The government of any nation is obligated to protect its citizens. However, the government’s role is limited by what it can afford to do. The family is traditionally the cornerstone of this support; however in recent years a demographic shift has taken place, with more people moving away from their traditional homes to the cities. This is where Takaful comes in, enlarging the resource pool and giving assistance and financial support when necessary.
Takaful and insurance are one of the few services you pay for in advance. That in itself creates risk as you attempt to choose a policy that is right for you. According to Zainal Kassim, senior partner at Actuarial Partners Consulting: “When we talk about risk management we are talking about life: life itself is a risk.” Takaful is much more consumer friendly in this respect, as Takaful is adopted as a policy that is good for the consumer by sharing risk and creating transparency.
Takaful’s goal is to create a balance between protecting your future and guaranteeing you a good current quality of life. There is of course a risk: performance risk. Providing suitable financial advice is one important aspect of Takaful.
Part of this is removing the bias, and avoiding mis-selling products. The cheapest products don’t necessarily provide the highest benefit for Takaful operators and their customers.
Stakeholders, shareholders and policyholders are all interested parties in Takaful. Brokers are looking for the greatest commission and volume; management is looking at higher pay and achieving their targets; while participants are dependent on agents for products and services.
Risk management begins at the point of sale. Is the product suitable for the customer? Agents should not be driven by commission; correct sales are as mutually beneficial for Takaful operators as good sales figures. Participation is key; policy conditions and legal jargon are only there to guarantee service and to protect policy holders and the Takaful operators. Takaful products should not disadvantage the consumer and this is a fundamental consideration in Shariah compliance.
In conventional insurance there is a transfer of risk to the insurance company, which then guarantees your money, and pays out as and when the policy dictates. Takaful is a different proposition in that the money is pooled together. The pool belongs to the policyholders. It is the responsibility of the Takaful companies to ensure that this pool is large enough to cover the possible claims that may arise. The risk is still there as there are no guarantees on the size of the pool, and in theory contributions should be increased and dividends reduced accordingly.
Ultimately it is the board of directors that should ensure everything runs smoothly; they are appointed by the shareholders and are responsible to them. Their job is to manage risk and make sure that shareholders get a reasonable return on investment.
Corporate governance needs to be strong in order to ensure that the system can be maintained. Checks and balances must be in place to ensure that the system remains clear cut and fair. Kassim states that: “Governance works best when all interests of the stakeholders are properly aligned.”
Regulations need not be all-encompassing for the Takaful model, as its risk sharing profile reduces the requirement for over-regulation. Over-regulation hinders innovation; Takaful is a relatively new and growing industry, and innovation is vital for it to develop.
Often the response is to increase the amount of capital. However, according to Kassim: “If you put too much capital at the disposal of the companies you force the Takaful industry to mirror the conventional insurance industry.”
Risk must be allocated and responsibilities addressed as part of the corporate governance structure. The company needs to be aware of what it is responsible for. Gains must be shared in an appropriate manner and all stakeholders must be rewarded in a manner proportionate to the risk undertaken. Collective responsibility is key.