Tomorrow’s Takaful Products By Ikram Shakir
Tomorrow’s Takaful Products
Islamic insurance products have existed, in one shape or another, for several years but the real impetus came during the early 1980s when such products appeared in Western Europe mainly due to the efforts of Dar Al-Mall Al-Islami, one of the biggest Islamic financial institutions in the world, through its Takafol subsidiaries. Business conditions for Islamic financial institutions were very favourable at the time and Takafol products were well received by the ethnic Muslim community living in Western European countries. The first generation of emigrant Muslims to Western Europe had established themselves successfully. The prejudices and discriminations of the host communities were coming to surface, Muslims were facing a crisis of identity and this created a chain reaction. These social problems were expressed through the establishment of a number of mosques and Halal meat and Islamic food shops throughout Western Europe. Simultaneously, non-interest bearing bank deposits and Islamic savings funds became more popular within Muslim communities.
2. No profit to the Takafol company from favour able mortality experience
3. Based on solidarity principles rather than probabilities (principles of gambling)
The Western insurance products have evolved over the last 2 centuries to meet the social and economic needs of the population. As Muslims in Europe are living in the Western social and financial environment, they have similar social and financial problems and their insurance needs are therefore very similar. In order to identify which products may have a wider appeal for Muslims in future in Western Europe, it may be helpful to first identify the factors which affect the insurance market. Some of the primary factors are as follows:
– Budgetary constraints
– Political Uncertainty
– Ageing population
– Longevity
– Changes in social habits
– Competition
– Available Investment
– Distribution
– Risks Involved
– State pension schemes.
– Occupational pension schemes, and
– Personal savings.
It can be seen that there was a sharp rise in fertility rates after World War II, followed by a sudden drop in the late 1960s. Some people call this phenomenon a time bomb, but it can be better described as a tidal wave because a time bomb explodes only once whereas this phenomenon has recurrent long-Iasting consequences. As the baby boomers aged it created temporary demand for age-specific products but as the baby boomers were replaced by the baby busters, these areas of temporary high demand immediately contracted. In the 1950s, there was a high demand for kindergartens and schools, which had to close down later on for lack of attendance. In the late 1960s, the demand was in the higher education sector, which was followed by a recession with the consequence that many teachers were made redundant and many schools were closed. In the 1980s it was housing, appliances and commercial office space. In the year 2020, the demand will probably be in the medical, pharmaceutical and old care houses sector.
Due to old age, or as a result of an accident or disease, some people lose some of their mobility and need special assistance to carry out daily activities. In the worst cases, 24-hour assistance may be required. The average length of such assistance normally varies between 6 to 12 years but it can be longer in certain circumstances. In the past, the family used to provide such assistance. However, because of the changing family structure (single parent families, divorces, working women, etc.), it appears that the family is no longer in a position to do so and, therefore, some external assistance is required. This can be quite expensive and, as State pension benefits and disability benefits are usually insufficient, extra cover could be provided through Takafol policies. The current estimate is that about 25% of retired people will require some long-term care at one time or another, which offers big potentials to Takafol companies. Benefits normally cover the cost of any external assistance required to carry out such activities as feeding, bathing, dressing, transferring to and from bed or chair, going to the toilet, etc. The target market for long term care products could be the middle-income group and the distribution could be through Islamic banks, occupational pension schemes and normal Takafol distribution channels.
Modern medicine and health care in the European Union has helped to improve the life expectancy but it has not improved the health and quality of life at older ages. In a recent research carried out in the USA, it was found that on average 77% of all health care expenses occur during the last six months of our life.
-
Ordinary medical care (where normal medical expenses are paid on an indemnity basis)
-
Major medical expenses (where fixed lump sum benefits are provided in respect of defined medical procedures)
-
Critical illness products (where the risk of diseases such as heart attack, stroke and cancer is covered)
-
Total health care products (where critical illness, medical care, life cover and long term care covers are provided under a single cover).
The word “Takafor’ may portray the real meaning of risk sharing on a solidarity basis in the Arabic language, but it is not commonly used and understood by the Muslim community living in Western Europe. It is already difficult for a Takafol salesman to convince somebody that he should take a Takafol policy and having to explain what Takafol is, adds even more difficulties in the selling process. It would perhaps be better to use “Islamic insurance”. This method was successfully used by the Islamic banking industry and a similar process could be employed by the Islamic insurance industry.
One of the main difficulties probably experienced by Islamic financial institutions is to design products, which can meet the insurance needs of the Muslim community living in Western Europe without contravening the basic Islamic (sharia) principles.
When designing a new product, considerations should be given not only to its adequacy, but also to its competitiveness. For that purpose, both the investment strategies and the product charging structure need to be carefully defined. For example, it should be noted that funds invested in short-term assets usually provide lower returns than those invested in longer term assets -since the liabilities of a Takafol company towards its policyholders are longer term by nature, it is considered prudent to invest the policyholders’ funds in long term assets. As regards the charges, the use of single mortality rates puts some people at a disadvantage, which may reduce the product attractiveness to some prospective policyholders. Takafol should devise systems under which it should be possible to invest in longer-term assets and to use different mortality rates without contravening sharia principles.
Takafol managers are well aware of the insurance needs of their customers but may not be well experienced in the interpretation and application of sharia principles, whereas Sharia experts (religious leaders) may not fully comprehend the commercial requirements of a Takafol company. Therefore, there is a need to educate both sides into the other discipline and to maintain a continuous dialogue between them so as to find pragmatic business solutions under which the Takafol products are acceptable on sharia principles but offer competitive terms to the Muslim community for their insurance needs. Institutions like DMI and the Islamic Institute for Banking and Insurance are already doing an excellent job in the development and promotion of Islamic financial systems. They should try to accelerate this process further by providing a forum where Takafol managers and sharia experts could communicate with each other.
According to some estimates, there are over 6 million Muslims living in Western European countries. That offers a very substantial market size to Islamic financial institutions. The Western insurance industry is facing problems in identifying its market and is going through a phase of consolidation and repositioning. With a defined market in Europe, Takafol companies do not face this problem. They potentially have a very prosperous future ahead of them, provided they can offer efficient Takafol solutions to the Muslim communities.