Islamic Insurance in Bangladesh with a special reference of Takaful Islami Insurance Limited.
As a requirement of MBA program from Department of Finance, University of Dhaka, we have prepared our report as a course material of MBA Course no: 501 (Management of Financial Institutions) with the objective of evaluating Islamic Insurance in Bangladesh with a special reference of Takaful Islami Insurance Limited.
Insurance is not a new business in Bangladesh. Almost a century back, during British rule in India, some insurance companies started transacting business, both life and general, in Bengal. Insurance business gained momentum in East Pakistan during 1947-1971, when 49 insurance companies transacted both life and general insurance schemes. Islamic insurance (Takaful) means the act of group of people reciprocally granting each commercial profit sharing contract between the providers of funds for a business venture and the entrepreneurs who actually conduct the business.
An Islamic insurance company transacts business on a co-operative basis in accordance with and subject to the principle of Islamic Shariah. All the functions of conventional insurance companies, i.e. underwriting, claims, reinsurance, marketing, investment, company management, etc. of Islamic Insurance Company should fully conform to Islamic Shariah Code. At the same time, the Islamic insurance companies should also make the scope and benefits of insurance coverage traditionally provided by the conventional companies available. Islamic insurance companies have developed extensive facilities to transact all classes of general insurance such as life, marine, fire, motor, accident, aviation, engineering, etc. Islamic
Takaful Islami Insurance Limited was established in 2002. A group of Businessmen who had earlier launched an Islami Bank in the private sector sponsored the company with 60 million taka capital. Client’s service and prompt settlement of claims is the key to the success and growth of the company. Claims are settled immediately on completion of the required formalities by the insured and the surveyors. Company’s portfolio is adequately reinsured both at home and abroad. Fire and allied risks are covered by surplus treaties and facultative, Marine Cargo risks are also covered by surplus treaties and facultative, motor risks are covered by 1st layer XL treaties. Engineering and Misc. risks are covered by surplus treaties and facultative. The company has also cover for fire and marine cargo own retained portfolio.
Takaful Islami Insurance Limited has seen their bottom line shrink from $59.6M to $41.1M despite an increase in revenues from $148.6M to $163.9M. Takaful Islami Insurance Limited appears to have little financial risk as the company holds a substantial amount of cash on its books with little or no debt.
Background of the report
This report has been undertaken as a part of our course F-501 (Management of Financial Institutions) under the MBA program. Our course instructor M. Jahangir Alam Chowdhury has assigned us this assignment so to gain some practical knowledge about Islamic Insurance. This really provides us the opportunity to explore and confront the reality about Islamic insurance in Bangladesh.
Objective of the study
Usually we gather theoretical knowledge from course material. But it is also very much important to relate that theoretical knowledge with practical situation. The basic objective of conducting this report is to apply our theoretical knowledge in practical situation. The objective behind conducting this study is as follows:
- To present an overview of Islamic insurance in world & in Bangladesh
- To present the concept of Islamic insurance and its difference general insurance.
- To present a current scenario of Islamic insurance in Bangladesh with a practical reference of Takaful Islami insurance Limited.
- To show the future challenge and contribution of Islamic insurance in Bangladesh.
Scope of the study
Here, we will be able to the actual scenario of insurance sector in Bangladesh and in world. We have gone through the Islamic insurance in Bangladesh thoroughly, analyzed the present condition in insurance sector and make a short mechanism of Islamic insurance that means their way of service, risk handling technique and financial position of Takaful Islami insurance limited.
Methodology of the Report
All the data used in this report have been gathered from the secondary sources. We have collected information of Islamic insurance from different websites from both Bangladesh and foreign sites to make the theory clear to understand easily.
Limitations of the study
Despite the diligent efforts given in preparing the report, it succeeded only to skim through the surface of the ocean on this subject. Therefore the views expressed in this report are likely to be restricted by limitations. A number of limitations are associated while preparing the report. They are summarized below –
· Time Constraint: The duration of the study was only three months. So it was not possible to reflect all activities in the report in such a short period of time.
· Unavailability of data: Some vital information would have made this report more fruitful. But as those data were confidential in nature, it was not provided by the authority.
An Overview of Insurance industry
(Global & Bangladesh)
Across the world, insurance markets are adapting to the aftermath of the economic crisis. Many multinational insurance companies that hunkered down to conserve capital and trim expenses are now ready to invest in global markets that are poised for significant growth.
Insurers enter new domains
Expectations are pointing to insurers entering new domains, as well as expand their presence in current markets. While there are signs of stabilization, consumers and businesses continue to tighten their purse strings. For much of the European and US insurance markets, these conditions continue, with only slight improvement. In Europe, for example, 2011 will likely be another year of low GDP growth, low interest rates and moderate equity market performance. On the life insurance side in Europe, low interest rates reduce the probability of people saving or putting capital into investment products like life insurance and annuities. Insurers that seek greater flexibility in their distribution relationships may be able to counter the stagnant sales environment.
Consumers and businesses tighten their purse strings
Sluggish consumer and business spending similarly strains the US property/casualty and life insurance segments, causing revenues and earnings to fall in 2010. The decline in net premiums occurred at the same time that investment yields were torpid. Insurers are further pressured by a competitive insurance market, with pricing barely budging in 2010 and no expectations for significant movement in 2011. Insurer surplus in the US is at an all-time high, and this, too, is driving enhanced competition for business. As in Europe, US insurers that invest in more efficient distribution methodologies and more cost-effective operations can drive stronger performance at home and abroad.
Investment in foreign markets
Indeed, with capital and surplus overflowing for many if not most multinational insurers, there are tantalizing opportunities for prudent investment in other foreign markets, depending on the region. In Asia-Pacific, for instance, significant opportunities beckon. Domestic markets in many countries are growing fast — now that a middle class has burgeoned. More people are buying homes, cars and other seeming luxuries beyond their grasp a few years ago. And more businesses have sprung up to provide these goods and services.
While more mature markets in the region are saturated from an insurance penetration standpoint, emerging markets and those continuing to develop offer varying opportunities for growth, especially for early movers willing to invest now for long-term potential. Strategically, such insurers might consider investments that seize upon the evolving distribution strategies in the region, especially for life insurance sales. Customers are seeking to buy insurance products outside the established agency and independent financial advisor channels, which will require insurers already in certain markets to retool their existing distribution models. For insurers entering the markets, they might consider adopting more flexible sales approaches that leverage the Internet, mobile platforms and other evolving technologies.
An Overview of Insurance industry in Bangladesh
Insurance is a system of spreading the risk of one to the shoulders of many. It is a contract whereby the insurers, on receipt of a consideration known as premium, agree to indemnify the insured against losses arising out of certain specified unforeseen contingencies or perils insured against.
Insurance is not a new business in Bangladesh. Almost a century back, during British rule in India, some insurance companies started transacting business, both life and general, in Bengal. Insurance business gained momentum in East Pakistan during 1947-1971, when 49 insurance companies transacted both life and general insurance schemes. These companies were of various origins British, Australian, Indian, West Pakistani and local. Ten insurance companies had their head offices in East Pakistan, 27 in West Pakistan, and the rest elsewhere in the world. These were mostly limited liability companies. Some of these companies were specialized in dealing in a particular class of business, while others were composite companies that dealt in more than one class of business.
The government of Bangladesh nationalized insurance industry in 1972 by the Bangladesh Insurance (Nationalization) Order 1972. By virtue of this order, save and except postal life insurance and foreign life insurance companies, all 49 insurance companies and organizations transacting insurance business in the country were placed in the public sector under five corporations. These corporations were: the Jatiya Bima Corporation, Tista Bima Corporation, Karnafuli Bima Corporation, Rupsa Jiban Bima Corporation, and Surma Jiban Bima Corporation. The Jatiya Bima Corporation was an apex corporation only to supervise and control the activities of the other insurance corporations, which were responsible for underwriting. Tista and Karnafuli Bima Corporations were for general insurance and Rupsa and Surma for life insurance. The specialist life companies or the life portion of a composite company joined the Rupsa and Surma corporations while specialist general insurance companies or the general portion of a composite company joined the Tista and Karnafuli corporations.
The basic idea behind the formation of four underwriting corporations, two in each main branch of life and general, was to encourage competition even under a nationalized system. But the burden of administrative expenses incurred in maintaining two corporations in each front of life and general and an apex institution at the top outweighed the advantages of limited competition. Consequently, on 14 May 1973, a restructuring was made under the Insurance Corporations Act 1973. Following the Act, in place of five corporations the government formed two: the sadharan Bima Corporation for general business, and jiban bima corporation for life business.
The postal life insurance business and the life insurance business by foreign companies were still allowed to continue as before. In reality, however, only the American life insurance company. Continued to operate in the life sector for both new business and servicing, while three other foreign life insurance continued to operate only for servicing their old policies issued during Pakistan days. Postal life maintained its business as before.
After 1973, general insurance business became the sole responsibility of the Sadharan Bima Corporation. Life insurance business was carried out by the Jiban Bima Corporation, the American Life insurance Company, and the Postal Life Insurance Department until 1994, when a change was made in the structural arrangement to keep pace with the new economic trend of liberalization.
The Insurance Corporations Act 1973 was amended in 1984 to allow insurance companies in the private sector to operate side by side with Sadharan Bima Corporation and Jiban Bima Corporation. The Insurance Corporations Amendment Act 1984 allowed floating of insurance companies, both life and general, in the private sector subject to certain restrictions regarding business operations and reinsurance. Under the new act, all general insurance businesses emanating from the public sector were reserved for the state owned Sadharan Bima Corporation, which could also underwrite insurance business emanating from the private sector. The Act of 1984 made it a requirement for the private sector insurance companies to obtain 100% reinsurance protection from the Sadharan Bima Corporation. This virtually turned Sadharan Bima Corporation into a reinsurance organization, in addition to its usual activities as direct insurer. Sadharan Bima Corporation itself had the right to reinsure its surplus elsewhere outside the country but only after exhausting the retention capacity of the domestic market. Such restrictions aimed at preventing outflow of foreign exchange in the shape of reinsurance premium and developing a reinsurance market within Bangladesh.
The restriction regarding business placement affected the interests of the private insurance companies in many ways. The restrictions were considered not congenial to the development of private sector business in insurance. Two strong arguments were put forward to articulate feelings: (a) since the public sector accounted for about 80% of the total premium volume of the country, there was little premium left for the insurance companies in the private sector to survive. In this context, Sadharan Bima Corporation should not have been allowed to compete with the private sector insurance companies for the meager premium (20%) emanating from the private sector; (b) Being a competitor in the insurance market, Sadharan Bima Corporation was hardly acceptable as an agency to protect the interests of the private sector insurance companies and should not have retained the exclusive right to reinsure policies of these companies. The arrangement was in fact, against the principle of laissez faire.
Private sector insurance companies demanded withdrawal of the above restrictions so that they could (a) underwrite both public and private sector insurance business in competition with the Sadharan Bima Corporation, and (b) effect reinsurance to the choice of reinsures. The government modified the system through promulgation of the Insurance Corporations (Amendment) Act 1990. The changes allowed private sector insurance companies to underwrite 50% of the insurance business emanating from the public sector and to place up to 50% of their reinsurance with any reinsurer of their choice, at home or abroad, keeping the remaining for placement with the Sadharan Bima Corporation.
According to the new rules the capital and deposit requirements for formation of an insurance company are as follows:
Capital requirements: for life insurance company – Tk 75 million, of which 40% shall be subscribed by the sponsors; for mutual life insurance company – Tk 10 million; for general insurance company – Tk 150 million, of which 40% shall be subscribed by the sponsors; and for cooperative insurance society – Tk 10 million for life and Tk 20 million for general.
Deposit requirements (in cash or in approved securities): For life insurance – Tk 4 million; for fire insurance – Tk 3 million; for marine insurance – Tk 3 million; for miscellaneous insurance – Tk 3 million; for mutual insurance company – Tk 1.4 million; and for cooperative insurance society, in case of life insurance – Tk 1.4 million, and in case of general insurance – Tk 1 million for each class.
The government guidelines for formation of an insurance company are:
(1) The intending sponsors must first submit an application in prescribed form to the Chief Controller of Insurance for prior permission. (2) After necessary scrutiny the Chief Controller shall forward the application with his recommendation to the Ministry of Commerce. (3) After further scrutiny, the Ministry of Commerce shall submit its views to the Cabinet Committee constituted for this purpose. (4) The decision of the Committee, if affirmative, should be sent back to the Ministry of Commerce which in turn should send it back to the Chief Controller of Insurance for communicating the same to the sponsors. (5) The sponsors would then be required to apply in a prescribed form to the Registrar of Joint Stock Companies to get registration as a public liability company under the Companies Act. Memorandum and Articles of Association duly approved by the Controller of Insurance would have to be submitted with the application. (6) Once the registration process was completed the sponsors would have to obtain permission of the Securities and Exchange Commission to issue share capital. (7) Reinsurance arrangements would have to be made at this stage. (8) After all the above requirements were fulfilled the license to commence business under the Insurance Act 1938 is to be obtained from the Chief Controller of Insurance. Application can only be made subject to government announcements in this regard.
The control over insurance companies, including their functions relating to investments, taxation, and reporting, is regulated mainly by the Insurance Act 1938 and the Finance Acts.
The privatization policy adopted in the 1980s paved the way for a number of insurers to emerge in the private sector. This resulted in a substantial growth of premium incomes, competition, improvement in services, and introduction of newer types of business in wider fields hitherto untapped. Prior to privatization, the yearly gross premium volume of the country was approximately Tk 900 million in general insurance businesses and approximately Tk 800 million in life insurance business. In 2000, premium incomes raised to Tk 4,000 million in general insurance business and Tk 5,000 million in life insurance business.
Up to 2000, the government has given permission to 19 general insurance companies and 10 life insurance companies in the private sector. Insurers of the country now conduct almost all types of general and life insurance, except crop insurance and export credit guarantee insurance, which are available only with the Sadharan Bima Corporation.
Numerous institutions, associations and professional groups work to promote the development of insurance business in Bangladesh. Prominent among them are the Bangladesh Insurance Association and Bangladesh insurance academy. Bangladesh Insurance Association was formed on 25 May 1988 under the Companies Act 1913. It is registered with the Registrar of Joint Stock Companies and has 30 members. It aims at promoting, supporting and protecting the interests and welfare of the member companies.
Surveyors and insurance agents occupy a prominent position in the insurance market of Bangladesh. The surveyors are mainly responsible for surveying and assessing general insurance losses and occasionally, for valuation of insurance properties, while the agents work to procure both life and general insurance business against commission. The system of professional brokers has not yet developed in Bangladesh. However, it is a common practice of the insurers to engage salaried development officers for promotion of their insurance business.
Islamic insurance (Takaful) means the act of group of people reciprocally granting each commercial profit sharing contract between the providers of funds for a business venture and the entrepreneurs who actually conduct the business. In other words, the Takaful business conducted by the company and the individual members of a group of participants who desire to reciprocally guarantee certain loss or damage that may be inflicted upon any one of them. This chapter deals with the conceptual issues, principles of contract insurance, types of general insurance policies, insurance in an Islamic perspective, modas operandi of Islamic Insurance Company, and other relevant matters.
We all know that life is full of uncertainties and it is general human tendency to avoid the uncertainties of life as far as possible. Social scientists of modern age have, therefore, stressed much need for the study of the subject of risk. In fact scientific study and management of risk is very important in the present context of worldly affairs. We know that different types of risk are involved in the society and one should know how to avoid or deal with it.
In the present day society, insurance is one of the most used, desired and prime methods of handling risks. However, insurance is a complex subject and is also a subject of much misunderstanding. It has been observed that much of the misunderstanding has arisen due to two main reasons:
· We have failed to understand the basic nature of risk
· The relationship and difference between insurance and other methods of handling risk have not been properly understood.
Therefore, in order to grasp the functions and nature of insurance we will try to understand some basic concepts of risks and insurance.
Risk and Insurance
Risk has been defined as the uncertainty as to the occurrence of an economic loss. Risk and probability are not synonymous. Before analyzing the relationship between risk and insurance, we must understand the difference between risk and probability. The term’s hazard and peril are more closely related to probability than they are to risk. For example, collision is a peril that causes the automobile accident and loss. The condition that makes the occurrence of collision more likely is called the hazard. For example, foggy weather is the hazard that creates the peril of collision. This means probability of collision increases when the hazard of foggy weather creates the peril of collision. Therefore, one can say that probability is the long run chance that out of a given number of possibilities, certain number of specific events will occur. But risk is the uncertainty as to occurrence of a loss. This is measured in the terms of degree of variation that actual events bear to probable events. The larger the number of exposures, the smaller is the risk. This is because under this situation, the smaller is the variation that actual events bear to the probable events. This called the law of large numbers.
The law of large number states that for a very large number of exposures, one can predict precisely the actual number of occurrence of an event. This law has proved very significant in the study of the subject of insurance. This is mainly because, the risks of the insurer is that he does not know what the actual probability of a loss is. It is, therefore, necessary to estimate the actual probability. The law of large number is of vital significance in analyzing this problem (Majumdern & Dewan 1999, p.23). According to this law, one can estimate the probability of occurrence of certain events more precisely by increasing the number of observations by sampling process. It has been observed that the average value of a very large number of observations will be very close to the actual average of the population from which the observations were taken. For example, probability of death at certain age can be estimated by way of a large number of observations in a sampling process.
It may be noted that foundation of insurance rests upon the law of large numbers. The insurers obtain a very large number of observations. In the case of life insurance mortality records of people at different ages are analyzed and summarized to find out the probability of death at certain age. In the case of general insurance the insurers usually have the statistical records of loss against different perils and thus they can fairly measure the underlying probability of a loss against, fire, accident, mechanical breakdown etc.
How to Handle Risk
An individual is always concerned because of the uncertainties of life. The does not know whether or not a given loss will occur to him individually. For an individual, the risk is very large. This is simply because an individual cannot obtain a sufficient number of exposures to have an accurate prediction as to the occurrence of loss. It is not the probability of loss which causes difficulty, but rather the uncertainly as to whether an individual will be among those who are expected to suffer loss. Had the loss been certain, one could perhaps prepare him for it in advance. Since this is not the case, one should try to reduce risk through insurance and other means.
One can handle risk by assuming it. Most of the people do it knowingly and unknowingly. In many cases we pass through life by way of accepting or assuming many small risks. However, in many occasions one has to accept it simply because one cannot afford to pay for it’s reduction or transfer. If one can afford to pay the price of risk transfer, the insurance company or some other organization will bear the risk. In that case the insurance company will bear the risk for a price. But how will the insurance company bear the risk? The insurance company handles risk by utilizing the combination method as the basis of their insuring operation. The method of combination is the system of handling risk that usually involves the use of large numbers. The insurance companies persuade a large number of individuals, known as insured to pool their individual risks in a large group. When sufficiently large numbers are grouped the actual loss experience over a period of time will closely approximate the probable loss experience. The insurance company has little or no risk at all if this method is used properly When all of the individual objects are pooled into one group; the risk is no longer present, if the requisites of insurable risks are met with.
It may be noted here, that insurance companies do not cover all risks. That is to say, all risks are not insurable. Usually it is only the “pure” risks that are insurable and not the “speculative” risks. A pure risk can cause only loss but a speculative risk causes either a profit or loss. For example, there is risk in any investment and business venture due to market fluctuations. This is a speculative risk and therefore, not insurable. However, a businessman can insure the assets and legal liabilities against specified perils like fire, flood, cyclone, negligence, collision, etc. Similarly, one cannot insure the risk of gambling. However, all pure risks are not insurable as there are many situations that can cause loss where the loss a of large number does not operate satisfactorily. For many situations large number of required statistical records is not available. If the insurers cannot obtain statistics over a sufficient length of time on losses resulting from a particular peril, they cannot accurately predict the probable loss experience. In that situation it is not prudent to cover such risk. So it is evident that the prime requisite of insurable risk is that the number of objects must be of sufficient number. This means that the probable loss must be subject to advance estimation in order that it can be made accurate and the objects to be insured must be similar so that reliable statistics of loss can be formulated. For example, in case of fire and theft insurance, commercial buildings and private dwellings should be grouped separately as the hazards against these risks are different. Similarly the properties situated in the cyclone belt should not be grouped with that of the properties located in the cyclone free zone. This means the physical and social environment of the group ought to be roughly similar. Therefore, it is evident that from the viewpoint of the insurer, one of the prime requisites of insurable risks is that the number of objects must be sufficient in number and quality so that a reasonably close calculation of probable loss can be made.
Requisites of Insurance for Covering Risk
Apart from what has been discussed above, the other requisites of insurance may be summarized as following:
(a) Insurance must be affected by means of a legal contract and must meet the general requirements of contract as follows:
· It must be made by parties with legal capacity to contract; and
· It must be affected with a meeting of the minds of the parties.
(b) For any insurance contract to be valid it is necessary to have insurable interest of the insured on the subject of insurance. This means that an insured must suffer a financial loss himself.
(c) Property and liability insurance are subjected to the principle of indemnity which states that a person must not be indemnified more than his actual loss in the event of damage caused by a insured peril.
(d) Principle of subrogation ought to be followed where the principle of indemnity is in existence. Under this principle, the insurer is entitled to subrogation, which means that they acquire the right to recover from liable third parties. This is necessary to reinforce the principle of indemnity i.e. to prevent the insured to receive more than actual loss.
(e) Principle of utmost good faith must be followed in every insurance contract and for that matter breach of warranty, material misrepresentation and concealment of facts makes the contract void.
(f) Last, but not the least, there are the principles of loss determination and payment.
Not all risks are insurable. This is mainly because there are some risks, which in the true sense cannot be termed as risks. Therefore, the authors of risk management have differentiated between pure risk and speculative risk. Normally the pure risk is insurable and speculative risk is handled by methods other than insurance. In pure risk, there is uncertainty as to whether the loss will occur or not, but there is a chance of producing a profit out of that event. But in case of speculative risk there is uncertainty of an event that could produce either a profit or loss. For example, a business venture and a gambling contract are the risks of speculative nature and, therefore, not insurable. Market risks such as price changes and/or changes in the exchange rate of currency are not insurable. These risks are not subject to advance calculation; hence the insurer would have no realistic basis for computing his premium. Further, in times of rising prices no one would be interested to have insurance coverage against such risk and in times of failing prices an insurer can not afford to take on the risk because he can not avail the opportunity of spreading the risk over which to average out good years with bad years. The speculative risks are handled businessmen by way of hedging, whereby a speculator assumes the price risk.
Insurance and Gambling
Although it is common to confuse insurance with gambling, from economic and legal point of view gambling and insurance are two distinct matters. It is true that insurance company pays an insured a great deal more money than it has received, in terms of premiums, but this does not mean that insurance is thereby a gambling contract. The very purpose of insurance is to eliminate risks, whereas gambling creates a new risk.
For example, “A” and “B” may agree that if the property of “C” comes under fire, “A” will pay taka 1,000.00 to “B” and if there is no fire, “B” should pay taka 100.00 to “A”. In this case before this gambling contract neither party had any risk of losing or gaining any money from this source. When “A” and “B” agree to the above proposition, each party becomes subject to a new risk of losing money. Moreover, neither “A” nor “B” has any insurable interest on the property of “C”. However, if an insurance contract has to be effected it is only “C” (who can insure) to the extent of loss (up to agreed value) against a fixed premium. “C” in this case in fact has exchanged a large uncertain loss for a small but certain loss called the premium.
Although, insurance as being practiced in the modern world cannot be termed as gambling, this cannot be called also Islamic, simply because it is not gambling. However, insurance as a device to combat loss can rightly be used in an Islamic Society by way of applying the basic principles of insurance and eliminating the forbidden practices.
Principles of Insurance Contract
Insurance is affected by means of a legal contract and must meet the general requirements of contract. Thus the insurance contract must not be against public policy, must be enacted by parties with legal capacity to contract, must be affected with a meeting of the minds of the parties and must be supported by a consideration. Insurance is a contract of adhesion and any ambiguities are construed against the insurer. The following legal doctrines are vital to the understanding of insurance contract.
Insurable Interest: A fundamental legal principle underlying all insurance contracts is the principle of insurable interest. This means insurance is operative only in respect of the interest of the insured in the event of property concerned and it is this interest that is the subject matter of insurance contract. It means it is not the bricks and materials used in building which is the subject matter of insurance. The subject matter of insurance is the legally recognized relationship of the owner of the building whereby he will suffer loss if the building is caught in fire. This is essential; otherwise an individual would claim indemnification, even when he had not suffered any loss. The doctrine of insurable interest is also necessary to prevent insurance from becoming gambling.
Principle of Indemnity: The principle of indemnity ensures that a person does not get more than his actual loss, in the event of damage caused by an insured peril. It is important to note that only the contracts of property and liability insurance are subjected to this doctrine. Life insurance, health insurance and personal accident insurance policies are not contracts of indemnity (as no money payment can actually indemnify for loss of life or for bodily injury to the insured).
There are several ways by which an insured can be indemnified i.e. by cash payment, repair, replacement and reinstatement. In every instance the onus of proving that that the loss was caused by an insured peril rests upon the insured. The onus of proving that the loss was caused by other than in insured peril rests upon the insurer.
Without application of this principle, the insured would be tempted to make profit out of the happening of loss. There would be a tendency in the direction of over insurance. There are, however, some exceptions to the application of this principle in property insurance. For example, in marine insurance, for commercial convenience, it is customary to issue “value” policies i.e. the insured value is mutually agreed between the insured and the insurer. In the event of loss, the indemnity is measured in terms of the value fixed by the policy.
Principle of Subrogation: This principle states that the insurer, if and when indemnifies the insured, is entitled to recover from third party liable for the loss. One of the important reasons for this doctrine is to reinforce the principle of indemnity i.e. to prevent the insurer from collecting more than his actual loss. Another reason for subrogation is to hold premiums below what they would otherwise be. This, however, does not allow the insurer to lodge claim against the insured, even if the insured is negligent. The principle of subrogation also does not apply to personal accident and life policies.
Principle of Utmost Good Faith: This principle imposes a higher standard of honesty on parties to an insurance contract. The proposer must disclose before the contract is concluded all material facts, which he knows or ought to know. Failure to make such disclosure renders the contract avoidable at the insurer’s option. It is, important to note that avoiding the contract does not follow unless the misrepresentation is material to the risk. It is generally held that even an innocent misrepresentation of a material fact is no defense to the insured, if the insurer elects to avoid the contract. The insurer, however, in good faith pay the claim even if there is breach and a breach of warranty may also be waived by the insurers. However, unless it is waived, a warranty must be complied with strictly and literally. It makes no difference whether the breach of warranty is material or immaterial, fraudulent or innocent.
TYPES OF GENERAL INSURANCE POLICIES
Marine Insurance: Marine policies relate to three areas of risk: the hull, the cargo and the freight. The risks against which these items may be insured are “perils of the sea,” fire, theft, collision as well as a wide range of other perils. Cargo is usually insured on a warehouse (of departure) to warehouse (of arrival) basis and frequently covered against “all risks.”
Aviation Insurance: Most policies are issued on an “all risks” basis subject to certain restrictions. The buyers of these policies are the large commercial airlines, the corporate or business aircraft owners, private owners and flying clubs. Usually a comprehensive policy is issued covering the aircraft itself (the hull), the liabilities of passengers and liabilities to others.
Fire Insurance: A standard fire policy is used for almost all business insurance; the basic intention of the fire policy is to provide compensation to the insured person in the event of there being damage to the property insured. The standard fire policy covers damage to property caused by fire, lightning or explosion, where this explosion is brought about by gas or boilers used for domestic purposes.
This is limited in its scope as property can be damaged in other ways, and to meet this need a number of extra perils, known as special perils, can be added on to the basic policy. These perils can include:
· » Storm, tempest or flood
· » burst pipes
· » earthquake
· » aircraft
Accident Insurance: Personal Accident Insurance – The intention of the basic policy is to provide compensation in the event of an accident causing death or injury. What are termed “capital sums,” is paid in the event of death or certain specified injuries, such as loss of limbs or sight as may be defined in the policy. The policy is usually extended to include a weekly benefit up to 104 weeks or more for compensation if the insured is temporarily totally disabled due to an accident and a reduced weekly benefit if he is temporarily only partially disabled from carrying out his normal duties. In the event of permanent total disablement (other than loss of eyes or limbs) an annuity is paid. Practice varies among insurers, some of whom pay a lump sum.
Sickness Insurance – Personal accident cover can be extended to provide a weekly benefit for an agreed upon period which may be restricted to 52 weeks, in the event the insured is temporarily totally disabled from engaging in his usual occupation due to sickness.
Engineering Insurance: The cover is intended to provide compensation to the insured in the event of the insured plant being damaged by some extraneous cause or its own breakdown.
Engineering insurers provide an inspection service on a wide range of engineering plants and this is a service much sought after by industry. Engineering covers can be summarized thus:
a) Damage to or breakdown of specific items of plant and machinery
b) An inspection service of those items
c) Cost of repair of own surrounding property due to (a)
d) Legal liability for injury caused by (a)
e) Legal liability for damage to property of other caused by (a).
Theft Insurance: Theft insurance was first introduced towards the end of the nineteenth century and was originally called “burglary insurance.” Insurance companies included in their policies a phrase to the effect that theft, within the meaning of the policy, had to involve force and violence either in breaking in to or out of the premises of the insured for cover to apply.
Motor Insurance: The minimum requirement by law is to provide insurance in respect of legal liability to pay damages arising out of injury caused to any person. A policy for this risk only is available and is termed as an “Act Only” policy. A “’Third Party Only’” policy would satisfy the minimum legal requirements and in addition would include cover for legal liability where damage was caused to some other person’s property. The most common form of cover is the “’Comprehensive Policy”’ which adds accidental loss of or damage to the vehicle to the third party, fire and theft cover.
Money insurance – The policy provides compensation to the insured in the event of money being stolen either from his business premises, his home or while it is being carried to or from the bank.
Glass insurance – Accidental damage to glass, mainly plate glass windows but also glass doors and shelves, is covered by the Glass Insurance Policy. It is also possible to include damage to the shop front and the contents of the window.
TYPES OF LIFE INSURANCE POLICY
Life assurance contracts available are many and the basis of all these policies can be found under the following headings:
Terms Insurance: This is the simplest and oldest form of insurance and provides for payment of the sum assured on death, provided death occurs within a specified term. Should the life assured survive to the end of the term then the cover ceases and no money is payable. This is a very cheap form of cover and is suitable, for a young married man who wants to provide a reasonable sum for his wife in the event of his death. It can also be used for a variety of specific purposes such as business journeys.
Whole Life Insurance: The chosen sum assured is payable on the death of the assured whenever it occurs. Premiums are payable throughout the life of the assured until retirement of the assured. Although premiums may cease at, say, age sixty, the policy is still in force. Should the person die at age seventy-five, the policy would provide the benefits for his widow or family?
Endowment Insurance: The chosen sum assured is payable at the end of a given term of years or upon earlier death. These contracts are taken out as savings plans for the future with the added attraction of life cover. Endowment contracts will always be popular because each proposer earnestly hopes that he will live to the end of the term and spend the proceeds himself.
Annuities: When a person has a reasonably large sum of money and wants to provide an income for himself after he retires, or at some other time, he can approach a life assurance company and purchase an annuity. The annuity may start at once, when it is called an immediate annuity, or may start at some date in the future (a deferred annuity). Regardless of when it starts it can take various forms. It may provide an annuity for the life of the person, the annuitant, or it may be payable irrespective of death for a certain period, as in the case of the “annuity certain.” The guaranteed annuity is similar in that it provides the annuity for a guaranteed period and thereafter until the annuitant dies.
Pension Schemes: These schemes are designed to provide an income at retirement. So far as insurers are concerned they may be asked to arrange a scheme, rather than a firm doing all the work itself. This involves collecting the premiums, investing them and paying pensions to retired people. Many schemes are endowment policies with group life insurance cover to provide benefits, should the death of a member occur before retirement age, but there are different ways in which this can be done.
INSURANCE IN AN ISLAMIC FRAMEWORK
Insurance is a socio-economic institution that reduces risk both to society and to individuals. This accomplished by combining, under one management, a large group of objectives so that the aggregate loss to which society is subject become predictable. Insurance has scientific basis and is affected by legal contract, under which the insurer for consideration promises to reimburse the insured for any loss suffered during the tenure of the contract.
There are many social and economic value of insurance, but the greatest value lies in the benefits following from the reduction of risk in society. Insurance has the advantage as a device to handle risk and, therefore, it is necessary that its services be extended in order to bring about the greatest economic advantage to a given society. In order to establish the validity of this point we must have clear concept about the socio-economic objectives of an Islamic Society.
Belief in Allah is central in the Islamic concept of society. This is the organizing force without which life losses it’s full meaning. Belief in a supernatural power reduces man’s vanity and despair. Belief in one Allah does not mean that the individuals in the society are just the dolls in the hand of the Almighty. In fact, Islam fosters initiative and responsibility. The Quran insistently and consistently reminds people that they are judged on their own merits as independent, responsible individuals.
Another important aspect of Islam is that the society at large is based on the concept of humanity and brotherhood of the Muslim community. Concepts of universalism on the one hand and individualism on the other must be understood in its true spirit and applicability. Muslims in their minds should have a sense of awareness of mutual rights and obligations binding each individual of the society in their faith and Islam have a set of goals and values encompassing all aspects of human life including social, economic and political. The Islamic way of life being goal oriental, can be best understood by the practices of an organized community, which is governed in accordance with the tenets of Islam.
We all know that Allah has provided all necessary resources on this earth. Man, being the vicegerent of Allah on this earth, has the responsibility to utilize these resources for the general human welfare. According to Islamic principle, it is basically the moral responsibility of the individual to cater for his own needs through his own efforts.
The ethic of Islam clearly counsels against begging, against being a parasite living on the labor of others. In Islam, man’s economic endeavor is praised and economic resignation is condemned. Islam suggests a great attention to every aspect of material life of men and women. The Shariah has given us a pattern of material wealth distribution with which to order our lives. In Islam every Muslim by law is entitled to get support from fellow Muslims if he can prove his need. The purpose of Islamic Law is always to inject morality and responsibility into the fabric of human relations. Islam is not only a religion but also the supreme unifying social bond. From history we know that the Marinates affiliated themselves as brothers and sisters with the Makkan-immigrants. They voluntarily and gladly shared their entire property with Makkan. This type of affiliation was not motivated by any kind of gain or profit or even a promise of gain or profit. It was simply motivated by conviction, commitment and dedication towards a common cause. The new principle of sharing was established. The Muslims drew a great amount of satisfaction from offering ones help, property and life for the cause what they believed to be the ultimate truth. In fact, the Islamic way of life is inconceivable without an organized community governed in accordance with tenets of Islam.
Therefore, in an Islamic society, all organizations and institutions including the State should cater to the welfare of the people. Islam considers mankind as one family. All members of this family are alike in the eye of Allah. There is no difference between the rich and the poor, the high and the low or the white and the black. There is to be no discrimination due to race, color or position. The only criterion of a man’s worth is character, ability and service to Islam and humanity. Since Islam emphasizes distributive justice and incorporates in its system a program for organized community with the commitment of human welfare, there ought to be compulsory arrangement for insurance against unemployment and occupational hazards, old age pension and survivors benefit. The Islamic society should also provide assistance to those who because of disability, physical or mental handicaps or obsolescence, are unable to support himself or herself or to attain a respectable standard of living by their own efforts.
The objective of an Islamic Economic System is to create an exploitation free society and upliftment of the society as a whole. Therefore, any system or organization that is for the welfare of the mankind is not in contradiction with Islam. The objective of the Shariah is the promotion of welfare of people that lies in safeguarding their faith, life, intellect, posterity and property. Whatever ensures the safeguarding of these elements of human beings serves public interest and is desirable. This is because the basis of Shariah is wisdom and welfare of the people. Further, anything that departs from justice to injustice, welfare to misery, from mercy to harshness and from wisdom to folly has nothing to do with Shariah.
The principle foundation of insurance as an economic institution is the equitable distribution of the financial losses of a few over many. In insurance, each policyholder contributes an amount commensurate with the risk he introduces to a fund; established and administered by the insurer and out of the fund the losses are paid to the insured members. The main functions of an insurance organization then become the management of the fund and the assessment of the equitable contributions to be made by the policyholders.
In the business world without insurance, businessmen would have to set aside some of their capital resources against the possible losses that might occur. The capital thus safeguarded is freed for further development of the business. Apart from that, insurance removes the anxiety and thus helps to increase the efficiency of the business community. Insurance also helps to achieve a consistency of trading results and an avoidance of wide fluctuations. In this way insurance helps to develop and consolidate business on stable basis.
In the field of overseas commerce, the banks will not negotiate the bills of exchange unless the goods are insured against marine, and, sometimes, war risks. Even when the bank does not finance shipments, common prudence calls for marine insurance protection, as the cost of insurance is but a small fraction of the market value of the goods. Similarly, the large industrial organizations could not operate, as the banks would not be prepared to finance them without insurance arrangement. No large-scale enterprise could function, were it not possible to transfer many of its risks to insurer. Vast amount of capital in the form of premises, plant and machinery are at risk in industrial concerns. Without insurance, these risks would remain uncovered.
Human life has value for many reasons. The main economic problem that arises when someone in the family dies is the loss of earnings of the deceased person. In a business firm, if a key employee dies, the firm may lose valuable customers whose loyalty depends on this individual. The value of human life, apart from death, may also be diminished through loss of health by way of loss of earning due to disability and expenditure for medical care. Old age is another peril that affects earning capacity, just as premature death or loss of health.
Because human life is recognized to have great economic value, a demand has grown for life and health insurance. As a social and economic device, life insurance is a method by which a group of people may co-operate to even out the burden of loss resulting from the premature death of any member of that group. The purpose of life insurance is, therefore, primarily to accumulate wealth or property and, even if death intervenes, to ensure that the intended wealth will be available. Two distinct objectives of life insurance must be understood clearly. The first objective is termed a ‘saving need’ and the latter is termed as ‘protection need’.
The basic theory of life insurance is that all who pay life insurance premiums to the common fund do so with the willingness that the fund should be used to compensate the estate of those contributors at whatever age in life they may die. However, increasing emphasis on the investment aspects of life insurance has tended to overshadow the primary purpose of protection against premature death.
The uncertainties of life are such that no man can say how long his life will last and every prudent and considerate person desires to make some provision for his dependants in the event of his death. The fundamental economic purpose of life insurance is to mitigate such possible loss.
Technically speaking, insurance is a socio-economic device, which implies sharing of losses sustained by some members of a group by all the members of that group. It provides economic security against loss of life or property or pecuniary interest. Insurance also provides indemnity to the persons for legal liability. Therefore, insurance as a system is acceptable to Islamic Society as it resembles the concept of Bait-ul-Maal (Ali 1989).
MODUS OPERANDI OF ISLAMIC INSURANCE (TAKAFUL) COMPANY
An Islamic insurance company transacts business on a co-operative basis in accordance with and subject to the principle of Islamic Shariah. All the functions of conventional insurance companies, i.e. underwriting, claims, reinsurance, marketing, investment, company management, etc. of Islamic Insurance Company should fully conform to Islamic Shariah Code. At the same time, the Islamic insurance companies should also make the scope and benefits of insurance coverage traditionally provided by the conventional companies available. Islamic insurance companies have developed extensive facilities to transact all classes of general insurance such as life, marine, fire, motor, accident, aviation, engineering, etc. Islamic Insurance Companies are now functioning very efficiently on most economic and competitive terms consistent with safety and security.
The cost of insurance is one of the most important factors in a sound analysis of risk. Both the insured and the insurer are interested in a rate that is fair. The basic criteria for rate making are:
a) The premium should be adequate but not excessive to meet the claims; and
b) The premium should be allocated among the insured on “fair” basis.
These criteria will be followed by an Islamic Insurance Company on a more rational basis. For example, a participant (policyholder) of a general Takaful (insurance) scheme shall enter into contract with the company on the basis of the principle of Mudaraba as per “partnership” clause of the policy. This clause stipulates the rights and obligations of the participants as well as the company. The Company, acting as an entrepreneur collects the Takaful contributions (insurance premium) from the participants and manage the various classes of general Takaful fund. The amount of the premium to be paid by the policyholder of an Islamic insurance company depends upon the class of Takaful and the rate fixed on the basis of sound principles of rate making. The participants shall pay the premium to an Islamic insurance company as “Tabarru”. These Takaful contributions are credited into the “General Takaful Fund” of the company. The company in accordance with the requirements of the Shariah will invest the funds. All the profits from the investment shall be pooled back to the fund. The company shall pay from the General Takaful Fund compensation or indemnity to fellow participants, who have suffered a defined loss caused by one or more than one of the insured perils during the policy period. From this fund, operational costs of General Takaful Business, required reinsurance premiums are to be borne. Further, a “reserve” for unusual losses is to be built up from this fund. The surplus (profit) if any after meeting all these expenses and required reserve, will be shared between the participants and the company. However, the participants who had suffered losses should not have any share of profit as they have been already compensated out of this fund. This sharing of the surplus will be in a ratio agreed to in accordance with the principle of Mudaraba. The operation of the General Takaful is illustrated below.
The mode of operation of a General Islamic Insurance Company can be best described by taking an example. Say, the participants of fire risk contribute one crore taka in a particular year as Tabarru to a company, the company will keep this in a special account to be called Fire Takaful Fund. At the end of the year it may transpire as follows:
I) Claims paid or to be paid (25%) Taka 25, 00,000
ii) Operational cost during the year (15%) ” 15, 00,000
iii) Reinsurance premium (20%) ” 20, 00,000
Taka 60, 00,000
The company may decide to keep reserve for unusual year (30%) Taka 30, 00,000
Taka 90, 00,000
Therefore, the surplus money Tk. 10, 00,000 can be distributed to the policyholder as per terms of the contract. If the ratio agreed is 70:50, then 70% of this surplus i.e. Tk. 7, 00,000 will be distributed among the participants. This means a policyholder who has paid at the time of taking a cover as contribution Tk. 1,000/- will receive (Tk. 70/-) return on the amount of premium paid. This is only an example; the return can be as high as 20% to 25% depending upon the net underwriting surplus of a particular portfolio. This surplus will vary from year to year. In rare case, the policyholders may be asked to contribute additional premium.
FAMILY TAKAFUL SCHEME
The modus operandi for Islamic Insurance companies operating life business is almost similar but more clarification is needed. Life policies are issued in the name and style of Family Takaful Scheme. The participant or the policyholder of a Family Takaful Plan should pay the agreed amount of installments on a regular basis. Each installment paid by the participants is divided and credited into t