While the principles of Takaful/re-Takaful have been around for centuries, it was only in 1985 that The Grand Counsel of Islamic Scholars approved the current framework for the Takaful system as the correct alternative to conventional insurance as being in full compliance with Shariah.
Since then, the demand for Takaful has led to the establishment of a steadily maturing industry (principally in the GCC and Southeast Asia) that serves the need for Family Takaful by providing health, savings and investment benefits for individuals and groups. The commercial Takaful sector has not evolved to the same extent however, principally due to a historical disconnect between the Islamic finance and insurance sectors.
When compared with conventional insurance companies Takaful operators can generally be characterized as remaining under-developed due to the short-termism of investors and low capitalization; which has resulted in the under-utilization of capacity and ultimately of its potential, especially in the commercial and credit risk Takaful sector.
As a result, Shariah boards have historically allowed the purchase of conventional reinsurance due to an almost complete absence (up until recently, anyway) of commercial re-Takaful capacity in the insurance marketplace. The resultant commercial Takaful transaction is unfortunately not compliant with Shariah principles, and therefore is haram (forbidden).
GNL Insurance has been working to close the gap of this disconnect between Islamic finance and commercial Takaful, by working with certain global insurers that have the vision to seize the nascent opportunity to develop commercial Shariah compliant solutions. We are seeking to assist the Takaful industry in preventing any disparity between conventional and Islamic coverage, thus allowing its customers a peace of mind that their insurance protection does indeed fall completely within the principles of Islam.
Certain significant challenges remain however. Despite the positive influence of Islamic scholars via the AAOIFI, we believe that the rapid expansion of the industry still warrants a consistent and standardized global operational risk management framework. This would then provide Takaful operators worldwide with a standard (drawn on international best practice) that enhances the industry’s operational efficiency whilst enabling the building of sustainable Takaful funds, to the benefit of Takaful participants (policyholders).
While such risk management frameworks do obviously currently exist, there would appear to be a certain amount of disparity in the sophistication of the regulatory regimes that Takaful operators adhere to depending on where they operate. This has led to a degree of inconsistency and therefore arguably a certain amount of confusion as to what constitutes a Shariah compliant risk management framework. Such interpretation also varies from one Shariah scholar to another.
The challenge of implementing a global Takaful standard may also be a cultural one. As mentioned earlier, the Takaful industry has been plagued by the short-term thinking of its investors, who are seeking to make a quick return, as venture capitalists would, rather than seeking long-term investments and the subsequent development of a sustainable industry. This argument is supported by the inconsequential gross written premium that the Takaful industry writes globally when compared with the trillions that flow through the global insurance industry annually.
The cultural issue also appears to be embedded in the insurance purchasing habits of the corporate population, especially in the GCC. Whilst in the west there is an aversion to risk and indeed an embedded culture of using insurance for operational risk capital relief, there still appears to be an ignorance of the perils of litigation, white collar crime, reputational risk and the like that can damage a company’s financial strength and indeed its status as an ongoing concern. Indeed companies and institutions only appear to want to insure at levels that are either mandated or where there is an actual tangible (generally physical) exposure.
Thus it remains the responsibility of Takaful operators, if indeed they wish to take advantage of the nascent commercial Takaful sector, to educate their customers and connections as to the advantages of proper capital efficient solutions.
Discussions within the Islamic insurance industry have only really just started for the process of securing the appropriate contacts at the government (regulatory), scholar, corporate and customer level that can appreciate a responsible and sustainable approach to Takaful and re-Takaful solutions. Whilst penetration from the London insurance market has been limited to date, we would actually welcome competition, if indeed the commercial Takaful market can present and prove itself as a market worth competing for.
The current and ongoing development of commercial Takaful windows by conventional insurers is helpful. However what the market would ultimately like to see is the seeding of a truly global Takaful company, that offers centralized standards of governance, risk management, products and services, whilst offering participants (customers) competitive and sustainable products and a strong counterparty rating. Perhaps that will happen in the near future, but global standardization of risk management, governance, regulation and Shariah considerations must come first.
Edward Cross is the development director at GNL Insurance and he can be contacted at