TAKAFUL AS AN ALTERNATIVE TO CONVENTIONAL INSURANCE

Introduction Insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insured for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk (George E. Rejda, 2010, p.20). Moreover, insurance can clearly defined as a contract between person who intend to buy insurance known as insured and insurance company which known as insurer to give compensation or indemnify insured for such losses as long as the contract is still enforce. In contrast, insured must pay the assessed amount of money known as premium. Other sense of insurance is it is a the act, system, or business of insuring property, life, one's person, etc., against loss or harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in consideration of a payment proportionate to the risk involved. Coverage by contract in which one party agrees to indemnify or reimburse another for loss that occurs under the terms of the contract. However, in conventional insurance, the elements of gharar, qimar, riba and so on are exist. It is unaccepted in concept of syariah or Islamic law as well. So takaful are formed as an alternative to conventional insurance. Takaful is a type of Islamic insurance, where members contribute money into a pooling system in order to guarantee each other against loss or damage. Takaful branded insurance is based on syariah, Islamic religious law, and explains how it is the responsibility of individuals to cooperate and protect each other. Takaful insurance companies were introduced as an alternative to commercial insurance companies, which go against the riba, maisir, and gharar that are outlawed in syariah. In addition, takaful is a participatory form of insurance based on risk sharing by customer on co-operative principles instead of risk transfer to a third party, the company. The customer participate in the technical and investment surplus of insurance and reinsurance funds. The risk pool is manage by the company and the company is run on a commercial basis with corporate responsibilities towards its stakeholders. The business operations are strictly focused on aspects of social

goodness with all its monies and funds invested according to certain syariah principles for the greater good of society and environment at large benefiting everyone irrespective of religion.

Prohibited Elements in Takaful Several fatwa have been issued by eminent Muslim scholars on the subject of insurance. The objections tend to relate to the insurance contract itself or to insurance market practice in general. Objections relating to the insurance contract itself are those of riba, gharar, and maysir. The other objections relating to market practice are usually concerned with two issues: The first is that insurance companies investment policies are generally interest bearing which is not acceptable in Islam, and the second issue is the fact that life assurance is considered to breach Islamic inheritance rules by distributing the sum assured among beneficiaries. These objections relating to market practice can be easily overcome by the insurer making changes to their company policy, as they do not affect the insurance contract itself. The objections related to the contract itself, however, require the restructuring of insurance contracts to be in line with syariah
i.

Riba Under a conventional insurance, the insured pays the insurance company a premium either as a lump sum in general insurance or as installments in life insurance, in exchange for financial compensation at the time of a claim, subject to the happening of an insured occurrence or event. Claims are generally larger amounts than the premium paid. Islamic law objects to this payment on the grounds that a small amount of money or premium is being exchanged for a larger amount of money, the claim. Scholars consider this an unjustified increase of money, and therefore riba. Islamic insurers therefore have to structure their operations and investments to avoid riba. ..Allah (s.w.t) permitted trade while prohibited Riba. (Al-Baqarah 2:275). Allah (s.w.t) those who believe, deal not in usury, doubling and quadrupling the sum lent. Fear Allah, and you would be successful (Al-Imran 3:130). Otherwise narrated by Abu Huraira (r.a.) The Holy Prophet said: if a person conducts two transactions contained in one, he should stick to the lower one or he will commit an act involving riba

ii.

Gharar

Gharar can be defined as uncertainty or ambiguity. Islamic law seeks to avoid ambiguity in contracts, in order to prevent disputes and conflict between parties. This is a general Islamic principle that must be applied to all contracts, including insurance. In the case of conventional insurance, neither the insurer nor the insured knows the outcome of the contract. The insurer is entitled to get the premium in all cases, whereas the insured may not receive a claim because the payment of claims depends on the probability of loss occurrence which is a random variable. Other uncertain elements are as to when the claim may be paid and how much the insured may receive. In life assurance contracts, gharar can be seen to exist even in the premium, as the insured party does not know how much he will pay to the insurance company each year, or for how many years. The insured may know the monthly or yearly premium, but he does not know how much he will pay to the insurer before he dies. In general insurance, the premium is pre-agreed, but there is gharar in the claim amount. Therefore gharar exists in all insurance contracts, either in premiums or in claims. In Islamic insurance, scholars agree that engaging in takaful transactions, with a donation element as part of their contribution, offsets gharar. The Holy Quran has explicitly forbidden all business transactions including injustice in any form to any of the parties, whether in the form of deceit or fraud or undue advantage or peril leading to uncertainty in the business or any dealing. (Quran: 6:151-152). Hadith of the Prophet as narrated by Anas bin Malik states that the Prophet forbade the sale of fruits till they were almost ripe.

iii.

Maysir

Some arguments against conventional insurance are based on the grounds that insurance contracts are basically gambling contracts. Islam rejects any contract where financial gain comes from chance or speculation. Insurance, however, needs to comply with the principle of insurable interest. This principle requires a financial and legal relationship between the insured and the subject matter of insurance. The insured is only entitled to get a claim if he proves his insurable interest, and this feature therefore nullifies the notion that insurance is a gamble. The other difference
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between gambling and insurance is that the first is a speculative risk which is uninsurable, while the latter consists of pure risk only. O you who believe! Intoxicants, gambling, idolatrous practices and soothsaying are abomination of Satans handiwork. So avoid it in order that you may be successful. Surah alMaidah (5:90)

Main Objective of Takaful

Having a family takaful or Islamic life insurance policy does not mean that one has insured ones own life, but it is a fair financial transaction catering for the benefits of certain helpless people in the society. The rationale behind having a life insurance policy could be summed up as hereunder: It is one of the means of providing a material safeguard for offspring and is thus in line with the saying of the holy prophet SAW. He (SAW) spoke to this effect: "it is better for you to leave your off-spring wealthy than to leave them poor, asking others for help". The Holy Prophet (SAW) also encouraged the providing of security for the widows and poor persons as he highlighted in one of his traditions: "The one who looks after and works for a widow and for a poor person (dependent), is like a warrior fighting for the cause of Allah (SWT), or like a person who fasts during the day and prays throughout the night.

Tabarru and Takaful In order to eliminate the element of uncertainty in the takaful contract, the concept of "tabarru" is to donate or give away is incorporated in it. In relation to this, a participant agrees to relinquish as tabarru certain proportion of his takaful installments or contributions that he agrees or undertakes to pay thus enabling him to fulfill his obligation of mutual help and joint guarantee, should any of his fellow participants suffer a defined loss. In essence, tabarru' would enable the participants to perform their deeds sincerely in assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster. The sharing of profit or surplus that may emerge from the operations of takaful, is made only after the obligation of assisting the fellow participants has been fulfilled. It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure that funds are sufficiently protected against undue over exposure.
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The Concept of Islamic Insurance The main concept of Islamic insurance is that it is an alternative to conventional insurance, with characteristics and features that comply with syariah requirements. This is done by eliminating the objections against conventional insurance. The term takaful is an infinitive noun which is derived from the Arabic root verb kafal or kafala, meaning to guarantee or bear responsibility for. (Kassar, 2008, p. 26).

The main features of Islamic insurance are: cooperative risk sharing by using charitable donations to eliminate gharar and riba; clear financial segregation between the participant (insured) and the operator (insurance company); syariah-compliant underwriting policies and investment strategies.

Cooperative Risk Sharing The characteristics of a cooperative include self-responsibility, democracy, equality, equity, solidarity, honesty, openness, social responsibility, and caring for others. While mutuality or cooperative risk sharing is at the core of Islamic insurance, it cannot alone create an Islamic insurance operation. Islamic insurance is based on more than one contractual relationship: The first relationship is a mutual insurance contract between policyholders and each other. This is similar to a pure mutual insurance relationship, taking into consideration the concept of donation instead of premiums and an ethical framework of Islamic transactions. The main features behind cooperative insurance are: Policyholders pay premiums to a cooperative fund with the intention of it being a donation to those who will suffer losses (tabarru). Policyholders are entitled to receive any surplus resulting from the operation of the cooperative insurance fund. Policyholders are liable to make up for any deficits that result from the operation of the cooperative insurance fund. The amount of contribution (premium) differs from one participant to another, based on the degree of risk in general insurances and actuarial principles in life assurance. There is no unified system to operate the treatment of surplus and deficit. There is therefore more than one model accepted by syariah scholars being used in practice.
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Clear Segregation Between Participant and Operator In conventional insurance, the insurance company is a profit-making organization that aims to maximize profit by accepting the financial burden of others losses. The insurance company is owned by shareholders who are entitled to receive any profit and are responsible for financing any deficit. Under Islamic insurance, the system is that the insurance companys role is restricted to managing the portfolio and investing the insurance contributions for and on behalf of the participants. The relationship between the participants and the insurance company (as an operator, not as an insurer) is different. There are four different models in operation: The mudarabah model, the wakalah model, the hybrid mudarabahwakalah model, and the pure cooperative model (non-profit). The overarching goal of Takaful is brotherhood, solidarity, protection and mutual cooperation between members (Kassar, 2008, p. 66).

Syariah-Compliant Policies and Strategies Ethical insurers invest money in a responsible way in industries that are ethically sound and do not harm the environment or people. Islamic insurance is similar, except that the ethical considerations are extended to those which do not contravene the religion of Islam and are monitored by a syariah board, which is part of the company structure. In particular, the investment and underwriting policies need to be free of any involvement with the prohibited activities of gambling, alcohol, pork, armaments, tobacco, and interest bearing activities, loans, and securities.

Takaful Act 1984 :- Cases

Takaful act 1984 is an act to provide provisions control for takaful business in Malaysia and for other purposes relating to or connected with takaful.

Global Process Systems Inc & Anor vs Syarikat Takaful Malaysia Berhad

Background and first instance decision The case before the Supreme Court arose out of the Appellants insurance of the Respondents oil rig off the coast of South Africa. In the course of being towed from Galveston in the United States to Lumut in Malaysia, the rigs three legs broke off and fell
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into the sea. The Respondents made a claim under their policy with the Appellant for the loss of these three legs. The insurance policy excluded loss, damage or expense caused by inherent vice or nature of the subject matter insured from cover. The loss resulted from metal fatigue in the three legs. The fatigue was the result of stresses generated by the effect of wave action on the motion of the rig as it travelled. It was common ground that the weather encountered on the voyage was within the range that could reasonably be expected. The Appellant insurers therefore argued at first instance, before Blair J in the Commercial Court, that there was no cover under the policy because the loss of the legs was an inevitability, not a risk. In his judgment, however, Blair J rejected this argument, stating that the failure of the legs off South Africa was very probable, but it was not inevitable. However, Blair J also held that the proximate cause of the loss was the fact that the legs were not capable of withstanding the normal incidents of the insured voyage from Galveston to Lumut, including the weather reasonably to be expected. He therefore held that the loss resulted from the inherent vice of the legs, and accordingly was not covered by the insurance policy.

Court of Appeal The Court of Appeal disagreed. In their judgment, they held that the proximate cause of the loss was a leg breaking wave which resulted in the starboard leg breaking off, thereby increasing the stress on the other two legs, which then in turn broke off. Waller LJ (at paragraph 64) said that: It was not certain that that would happen and although with the benefit of hindsight we know that it was highly probable, that high probability was unknown to the insured and that was a risk against which the appellants insured. The appeal was therefore dismissed.

Supreme Court The Supreme Court has now upheld the Court of Appeals decision. This provides endorsement at the highest level of the narrow construction of inherent vice espoused by the Court of Appeal, and a definitive rejection of the wider construction adopted by Moore-Bick J (as he then was) in Mayban General Assurance BHD v Alstom Power Plants Ltd [2004] EWHC 1038 (Comm) and relied upon by Blair J at first instance in
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Global Process Systems. This is essentially a matter of the allocation of risk. The force of the ultimately unsuccessful arguments put forward by the Appellant insurers can be appreciated given the weather over the course of the rigs voyage was not exceptional, on one level it could readily be said to be an inherent vice of the rigs structure not to be able to withstand the stresses to which this weather ultimately gave rise. However, the Supreme Court has rejected the idea that, unless the weather was exceptional, unforeseen or unforeseeable, the proximate cause would be inherent vice. In the words of Lord Mance (at paragraph 81) inherent vice would only arise if: . . . the loss or damage could be said to be due either to uneventful wear or tear in the prevailing weather conditions or to inherent characteristics of the hull or cargo not involving any fortuitous external accident or casualty that insurers would have a defence. Of course, as Lord Clarke pointed out (at paragraph 140) this conclusion relied upon the factual finding of Blair J that the loss had not been bound to occur, albeit it was very likely. If the loss had inevitable, the loss would not have been covered.

Comments An important part of the Supreme Courts reasoning in its judgment was that exclusion of losses such as these can be dealt with by specific exclusions in policies. This may indeed be the markets response, although, conversely, insureds are likely to resist the introduction of wording into marine cargo and all risks policies which could imply that the cover responds only to exceptional circumstances. In any event, the Supreme Court has rejected the Holmesian approach of equating the absence of an exception peril with inherent vice, and confirmed the narrow concept of inherent vice with a decision which will be of comfort to insurers.

Conclusion

Takaful has emerged as an alternate of conventional insurance. Takaful has grown as a form of protection against the risk of loss. Takaful is now being operated in Muslim societies mainly because it is necessary to protect each and every member of the

society from any unexpected negative change in life, and wealth that he has. This is also necessary to protect the members of the society from unforeseen losses arising from legal liability. The system of protecting one from an unforeseen loss or damage is not a new concept that people just learnt about. Islamic societies have always collectively

assisted their members, both in cash and kind, and when they have been required to incur some usual or additional expenditure on deaths, births, marriages etc. The Arabs even in the pre-Islamic days tied by blood relationship considered to meet the loss of any individual member, including his liability towards the payment of blood money. They were obliged by custom and tradition to come to rescue of a fellow tribe and take suitable measure to cover losses or liabilities collectively. This took the form of mutuality and gave rise to the custom of losses being shared by

the group as a whole. Takaful has emerged as an alternate to insurance, because insurance and risk management are now being used in every sphere of human life and specially because of its tremendous importance to modern trade, commerce and industry. Because of the important role of insurance in the day today life and

business ventures, the legal and contractual aspects has been the subject matter of detailed studies by Islamic scholars. The scholars have come to different views,

opinions and conclusions. A few of them have approved all forms of insurance as permissible subject to certain limitations and qualifications. algharar (uncertainty and lack of clarity) riba (interest Other have totally

disapproved any form of insurance contract because it includes an element of & usury) and maisir

(gambling). However, most of the Islamic scholars have opined that the present day western oriented insurance contract does not in its present form, conform to the mechanism of

Islamic Shariah. This is why Takaful has emerged as an alternate handling risks

REFERENCE

Takaful Act 1984

George E. Rejda, 2010. Principles of Risk Management and Insurance. Eleventh Edition. Pearson Education: New Jersey 2010

Dr. Lim Chee Chee, 2009. Pengurusan Risiko dan Insurance. Universiti Utara Malaysia : Sintok Kedah 2009.

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