Conventional insurance in the US is unacceptable to many Islamic jurists due to the elements of Gharar (excessive uncertainty) and Maysir (gambling). This is because those purchasing the insurance do not know how much longer they will live and do not necessarily understand all the details of the exchange. In addition, the premiums collected are often invested into bonds and other interest-bearing instruments that are not Shariah compliant.
In the Islamic space, the alternative to this model is Takaful. In it, members contribute money into a pool or fund to help guarantee each other against loss or damage. Contributions are considered as donations and policyholders share the insurance risk rather than giving it to the Takaful company. In addition, assets are invested in underlying securities which conform to Shariah compliant guidelines.
There are two main models of Takaful: Mudarabah (profit-sharing) and Wakalah (agency fee). Mudarabah refers to a system whereby shareholders share profit and losses with the policyholders, while Wakalah refers to a fee that is given upfront from contributors and transferred to the shareholders’ fund. These two models may be used separately or in conjunction with one another.
Currently, options for engaging in Takaful in the US are fairly limited. Aside from AIG, which began offering Takaful products in 2008, one name worthy of note is Zayan Takaful, which offers customized Shariah compliant insurance solutions to consumers across the US and provides homeowner policies through a relationship with Lexington Insurance Company.
There are a number of obstacles hindering the growth of Takaful in the US. For one thing, since insurance is regulated by individual states, licensing requirements can vary from region to region. Then there is also the potential for insolvency; shareholders’ funds are required to provide emergency interest-free loans to meet existing claim obligations, and the laws of the state may not differentiate between a policyholder and a shareholder in a Takaful contract. Lastly, the issue of lawsuits: ‘Murray v. Geithner’ refers to a case where it was argued — unsuccessfully — that AIG should not be eligible for emergency TARP (Troubled Asset Relief Program) funds because of its involvement in Shariah compliant financial instruments.
Given these obstacles, it is difficult to see where the future is headed for the Takaful industry in the US. Although there is much room for further development in terms of catering to other insurance lines (such as automobile, health and such), these steps can only come after more work is put to create solid products within the commercial and residential property insurance space.
Aliredha Walji is the vice-president of ShariaPortfolio. He can be contacted at [email protected].