The concept of takaful might initially be confusing but we have simplified the idea of takaful and how it ultimately works in the UAE financial sector as well as for any individual living at the Emirates. It all started millenias ago, when Islam was born in the region. People who followed Islam came up with an unorthodox cooperative system where repayment or reimbursement in an instance of loss was made easy to deal with. People at the time came together to donate to a fund amounting to a large amount of money.
The contributions had to be regular, but in small amounts. This participating contribution or fund is also called ‘tabarru’. In the hour of need, for any one of the donors, this amount was used to compensate for repayment in circumstances of loss. Thus takaful was born under the laws of Islamic muamalat which is also known as islamic banking. In present times the management of these funds is conducted by the takaful operators which are basically Islamic banks which follow the Islamic laws of banking.
As early as 622 AD, this concept was borne with the idea of mutual aid brought to people in need. But today takaful is available to both followers of Islam and non-followers alike. Takaful is hence mutual insurance based on responsibilities that is shared through contributions to a fund. However, today, takaful is not limited to life insurance products. There is much more to it than meets the eye.
Principles of Takaful Life Insurance and Business Model
To make the concept simpler to understand here are the main principles and business model of the takaful life insurance products:
- People contributing (policyholders) to this takaful set a target amount to be accumulated.
- There is also a set period of time over which is this amount is accumulated, which is why this type of insurance has a maturity period.
- This is also a mutual protection plan where all the people contributing are agreeing or rather guaranteeing financial aid through the accumulated fund under specific conditions or circumstances.
- There are 2 types of accounts for each policyholder's contribution: The individual account and the special account.
- The money that goes into the individual account is used for investment and savings, and forms the major portion of the contribution.
- The special account is the portion of the premiums which is saved up to be utilized in the hours of need.
- The investments of the individual account funds is done on stocks of companies which are either Islamic or fall under the halal laws of Islam. For a quick understanding, halal laws are a disciplined form of conducting a business or enterprise under the Sharia laws of Islamic banking.
- Though there are fund managers looking after the successful operation of the investments, a Sharia board supervises and closely monitors the transactions and investments to ensure that not only are the laws being followed but the whole operation is made transparent to the people’s money which is being used.
- This is the interesting part. The insurance provider, will not touch the money in any of the accounts but will come to a contract known as mudaraba, to share the profits made from the investment.
- This also ensures an extra effort from the end of the insurance provider to make the investments work, since that is how they will be profiting too.
- However, it is essential to understand that in the case of losses, it is only the insured that will lose money.
- A mudarib fee is paid, which serves as charges to the insurance provider by the insured for the investments.
- Wakala fees on the other hand are charged for managing the insurance to the insurance providing bank or company.
- The death benefit for takaful works similar to any regular life insurance except, the beneficiaries are also paid the profits earned from investments.
- Some charges are deducted from the amount towards administrative charges, operations and future claims.
- The survival benefit i.e. if the insured survives the whole period until maturity and is able to accumulate the target amount, he or she will receive their whole premium amount as well the profits made through the investments. Some of the fees and charges are deducted from the amount as mentioned earlier in the death benefit.
- In the case of a policy surrender, the amount contributed as premiums and their share of the profit made from investment is paid out. However, no money is refunded from the contributions made towards the special account along with other fees such as administrative charges.
Note that the business models may vary to a certain point for insurance providers in UAE, but most of it is followed and practiced transparently.
Takaful Non-life Insurance
Here is what to expect from Takaful non-life insurance or general insurance products:
- These non-life insurance takaful policies are mainly available for vehicles, liability, worker’s compensation, liability, fidelity, fire and also for agricultural insurance as well.
- Most of these policies can be renewed on a yearly basis, but the basic principles of the takaful model remains the same.
- The major difference in this case, is that there are no separate accounts functioning or contributed towards under these policies; but just one.
- The funds are instead invested towards Islamic-compliant tools channelling the investment income back to the fund deducting the investment costs.
- The balance if any is adjusted between the insured and the insurance provider on a basis of a mutually agreed profit sharing formula.
- This is distributed when the policy matures. Hence, no money from the premiums are returned unless, excess profits are made over the amount insured. Only this excess profit amount is paid and shared between the two insurance parties. Therefore there is no savings made.
Takaful Reinsurance (Retakaful)
Retakaful is also a concept working under Islamic laws of banking:
- Under retakaful, the original reinsurance concept is simply modified into two arrangements being proportional along with non-proportional arrangements.
- The non-proportional arrangements which include stop-loss arrangements have an unpredictability when it comes to the loss assessments.
- However, islamic financial laws demand a complete transparency in the joint responsibility of the insured and insurance provider during the complete course of the protection coverage period.
- Therefore chances are that retakaful is arranged in a proportional or pro-rata basis.
- Here the financing system is musharaka. Musharaka is an agreement to share the loss or profit based on ratio and hence shared likewise.
Takaful Market and Regulations in the UAE
The 11th Annual World Takaful Conference was held in Dubai, in the earlier months of 2016. The conference made some revelations regarding the number of Takaful providers in UAE and how they are growing at a commendable pace. Also the industry and its participating members showed a great amount of interest in developing the industry further by adding more benefits and options for the consumers of the takaful products.
The industry is at a developing stage where the products can be enhanced through the challenges as well as opportunities presented at this time. The major opportunity presented to takaful providers through a challenge is the factors that make them different from the regular conventional insurance providers. It is said to be already a highly competitive market in the first place with conventional products such as ULIPs and saving plans rivalling against takaful products.
In contrast with other countries which offer takaful such as Malaysia, the Islamic banks in UAE are utilizing their already existing base of customers to be able to create a brand new channel of distribution known as bancatakaful.
Takaful providers in the Middle-eastern region as of now have mostly concentrated their activities on non-life insurance takaful approximately amounting to 90% concentration. Unlike UAE, a country like Malaysia, concentrates 75% of activities not from general insurance but life insurance Takaful. Based on the reports of Dubai Center for Islamic Banking and Finance (DCIBF), only 5 Takaful operators out of 16 Takaful operators made a surplus in the year 2014 at the GCC region. In Asia, this number gets even lower with only 10% of the 56 Takaful operators producing profits between 2011 and 2013.
It is essential to know the takaful market in UAE, as a common man or a potential customer for takaful insurance because awareness of the competitiveness in the market only helps to make sure that they are being offered the best option.
News about Takaful Insurance
Results of financial health check for Q3 2016 unveiled
The financial health check for Q3 2016 concentrated on the takaful coverage of National Bonds customers. 73% of the UAE National respondents who participated in the health check survey did not have a takaful life cover. 89% of UAE Nationals were not insured against disabilities through takaful. 83% of the expat respondents did not have takaful live coverage and 76% were not covered for disabilities through takaful. 67% of the UAE Nationals and 72% of the expats were planning to pay off their liabilities and become debt free by the end of the year. This study shows that the takaful sector in general is growing slowly. Most people don’t take a life coverage as it is provided by their employer.
28th September 2016
Takaful insurance sector to grow at double digit pace
In a report published, the Moody’s Investors Service said that the growth in the takaful insurance sector is slow but will remain to grow at a double digit level. The takaful premiums will remain at 14% between 2012 and 2017. Moody’s expects the gross takaful contribution to reach up to $20 billion by 2017. The growth is driven by Gulf countries and is supported by the growth of Muslim population. The low levels of insurance penetration and low insurance density means that there is a significant opening for the Shariah-compliant insurance.
23rd September 2016
Profitability of GCC Islamic Insurance industry to remain weak for the current year
The GCC Islamic Insurance industry is expected to remain relatively low for the current year despite the 20% year on year growth. Most of the insurance players are relatively small compared to their conventional peers. The short track period and their less diverse books of business is putting them at a disadvantage as the oil prices are fall and insurance market regulations are getting stricter. The overall takaful market in the UAE recorded a loss of US$43 million. Three of the eight insurers are trading in loss.
12th September 2016