This has resulted from factors including the general attitude to personal risk, a greater reliance on social welfare provisions and, in some regions, lower disposable incomes. While individuals in the
Addressing the problems of conventional insurance
Sharia scholars have determined that conventional insurance contains elements of risk and uncertainty (Al-gharar), gambling (Al-maisir) as a consequence of the presence of uncertainty and an unjustifiable increase in capital (Al-riba) on the basis that ordinarily any loss paid out will be a sum greater than the premiums paid; each of which is haram (prohibited) according to Sharia law.
The Islamic Fiqh Academy sought to address these issues in 1985 by ruling that an alternative contract based on co-operative insurance, which conforms to the principles of Islamic dealings and which is founded on principles of charity and co-operation, was acceptable. Islamic insurance (takaful) is based on a number of principles:
- each participant pays a contribution or donation to help those that need assistance;
- losses are divided and liabilities spread in accordance with a mutual pooling system;
- uncertainty is eliminated both in terms of the donation paid into the takaful fund and the compensation received from it; and
- participants co-operate with each other for the common good and no advantage is derived at the cost of others.
The two main takaful models in the
There has also been a significant growth in the use of a mixed model combining elements of both structures, which is widely practised by takaful operators around the globe and is currently the dominant model in the
Takaful in
Although the regulation of takaful globally is in its infancy, the demand for Sharia-compliant insurance products in the
In
The CBB has prescribed the adoption of the mixed model in order to take advantage of the benefits of both the wakala and mudarabah structures. To avoid over-regulation, the CBB takes no view on whether activities of takaful operators comply with Sharia law. Rather, each licensed takaful firm is required to have a Sharia supervisory board.
The CBB has adopted international standards of regulation on the conduct of business, capital adequacy and
management, systems and controls, which apply to all applicants for authorisation, including takaful and re-takaful operators.
While the regulation of insurance in the
In circumstances where no international consensus has been reached, the DIFC has not imposed a prescriptive regulatory regime. As such, there is no prescribed model upon which takaful operations and investments should be based. To obtain a licence for conducting insurance business in
The growth of takaful
Since the establishment of the first takaful operator in the
Unsurprisingly, therefore, an increasing number of global international insurance and reinsurance companies are obtaining licences to operate takaful and re-takaful companies around the globe. In recent months, Hannover Re and AIG have been granted re-takaful and takaful licences respectively to operate in
Yet the continued growth of the market depends on several factors, including the standardisation of regulation, which is at different stages of development in different jurisdictions across the Middle East and worldwide. Therefore there is currently no measure of international uniformity in the conduct of takaful business and regulation.
International uniformity is the key to facilitating the growth and global marketing of takaful. In jurisdictions where there has historically been low penetration of insurance products, this uniformity will help change attitudes towards risk and boost awareness of life and non-life cover.
The development of an Islamic capital and investment market is also critical to the corresponding development of takaful, increasing investment opportunities for takaful operators and enabling them to maximise returns within the parameters of Sharia law.
The greater availability of capital may also assist the development of a re-takaful market, where takaful operators are currently left to seek reinsurance cover from conventional reinsurers. With new global players entering the market, there is an incentive for initiatives such as the Bahraini-based International Takaful Association to develop standardisation in products and processes in order to promote the growth of takaful in the
Susan Dingwall is a partner and Ffion Griffiths an associate in the insurance group at Norton Rose.