DEFINITION OF INSURANCE

1

DEFINITION OF INSURANCE

• Insurance is a means to spread the loss caused by particulars risk, over a number of people against some amount called premium.

• Insurance creates a fund under which many persons contribute a certain some of money called the premium, and out of which the persons who suffer losses are compensated.

2

• Insurance has become a business in which the party doing the business promises to indemnify the losses against some amount, of persons who insure themselves.

• Insurance can not prevent loss.

• It can compensate those who suffer loss.

3

• A contract of insurance is a contingent contract.

• The general principles of the law of contract apply to a contract of insurance.

• It is perfectly a valid contract.

• It becomes into existence by the process of offer in the form of proposal and its acceptance by the issue of a policy.

4

•Competent parties must make the contract of insurance.

•The object of the contract must not be immoral or illegal.

•It must be supported by consideration.

•Briefly, it must fulfill all the essentials of a valid contract like every other contract

5

History

6

•In 3000 BC merchants in Sumer and Babylonia pooled their money to protect themselves from losses from thieves and pirates.

•Greeks and Romans established benevolent societies; dues used to pay burial expenses of members who died.

•Marine, life, disability, and fire insurance developed in Europe beginning in 15th century.

History of Insurance

7

•Ben Franklin formed the Philadelphia Contributor ship for the Insurance from Losses by Fire in 1730.

•Presbyterian Ministers’ Fund of Philadelphia offered life insurance to members in 1759.

History of Insurance

8

Greek and German

Established Benevolent Societies

Funds Utilized for Meeting

Burial Expense

9

In BC 3000

Merchants of

Summer Babylonia

Pool their Money to Protect

From Losses, Thefts, Pirates

10

Time Period

15th Century 1730 1759

Ben Franklin Presbyterian Ministers’

Fund of PhiladelphiaFormed the Philadelphia

Contributor ship

For the Insurance from Losses by Fire

Offered life insurance

to members

Marine, Life, Disability,

& Fire Insurance Developed in Europe

11

Features

• The party, which promises to pay a certain sum of money to the other party, is called the Insurer (insurance company).

• The party to whom a certain some of money is paid is called the insured (policy-holder) .

• The document containing the terms and conditions of the contract of insurance is called a policy.

12

•The consideration, which the insured has to pay to the insurer for the protection given to him is called premium.

•The amount for which a policy is issued is known as policy amount.

13

•The thing or property insured is called the subject matter of insurance.

•The interest of the insured in the subject matter is called his insurable interest.

14

Contract

Between

Individual Insurance Company

Insurance

15

Contract of Purchase and Sales

(1) Insured (4) Insurance Company

(3) By PayingPremium to

(5) SellsPolicy to

(2) Buys PolicyFor subject Matter

SubjectMatter

Consideration

16

Parties Subject Matter

Consideration Type

Insured &Insurance Company

Policy Premium Akd-Awaz

Insurance Contract

17

Islamic View for Insurance Contract

Policy Contract

Can’t BecomeSubject Matter

Status

Batil

Payment Excess

Over Premium

RIBA

18

PremiumPayable

By Insured

StatusAs per Islamic

Sharia

DEBT to

Insurance Company

19

SIZE: Premium and Sum Insured

PremiumAmount

Sum InsuredProtection to

Insured

SmallAmount

Large Amount

Premium is 3 to 4% of sum insured in case of General Insurance

20

Insurance Means

to spread the loss caused by particulars risk

over a number of people

against

Some amount called Premium

Large Amount

Small Amount

21

Insurance Company

Pool of Fund

ParticipantsPremium

ParticipantsPremium

ParticipantsPremium

ParticipantsPremium

Status of Fund not a Legal Body

Creates

22

Contract of Insurance

Between

Insured and Insurer Members of thePool

Not between

23

Status

Company Fund of Participants

Legal BodyPart of Insurance

Company

Not a Legal Body

24

InsuranceContractBetween

ParticipantAnd

Company

ParticipantAnd

Company

ParticipantAnd

Company

ParticipantAnd

Company

25

No Contractamong

Participant Participant


All Participants have separate ContractOnly with the Company.

Between Participants there is no Contract

26

Contract

Type Between

Insured InsurerCommutativeAkd-e- Awaz

View : Conventional Experts

27

Parties to the Insurance Contract

Insurer (Insurance Company)

Insured(Individual)

Buys RiskTransfers

Risk

28

Requirement of Insurable Risk

Large NumberOf Exposure

Units

Loss must be calculable

Loss must be determinable

and measurable

Loss must not Deliberately

Be made

Premium shall be economically

reasonable

Loss shall not beCatastrophic

29

Principle Of

Indemnity

The first purpose is to prevent the

insured from profiting from

insurance

The second purpose is to reduce

moral hazard

Insured should be restored to approximately the same financial position that existed prior to the loss.

Does not apply On

Life Insurance

30

Types of Insurance

31

Type of Insurance

General Life

EXAMPLE EXAMPLE

Third Party

http://affiliates.allposters.com/link/redirect.asp?item=374666&AID=1804904905&PSTID=1&LTID=1

32

InsuranceGeneral Life

Insured Insurer Insured Insurer

Full Premium Payment

Even Part Claims

Payment is not Certain

Full Claim Payment

is Certain

Full Premium Payment is not Certain

Element of Gharar presents

33

Insurance Contract

Sum Insured Premium

Larger than Premium

Smaller than Sum Insured

Toyota Corolla Sum Insured 1,000,000. Premium Yearly 40,000

34

General Insurance Contract for Motor Vehicle Premium decides 40,000 and Insured Amount 1,000,000

No Loss To Car

Loss amount 400,000

Loss Up to 23,000

Rs. 40,000 totally enjoyed by

Insurance Company

Rs. 360,000Enjoyed by

Insured

Rs. 17,000 only enjoyed by

Insurance Company

GENERAL INSURANCE

35

Life Insurance Contract Premium decides Rs. 36,000 per year For 10 years. Payment to Insured by Insurance Company with Interest Rs. 600,000Contract Total Premium is Rs. 360,000 Interest thereon Rs. 240,000

Insured alive & paid 360,000

in 10 Years

Insured paid Rs. 324,000 in 9 yearsInsured death

& paid 36,000

Rs. 240,000Excess Received

by Insured


by Insured


by Insured

LIFE INSURANCE

36


Between

Insured and Insurer Members of thePool

Not between

37

Termination of Insurance- LIFE Insurance

When Insurer does not pay if insured alive at maturity or terminates

the contract

When Insurer does pay if insured alive at maturity or terminates

the contract

Premium reasonably small in size

Premium reasonably large in size

Examples: Credit Cards, LoansPayment to Instant man

Example: Normal Policy

38

Legislation

Prime Law

Supporting toPrime Law

Insurance Ordinance

2000

Insurance Rules 2002

Ministry ofFinance

SECP

Expert recommended that there should be unity of direction Both Ministry of Finance & SECP have tassel

as both of them have made Insurance Rules 2002

39

Insurance

Conceptual aspect Practice aspect

It is a good Concept Further does not

Violate ShariaViolate Sharia Principles

40

"Help ye one another in righteousness and piety, but help ye not one another in sin and rancor".

Principles of Muwalat, Maaqil, and Kafalah and establishment of Islamic welfare state by the Holy Prophet (SAW), Waqf and Tabrru are examples for recognition of this concept.

Al-Maidah verse # 2:

Conceptual Aspect

41

Practical Aspect

Violation

Sharia Principles

Riba Based Gharar Maisir Sale of Debt vs Debt

42

Fatawas Against Insurance

43

Fatwa issued in Judicial Conference held in Makkah in Fatwa issued in Judicial Conference held in Makkah in Shaban 1398 AH.Shaban 1398 AH.

Verdict of Supreme Court of Egypt on Dec. 27, 1926.Verdict of Supreme Court of Egypt on Dec. 27, 1926.

Unanimous resolutions and fatwa by Ulama in the Muslim Unanimous resolutions and fatwa by Ulama in the Muslim League Conference in Cairo in 1965.League Conference in Cairo in 1965.

Unanimous decision by Muslim Scholars in seminar held in Unanimous decision by Muslim Scholars in seminar held in Morocco on May 6, 1972.Morocco on May 6, 1972.

Declaration by Shariah scholars rendering Declaration by Shariah scholars rendering conventional insurance un-Islamicconventional insurance un-Islamic

44

Fatwa issued by Higher Council of Saudi Fatwa issued by Higher Council of Saudi Arabia in 1397 AH. Arabia in 1397 AH.

Fatwa Issued by the Fiqh Council of Fatwa Issued by the Fiqh Council of Muslim World League in 1398 AH. Muslim World League in 1398 AH.

Fatwa issued by the Fiqh Council of the Fatwa issued by the Fiqh Council of the OIC in 1405 AH. OIC in 1405 AH.

Approval of the Grand Counsel of Approval of the Grand Counsel of Islamic scholars in Makkah, Maja Al – Islamic scholars in Makkah, Maja Al – Fiqh, in 1985Fiqh, in 1985..

Judicial Opinions and Fatwas confirming validity of TakafulJudicial Opinions and Fatwas confirming validity of Takaful

45

TAKAFUL

46

Definition of Takaful

Takaful is an Arabic word that means

"guaranteeing each other".

47

Takaful is based on

TA-AWUN (mutual assistance)

Tabarru (Voluntarily)

48

OBJECTIVES

OF

TAKAFUL

49

• (1) It is one of the means of providing a material safeguard for offspring and is thus in line with the saying of the holy prophet SAW. He (SAW) spoke to this effect:

• "It is better for you to leave your off-springs wealthy than to leave them poor, asking others for help" [Narrated by Saad b. Abi Waqqas (r.a).

50

HADITH OF HOLY PROPHET (PBUH)

Explicitly mentioned

Impliedlymentioned

To leave off-springsWealthy

Not to leave off-springsPoor

•[Narrated by Saad b. Abi Waqqas (r.a).

51

• 2) Having a life insurance policy (Family Takaful) is a future material security for widows and other dependents of the deceased (assured). The Holy Prophet (SAW) in fact encouraged the providing of security for the widows and poor persons as he highlighted in one of his traditions:

"The one who looks after and works for a widow and for a poor person (dependent), is like a warrior fighting for The Cause of Allah (SWT), or like a person who fasts during the day and prays throughout the night. Narrated by Safwan bin Salim (r.a).

52

A person who looks after and Works for Poor person is like

A warrior fighting for the cause of Allah (SWT)

And pray throughout the night

A Person who fast during the Day

Narrated by Safwan bin Salim (r.a).

53

• 3) A life insurance policy guarantees a future material protection for, inter alia, orphans, and it is again justified by the saying of the holy Prophet (SAW):

"I and the person who looks after an orphan and provides for him, will be in paradise like this, putting his index and middle finger together. " [Narrated by Sahl bin Saad (r.a).

54

I and the person who looks after an orphan and provides for him

will be in paradise

Narrated by

Sahl bin Saad (r.a).

like this, putting his index and middle finger together.

55

• 4) Having a life insurance policy provides certain persons (as widows, orphans and so on) with a protection from unexpected future material difficulties which may result in hardship for the life of these people. The Holy Prophet advised the Ummah to protect one from any form of hardships and difficulties when he said to the effect:

• Whosoever removes a worldly grief from a believer Allah (SWT) will remove from him one of the griefs of the day of Judgment.

• Whosoever alleviates a needy person Allah (SWT) will alleviate from him in this world and the next... [Narrated by Abu Huraira (r. a).

56

Whosoever alleviates a needy person

ALLAH (SWT)

will alleviate from him in this world and the next...

•[Narrated by Abu Huraira (r. a).

57

Whosoever removes a worldly grief from a believer

ALLAH (SWT)

one of the grieves of the day of Judgment.

will remove from him

Narrated by Abu Huraira (r. a).

58

• 5) Having a life insurance policy is like taking an initiative towards reducing the poverty rates and contributing towards a reasonable comfortable life without such difficulties. It is thus justified by the Qur'anic principle whereby Allah (SWT) advised the creatures to seek from Him for The Comfortable life. He (SWT) says to the effect:

"Our Lord! Give us comfortable life. in this world and comfortable in the hereafter.. “

59

•Allah (SWT) advised the creatures to seek from Him

for The Comfortable life. He (SWT) says to the effect:

"Our Lord! Give us comfortable life

in this world in the hereafter

60

• 6) A life insurance policy ensures mutual cooperation, a brotherly feeling towards others, which provides a positive status, which can provide a feeling of brotherhood in society.

• Moreover, having a life insurance policy is a positive

initiative by the assured towards a positive material status of the widow, offspring and so on. Such mutual cooperation towards a positive goal is in fact ruled on by Allah (SWT) where He (SWT) says to the effect:

• "...Sustain in mutual cooperation among yourselves in righteousness and piety..."

61

• 7) Finally having a life insurance policy is like taking an initiative towards ensuring a self-reliant society, without facing hardship and difficulties, and, of course, an economic growth in society which may result in the elimination of hardship and bring about a comfortable standard of living in the society.

It is thus in line with the Qur'anic principle where Allah (SWT) Himself prefers an easy life for the creatures rather than them having

difficulties. He (SWT) says to the effect:

"... .Allah (SWT) intends easy life for all of you while He does not want you to be in difficulties..."

62

• 8) Such transaction is considered as a mutual cooperation towards the welfare of the helpless people in society and is thus in line with the Qur'anic principle. Allah (SWT) says to the effect:

"...Cooperate among yourselves in righteousness and piety.. ."

63

Reference of Takaful in QURAN

The Quran states in Surah Al-Maidah verse # 2:

"Help ye one another in righteousness and piety, but help ye not one another in sin and rancor".

64

Reference of Takaful in HADITH

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

of Allah”

65

First

tie the camel first

Then

submit (tawakkal)

to the will of Allah”

66

Origin of

Takaful

67

Origins of Takaful• Members of the first Islamic community 14

centuries ago practiced successful schemes of co-operative risk sharing.

• Early precursors were developed in response to perils and risks associated with long-distance trade via caravans or sea voyage and included:

• Hilf (undertaking)• Aaqila (pooling of resources for arranging payment

of blood money) • Damaan khatar al tarik (surety)

68

…… origins of Takaful• In the first constitution in Madinah of 622 CE,

there were codified references to social insurance relying upon practices like:

• Al – diyah and Al – aqila (wergild or blood money to rescue accused in accidental killing).

• Fidyah (ransom for prisoners of war)

• Dawania – Mutual indemnification amongst officers working in the same department during the rule of the 2nd Caliph Umar Ibn Al Khattab.

• Cooperative schemes to aid the needy, ill and poor.

69

Main drivers of Takaful

• Piety (individual purification)

• Brotherhood (mutual assistance)

• Charity (Tabarru or contribution)

• Mutual Guarantee

• Community well-being as opposed to profit maximization.

70

Uses of TakafulTakaful can be used to cover

• Property like house, factory, mosque, offices

• Vehicles (car, motorcycle etc..)

• Goods ( like during import or export )

• Valuables

• Health, accidents and Life

71

ISSUES AGAINST INSURANCE

72

Issues against Conventional Insurance

• COMMUTATIVE CONTRACT

• GHARAR

• QIMAR

• INTEREST

• RISK SELLING

• SELL OF DEBT vs DEBT (Life Insurance)

73


Islamic Conventional

It is a CommutativeContract

Aqd Awaz

It is a non Commutative

ContractAqd taburru

74

Gharar

Commutative Contract

Non CommutativeContract

If major thenDisallowed

AllowedIn all situations

75

Gharar

Present in Takaful

Present in Insurance

Allowed Not Allowed

Due to Tabaru Contract Due to Commutative Contract

76

Commutative Contract

Application of Doctrine of Necessity

No disputearises

Not related to Original partOf Contract

Gharar is Minor

Gharar Allowed When

SalamIstisna

77

Uncertainty - Gharrar Conventional insurance contract is basically a contract of exchange (mu'awadat) * Buying and selling whereby policy (indemnity) is sold as goods, with the premium as the price or consideration. * The consideration must be certain for exchange contract. * Gharrar in insurance contracts pertains to "deliverability" of subject matter, uncertainty as to: * Whether the insured will get the compensation promised? * How much the insured will get? * When will the compensation be paid?

Thus, it involves an element of uncertainty in the subject matter of the insurancesales contract, which renders its void under the Islamic law.

78

Insurance Contract and Gharar

Gharar is OriginalIn Insurance

Contract

Insurance Contract is Commutative Contract

Gharar is Large in Insurance

Contract

In Dar ul Hurb;

Some Scholars says Doctrine of Necessity is Applicable

Most of the Ulma are agreed that Insurance is Haram and not allowed even as Doctrine of necessity

79

Third Party Insurance is Allowed

Under Special Circumstances

Like USA , UK Australia If a person slips outside the door of House Owner

The Owner is by Law Held Responsible

80

Essential of Gharar

• It must be Original in the agreement.

• Agreement shall be Commutative.

• Doctrine of necessity is not applicable.

• Gharar is large in Contract.

81

Interest - Riba

" .... Allah has permitted trading and forbidden riba" (AI Baqarah 2 : 275).

Insurance funds are invested in financial instruments which contain the element of Riba.

82

ALLAH has

Allowed Prohibited

TRADE RIBA

(AI Baqarah 2 : 275)

83

General Insurance Contract for Motor Vehicle Premium decides 40,000 and Insured Amount 1,000,000

No Loss To Car

Loss amount 400,000

Loss Up to 23,000

Qimar Rs. 40,000

on Insurance Company

Riba earned by Insured Rs. 360,000

Qimar Up to 17,000 on

Insurance Company

84

Gambling/Qimar/Maisir"Insurance is a contract upon speculation.

Good faith forbids either party from concealing what he privately knows, to draw the other into a bargain, from his ignorance of that fact,

and his believing to the contrary"

(Lord Mansfield in Carter v. Boehm - 1766).

The insured loses the money paid for the premium when the insured event does not occur.

The company will be in deficit if claims are higher than premium.

85

Life Insurance Contract Premium decides Rs. 36,000 per year For 10 years. Payment to Insured by Insurance Company with Interest Rs. 600,000Contract Total Premium is Rs. 360,000 Interest thereon Rs. 240,000

Insured alive & paid 360,000

in 10 Years

Insured paid Rs. 324,000 in 9 yearsInsured death

& paid 36,000

RIBA is Rs. 240,000, It is case when Riba is

minimum and the same amount decided in the

contract

RIBA is Rs. 276,000Size of Riba is Smaller

As the insured alive Till the last periods

RIBA is Rs. 564,000Size of Riba is

very large

No Qimar under Life Insurance

86

Gharar on

Insured's End

87

Gharar on Insured's end on Premium Payment

In General In LIFE

No GhararHe pays all the amount at once

Gharar ExistsBecause

Death is uncertain

88

Gharar on Insured's end on Receiving of Claim

In General In LIFE

Gharar No Gharar in receiving but

When to receive is uncertain

89

Gharar on

Insurance Company's End

90

Gharar on Insurance Company's end on Premium Receipt

In General In LIFE

No GhararGharar Exists

91

Gharar on Insurance Company's end on Claim Payment

In General In LIFE

Gharar No Gharar in Payment but

When to pay is uncertain

When to Pay, To pay or Not to Pay,

How much to Pay

92

Sales of Debt

Vs

Debt

93

Policy Price500,000

Terms 10 Years

Interest Rate 10%

Contract between Insured and Insurer

Insured has Bought the Policy and he pays in Installments

Rs. 500,000 is debt On Insured

Policy amount Rs. 500,000+ 10% is debt on Insurance Company too

Sale of Debt vs Debt

94

Debt

Buyer(Insured)

Insurance Company

Buyers pays inInstallments

Insurance Company is bound to pay in Case of Contingency or Maturity

Both Parties are in debt to each other

95

Status of Policy

Whether It becomes Subject Matter

96

Policy is not a Product

Subject Matter defined by ShariaDoes not cover Policy as Product/ Services

97

Subject Matter

ExistenceMala –e-

MutaqavumAscertained Deliverable

98

Is Insurance Contract is a Service Contract

Like Security Guard

99

Safety

Guard ProvidesIt is a Service Contract

Insurance Company Does not act as Guard

It is not IjaraIt is Ijara

Law of Indemnity

DoesNot Apply

Does apply on General Insurance

Loss Guaranteed

100

Guard Services

Guard must Take Due Care

In Case of Losses

If Guard is negligent

If Guard is not Negligent

Compensation may be taken as per the term of the Contract

Owner Personally Responsible

Loss notGuaranteed

To Compensate

101

Risk

In Guard Service

In InsuranceRisk Is transferred

Risk is not transferred

102

Law of Indemnity

Upto the amount AgreedLess Deductibles

Causes of Loss(Perils)

Insurance Company is Bound to compensate

Shall be same as Mentioned in the

Contract

103

MISCONCEPTIONSABOUT TAKAFUL

Misconception – 1

• Risk Protection (insurance) is against Tawakkul (total dependence upon Allah (SWT)).

Response

• In a Hadith narrated by Anas bin Malik, one day Prophet Muhammed (PBUH) noticed an Arab Bedouin leaving his camel untied. He asked the Bedouin, “Why don’t you tie down your camel”

The Bedouin answered, “I put my trust in Allah (SWT)”. To which the Prophet (SAW) replied, “Tie your camel first, then put your trust in Allah (SWT)”. <Tirmidhi>

Misconceptions about Takaful


Misconception – 2

• All risk Protection (insurance) is Haram (prohibited)

Response

• Fiqh Council of World Muslim League resolution and Fiqh Council of Organization of Islamic Conference in Jeddah resolved that, conventional insurance as presently practiced is Haram, and that, cooperative insurance (Takaful) is permissible and fully consistent with Shariah principles.


Misconception – 3

• All insurance contracts seek to maximize profits, which takes benefits away from the policy holders

Response

• Takaful operators are mutual or cooperative entities and they aim for Community well being and self-sustaining operations.

• Under the Takaful Wakalah Model, the surplus in the fund is returned entirely to the policy holders.


Misconception - 4

• All types of insurance are a form of Gambling or Wagering, which is forbidden in Islam

Response

• Risk or Uncertainty can be divided into two classes:• Pure Risk (involves the possibility of loss or no loss)• Speculative Risk (involves the possibility of loss, no

loss or gain)

• Takaful insures only Pure Risks and the claims are paid in the event of Loss to cover repairs, damage, replacement of property, or an agreed fixed sum.

108

Takaful Through Time

A chronology of developments

109

S. NO. EVENTS DATE

1Prophet Muhammad (PBUH) validated a system of community

self help and financial assistance which later developed into Takaful.

At the start of Hijri (During

the 7th Century CE)

2Unanimous decisions by Muslims & Fatwa issued by National

Religious Council of Malaysia.1972

3First International conference on Islamic Economics was held in

Makkah.1976

4Fatwa issued by Higher Council of Saudi Arabia in favour of

Islamic Insurance model.1977

5Development of Takaful in modern times by establishing the first

Takaful Company in Sudan.1979

6 First National Reinsurance in Sudan. 1979

…………. . Takaful Through TimeTakaful Through Time

110

S. NO. EVENTS DATE

7Establishment of The Islamic Arab Insurance Company in Saudi

Arabia which was later relocated in UAE.1979-80

8 Dar Al Mal Al Islami Trust, Switzerland. 1981

9 Saudi Islamic Takaful and Re-Takaful Company, Bahamas. 1983

10 Islamic Takaful Company in Luxembourg. 1983

11Development of Takaful in modern times by establishing the first

Takaful Company in Malaysia.1984

12Takaful Act, an act passed to provide for the registration and

regulation of Takaful business in Malaysia.1984


111

S. NO. EVENTS DATE

13Takaful Islamic Insurance and Takaful Islamic Re-Insurance in

Saudi Arabia and Bahrain respectively.1985

14 Saudi Takaful Ltd., the first dedicated Re-Takaful in Tunisia. 1985

15International Cooperative & Mutual Insurance Federation ( ICMIF

) started interacting with Takaful operators in a proactive manner.

1990's

16 Takaful Bangunan IBB, Brunei Darussalam. 1993

17 PT Syarikat Takaful, Indonesia. 1994


112

S. NO. EVENTS DATE

18 Syarikat Takaful, Singapore. 1995

19 Islamic Insurance Company, Qatar. 1995

20ASEAN Takaful Group evolved into ASEAN Retakaful

International (ARIL) in Labuan, Malaysia.1997

21 Establishment of Dubai Takaful Insurance Company, UAE. 1997

22 Establishment of Trinidad-Tobago Takaful Friendly Society. 1999

23 Establishment of Amana Takaful in Sri Lanka. 1999


113

S. NO. EVENTS DATE

24A code of Ethics was developed for the Takaful Industry by

Takaful Malaysia and Takaful Nasional.2000

25 Al Aman Takaful, Lebanon. 2002

26Incorporation of Pak-Kuwait Takaful Company Ltd., the first

Islamic Insurance operator in Pakistan.2003

27International Takaful conference held in London to promote

Takaful business.2003

28A paper was published by Bahrain Monetary Agency (BMA)

which proposed rules to regulate the Takaful and ReTakaful industry.

2004

29Takaful Insurance forum organized by Egyptian Insurance

Supervisory Authority (EISA) was held for the recognition of a growing interest in Takaful scheme.

2005

30 SECP notifies Takaful Rules in Pakistan. 2005


114

Comparison BetweenTakaful and Conventional Insurance

115

Comparing Takaful to Conventional InsuranceIssue Conventional Insurance Takaful

Organization Principle Profit for shareholders Mutual for participants

Basis Risk Transfer Co-operative risk sharing

Value Proposition Profits maximization Affordability and spiritual

satisfaction

Laws Secular/Regulations Sharia plus regulations

Management status Company Management Operator

Form of Contract Contract of Sale Cooperative,

Islamic contracts of Wakala or

Mudarbah with Tabar’ru

(contributions)

Investments Interest based Sharia compliant, Riba-free

Surplus Insurance Company Participants’ account

116

Description Takaful Insurance

ContractNon Commutative Contract Commutative Contract

Parties to the ContractThree (Policy Holder, Pool, Takaful Operator)

Two (Policy Holder and Insurance Company)

Ownership over Premium Wakf is the OwnerInsurance Company is the Owner

Risk Sharing Transferring

Relationship between Insured Exists No relationship exists

Surplus Returned to Policy Holders Retained by Company

Status of Pool Legal entity Not a Legal Entity

In SuicideRight of Policy Holder remains

Right of Policy Holder no more

117

RISK

Insurance Takaful

Transferred Shared

118

Co-Insurance

IslamicInsurance

ConventionalInsurance

Allowed

As both are Responsible for their part

Allowed on the basis of Doctrine of Necessity

119

120

Insurance Company

Pool of Fund

ParticipantsPremium

ParticipantsPremium

ParticipantsPremium

ParticipantsPremium

Status of Fund not a Legal Body

Creates

121

Takaful Company

Pool of Fund

ParticipantsPremium

ParticipantsPremium

ParticipantsPremium

ParticipantsPremium

Status of Fund a Legal Body I.e. WAKF

Creates

122

Contract of Takaful

Between

Insured and InsurerMembers of the

Pool

Not between

123

Status

Company Fund of Participants

Legal BodyIndependent

To Insurance Company

Legal Body

124

TakafulContract

Not Between

ParticipantAnd

Company

ParticipantAnd

Company

ParticipantAnd

Company

ParticipantAnd

Company

125

Contractamong



All Participants donors of the PoolCompany is the arranger of the Pool

126

MODELS OF TAKAFUL

127

Mudarba Model A Malaysian Product

128

Share Holders

Establish a Takaful Management Company

Purpose

Receives Amount from Participants

Company actsAs Mudarib

Participants actas RABUL MAL

129

Management Company

Act as Mudarib

Creates Invests of Funds

Takaful FundProfit

Expenses & Claims : Paid

SurplusShared Between

Participants and Company

130

Takaful Fund -Managed by Mudarib

Deduction of Operational Cost

From Takaful Fund

ParticipantsMoney

Investment

Profit

Surplus

Distribute

Participants’Share

Company’sShare

AdministrativeCost

Share HoldersEquity

Step- 1 Step- 2

131

Profits attributable

to Shareholders

Company’s Admin. & Mangt.

Expenses

Takaful Contribution

paid by Participant

General TakafulFund

General TakafulFund

Operational Cost ofTakaful

Surplus(Profit)

Participant’sShare

from Surplus

Company’s Share from

Surplus

Investment By

Company

Profit From

Investments

Company

Participant

Mudaraba Model

132

Function of Mudarib

Look after activates Underwriting

Claim Management

Operations of

Business

133

Issue Sensitive

In Mudarba Model

134

Issues in Mudarba Model

Mudarba is a Commutative

Contract

Gharar is not Allowed in

CommutativeContract

Mudarib is allowed to Share in

Surplus

Surplus means Premium Minus

Expenses

The Objective of Mudarba is to

invest and Earn thereon But In

Takaful the prime Object is to

compensate losses of participants.

135

In Mudarbah Model

Capital

Premium

Object

To Compensate and Earn Surplus

if any

Contract

Tabaru

Ras-ul-Mal

ImpossibleModarba is

Always aCommutative Contract

WrongMudarba Object

is to Earn

136

Parties

Insured

Rabul Mal

Insurance Company

Insurer

Mudarba Model

137

Concept

ConceptOf Mudarba

Concept of

Insurance

EARN Profits Compensate Losses

ContradictionIn

Object

Modarba Model

138

DeductedAdministrative & Operational Cost

Share of InsuredRabul MAL

Share of Company Mudarib

Investments

Surplus

Mudarib can not share in the capital of Rabul Mal

Contribution of Participants

Contribution of Participants

139

Rabul Mal Invested Rs. 100,000Ratio decided 50:50

Capital + Profit = 120,000

Reserves, Claim & Expenses Rs 70,000

Sharing of Surplus Rs. 50,000

Rabul MalRs. 25,000

Mudarib 25,000

Here Mudarib Share In the equity of Rabul Mal Rs. 15,000

MudarbaModelProfit Rs 20,000

140

In Insurance/Takaful Contract

The Surplus comprising of the differenceBetween Premium and Claims

Size of Profit On Investment of Premium is not very large

There is a great chanceThat Mudarib Share in residual premium

In Mudarba Model All premium are considered as Capital of RAB UL MAL

Mudarib can not share in Capital, He shares in Operational Profits Only

141

Element of Gharar Always present in Takaful

Mudarib can not Share in theCapital of

RAB UL MAL

Mudarba is CommutativeContract so Takaful operations can not be done under Mudarba

Genuine Grounds against Validity of Mudarba Model

142

In General Insurance/Takaful

Claim is PaidAgainst the losses

of Participants

No Amount is Refundable

Participants are given only Surplus

Here “ZAKAT” Order and “Inheritance Rights” are effected

Ownership over amounts remains with the Participants

143

Wakala Model Middle East Product

144

Share Holders

Form a Company

Purpose

Receives Contributions from Participants

Company actsAs Wakeel

Participants actAs Donor

145

Takaful Company under Wakala Model

Has Paid Up Capital

TakesPremiumAnd put

them in a Fund for

Investment

Not Liable Personally to

Insured as Company is

AN agent not Principal

Asks Wakala

Fees from Policy Holders

•Risk Management•Underwriting•Claim Management•Invests Premium

On Return on Investment

Companies charges profit as Mudarib

Not mixed with

premium

For Doing

146

Management Company

Act as Wakeel

Creates Receives

Amount from

Takaful FundAmount

Allocation

Participants

Status of Participants Donor

Wakala FeesAs Donation

147

Wakala Model is based on Munahada

An arrangement where people put all their Goods / Cash together and consume them

Consequences

Contributor consumesmore than

his contribution

Contributor consumesless than

his contribution

Contributor consumesequal than

his contribution

Islam Allows

148

Donation from Participants

Place in Investment

Company Act as

MudaribFor the purpose of

Investment

Income

Transfer to Takaful FundDeduction of Operational Cost,

Creating a Reserve,

THE SURPLUS

DistributesParticipants

Mudarib’s Share

149

Income Of Takaful Company

Wakala FeesMudarib 's

Shares

Profit on Investmentsof Wakala Fees

Income Earned on

Placement ofParticipants

Funds

Further

150

Role of Company

Works asAgent of fund

Work as PartnerMudarib for the Purpose

of Investments

Wakala Fees Mudarib’sShare in Profit

Consideration

151

Insurance Company

Takes Premium

Transfer to FUND after deducting their

Agency Commission

Charges Agency Commission

Maximum Upto 30%

Utilizes for

Statutory Reserves

BusinessOperations If Profit

Takes share as Modarib

Share of Policy Holders

152

General TakafulFund

OperationalCost ofTakaful/

ReTakaful

Surplus(Profit)

SurplusDistribution

toParticipants

Participants’

Takaful Fund

Wakala Model

Takaful

Contribution

paid

by Participant

Company

(Capital)

Mudarib's’Share

of PTF’s Investment

Income

ManagementExpense

of the Company

Profit/Lossattributable toShareholders

WakalaFee

(30% to 35%)

ProfitFrom

Investments

InvestmentIncome

Reserves

Investment bythe Company

Investment Income Sharingon Mudaraba Basis

Wakala Fee is also invested and profits on it only enjoyed by the Company

153

Claims to be Paid

First:Premiums

Second:Un appropriation

Reserves

Capital of the Company

Such Compensation is based on Qarz-e- Hassna

Last: Resort

154

Sensitive Issues

In Wakala Model

155

Wakala Model is based on Munahada

An arrangement where people put all their Goods / Cash together and consume them

Consequences

Contributor consumesmore than

his contribution

Contributor consumesless than

his contribution

Contributor consumesequal than

his contribution

Islam Allows

Ownership is not transferred until it is consumed

156

Donation to Takaful

Company(1)

(2) TakafulCompany

(3) As an agent Invests Funds and Operates

Insurance activity and incurred Other Cost

(4) If Surplus then it is Distributed to Donar

(4) If Loss then CompanyGives Qaz-I- Hassna

Or

157

InsuredInsuranceCompanyTransfer

the amount to

Fund

OwnershipOver Amount

Not a Legal Body

Wakala Model

DonatesTo

158

InsuredInsuranceCompanyTransfer

the amount to

Fund InvestedPlus Return

Less : Reserves, Claims,Expenses

SURPLUS goes to

OwnershipOver Amount

Even after Donation

Wakala Model

DonatesTo

It is a wrong Principle to get right over things after donation

159

Gift Moalaka by Mr. FaisalRs. 100,000

TakafulCompany

Loss arisesto Mr. FaisalRs. 110,000

Interest to Mr. Faisal Rs. 10,000As from start to Loss the Owner

of Rs. 100,000 is Mr. Faisal

Wakala Model

Compensation by Insurance

Company from PoolRs. 110,000

160

Gift in Takaful

When the Gift giver surrender the amount

and it is used to compensate other party

it is a Real gift

A person comes and surrender the amount to gift other, if there is no

loss to other the Gift remains Without utilization

GIFT Type :HIBA MO-AL-LAKA

When Insured comes and gives amount, Simultaneously the Insurance company does not

use it for compensating losses of others

161

A person comes to Insurance Company

And surrender amount

Such Surrendered amount is

Gift

When it is utilized/ compensated to People who have suffered loss,

if no people has suffered loss then the amount shall treated as

HIBA Mo-al-laka

Intention: To Gift Loss effected People.

162

Gift Type

Real gift HIBAMo-Al-Laka

Executed Executory

Future

163

Gift : Mo-al-lakaProperty of whom ??

Donor/ Participant Fund

Legal Body

Not a Legal Body

Conclusion : It is a property of Donar

164

Gift : Mo-al-laka

Property OwnerIs Participant / donor

Gift Mean: Absolute Transfer of Ownership

from one person to another which is not present

Such concept is against the root of Gift

165

Gift : Mo-al-laka

Rights of Donar

Zakat Applicable

Applicability of Law of

Inheritance

Such person May ask for

refundAs he is owner

Right of Creditor

And GovtExists on Donated amount

Ask from Insurance Company about his/her remaining of Hiba-al- Mo-al-laka

166

Under Gift: The donor can not withdraw any amount

So at the end the surplus can not be Given to Donors

But in Wakala ModelIt is given

167

A100,000

B400,000

C300,000

D200,000

Gift to FundLoss happens Rs. 200,000

20% of Rs. 1000,000

B320,000

C240,000

D160,000

A80,000

Gift amount Hiba Mo-al-laka

Total 1,000,000

Total800,000

168

FUND 100,000

Donation From

Mr. Aslam100,000

Mr. Aslam remains the Owner of the amount Rs. 100,000

169

Funds Rs. 300,0000

Loss to Mr. B 230,000

Mr. A Dontes Rs. 100,000

Mr. C DonatesRs. 100,000

Mr. B DonatesRs. 100,000

Remaining Fund Rs 70,000

Ownership of Mr. ARs. 35,000

Ownership of Mr. BRs. 35,000

Zakat and Inheritence Rights are applicable

170

Wakala Model is Based on Donations

But for a Valid Donation / GIFT

Transfer of Ownership is Essential

Who are the Beneficiary at the time of Donation is Unknown

Here “ZAKAT” Order and “Inheritance Rights” are effected

171

Real Beneficiary

Who suffers Loss

Before Loss the Donee is not Identified

Ownership remains with the Donor

172

Wakala Wakf

A Pakistani Product

173

Share Holders Forms

Management Company

Company forms a WAKF

Company Receives Contributions

from Participants

Allocation of Amount

Transferred to WAKF

WakalaFees

174

Income Of Share Holders

Wakala FeesMudarib 's

Shares

Profit on Investmentsof Wakala Fees

Income Earned on

Placement ofParticipants

Funds

175

Status of Entities

ManagementCompany

WAKF

SeparateStatus

Both areLegal Body

176

Status of Takaful Company

Sharia Perspective Law of Land

All of the below acceptable

Association of Persons

Individual

Corporate/ Company

CorporateLegal Body

(SECP Bindings)

177

Status of WAKF

Sharia Perspective Law of Land

CorporateLegal Body

(SECP Bindings)

CorporateLegal Body

(SECP Bindings)

178

Sources of Income of Takaful Company

Return on Equity

WakalaFee

OtherIncomes

Share of Mudarib

179

Sources of Income of WAKF

PremiumGeneral

DonationsRetakaful

ClaimsShare of

Investment as

Rabul Mal

Qara-e-Hassna in case of Deficit

180

Participants Contributions

To Wakf

Ownership over amount transferred to WAKF

Consequently :the Parcipants is not the owner of the Amount

181

Wakf100,000

Donation From

Mr. Aslam100,000

WAKF is the Owner of Rs. 100,000

Aslam is notThe Owner

Of Rs.100,000

182

Wakf Funds Rs. 300,0000

Loss to Mr. B 130,000

Mr. A Dontes Rs. 100,000

Mr. C DonatesRs. 100,000

Mr. B DonatesRs. 100,000

Remiaing Fund Rs 70,000

Ownership of WakfOver Remaining Rs. 70,000

183

ParticipantsDonates -(1)

Donation through Takaful Operator

Goes to FUND (2)

Fund : WAKFOwner Allah

(3)

MudarbahContract

(4)Takaful Operator

Wakf

WakeelOf Fund

184

WAQF FundOperational

Cost ofTakaful/

ReTakaful

Surplus(Profit)

SurplusDistribution

toParticipants

Wakala-Waqf Model

Company

(Capital)

Mudarib's’Share

of PTF’s Investment

Income

ManagementExpense

of the Company

Profit/Lossattributable toShareholders

WakalaFee

(e.g. 30% to 35%)

InvestmentIncome

InvestmentIncome

Reserves

Investment bythe Company

Initial Donation

to create

WAQF Fund

Contribution

by

Participant

Investment Income Sharingon Mudaraba Basis

185

WAKF Concept

Can a Person after donation be himself the

Beneficiary of the Wakf

186

Donor himself Beneficiary

Companion of Holy Prophet (PBUH)

Hazrat Zubair(R.A)

Law of PakistanHazrat Anus

(R.A)

He Wakfed his House with the

Condition

He Wakfed his twoFloor House with the

Condition

If my daughters are Divorced then they can live in the House

That he lives in one floor till

death

Section 3(b)Of Wakf ActAllows for

HanfisMuslims

187

Difference between Mudarba and Wakf Model

Mudarba ContractBetween

Wakala Wakf Model

Mudarba Model

Wakf and

Takaful Company

Policy Holder and

Takaful Compnay

188

Difference between Wakala and Wakf Model

Mudarba ContractBetween

Wakala Wakf Model

Wakala Model

Wakf and

Takaful Company

Pool (Jointly by Policy Holders) and

Takaful Compnay

189

COMPARISIONINSURANCE VS TAKAFUL

MODELSDescription Insurance Takaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Nature of Contract

Commutative / Commercial / Aqad-e-Awaz

Commutative / Commercial / Aqad-e-Awaz

Non-commutative /

Non-commercial /

Aqad-e-Tabarru

Non-commutative /

Non-commercial /

Aqad-e-Tabarru

190


MODELS

Description Insurance Takaful Modaraba

Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

ModelConcept given by

Greeks Malaysia UAE/ Bahrain Allama Muhammad Shafi Father of Allama Justice Taki Usmani

191



Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

ModelLaw Applied Contract Law Islamic Law of

Contract and

Modaraba

Islamic Law of Contract

Wakalah, Mudarba, Takaful Rules

Islamic Law of Contract

Wakala, Waqaf, Mudarba, Takaful Rules

192


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Insurer Insurance company is called insurer

Takaful company is called insurer



193


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Insured Customer / Policy Holder

Rabbul-Mal / Policy Holder

Donor Donor

194


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Owner of the Amount of Policy

The Insurance Company.

The Policy Holder (Rabul Mal) as he gives amount as Capital to Insurance Company

The Policy Holder as he gives amount but the donee is not identified

The Wakf as when amount goes to Wakf the Wakf becomes the Owner

195


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Risk Transfer Share Share Share

196


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Premium Consideration as Sales

Rasul-Mal Donation/Gift Donation/Gift

197


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Insurance Company

Seller Takaful Company is Mudarib

Takaful Company is Wakeel / Mudarib

Takaful Company / Wakeel & Mudarib

198


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Policy Holder Buyer Rabbul-Mal Donor Donor

199


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Basis Risk transfer Risk Sharing Risk Sharing Risk Sharing

200


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

ModelLegal Bodies found in contract

Insurance Company and Policy Holder

Takaful Company and Policy Holder

Takaful Company and Policy Holder.

Pool is not the legal body

Takaful Company, Policy Holder and

WAKF

201


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Contract b/w Insurer & Insured

Sale & Purchase transaction

Mudarba (Mudarib & Rabbul-Mal)

Wakala & Mudarba

No Contract

202


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Status of Contract as per Sharia Ruling

Fasid- as it contains Interest, Uncertainty & Gambling

Fasid as element of Gharar is not allowed in commutative Contract

Batil as Pool is not the legal body

Sahee has all requirement of the sharia rulings are considered

203


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Consideration at the end of Company

Premium Premium MINUS

Expenses+ premium * Share of Mudarib

Wakala Fees + Mudarib share on Investment

Wakala Fees + Mudarib share on Investment

204


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Consideration at the end of Insured

Risk coverage Help in occasion of any loss or mishap & Share in shape of profits

Help in occasion of any loss or mishap & income in shape of residual amount

Help in occasion of any loss or mishap & income in shape of residual amount

205


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Relationship between Pool and Insured

No Relationship. Pool is the part of Insurance entity.

All the Rabul Mal is the Owner of the Pool

Donor is the Owner of his share in the Pool

Pool is replaced with Wakf which is a legal entity. Policy Holder is the Donor and beneficiary.

206


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Gharar -As contract is AKD AAWIZ (Commutative) so Gharar is strictly prohibited

As contract is AKD AAWIZ (Commutative) so Gharar is strictly prohibited

As contract is Batil so Zakat is applicable

Gharar does not effect contract of Tabaru

207


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

ModelIssues -AKD-e-Awaz

-Gharar

-Qimar

-Interest

-Risk Selling

-Sell Debt Vs Debt

-Commercial.

- Rabbul-Mal Should get the returns of investment in shape of surplus (which is not actually shared).

- Rabbul-Mal should be the owner of profits & losses, which in term.

- It’s a Waqaf and ideally a Islamic way of Charity based help in mishaps.

208


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Surplus=

Premium - Expenses+Profits

NCB (No Claim Bonus) is given on General Insurance

Share between Mudarib and Rabul Mal

Given to Donee Given to Donee

209


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Consideration to Insurance Company

Only Premium Surplus after meeting Expenses and earning returns on Investments

Wakala Fees

Mudarba Share

Wakala Fees

Mudarba Share

210


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

ModelWakala Fees of Takaful Company

No Applicable Not Applicable Upfront as its income of Underwriting and managing Wakf

First amount goes to Wakf then from Wakf it goes to Takaful Company as its income of Underwriting and managing Wakf

211



Modaraba ModelTakaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Contract of Mudarba

No Such Contract. As When Insurance Company receives the amount, it becomes the sole owner of the said amount

-Between Policy Holder (Rabul Mal) and Takaful Company as Mudarib

Between Company and Pool (Owner of the Pool is the Policy Holder) so indirectly between Policy holder and the Company

Between Wakf and Takaful Company

212


MODELSDescriptio

nInsuranc

eTakaful

Modaraba Model

Takaful

Wakala

Model

Takaful

Wakala Waqaf

Model

Contract of Wakala

-No Such Contract.

-No Such Contract.

Between Policy Holder and Takaful Company

Between Wakf and Takaful Company

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DEFINITION OF INSURANCE

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