agreement on each business process that our
clients desire to outsource.

Our vision is to ensure that our delivery innovation is replicated across all the
markets we operate in. Our own Revenue Innovation model ensures that we are able
to work and operate within our client's operating budget rather than being a burden
on their cash flow. We have seen an increasing demand from our clients for our
Business Enablement Services around Agilis, and we intend building on that
strength and replicate the same across markets.

We will work closely with regulatory and industry bodies and key industry players
to ensure that we lead through innovation in delivery and practice. As enablers of
businesses, we are extensions to the operations of our clients. We are sensitive to
the various elements of operations risk that our clients would be subject to and our
offering will have the same metrics that our clients would measure their operations

Takaful: Opportunities for Financial Institutions January 2009

Continued from page 11

supervision of the insurance sector. They provide the basis for evaluating insurance
legislation, and supervisory systems and procedures, and are used for that purpose
by the IMF and the World Bank. They apply to the supervision of insurers and
reinsurers, whether private undertakings or government-controlled insurers that
compete with private enterprises, wherever their business is conducted. They have
therefore formed the basis of even Takaful work.

Starting as a Takaful window of an existing insurance company will require some

institutional process orientation and creation of instruments. The Boards of
insurance companies may decide to launch shari'a compliant insurance in domestic
market. There is need to tie up with a shari'a advisory board. Some companies in
India are already managing Shari'a compliant portfolios overseas like Al Madina
since February 2006. In India there are forums like Indo-Arab Economic Co-
operation Forum (IAECF), who have constituted Shari'a boards. Similarly institutions
like Eastwind Capital Advisors have launched an Islamic Index in Indian markets.

Forums like this inter alia provide marketing support to launch Shari'a compliant
products and enable takaful windows to make investment in shari'a compliant
securities and conducting shari'a audit as required by the applicable rules framed
by shari'a supervisory board. Such forums provide shari'a advisory services for
shari'a authentification, preparation and submission of compliance report including
matters like "purification' of investment.

EW India Islamic Index or such instruments will be the benchmark index for
comparing the performance of the shari'a compliant portfolio. Such advisors may
be identified by the regulators to provide shari'a stock universe to takaful operators
or insurance takaful windows. With these regulatory and shari'a safeguards Takaful
Windows can be manifested in India in near terms.


While the mutual foundations of takaful may lead some to assume that this would
conflict with the commercial goals of a Indian company, this has not been the case,
as evidenced by the Islamic banking industry, where banks play a substantial role.
It is widely acknowledged that the further involvement of Indian companies is
beneficial to the development of the takaful industry because it will help bring more
technical know-how into the sector. A similar role applies to Indian reinsurers with
retakaful windows or dedicated takaful subsidiaries. The reinsurers' technical know-
how can complement the takaful company's shari'a know-how in a beneficial way.

Additional insurance premium volume 2002-2007 for India is 21.6% of emerging

market premium growth. In 2007 Indian Life Insurance premium volume $51 322
gives it 23.0% share of emerging markets, which is second in emerging market.
Micro insurance, which provides insurance coverage for low-income individuals, is
gaining in popularity. Total premium volume in local currency in 2007 Rs2189347
mn, with a nominal growth of 20.3% (previous year 43%) and inflation adjusted
growth of 13% (previous year 35%). In USD terms as per OECD norms India ranks 15
in the world with premium USD54375 mn with nominal growth rate 34.81% and

Takaful: Opportunities for Financial Institutions January 2009

inflation adjusted 13% giving a global insurance share of 1.34%. India ranks 11 in
the world in life insurance and 26 in general insurance.

Life insurance premium in same period was USD 47132 mn, which is 86.7% of total
insurance, 1.97% of the world, 36.3% increase in nominal terms and 14.2 inflation
adjusted. With USD 7.432 mn in premium general insurance is 13.3% of total Indian
insurance and 0.43% of global share; nominal increase is 26% and inflation adjusted
5.6%. Insurance density or per capita premium of India is 77 in the world at
USD46.6. Insurance penetration or premium in % of GDP is 4.7 giving 30th position
in the world.

Takaful potential: Assuming switch over and India's insurance growth rate, Takaful
potential of India on switch over is 13% of conventional insurance ie. USD 6.6 bn
and with the projected growth rate of 20% even potential in 2010 and 2015 are USD
9.2 bn and USD 22.5 bn respectively. Deducting the base, the business potential of
Takaful in India by 2010 should be USD 2.6 bn with new annual donation USD 1.5
bn and by 2015 USD 15.9 bn with annual new donation USD 3.5 bn.

Takaful Models Used

Indian insurance companies and reinsurance arrangements may have subsidiaries

or set up takaful windows to serve the Muslim community with shari'a-compliant
products as done by existing mutual funds. Established companies are well
positioned due to their reputation and their technical expertise. The most important
factors for successful takaful operations are the transparency of operations, the
establishment of shari'a-compliant rules and a robust shari'a supervisory board that
guides product design and ensures shari'a compliance. Hybrid model should find
Indian flavour

Distribution Channels

India is fast moving to multi-distribution channel mode. Erstwhile monopoly of tied

agents is diminishing. Bancassurance is gaining in popularity. Broking is expanding
very fast. Brandassurances like Mall insurance, motor agency distribution and other
co-brand distribution are gaining currency. Worksite and affinity group marketing
are also expanding. Insurers are developing their own portals for direct marketing.
So banctakaful in India is a distinct advantage apart from co-branding to gain
brandassurance advantage. Tied agent and broking channels may out price
themselves for takaful distribution in existing insurance takaful window mode
recommended for short and medium terms.

Outlook for Takaful

Since its foundation, takaful has continued to prosper. Growth and general
awareness have improved since 2000 as interest in Islamic finance increased. In
2007, takaful premiums were estimated at USD 2 bn. Growth has been exceptional
over the past four years - at 26% adjusted for inflation. Takaful has outpaced growth
in the conventional markets by 11%. Growth will be solid in the long term, given the
positive economic outlook in the oil and gas-based economies despite the current
downturn and the financial crisis. Until 2015, takaful is expected to grow at 17% per

Takaful: Opportunities for Financial Institutions January 2009

year adjusted for inflation to USD 7bn, which is faster than the conventional market.
Takaful's market share is set to reach 8-10%. Insurance penetration should also


A number of factors suggest that the takaful industry is set to grow in importance
in the coming years. For example:

 The Indian market has strong economic fundamentals and growth prospects.
 The populations is rapidly growing; the demographics are also favourable.
 Shari'a scholars agree that Muslims should refrain from buying conventional
insurance if a takaful operator is selling the same product, and offering similar
benefits and services.
 Increasing Islamic consciousness has resulted in Muslims switching from
conventional insurance to takaful products; there is a tendency to rely less on
necessity (dharurat) to justify the use of conventional insurance.
 The insurance markets are underdeveloped, the personal lines business is very
small, and life insurance has not yet been fully developed. Takaful can play a
key role in raising insurance awareness.
 The number of companies - global, regional and local - that have set up new
takaful operations has grown significantly over the past five years. The new
players, who often have a higher capitalisation and a multinational approach to
takaful, are expected to raise consumer awareness, revive the markets with
new competition and stimulate growth.
 Takaful may be an attractive solution for Muslims and non-Muslims. Once
takaful players achieve critical mass and offer comparable prices, the
opportunity to share in the profits from the takaful pool may attract non-
Muslims as well - as the observation of some market practitioners in Malaysia
would suggest.
 Islamic banking has boomed over the past thirty years, while takaful is still in
its early stages. The success of Islamic banking is expected to benefit takaful.
Furthermore, the distribution of insurance products by banks is increasingly
popular. Particularly in urban areas, bancatakaful - the distribution of takaful
products via banks - could play a significant role in raising insurance
awareness in the region. Banks could leverage their strong reputations by
distributing simple protection savings products through their branches.
 Increased availability of highly rated retakaful capacity will further boost the
growth of takaful.


 Considerable effort will need to be taken by companies, regulators, shari'a

scholars and others to raise the awareness of takaful if the takaful industry is
to live up to its potential.
 For quite some time, Muslims have been told that insurance, and particularly
life insurance, contradicts their faith. Despite the rulings of the Fiqh Academy
and the rise of the takaful industry, many Muslims still share this view.
Knowledge of insurance and its benefits is very low. Individuals tend to
downplay the need for retirement financing, opting instead to rely on family

Takaful: Opportunities for Financial Institutions January 2009

and the social security system. It will take time to change this way of thinking.
While takaful has become a topic in the insurance industry, it has not yet
pierced consumer consciousness. The recent introduction of compulsory
business lines is expected to raise awareness. Nevertheless, companies and
the government will need to step up their efforts to reach consumers and
educate them about the benefits of takaful.
 The takaful industry cannot rely solely on offering shari'a-compliant products,
as price and service also play a role. The distribution of surplus to
policyholders can be a deciding factor when buying a takaful product. The
service level and product features might also matter as much as conformity to
Islamic beliefs.
 Takaful products are an important innovation in the insurance industry. It is
generally accepted that they will gain a strong foothold in the personal lines of
business, where there are many small risks that can easily be pooled and
shared among takaful participants. To gain the acceptance of low-income
individuals, takaful may be offered as microtakaful. The main risks for low-
income individuals include serious illnesses, bad harvests, education of
children and death of relatives; such risks would be the main focus of a
microtakaful product. Another challenge exists at the other end of the
spectrum. The market for large corporate and commercial business offers
significant opportunities for takaful, particularly for investment projects
handled by Islamic banks. This segment is currently insured by conventional
insurers in the vast majority of cases. A change to takaful coverage could
provide the sector with a large boost. Retakaful capacity will further grow in
importance as a way of managing risk in the takaful pools.
 Diversity is inherent in Islam. It allows various interpretations to co-exist,
hence, the various takaful models. Increasing standardisation of the operating
models would help the takaful industry to grow on a global scale. The
regulators have to take steps to establish standards and enhance transparency.
Standardisation will reduce costs, reduce confusion amongst customers and
free up resources at financial institutions offering shari'a-compliant products.
However, it is likely that some differences in interpretation across the various
schools of thought are likely to remain. Some convergence may occur because
many shari'a scholars are engaged in various companies and will apply the
same judgements in different companies. However, this may lead to conflicts
of interest. Also, issues such as the further development of regulations
regarding the timely distribution of surpluses to policyholders, the conditions
for interest free loans (qard al-hasnah), and the need to ensure separation of
shareholder and policyholder pools will need to be addressed. However,
globally some organisations are already increasing their efforts to introduce
certain standards or principles. For example, the Islamic Finance Services
Board (IFSB) and the International Association of Insurance Supervisors (IAIS)
have been working to establish core principles that can be applied at takaful
companies. The Accounting and Auditing Organisation for Islamic and
Financial Institutions (AAOIFIC) has also laid down accounting principles for
Islamic institutions.
 Risk management is more limited for takaful firms as no derivatives can be
used to control risks. The limited availability of fixed-interest investments can
affect asset-liability matching. A lack of understanding about shari'a could lead
to non-shari'a compliant products being sold inadvertently, resulting in a

Takaful: Opportunities for Financial Institutions January 2009

negative effect on the company's reputation.

 Qualified staff with knowledge of insurance and shari'a are scarce. It is even
more difficult to find management staff and trained shari'a scholars. There
should be ongoing efforts to establish takaful education programmes - similar
to Malaysia and Bahrain - which will support the industry.
 Only a few years ago, retakaful capacity was quite scarce. The situation has
now improved as many global reinsurers and some regional players have set
up operations or are planning to do so. The further development of capacity
will spur the growth of takaful.
 Takaful operators must deal with additional corporate governance challenges
that conventional insurers do not face. For example, the separation of assets
between the takaful operator and the takaful fund can lead to an increased
principal-agent challenge as the interests of the takaful operator and the
participants are not fully aligned. This may require an organisational structure
where the interests of policyholders within the takaful company are reflected.
Despite the requirement of the takaful operator to provide an interest-free loan
to the takaful pool in the case of a deficit, the operator is protected from the
downside risks, which could encourage the operator to take too many risks.
Another corporate governance issue is the composition of the shari'a board
and its interaction with management. Appropriate checks and balances are
needed for each of these stakeholders.


It is likely that current Muslim buyers will switch to an equivalent takaful alternative
in non-life and compulsory business lines. It will probably take more time and effort
to persuade Muslims who have never bought insurance that takaful is shariah-
compliant and provides benefits. However, in rapidly growing insurance markets,
the amount of leakage from the conventional sector is likely to be hidden by the
overall strong growth. In the long run, takaful will help to grow the market
substantially. Nevertheless, takaful could also draw the attention of non-Muslim
buyers, leading to leakage from conventional insurance, as has been the case in

While the presence of western companies may seem like a contradiction, their
reputation, technical and distribution expertise and their capital strength appeal to
Muslim customers. These attributes are also seen as positive for the development
of the takaful market as a whole.

The distribution channels used for takaful products are not much different than
those for conventional insurance products. Direct sales and tied agents seem to be
the favoured methods, particularly in markets where consumers need to be
educated about the benefits of insurance products.

The International Association of Insurance Supervisors (IAIS) and the Islamic

Financial Services Board (IFSB) on 4th December 2008 announced the signing of a
working agreement which reinforces cooperation and mutual understanding
between both organisations in the pursuit of the common goal of establishing a
sound regulatory and supervisory framework for the insurance/Takaful industry.

Takaful: Opportunities for Financial Institutions January 2009


(Gratitude for quoting from following references, which is acknowledged by

reporter. The reporter has also followed Muslim Shari'a literature from publicly
available sources.)

Central Bank of Bahrain (2007). Insurance Rulebook, TA Takaful/Retakaful,


Clyde & Co. (2007). Translation of the UAE Federal Law 6 of 2007 concerning the
formation of the insurance commission, Dubai.

Dubai Financial Services Authority (2008). DFSA Rulebook, Islamic Financial

Business Module (IFS), Ver. 2/07.

Dubai Financial Services Authority (2008). DFSA Rulebook, Prudential -Insurance

Business Module (PIN), Ver. 10/07.

El-Gamal, Mahmoud A. (2006). Islamic finance, law, economics, and practice, New
York: Cambridge University Press.

Ernst & Young (2008). The world takaful report. Highlighting a new growth
opportunity in Islamic Finance.

Insurance Services Malaysia Berhad (2007). Takaful and conventional insurance.

Fitch Ratings (2007). Takaful review and outlook, October, 2007.

Majama al-Fiqh; Academy of the Organisation of Islamic Conference (1985) The

grand council of Islamic scholars.

S & P Ratings Direct (2008). Takaful: A new and viable insurance business model or
just a marketing opportunity? 5 April, 2008.

Sigma 5/2008 (2008). Insurance in the emerging markets.

Sole, Juan (2007). Introducing Islamic Banks into Conventional Banking Systems,
IMF Working Paper, WP/07/175, July, 2007.

World Islamic insurance directory 2008. Middle East Insurance Review and Takaful

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