Page 50 - MC14326 all pages

46 | The South African Insurance Industry Survey 2016
There are various models for Takaful in practice. One of the
models, the Mudharaba model, divides the contributions
made by participants into two parts: an amount for tabarru
which is earmarked to cover policyholder losses and a
second portion used for investment.
There are two main stakeholders in Takaful, namely
the policyholder and the Takaful operator who runs the
insurance scheme on behalf of the policyholders. The
Takaful operator is typically a commercial entity, backed by
shareholders, that manages the Takaful fund with duties
including underwriting the risks and investing the pool of
funds. In return for performing these duties, the operator
is either paid a fee or shares in the investment profit and/
or underwriting surplus.
The Takaful operator will also have a Shari’ah Advisory
Board who monitors the activities of the operations in
order to ensure that it is Shari’ah compliant.
Takaful vs. conventional insurance
Takaful and conventional insurance companies share the
same objective of providing protection to you, your loved
ones and your valuable possessions. The main difference
between conventional insurance and Takaful is that the
former is a risk-transfer model whereas the latter is a risk- to the shareholders. In the case of a mutual insurer the
sharing model.
With conventional insurance, there is a transfer of risk
from the policyholder to the insurance company in
exchange for a premium. The loss is indemnified by the
insurance company according to the terms and conditions
of the policy. The risk is therefore, transferred from the
policyholders to the insurer. In this manner, the insurance
company is the risk-taker.
2 A stokvel is a savings or investment society to which members regularly contribute an agreed amount and from which they receive a lump sum payment.
Under Takaful, the Takaful operator is playing the role of a
risk manager and not a risk-taker. However, this does not
mean that the operator bears no risk. In the event of a
deficit arising in the fund, the shareholders of the Takaful
operator typically finance the deficit by means of an
interest-free loan. These loans are repaid from the future
surpluses that arise from the fund.
Another key difference between Takaful and conventional
insurance is that all investments managed by the Takaful
operator are to be made in accordance with Shari’ah.
Shari’ah prohibits investment in sectors involved in
alcohol, tobacco, pork, adult entertainment, weapons,
gambling and conventional banking and insurance. In
addition, a Shari’ah fund may not invest in interest–based
instruments.
Unlike conventional insurance, the participants of
Takaful retain an ownership interest in the Takaful fund.
Contributions from the participants are invested in Shari’ah
compliant funds to derive investment income. In the event
that the fund generates a surplus, it is then shared among
the participants - and, in some cases with the Takaful
operator - or donated to charity. Under conventional
insurance, for proprietary insurers, the surplus belongs
situation is similar to Takaful, in that the policyholders
share in the experience of the fund. Takaful also bears a
resemblance to the way that a stokvel2 is operated, as
they are both risk-sharing mechanisms.
Takaful in practice
The Takaful industry in Africa is growing steadily, with
Takaful operators offering a variety of products from basic
The South African Insurance Industry Survey 2014 | 46
motor Takaful products to complex pension schemes,
such as a Takaful Umbrella Fund. Many Takaful products
can be seen as parallels of their conventional insurance
counterparts. Even so, with close to half the population of
Africa being Muslim, there is room for Takaful operators to
be innovative in their marketing strategies and to actively
promote education on both insurance and Takaful.
On the other hand, one of the challenges is the
misconception that Takaful is only for Muslims. This is
assisted by the fact that Takaful is predominantly found in
countries that have majority Muslim populations, including
Nigeria, Tunisia and Sudan. However, due to its explicit
ethical structure, the principles of fairness and the sharing
of burdens among members of a given community, Takaful
can be marketed to both Muslims and non-Muslims. An
illustration of this can be found in multiracial Malaysia,
where Takaful products have also attracted non-Muslim
communities. Another challenge faced by the Takaful
industry is the scarcity of Shari’ah-compliant investments.
As a result, Takaful companies have had to seek
instruments in different markets to diversify their risk,
including sometimes volatile equity and property markets.
Conclusion
After slicing through the layers of Takaful and conventional
insurance, it can be seen that although they may share
the same objective, the differences in surplus distribution
and investment allocations make the two quite distinct.
With the growth in Takaful and rising need for protection
in Africa, it seems like only a matter of time before Takaful
companies will begin attracting new clients from the
existing conventional insurance franchises.