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Islamic Insurance

Islamic insurance (Takaful) means the act of group of people reciprocally granting each commercial profit
sharing contract between the providers of funds for a business venture and the entrepreneurs who actually
conduct the business. In other words, the Takaful business conducted by the company and the individual
members of a group of participants who desire to reciprocally guarantee certain loss or damage that may be
inflicted upon any one of them.

We all know that life is full of uncertainties and it is general human tendency to avoid the uncertainties of life
as far as possible. Social scientists of modern age have, therefore, stressed much need for the study of the
subject of risk. In fact scientific study and management of risk is very important in the present context of
worldly affairs. We know that different types of risk are involved in the society and one should know how to
avoid or deal with it.

In the present day society, insurance is one of the most used, desired and prime methods of handling risks.
However, insurance is a complex subject and is also a subject of much misunderstanding. It has been observed
that much of the misunderstanding has arisen due to two main reasons:

i)              We have failed to understand the basic nature of risk

ii)         The relationship and difference between insurance and other methods of handling risk have not been
properly understood.

Therefore, in order to grasp the functions and nature of insurance we will try to understand some basic
concepts of risks and insurance.

TYPES OF TAKAFUL:
Takaful is the protection plan that is based on the concepts of Shariah. There are many
unique features that the owners of policy will enjoy. It will provide the coverage according
to the Islamic rules and regulation. There will be no interest rate and the owner will surely
get the benefits he has applied for. There are two basic types of takaful, and they are general
takaful and family Takaful.

General Takaful:
General Takaful plans intended to meet the insurance needs of people and corporate bodies
in connection to materialistic loss or damage done due to any catastrophic condition.

Concept Of General Takaful:

In this takaful Participants pay their premiums into the Takaful store as a Tabarru’. This will
wipe out the components of al Gharar and bet. That is, the member consents to give their
premium to the reserve with a mission to help different members secured under the different
Takaful plans when in trouble.
In this way, the individuals convey the hazard and the Takaful administrator is just an

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overseer. Musharakah, Mudharabah, and Wakalah models can be actualized under this
approach. For the most part, all the physical properties and resources are secured like home,
car, and buildings.

General Takaful Products:

The measure of commitment to be paid by any members who take an interest in any of the
assortment of plans of General Takaful relies upon and is corresponding to the fitting
Takaful rates and the estimation of properties being secured. The benefit-sharing proportion
will be made known to the member in advance and concurred by the two gatherings.

General Takaful offers all kinds of non-life risk coverage, and it is divided into following
classes:

Property Takaful:

This policy provides compensation in an event of damage to the property caused by fire,
lightning and explosion. And, it applies to buildings, stock, machinery, and similar contents.

Marine Takaful:

It compensates losses or damages to cargo or freight on: Vessels, Aircraft or Road.

Motor Takaful:

It is applicable on damage to vehicle, incurred as a result of any accident.

Miscellaneous General Takaful:

This coverage is personalized and tailor made, with the corporate requirements.

Family Takaful:
It is a contract of Taburru where non-zakat gift is made in customary interims to the Waqf
Fund by the members. Under this takaful, all dangers related with human life are secured
like demise, handicap, and ailment including here and now and long-haul speculation needs.

The scope of Takaful items offered falls into two classifications:

 Hazard items that are accommodated the security of the members.


 Speculation items with a component of hazard.

Concept Family Takaful:

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These items have a tendency to be normal reserve funds designs where a member
demonstrates his need to accomplish an objective singular amount by a predetermined time
later on. Under this plan, the members pay their premiums into the Takaful store. A bit of
the premium is allotted only for funds and venture, and the adjust goes as a Tabarru to
develop saves like claims holds, unmerited premium saves and much more, to coordinate
costs, and to pay for Retakaful or reinsurance.

This policy covers all risks associated with human life such as: death, disability, and illness;
through short-term and long-term investment needs.

Types Of Family Takaful Plans:

Term Life Takaful:

If the life assured dies within a specified period, it provides payment of the sum assured
only.

Whole Life Takaful:

This contract theoretically covers the insured and a level premium is payable for life.

Endowment Takaful:

It provides endowment benefit at retirement. Or, in case of earlier death of the insuree, they
are paid to the dependents.

Universal Takaful:

It provides lifetime financial security, with the flexibility to the changing needs and
aspirations of the insuree.

Marriage Plan:

It is designed to fulfill parent’s needs for their children’s marriage.

Education Plan:

It especially caters child’s future financial needs for education.

Once more, Mudharabah, Wakalah, and Musharakah models can be executed under this
approach. Past these two primary regions, Takaful items are additionally accessible for
wellbeing and benefits needs. It ought to be noticed that Takaful protection isn’t only for
Muslims yet in addition for non-Muslims, as it is observed by them as a moral type of
protection

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What Is Takaful?
Takaful is a type of Islamic insurance wherein members contribute money into a
pool system to guarantee each other against loss or damage. Takaful-branded
insurance is based on sharia or Islamic religious law, which explains how
individuals are responsible to cooperate and protect one another. Takaful policies
cover health, life, and general insurance needs.

Takaful insurance companies were introduced as an alternative to those in the


commercial insurance industry, which are believed to go against Islamic
restrictions on riba (interest), al-maisir (gambling), and al-gharar (uncertainty)
principles—all of which are outlawed in sharia.

KEY TAKEAWAYS

 Takaful is a type of Islamic insurance wherein members contribute money


into a pool system to guarantee each other.
 Takaful-branded insurance is based on sharia or Islamic religious law and
covers health, life, and general insurance needs.
 Any claims made by participants are paid out of the takaful fund.

Understanding Takaful
All parties or policyholders in a takaful arrangement agree to guarantee each other
and make contributions to a pool or mutual fund instead of paying premiums. The
pool of collected contributions creates the takaful fund. Each participant's
contribution is based on the type of coverage they require and their personal
circumstances. A takaful contract specifies the nature of the risk and the length of
the coverage, similar to that of a conventional insurance policy.

The takaful fund is managed and administered on behalf of the participants by a


takaful operator, who charges an agreed-upon fee to cover costs. Much like a
conventional insurance company, costs include sales and marketing, underwriting,
and claims management.

Any claims made by participants are paid out of the takaful fund and any remaining
surpluses, after making provisions for the likely cost of future claims and other
reserves, belong to the participants in the fund—not the takaful operator. Those
funds may be distributed to the participants as cash dividends or distributions, or
via a reduction in future contributions. 

An Islamic insurance company operating a takaful fund must operate under the


following principles:

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 It must operate according to Islamic cooperative principles.
 A reinsurance commission may only be received from or paid out to Islamic
insurance and reinsurance companies.
 The insurance company must maintain two separate funds: a participant
and policyholder fund, and a shareholder fund. 1

Special Considerations
According to Allied Market Research, the global takaful insurance market was
valued at $24.85 billion in 2020 and is projected to reach $97.17 billion by 2030,
growing at a CAGR of 14.6% from 2021 to 2030. 2  

 
Since 60% of the global Muslim population is comprised of young Muslims—less
than 25 years of age—this demographic can represent a sizeable customer base
as their wealth grows over time. 3

Some of the largest names in the takaful market, according to a Research and
Markets report, were believed to be the following:

 Islamic Insurance Company


 JamaPunji
 AMAN
 Salama
 Standard Chartered
 Takaful Brunei Darussalam Sdn Bhd
 Allianz
 Prudential BSN Takaful Berhad
 Zurich Malaysia
 Takaful Malaysia
 Qatar Islamic Insurance Company. 4

Takaful vs. Conventional Insurance 


Most Islamic jurists conclude that conventional insurance is unacceptable in Islam
because it does not conform with sharia for the following reasons:

 Conventional insurance includes an element of al-gharar or uncertainty.


 Conventional insurance is based on the concept and practice of
charging interest. Islamic insurance, on the other hand, is based
on tabarru, where a portion of the contributions made by participants
is treated as a donation. This is why policyholders in takaful are usually
referred to as participants.

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 Conventional insurance is considered a form of gambling

Risk and Insurance

Risk has been defined as the uncertainty as to the occurrence of an economic loss. Risk and probability are not
synonymous. Before analyzing the relationship between risk and insurance, we must understand the difference
between risk and probability.  The term's hazard and peril are more closely related to probability than they are
to risk. For example, collision is a peril that causes the automobile accident and loss. The condition that makes
the occurrence of collision more likely is called the hazard. For example, foggy weather is the hazard that
creates the peril of collision. This means probability of collision increases when the hazard of foggy weather
creates the peril of collision. Therefore, one can say that probability is the long run chance that out of a given
number of possibilities, certain number of specific events will occur. But risk is the uncertainty as to
occurrence of a loss. This is measured in the terms of degree of variation that actual events bear to probable
events. The larger the number of exposures, the smaller is the risk. This is because under this situation, the
smaller is the variation that actual events bear to the probable events. This called the law of large numbers.

The law of large number states that for a very large number of exposures, one can predict precisely the actual
number of occurrence of an event. This law has proved very significant in the study of the subject of
insurance.  This is mainly because, the risks of the insurer is that he does not know what is the actual
probability of a loss. It is, therefore, necessary to estimate the actual probability. The law of large number is of
vital significance in analyzing this problem (Majumdern & Dewan 1999, p.23). According to this law, one can
estimate the probability of occurrence of certain events more precisely by increasing the number of
observations by sampling process. It has been observed that the average value of a very large number of
observations will be very close to the actual average of the population from which the observations were
taken. For example, probability of death at certain age can be estimated by way of a large number of
observations in a sampling process.

It may be noted that foundation of insurance rests upon the law of large numbers. The insurers obtain a very
large number of observations. In the case of life insurance mortality records of people at different ages are
analyzed and summarized to find out the probability of death at certain age. In the case of general insurance
the insurers usually have the statistical records of loss against different perils and thus they can fairly measure
the underlying probability of a loss against, fire, accident, mechanical breakdown etc.

How to Handle Risk

An individual is always concerned because of the uncertainties of life. He does not know whether or not a
given loss will occur to him individually. For an individual, the risk is very large. This is simply because an
individual cannot obtain a sufficient number of exposures to have an accurate prediction as to the occurrence
of loss. It is not the probability of loss which causes difficulty, but rather the uncertainly as to whether an
individual will be among those who are expected to suffer loss. Had the loss been certain, one could perhaps
prepare him for it in advance. Since this is not the case, one should try to reduce risk through insurance and
other means.

One can handle risk by assuming it. Most of the people do it knowingly and unknowingly. In many cases we
pass through life by way of accepting or assuming many small risks. However, in many occasions one has to
accept it simply because one cannot afford to pay for it's reduction or transfer.  If one can afford to pay the
price of risk transfer, the insurance company or some other organization will bear the risk. In that case the

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insurance company will bear the risk for a price. But how will the insurance company bear the risk? The
insurance company handles risk by utilizing the combination method as the basis of their insuring operation.
The method of combination is the system of handling risk that usually involves the use of large numbers. The
insurance companies persuade a large number of individuals, known as insured to pool their individual risks in
a large group. When sufficiently large numbers are grouped the actual loss experience over a period of time
will closely approximate the probable loss experience. The insurance company has little or no risk at all if this
method is used properly When all of the individual objects are pooled into one group, the risk is no longer
present, if the requisites of insurable risks are met with.

It may be noted here, that insurance companies do not cover all risks. That is to say, all risks are not insurable.
Usually it is only the �pure� risks that are insurable and not the �speculative� risks. A pure risk can cause
only loss but a speculative risk causes either a profit or loss. For example, there is risk in any investment and
business venture due to market fluctuations. This is a speculative risk and therefore, not insurable. However, a
businessman can insure the assets and legal liabilities against specified perils like fire, flood, cyclone,
negligence, collision, etc. Similarly, one cannot insure the risk of gambling.  However, all pure risks are not
insurable as there are many situations that can cause loss where the loss  a of large number does not operate
satisfactorily. For many situations large number of required statistical records are not available. If the insurers
cannot obtain statistics over a sufficient length of time on losses resulting from a particular peril, they cannot
accurately predict the probable loss experience. In that situation it is not prudent to cover such risk. So it is
evident that the prime requisite of insurable risk is that the number of objects must be of sufficient number.
This means that the probable loss must be subject to advance estimation in order that it can be made accurate
and the objects to be insured must be similar so that reliable statistics of loss can be formulated. For example,
in case of fire and theft insurance, commercial buildings and private dwellings should be grouped separately as
the hazards against these risks are different. Similarly the properties situated in the cyclone belt should not be
grouped with that of the properties located in the cyclone free zone. This means the physical and social
environment of the group ought to be roughly similar. Therefore, it is evident that from the viewpoint of the
insurer, one of the prime requisites of insurable risks is that the number of objects must be sufficient in number
and quality so that a reasonably close calculation of probable loss can be made (Greene 1962, p.47).

Requisites of Insurance for Covering Risk

Apart from what has been discussed above, the other requisites of insurance may be summarized as following:

(a)       Insurance must be effected by means of a legal contract and must meet the general requirements of
contract as follows:

i)       It must be made by parties with legal capacity to contract; and

ii)       It must be affected with a meeting of the minds of the parties.

(b)       For any insurance contract to be valid it is necessary to have insurable interest of the insured on the
subject of insurance. This means that an insured must suffer a financial loss himself.

(c)        Property and liability insurance are subjected to the principle of indemnity which states that a person
must not be indemnified more than his actual loss in the event of damage caused by a insured peril.

(d)       Principle of subrogation ought to be followed where the principle of indemnity is in existence. Under
this principle, the insurer is entitled to subrogation, which means that they acquire the right to recover from
liable third parties. This is necessary to reinforce the principle of indemnity i.e. to prevent the insured to

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receive more than actual loss.

(e)       Principle of utmost good faith must be followed in every insurance contract and for that matter breach
of warranty, material misrepresentation and concealment of facts makes the contract void.

(f)         Last, but not the least, there are the principles of loss determination and payment.

Uninsurable Risks

Not all risks are insurable. This is mainly because there are some risks, which in the true sense cannot be
termed as risks. Therefore, the authors of risk management have differentiated between pure risk and
speculative risk. Normally the pure risk is insurable and speculative risk is handled by methods other than
insurance. In pure risk, there is uncertainty as to whether the loss will occur or not, but there is a chance of
producing a profit out of that event. But in case of speculative risk there is uncertainty of an event that could
produce either a profit or loss. For example, a business venture and a gambling contract are the risks of
speculative nature and, therefore, not insurable. Market risks such as price changes and/or changes in the
exchange rate of currency are not insurable. These risks are not subject to advance calculation, hence the
insurer would have no realistic basis for computing his premium. Further, in times of rising prices no one
would be interested to have insurance coverage against such risk and in times of failling prices an insurer can
not afford to take on the risk because he can not avail the opportunity of spreading the risk over which to
average out good years with bad years.  The speculative risks are handled businessmen by way of hedging,
whereby a speculator assumes the price risk.

Insurance and Gambling

Although it is common to confuse insurance with gambling, from economic and legal point of view gambling
and insurance are two distinct matters. It is true that insurance company pays an insured a great deal more
money than it has received, in terms of premiums, but this does not mean that insurance is thereby a gambling
contract. The very purpose of insurance is to eliminate risks, whereas gambling creates a new risk.

For example,  �A� and �B� may agree that if the property of  �C� comes under fire,  �A� will pay
taka 1,000.00 to �B� and if there is no fire,  �B� should pay taka 100.00 to �A�.  In this case before
this gambling contract neither party had any risk of loosing or gaining any money from this source. When
�A� and �B� agree to the above proposition, each party becomes subject to a new risk of loosing money.
Moreover, neither �A� nor �B� has any insurable interest on the property of �C�. However, if an
insurance contract has to be effected it is only �C� (who can insure) to the extent of loss (up to agreed
value) against a fixed premium. �C� in this case in fact has exchanged a large uncertain loss for a small but
certain loss called the premium.

Although, insurance as being practiced in the modern world cannot be termed as gambling, this cannot be
called also Islamic, simply because it is not gambling. However, insurance as a device to combat loss can
rightly be used in an Islamic Society by way of applying the basic principles of insurance and eliminating the
forbidden practices.

Principles of Insurance Contract

Insurance is affected by means of a legal contract and must meet the general requirements of contract. Thus
the insurance contract must not be against public policy, must be enacted by parties with legal capacity to
contract, must be affected with a meeting of the minds of the parties and must be supported by a consideration.

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Insurance is a contract of adhesion and any ambiguities are construed against the insurer. The following legal
doctrines are vital to the understanding of insurance contract.

Insurable Interest: A fundamental legal principle underlying all insurance contracts is the principle of insurable
interest. This means insurance is operative only in respect of the interest of the insured in the event of property
concerned and it is this interest that is the subject matter of insurance contract. It means it is not the bricks and
materials used in building which is the subject matter of insurance. The subject matter of insurance is the
legally recognized relationship of the owner of the building whereby he will suffer loss if the building is
caught in fire.  This is essential; otherwise an individual would claim indemnification, even when he had not
suffered any loss. The doctrine of insurable interest is also necessary to prevent insurance from becoming
gambling.

Principle of Indemnity: The principle of indemnity ensures that a person does not get more than his actual loss,
in the event of damage caused by an insured peril. It is important to note that only the contracts of property
and liability insurance is subjected to this doctrine. Life insurance, health insurance and personal accident
insurance policies are not contracts of indemnity (as no money payment can actually indemnify for loss of life
or for bodily injury to the insured).

There are several ways by which an insured can be indemnified i.e. by cash payment, repair, replacement and
reinstatement.  In every instance the onus of proving that that the loss was caused by an insured peril rests
upon the insured. The onus of proving that the loss was caused by other than in insured peril rests upon the
insurer.

Without application of this principle, the insured would be tempted to make profit out of the happening of loss.
There would be a tendency in the direction of over insurance. There are, however, some exceptions to the
application of this principle in property insurance. For example, in marine insurance, for commercial
convenience, it is customary to issue �value� policies i.e. the insured value is mutually agreed between the
insured and the insurer. In the event of loss, the indemnity is measured in terms of the value fixed by the
policy.

Principle of Subrogation: This principle states that the insurer, if and when indemnifies the insured, is entitled
to recover from third party liable for the loss. One of the important reasons for this doctrine is to reinforce
the principle of indemnity i.e. to prevent the insurer from collecting more than his actual loss. Another reason
for subrogation is to hold premiums below what they would otherwise be. This, however, does not allow the
insurer to lodge claim against the insured, even if the insured is negligent. The principle of subrogation also
does not apply to personal accident and life policies.

Principle of Utmost Good Faith: This principle imposes a higher standard of honesty on parties to an insurance
contract. The proposer must disclose before the contract is concluded all material facts, which he knows or
ought to know. Failure to make such disclosure renders the contract avoidable at the insurers option. It is,
important to note that avoiding the contract does not follow unless the misrepresentation is material to the risk.
It is generally held that even an innocent misrepresentation of a material fact is no defense to the insured, if the
insurer elects to avoid the contract. The insurer, however, in good faith pay the claim even if there is breach,
and a breach of warranty may also be waived by the insurers. However, unless it is waived, a warranty must be
complied with strictly and literally. It makes no difference whether the breach of warranty is material or
immaterial, fraudulent or innocent.

TYPES OF GENERAL INSURANCE POLICIES

Marine Insurance: Marine policies relate to three areas of risk:  the hull, the cargo and the freight.  The risks

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against which these items may be insured are �perils of the sea,� fire, theft, collision as well as a wide range
of other perils. Cargo is usually insured on a warehouse (of departure) to warehouse (of arrival) basis and
frequently covered against "all risks."

Aviation Insurance: Most policies are issued on an "all risks" basis subject to certain restrictions. The buyers
of these policies are the large commercial airlines, the corporate or business aircraft owners, private owners
and  flying clubs. Usually a comprehensive policy is issued covering the aircraft itself (the hull), the liabilities
of passengers and liabilities to others.

Fire Insurance:  A standard fire policy is used for almost all business insurance, the basic intention of the fire
policy is to provide compensation to the insured person in the event of there being damage to the property
insured. The standard fire policy covers damage to property caused by fire, lightning or explosion, where this
explosion is brought about by gas or boilers used for domestic purposes.

This is limited in its scope as property can be damaged in other ways, and to meet this need a number of extra
perils, known as special perils, can be added on to the basic policy. These perils can include:

�Storm, tempest or flood

�burst pipes

�earthquake

�aircraft

Accident Insurance: Personal Accident Insurance - The intention of the basic policy is to provide
compensation in the event of an accident causing death or injury. What are termed "capital sums," is paid in
the event of death or certain specified injuries, such as loss of limbs or sight as may be defined in the policy.
The policy is usually extended to include a weekly benefit up to 104 weeks or more for compensation if the
insured is temporarily totally disabled due to an accident and a reduced weekly benefit if he is temporarily
only partially disabled from carrying out his normal duties. In the event of permanent total disablement (other
than loss of eyes or limbs) an annuity is paid. Practice varies among insurers, some of whom pay a lump sum.

Sickness Insurance - Personal accident cover can be extended to provide a weekly benefit for an agreed upon
period which may be restricted to 52 weeks, in the event the insured is temporarily totally disabled from
engaging in his usual occupation due to sickness.

Engineering Insurance: The cover is intended to provide compensation to the insured in the event of the
insured plant being damaged by some extraneous cause or its own breakdown.

Engineering insurers provide an inspection service on a wide range of engineering plants and this is a service
much sought after by industry. Engineering covers can be summarized thus:

a)                  damage to or breakdown of specific items of plant and machinery

b)                  an inspection service of those items

c)                   cost of repair of own surrounding property due to (a)

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d)                  legal liability for injury caused by (a)

e)                  legal liability for damage to property of other caused by (a).

Theft Insurance: Theft insurance was first introduced towards the end of the nineteenth century and was
originally called "burglary insurance." Insurance companies included in their policies a phrase to the effect
that theft, within the meaning of the policy, had to involve force and violence either in breaking in to or out of
the premises of the insured for cover to apply.

Motor Insurance: The minimum requirement by law is to provide insurance in respect of legal liability to pay
damages arising out of injury caused to any person. A policy for this risk only is available and is termed as an
"Act Only" policy. A �'Third Party Only'� policy would satisfy the minimum legal requirements and in
addition would include cover for legal liability where damage was caused to some other person's property. The
most common form of cover is the �'Comprehensive Policy�' which adds accidental loss of or damage to the
vehicle to the third party, fire and theft cover.

Miscellaneous Insurance

Money insurance - The policy provides compensation to the insured in the event of money being stolen either
from his business premises, his home or while it is being carried to or from the bank.

Glass insurance - Accidental damage to glass, mainly plate glass windows but also glass doors and shelves, is
covered by the Glass Insurance Policy. It is also possible to include damage to the shop front and the contents
of the window.

TYPES OF LIFE INSURANCE POLICY

Life assurance contracts available are many and the basis of all these policies can be found under the following
headings :

Terms Insurance: This is the simplest and oldest form of insurance and provides for payment of the sum
assured on death, provided death occurs within a specified term. Should the life assured survive to the end of
the term then the cover ceases and no money is payable. This is a very cheap form of cover and is suitable, for
a young married man who wants to provide a reasonable sum for his wife in the event of his death. It can also
be used for a variety of specific purposes such as business journeys.

Whole Life Insurance: The chosen sum assured is payable on the death of the assured whenever it occurs.
Premiums are payable throughout the life of the assured until retirement of the assured. Although premiums
may cease at, say, age sixty, the policy is still in force.  Should the person die at age seventy-five, the policy
would provide the benefits for his widow or family.

Endowment Insurance: The chosen sum assured is payable at the end of a given term of years or upon earlier
death. These contracts are taken out as savings plans for the future with the added attraction of life cover.  
Endowment contracts will always be popular because each proposer earnestly hopes that he will live to the end
of the term and spend the proceeds himself.

Annuities: When a person has a reasonably large sum of money and wants to provide an income for himself
after he retires, or at some other time, he can approach a life assurance company and purchase an annuity. The
annuity may start at once, when it is called an immediate annuity, or may start at some date in the future (a
deferred annuity). Regardless of when it starts it can take various forms. It may provide an annuity for the life

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of the person, the annuitant, or it may be payable irrespective of death for a certain period, as in the case of the
"annuity certain." The guaranteed annuity is similar in that it provides the annuity for a guaranteed period and
thereafter until the annuitant dies.

Pension Schemes: These schemes are designed to provide an income at retirement. So far as insurers are
concerned they may be asked to arrange a scheme, rather than a firm doing all the work itself. This involves
collecting the premiums, investing them and paying pensions to retired people. Many schemes are endowment
policies with group life insurance cover to provide benefits, should the death of a member occur before
retirement age, but there are different ways in which this can be done.

INSURANCE IN AN ISLAMIC FRAMEWORK

Insurance is a socio-economic institution that reduces risk both to society and to individuals. This
accomplished by combining, under one management, a large group of objectives so that the aggregate loss to
which society is subject become predictable. Insurance has scientific basis and is effected by legal contract,
under which the insurer for consideration promises to reimburse the insured for any loss suffered during the
tenure of the contract.

There are many social and economic value of insurance, but the greatest value lies in the benefits following
from the reduction of risk in society. Insurance has the advantage as a device to handle risk and, therefore, it is
necessary that its services be extended in order to bring about the greatest economic advantage to a given
society. In order to establish the validity of this point we must have clear concept about the socio-economic
objectives of an Islamic Society.

Belief in Allah is central in the Islamic concept of society. This is the organizing force without which life
losses it�s full meaning. Belief in a supernatural power reduces man's vanity and despair. Belief in one Allah
does not mean that the individuals in the society are just the dolls in the hand of the Almighty. In fact, Islam
fosters initiative and responsibility. The Quran insistently and consistently reminds people that they are judged
on their own merits as independent, responsible individuals.

Another important aspect of Islam is that the society at large is based on the concept of humanity and
brotherhood of the Muslim community. Concepts of universalism on the one hand and individualism on the
other must be understood in its true spirit and applicability. Muslims in their minds should have a sense of
awareness of mutual rights and obligations binding each individual of the society in their faith and Islam have
a set of goals and values encompassing all  aspects of human life including social, economic and political. The
Islamic way of life being goal oriental, can be best understood by the practices of an organized community,
which is governed in accordance with the tenets of Islam.

We all know that Allah has provided all necessary resources on this earth. Man, being the vicegerent of Allah
on this earth, has the responsibility to utilize these resources for the general human welfare. According to
Islamic principle, it is basically the moral responsibility of the individual to cater for his own needs through
his own efforts.

The ethic of Islam clearly counsels against begging, against being a parasite living on the labor of others. In
Islam, man's economic endeavor is praised and economic resignation is condemned. Islam suggests a great
attention to every aspect of material life of men and women. The Shariah has given us a pattern of material
wealth distribution with which to order our lives. In Islam every Muslim by law is entitled to get support from
fellow Muslims if he can prove his need. The purpose of Islamic Law is always to inject morality and
responsibility into the fabric of human relations. Islam is not only a religion but also the supreme unifying
social bond. From history we know that the Madinites affiliated themselves as brothers and sisters with the

12
Makkan-immigrants. They voluntarily and gladly shared their entire property with Makkan. This  type of
affiliation was not motivated by any kind of gain or profit or even a promise of gain or profit. It was simply
motivated by conviction, commitment and dedication towards a common cause. The new principle of sharing
was established. The Muslims drew a great amount of satisfaction from offering ones help, property and life
for the cause what they believed to be the ultimate truth. In fact, the Islamic way of life is inconceivable
without an organized community governed in accordance with tenets of Islam.

Therefore, in an Islamic society, all organizations and institutions including the State should cater to the
welfare of the people. Islam considers mankind as one family. All members of this family are alike in the eye
of Allah. There is no difference between the rich and the poor, the high and the low or the white and the black.
There is to be no discrimination due to race, color or position. The only criterion of a man's worth is character,
ability and service to Islam and humanity. Since Islam emphasizes distributive justice and incorporates in its
system a program for organized community with the commitment of human welfare, there ought to be
compulsory arrangement for insurance against unemployment and occupational hazards, old age pension and
survivors benefit. The Islamic society should also provide assistance to those who because of disability,
physical or mental handicaps or obsolescence, are unable to support himself or herself or to attain a
respectable standard of living by their own efforts.

The objective of an Islamic Economic System is to create an exploitation free society and upliftment of the
society as a whole. Therefore, any system or organization that is for the welfare of the mankind is not in
contradiction with Islam. The objective of the Shariah is the promotion of welfare of people that lies in
safeguarding their faith, life, intellect, posterity and property. Whatever ensures the safeguarding of these
elements of human beings serves public interest and is desirable. This is because the basis of Shariah is
wisdom and welfare of the people. Further, anything that departs from justice to injustice, welfare to misery,
from mercy to harshness and from wisdom to folly has nothing to do with Shariah.

The principle foundation of insurance as an economic institution is the equitable distribution of the financial
losses of a few over many. In insurance, each policyholder contributes an amount commensurate with the risk
he introduces to a fund; established and administered by the insurer and out of the fund the losses are paid to
the insured members. The main functions of an insurance organization then becomes the management of the
fund and the assessment of the equitable contributions to be made by the policyholders.

In the business world without insurance, businessmen would have to set aside some of their capital resources
against the possible losses that might occur. The capital thus safeguarded is freed for further development of
the business.  Apart from that, insurance removes the anxiety and thus helps to increase the efficiency of the
business community. Insurance also helps to achieve a consistency of trading results and an avoidance of wide
fluctuations. In this way insurance helps to develop and consolidate business on stable basis.

In the field of overseas commerce, the banks will not negotiate the bills of exchange unless the goods are
insured against marine, and, sometimes, war risks. Even when the bank does not finance shipments, common
prudence calls for marine insurance protection, as the cost of insurance is but a small fraction of the market
value of the goods. Similarly, the large industrial organizations could not operate, as the banks would not be
prepared to finance them without insurance arrangement. No large-scale enterprise could function, were it not
possible to transfer many of its risks to insurer. Vast amount of capital in the form of premises, plant and
machinery are at risk in industrial concerns. Without insurance, these risks would remain uncovered.

Human life has value for many reasons. The main economic problem that arises when someone in the family
dies is the loss of earnings of the deceased person.  In a business firm, if a key employee dies, the firm may
lose valuable customers whose loyalty depends on this individual. The value of human life, apart from death,
may also be diminished through loss of health by way of loss of earning due to disability and expenditure for

13
medical care. Old age is another peril that affects earning capacity, just as premature death or loss of health.

Because human life is recognized to have great economic value, a demand has grown for life and health
insurance. As a social and economic device, life insurance is a method by which a group of people may co-
operate to even out the burden of loss resulting from the premature death of any member of that group. The
purpose of life insurance is, therefore, primarily to accumulate wealth or property and, even if death
intervenes, to ensure that the intended wealth will be available. Two distinct objectives of life insurance must
be understood clearly. The first objective is termed a 'saving need' and the latter is termed as 'protection need'.

The basic theory of life insurance is that all who pay life insurance premiums to the common fund do so with
the willingness that the fund should be used to compensate the estate of those contributors at whatever age in
life they may die. However, increasing emphasis on the investment aspects of life insurance has tended to
overshadow the primary purpose of protection against premature death.

The uncertainties of life are such that no man can say how long his life will last and every prudent and
considerate person desires to make some provision for his dependants in the event of his death. The
fundamental economic purpose of life insurance is to mitigate such possible loss.

Technically speaking, insurance is a socio-economic device, which implies sharing of losses sustained by
some members of a group by all the members of that group. It provides economic security against loss of life
or property or pecuniary interest. Insurance also provides indemnity to the persons for legal liability.
Therefore, insurance as a system is acceptable to Islamic Society as it resembles the concept of Bait-ul-
Maal (Ali 1989).

 MODUS OPERANDI OF ISLAMIC INSURANCE (TAKAFUL) COMPANY

An Islamic insurance company transacts business on a co-operative basis in accordance with and subject to the
principle of Islamic Shariah. All the functions of conventional insurance companies, i.e. underwriting, claims,
reinsurance, marketing, investment, company management, etc. of Islamic Insurance Company should fully
conform to Islamic Shariah Code. At the same time, the Islamic insurance companies should also make the
scope and benefits of insurance coverage traditionally provided by the conventional companies available.  
Islamic insurance companies have developed extensive facilities to transact all classes of general insurance
such as life, marine, fire, motor, accident, aviation, engineering, etc. Islamic Insurance Companies are now
functioning very efficiently on most economic and competitive terms consistent with safety and security.

The cost of insurance is one of the most important factors in a sound analysis of risk.  Both the insured and the
insurer are interested in a rate that is fair. The basic criteria for rate making are:

a)          The premium should be adequate but not excessive to meet the claims; and

b)          The premium should be allocated among the insured on "fair" basis.

These criteria will be followed by an Islamic Insurance Company on a more rational basis. For example, a
participant (policyholder) of a general Takaful (insurance) scheme shall enter into contract with the company
on the basis of the principle of Mudaraba as per "partnership" clause of the policy. This clause stipulates the
rights and obligations of the participants as well as the company. The Company, acting as an entrepreneur
collects the Takaful contributions (insurance premium) from the participants and manage the various classes of
general Takaful fund. The amount of the premium to be paid by the policyholder of an Islamic insurance
company depends upon the class of Takaful and the rate fixed on the basis of sound principles of rate making.
The participants shall pay the premium to an Islamic insurance company as "Tabarru". These Takaful

14
contributions are credited into the "General Takaful Fund" of the company. The company in accordance with
the requirements of the Shariah will invest the funds. All the profits from the investment shall be pooled back
to the fund. The company shall pay from the General Takaful Fund compensation or indemnity to fellow
participants, who have suffered a defined loss caused by one or more than one of the insured perils during the
policy period. From this fund, operational costs of General Takaful Business, required reinsurance premiums
are to be borne. Further, a �reserve� for unusual losses is to be built up from this fund. The surplus (profit)
if any after meeting all these expenses and required reserve, will be shared between the participants and the
company. However, the participants who had suffered losses should not have any share of profit as they have
been already compensated out of this fund. This sharing of the surplus will be in a ratio agreed to in
accordance with the principle of Mudaraba. The operation of the General Takaful is illustrated below.

Chart I: General Takaful Scheme of Islamic Insurance

The mode of operation of a General Islamic Insurance Company can be best described by taking an example.
Say, the participants of fire risk contribute one crore taka in a particular year as Tabarru to a company, the
company will keep this in a special account to be called Fire Takaful Fund.  At the end of the year it may
transpire as follows:

            i)          Claims paid or to be paid (25%)                          Taka     25,00,000


            ii)         Operational cost during the year  (15%)                 "         15,00,000
           iii)         Reinsurance premium  (20%)                                "         20,00,000
                                                                                                ---------------------
                                                                                               Taka     60,00,000
           The company may decide to keep reserve for unusual year (30%)  Taka     30,00,000
                                                                                                ---------------------
                                                                                               Taka     90,00,000

Therefore, the surplus money Tk. 10,00,000 can be distributed to the policyholder as per terms of the contract.
If the ratio agreed is 70:50, then 70% of this surplus i.e. Tk. 7,00,000 will be distributed among the
participants. This means a policyholder who has paid at the time of taking a cover as contribution Tk. 1,000/-
will receive (Tk. 70/-) return on the amount of premium paid. This is only an example, the return can be as
high as 20% to 25% depending upon the net underwriting surplus of a particular portfolio. This surplus will

15
vary from year to year.  In rare case, the policyholders may be asked to contribute additional premium.

FAMILY TAKAFUL SCHEME

The modus operandi for Islamic Insurance companies operating life business are almost similar but more
clarification is needed. Life policies are issued in the name and style of Family Takaful Scheme. The
participant or the policyholder of a Family Takaful Plan should pay the agreed amount of installments on a
regular basis. Each installment paid by the participants is divided and credited into two separate accounts
namely "The Participant Account" and the "The Special Account".  Normally the major portion of the
installment amount (say 90%) is credited to the Participants Account and the balance of 10% is credited to
Special Account. The deposits are paid back to the participants as per terms of the contract with profit. The 
amount that is credited to the Special Account is meant for those participants who will not be able to pay full
installments because of their early death. Thus the company will be able to pay Takaful benefits to all fellow
participants who become members of the scheme. The amount that is credited into these two accounts is
invested as per Shariah Code and profits are shared between the Participants and the Company in an agreed
ratio. The major portion of the profit (say 80%) is paid to the policyholders and the company is entitled to get
the balance amount of the profit only.

In the event of surrender of the policy, the incumbent participant will receive the proportion of his Takaful
installment, which had been credited to Participant Account together with his share of profits accumulated up
to the date of the surrender. But he will not be entitled to get any refund from the Special Account.

If a participant expires before the maturity of his Family Takaful Scheme, then his or her heirs will be entitled
to get the total amount of the installments deposited in the Participants Account before his death along with his
share of profit credited into Participants Account. His/her heirs will also be entitled to the total outstanding
installments that would have been paid by the deceased participant, had he/she survived. If a participant is
alive until the date of maturity of the Takaful Scheme, he/she is entitled to get the total amount of Takaful
installments deposited in the Participants Account along with his share of profit. He will also be entitled to a
proportion of net surplus, if any, which is available in the Special Account as per last valuation of this account
before the maturity date. We can illustrate this in Chart 2 of Family Takaful of Tk. 2,00,000.00 -

Chart 2: Flow of Family Takaful Contribution

In the above Chart it has been assumed that for a Takaful plan of an individual for a twenty-year term the
participants should contribute annually Taka 10,000. At the end of the year the Participants Account will be
credited with Tk. 10,080.00  and the Special Account will be credited Tk. 1,120.00. In every year, these two
accounts will be credited with more or less the same figure. The profit amount may vary depending upon
return on investment.  If the participants want to surrender i.e. not willing or are not capable he gets back his
money credited in the Participants Account.  For example, if a participant wants to surrender, at the end of the
fifth year of the plan, he gets back Tk. 50,400.00 ( 10,080 X 5).    He  receives only the credit along with the
profit in Participants Accounts. At the maturity i.e. at the end of the 20 th year, presuming that the rate of return
is the  same throughout the period he will get Tk. 2,01,600.00. He is also entitled to get his share of surplus
money in the Special Account after paying for premature claims from this fund.

If we assume that the participant expires at the end of the 10 th year of the policy term, his nominee will get
(Tk. 10,080 X 10 = Tk. 1,00,800 + 1,00,000).  An additional 1,00,000 taka will be granted by the other
participants in the scheme and will be paid from the fund created in the Special Account. Even if a participant
expires after payment of a single annual contribution of TK 10,000, his nominee/heirs will get a guaranteed
outstanding balance of Tk 1,90,000  plus his portion of Participants Account along with profit i.e. Tk. 10,080,

16
total Tk. 2,00,080 under this scheme (Ali 2000).

HISTORICAL PERSPECTIVE OF CONVENTIONAL AND ISLAMIC INSURANCE

In the seventeenth century, there were no insurance companies as we know them today. The practice was for
individuals, who came to be called "underwriters," because they wrote their names TO benefit the wording of
insurance policies, to guarantee commercial ventures on a personal basis. 'Lloyds Coffee House' in Tower
Street of London (owned by Mr. Edward Lloyd) proved to be a favorite venue for them to conduct their
business informally over cups of coffee. Mr. Lloyd promoted the trend towards business by providing his
customers with pen, ink, paper and shipping information. Lloyds Coffee House thus became recognized as a
like place for persons wanting insurance cover to find underwriters.

During the course of the eighteenth century, the British Mercantile Fleet had increased in size and operations.
It was found that many individuals who underwrote marine risks were undependable, and after receiving
substantial premiums failed to pay claims. Therefore, in 1720, an Act was passed which provided for the
incorporation of the Royal Exchange Assurance and the London Assurance Companies for the purpose of
effecting marine insurance. Each of these two companies had a substantial stock. Since the companies offered
cover of a very restricted nature and consistently refused to underwrite any but the safest risks, the purpose of
the Act was defeated and Lloyds Coffee House was established as the most important center of marine
underwriting.

This system resulted in considerably less security to the insured than would have been provided by
associations of individuals. Although many merchants would have much preferred to insure with the
companies, and would have been prepared to pay higher premiums to them, they were not able to do so. Since
the companies and Lloyds Coffee House operated from London, the difficulties encountered by traders from
other ports in the UK were much greater. As a result, groups of ship owners at various ports joined together to
settle own hull loss (averages) on a mutual basis, each member underwriting share of the risks, for which he
was individually responsible. In such clubs each member is both insured and insurer. All the other members in
proportion to their respective properties in it insure him to his own property in the club, and he is at the same
time an insurer in the proportion of his own property in the club for the property of the each of the others.

In 1824, when the monopoly to the London Assurance and the Royal Exchange Assurance was removed,
several other companies were founded. However, in practice, it was found that the underwriters established at
Lloyds were able to quote rates. The result was that the better class of vessel was insured at Lloyds and the
Clubs were left with the risks that were unacceptable elsewhere. This led to the decline of hull clubs in the
long run. But in marine insurance, the P & I Clubs were very important market component in the field of ship
owners liability insurance.

In the context of the above we will look into the background of the formation of the first Islamic Insurance
Company. With the establishment of the Dubai Islamic Bank and the Islamic Development Bank, as the
starting point of Islamic Banking Movement, H.E. Prince Mohammed-al-Faisal-Al-Saud of Saudi Arabia took
initiative for the establishment of a number of Islamic Banks. In one such initiative, in February 1976, he held
discussions with H.E. Gafar Nimeiry (the then President of the Democratic Republic of Sudan) and asked for
permission to establish an Islamic Bank to be operated in Sudan. Executive and Legislative authorities in the
Sudanese Government at all levels gave every encouragement and acceded to the proposal. In August 1977,
Faisal Islamic Bank was registered as a public limited company under the Sudanese Company Act-1925.

When Faisal Islamic Bank was established, the bank authorities initiated studies on the establishment of a co-
operative insurance company. In this respect the opinion of the Bank's Shariah Supervisory Board (SSB) was
sought. The SSB studied the scheme at the first meeting. Studies continued and several steps followed. The

17
Faisal Islamic Bank Authorities prepared the Memorandum of Association and Article of Association. The
SSB proposed some amendments, which were implemented. The SSB ensured that the scheme was sound
from a Shariah point of view as well as feasible from a practical point of view. Therefore, the Islamic
Insurance Company Ltd. Sudan was incorporated as a Sudanese Public Company (under the Companies Act
1925) in January 1979. This is the first ever-insurance company established in the world to transact business
according to the Islamic Shariah. The Faisal Islamic Bank has subscribed to the entire authorized capital of
this company. The company enjoys numerous concession and exemptions. All its assets and profits are exempt
from all types of taxes. Further, the assets of the company are not subject to confiscation, nationalization etc.
The Company is also exempt from the application of acts regulating insurance in Sudan.

In Malaysia, the Islamic Insurance Company was established as a private limited company (in accordance with
companies Act 1965) in November 1984 and started its operation in August 1985 as a composite insurance
company. This was made possible by the Malaysian Government who, in 1982, took a positive step by
forming a special body known as the "Task Force" for the study of the establishment of Islamic Insurance
in Malaysia. This Task Force was formed on the basis of the recommendations of the National Steering
Committee on Islamic Bank, which highlighted in its report to the Malaysian Government the need for an
Islamic Insurance. The Committee felt that it was necessary in order to cater the insurance requirement of the
Islamic Bank that was about to be launched. Members of the Task Force were drawn from personalities and
groups representing religious scholars, legal experts, economists and insurance practitioners. The members of
the task force visited a number of Islamic countries and also had discussions with three Islamic Insurance
Companies already established or about to be established. Finally, in its report to the Government, the task
force suggested that an Islamic Insurance company should be established in Malaysia as soon as possible. The
Malaysian Government then promulgated legislation entitled as the Takaful Act, which regulates the Islamic
Insurance (Takaful) of Malaysia.  It may be of interest to note that in Malaysia, the Islamic Insurance
Company (known as the Syarikat Takaful Malaysia) is practically a subsidiary of Bank Islamic Malaysia
Berhad, which owns 51% of the paid up capital of the Takaful Company. The balance 49% of the shares are
owned by the various state religious councils and state religious foundations within Malaysia.

DISTINGUISHING FEATURES OF ISLAMIC INSURANCE

From historical background of conventional companies we find that three predominant legal forms have been
used as follows:

a)                  Association of Individuals (Lloyds)

b)                  Stock Companies

c)                   Mutual Companies, and Clubs

A Lloyds Association is an organization of individuals joined together to underwrite risks on a co-operative


basis. Here the individual underwriter assumes risks in his own name and does not bind the organization for
his obligations. Each underwriter is individually liable for losses on which he has assumed risks. Thus it can
be said that a Lloyds Association is proprietary organization bent on profit and the underwriter is always an
individual. On the other hand, a stock company is the corporate body of stockholders that is organized as a
profit-making venture in the insurance field. However, the Mutual companies and the clubs are organized as a
non-profit corporate body that is owned by policyholders as there are no stockholders.

However, in the case of Islamic insurance, we observe that the corporate objective of the Islamic Insurance
Company is to provide Islamic Insurance or 'Takaful' service on a commercial basis in accordance with

18
Islamic Principles in order to provide the service of insurance as permissible in the Shariah.

In this respect, it has been observed that an Islamic Insurance Company be established on condition that its co-
operative nature be made evident. This necessitates clear stipulations in the insurance contract and certain
additional clauses to signify that the premiums paid by the insured are grants from him to the company to be
remitted to fellow contributors in need of assistance according to the regulations agreed upon. Therefore, it has
been suggested that certain special clause should be added to the insurance contract to signify its co-operative
nature. The additional terms provide the insurer the right to revert back to the insured for additional premium
and the right of policyholders to share in the surpluses. The insurer also enjoys the right to invest the surplus
fund in any way that it deems fit in projects and other fields of investment as allowed by Shariah and under
the relevant insurance rules or regulations.

Islamic Insurance Co. (Sudan) has incorporated these principles by way of inserting additional clause in the
policy condition as follows:

 Co-operative (Mutual Clauses): "The Insurance granted under this policy is subject to company's
Memorandum and Article of Association which provide inter alia that the company shall transact business on
a co-operative basis in accordance with the subject of the Islamic Shariah. The Company accordingly
maintains a distinct and separate account for its policyholders known as the policyholders Account. The Policy
holders account is credited with all the premiums paid by them gratuitously and debited with their share of
service charges, claims and the surplus, if any arrived at after making provision for depreciation, bad and
doubtful debts and establishing traditional technical services at the end of each financial year shall be treated
as follows:

(a)                 The Board may set aside all or part of the surplus as general reserves or other special reserves
and such reserves shall be considered as gratuity from the policyholders.

(b)                 If the whole of the surplus has not been set aside as reserves the balance shall be distributed
amongst the policy holders in proportion to the surplus generated by the premiums paid by them".

 Investment Fund Clause: "The Company invests the funds held by it on behalf of the policy holders in
accordance with the principles of Islamic Shariah Code".

Dr. Abdul Halim Bin Hazi Islamil, the Chairman of Syarikat Takaful Malaysia, has explained the above
principles as follows:

"The provision of insurance cover as a form of business in conformity with Shariah is in essence based on the
Islamic principles of Al-Takaful and Mudaraba - Al-Takaful briefly means the act of a group of people
reciprocally granting each commercial profit sharing contract between the provider or providers of fund for a
business venture and the entrepreneur who actually conducts the business. The Islamic insurance or Takaful
business conducted by the company may thus be envisaged as the profit sharing business venture between the
Company an the individual members of a group of participants who desires to reciprocally guarantee certain
loss or damage that may be inflicted upon any one of them."

From what stated so far we obverse that an Islamic Insurance company should have following features:

(a)               The policyholders should have the right to participate in surplus profits .

(b)               The policyholders should be liable to contribute additional amounts if the initial subscriptions

19
(contributions) made during a particular year are not sufficient to meet all the losses.

(c)               The policyholders may be given representation on the Board of Directors of the company.

(d)               The company would invest its funds in sources that are not forbidden by Islam and should not
indulge in the harmful and forbidden practice of Riba in any form.

(e)               The company would maintain two separate and distinct accounts. One known as the
policyholder�s account and the other the shareholders accounts.

(f)                The policyholder�s account is credited with all the contributions made by the policyholders and
their share of profits on investment of funds. The policyholder account is debited with their proportion of
service charges and claim.

(g)               The surplus after the establishment of necessary reserves is distributed amongst policyholders.
The deficit, if any, is written off against the general reserve.

(h)               If there is no general reserve or the amount of the general reserve does not cover the deficit fully,
such deficit is met from the shareholders reserve and capital in the form interest-free loan to be recovered from
the future surpluses.

(i)                 The shareholders  do not participate in any part of the surpluses of  the policyholders account.

(j)                The income derived from the investment of the share capital is credited to the shareholders
account the surplus left after meeting their share of current expenses etc., is distributed amongst shareholders.

(k)               A Zapata fund will be developed by way of charging 2.5% annually on the share capital, reserves
and profit.

(l)                 There should be a Shariah supervisory Board. The Board will be responsible for supervising the
day-to-day functions of the company in the light of Shariah (Ali 1991).

INVESTMENT OF PREMIUM UNDER ISLAMIC INSURANCE

The insurance industry as a whole, and an individual insurance company in particular, plays a vital role in the
development of a capital market. However, investment of an insurance company is mostly guided by relevant
provisions in the Insurance Act, which provides formulae for minimum investments required by a particular
company depending upon the type or types of businesses and on the basis of liabilities involved in a particular
year. The Act also specifies the percentage of investment to be made in Government Securities, Approved
Securities and other Approved investments as may be notified from time to time. Subject to the restrictions
made by the Government, investments of an insurance company are made in the following categories:

�Government Securities (including Bills, Bonds and Certificates)

�Shares

�Debentures

20
�Real Estates

�Deposits with Banks

�Bridge Finance

Investment Guidelines are set out in Section 27, 27A, of Insurance Act 1938 as adopted in Bangladesh. About
60% of the life funds require to be invested in Government or other approved securities. The balance is
allowed in approved investments.

Investment operations are incidental yet crucial to the business of insurance.  Insurers are required to generate
reserves for claims that might arise and over a period a large corpus of funds is built up. It is essential that
insurance companies invest these funds judiciously with the combined objectives of liquidity, maximization of
yield, security, and most importantly, ensuring that they can meet the liabilities when required. The choice of
investments will depend on the type of liabilities. Returns on investments from life insurance funds influence,
to a large extent, premium rates and bonuses. It has been recommended that the insurers must at all times
maintain a prescribed minimum level of solvency as a protection for the policy holders' legitimate interests.
Because of public interest, investment of life insurance funds is regulated in some countries.  Most countries
do not prescribe the investment pattern, but instead set ceilings on the maximum value as a percentage of the
fund in each of the different categories of investments that are admissible for the purpose of determining the
solvency margin.

In Singapore, up to 35% of the fund can be invested in equity shares, preference shares, subscription rights and
share warrants. Up to 5% is allowed in unquoted shares and up to 20% is allowed in property. The admitted
value of outstanding premiums and agents' balances (in respect of general business only) is 12.5% of written
premiums. In Malaysia, the value of investment securities should not be less than 25% of the total value of the
fund and not less than 80% of the fund should be invested in Malaysia.

The life insurance industry will be competing against other financial institutions, life banks, mutual funds, and
unit trusts for the investor's moneys. A level playing field is required to promote healthy competition between
these different types of financial institutions. Therefore, it is recommend that the requirement for life insurance
companies to be heavily invested in Government Securities be removed. Investing in equities is more volatile
than investing in Government Securities but it is possible to improve returns by efficient and timely market
operations and to reduce risks by properly matching assets against liabilities. A dynamic approach to the
management of equities with requisite information support and the application of the techniques of security
analysis is called for in the interests of the insuring public.

The general insurance sector will have liabilities, which are shorter in term as compared with the life sector.
Equity investments are generally made with a medium to long-term perspective and hence the maximum
investment allowed in equities should be lower for the general insurance companies than in the life sector.

An Islamic Insurance Company shall have to be guided by the relevant law of the country, but, at the same
time, it must use the investible funds in financing and participating in permissible economic activities
according to Shariah provided modes on profit and income sharing basis. Therefore, investment of Islamic
Insurance Companies should be made as per the following modes:

(a)                  Musharaka (Sharing profit and loss on a productive investment).

(b)                  Mudaraba (project finance for a fixed time with profit and losses being shared)

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(c)                   Real Estate

(d)                  Deposits with Islamic Banks.

Government and other approved Securities are interest bearing. Naturally, the Islamic Insurance Companies
cannot invest the permissible required surpluses in these Securities.  Therefore, in order to meet the
requirements of Islamic Insurance Companies, it would be necessary to amend the relevant sections of the
Insurance Act, so that it allows the Islamic Insurance to invest funds only as per Shariah approved means and
modes (and not in any interest bearing Securities and deposits).  Alternatively, it is necessary that the
Parliament frames out and passes the required Islamic Insurance Act as per the model of Malaysia Takaful Act
1984.  In fact the proposed Act has to be modeled on the existing Insurance Act with modifications and
amendments, which are necessary to conform to Islamic Insurance practices.
 

References

Ali, K. M. M. (1989). �Need for Islamic Insurance�. Islamic Banking and Insurance, Proceedings and Papers of International
Seminar held in Dhaka.
Ali, M. M. (1991). Insurance in Islam � Some Aspects of Islamic Insurance. IERB, Dhaka.
Ali, K. M. M. (2000). �Concept and Prospect of Islamic Insurance in Bangladesh�.  Fair Review, December, Egypt.
Greene, M. R. (1962). Risk and Insurance. South Western Publishing Co. Ohio.
Majumder, P. I. and M. G. Dewan (1999). Principles of Insurance. Insurance Institute of India.

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