SPECIMEN PAPER PRINCIPLES OF TAKAFUL

Transcription

1 590 SPECIMEN PAPER PRINCIPLES OF TAKAFUL This paper is intended as a guide to candidates preparing for an examination in Principles of Takaful. It provides candidates with an insight into the different style of questions in the examination paper and indicates the depth and breadth of answer sought by examiners. It also indicates the structure of the full examination paper which will be presented to candidates when they sit the examination in October The answers presented in the paper provide an outline of the key points which candidates could beneficially cover in responding to the questions. They are not intended as a definitive answer to each of the questions: in many instances the examiners can allow scope for well reasoned, alternative views to gain good marks. Careful preparation is a major factor in achieving examination success. Giving attention to these specimen questions should therefore help candidates to feel more confident that they are prepared for the forthcoming examination, and can demonstrate their knowledge to its full extent. Produced by: The Chartered Insurance Institute, 20 Aldermanbury, London EC2V 7HY +44 (0)

2 590 THE CHARTERED INSURANCE INSTITUTE ADVANCED DIPLOMA SPECIMEN PAPER UNIT 590 PRINCIPLES OF TAKAFUL Three hours are allowed for this paper. INSTRUCTIONS Fill in the information requested on the answer booklet and on form B. You are allowed to write on the inside pages of this question paper but you must NOT write your name, candidate number, PIN or any other identification anywhere on this question paper. The answer booklet and this question paper must be handed in personally by you to the invigilator before you leave the examination. Failure to do this may result in your paper not being marked and you may be prevented from entering this examination in future. READ THE INSTRUCTIONS OVERLEAF CAREFULLY BEFORE ANSWERING ANY QUESTIONS. 590SP 2

3 THE CHARTERED INSURANCE INSTITUTE Principles of Takaful CANDIDATE INSTRUCTIONS READ THE INSTRUCTIONS BELOW BEFORE ANSWERING ANY QUESTIONS. Three hours are allowed for this paper. You should answer all questions in Part I, the compulsory question in Part II and three out of the five questions in Part III. The paper carries a total of 200 marks, as follows: Part I 8 compulsory questions 48 marks Part II 1 compulsory question 38 marks Part III 3 questions selected from marks The number of marks allocated to each question part is shown next to the question and you should spend your time in accordance with that allocation. Answer each question on a new page. If a question has more than one part, leave several lines blank after each part. It is important to show each step in any calculation, even if you have used a calculator. You may find it helpful in some places to make rough notes in the answer booklet. If you do this, you should cross through these notes before you hand in the booklet. The CII Examinations Department, 20 Aldermanbury, London EC2V 7HY 590SP 3 PTO

4 Part I Answer ALL questions. Note form is acceptable where this conveys all the necessary information. 1. Identify the major constraints facing Islamic insurers in the global marketplace. (6) 2. Explain Deya and how important its role is in case of accidents in a traditional Muslim society. (6) 3. Describe the differences that exist between the objectives of a traditional insurer and a Takaful provider. (6) 4. Explain briefly why the inclusion of interest in insurance business is entirely non-shariah compliant on Shariah grounds. (6) 5. Describe the meaning of Takaful in Islamic ethics and explain how far the Aquela system reflects this principle in a traditional Muslim community. (6) 6. Define the meaning of Tabarru and the role that it plays in Islamic insurance (Takaful). (6) 7. Describe the meaning of Gharar in Shariah and explain why it would be entirely non-shariah compliant if included in an insurance contract. (6) 8. Explain briefly the main characteristics of the Mudaraba contract. (6) 590SP 4

5 Part II Compulsory question This question is worth 38 marks 9. The data below represents the results of the Islamic insurance (Takaful) portfolio of XYZ insurance company at 31 December Surplus: $170,000 GPW: $200,000 Claims Paid: $30,000 The policyholders results are shown in the following table: Policyholder Premiums $ Claims $ Result $ A 100,000 30,000 70,000 B 100, ,000 Total 200,000 30, ,000 The total surplus of the insurance fund is $1,000,000. (a) Describe three different methods that could be used to distribute the surplus of the $1,000,000, which are Shariah compliant. (23) (b) For each method identified in (a) above, identify the distribution of the surplus for each contributor (insured) using the data from the table above. (15) 590SP 5 PTO

6 Part III Answer THREE of the following FIVE questions Each question is worth 38 marks 10. Identify the roles and responsibilities of the Shariah board and explain how far the inclusion of this board in an Islamic insurance (Takaful) company changes its managerial structure from that of a conventional insurance company. (38) 11. Explain how objections raised by a group of Islamic scholars against some particular practices of traditional insurance have been overcome within the boundaries of Shariah and in a manner that has helped the promotion of Islamic insurance (Takaful). (38) 12. Explain and comment on the similarities and differences between Mutual insurers and Islamic insurers and how far Islamic insurance (Takaful) may benefit from the Mutual insurance experience. (38) 13. Give an analytical account of the Takaful experience in one of the following markets: Sudan, the Arab Gulf countries, or Malaysia and explain, for the Takaful market selected, how far it is expected to expand in the future. (38) 14. (a) Outline the main features of an acceptance criteria (underwriting policy) for an Islamic insurance (Takaful) company. (30) (b) Identify, giving your reasons, three of the risks that an Islamic insurance (Takaful) company cannot accept. (8) 590SP 6

7 NOTE ON MODEL ANSWERS The model answers given are those which would achieve maximum marks. However, there are alternative answers to some question parts which would also gain high marks. For the sake of clarity and brevity not all of these alternative answers are shown. An oblique (/) indicates an equally acceptable alternative answer. 1. Lack of Islamic reinsurance (Retakaful) capacity. Lack of qualified people. Lack of consumer awareness for Takaful products. 2. Deya (blood money) is an Islamic compensation system. In the case of unintentional killing, the killer must pay blood money as compensation to the victim s family. Shariah measures Deya in terms of gold (value of 4,250g 23.90k). At present the Deya system is used in some Muslim countries (e.g. Saudi Arabia and Kuwait) as a basis for indemnifying the victim s family under third party motor insurance policies. 3. Both conventional and Islamic insurance (Takaful) work in the same way and the protection provided to the client is exactly the same. The differences lie in the ownership and financing of the company, in the management and accounting systems and in the entities in which the premiums are invested. It is a very similar concept to that of mutual in the west and in particular, to ethical insurers. Ethical insurers invest money in a responsible way in industries that are ethically sound and do not harm the environment or people. Islamic insurance (Takaful) is similar, except that the ethical considerations are extended to those which do not contravene the religion of Islam. 4. Inclusion of interest in insurance business is entirely non-shariah compliant on Shariah grounds because the interest is a form of Riba (usury), which is strictly prohibited in Islamic law. The main difference between conventional and Islamic insurance (Takaful) companies, in respect of investment policy, is that Islamic insurance (Takaful) companies must invest their money in interest free investments. Sometimes the Islamic insurance (Takaful) company may invest in interestbearing deposits in order to comply with local regulations in some countries. In this case the deposit interest must be distributed to charities and can not be added to policyholder s or shareholder s benefits. 590SP 7 PTO

8 5. The Takaful concept originates from the Arabic word Kafalah, meaning guaranteeing each other or joint guarantee. In principle, the Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. The main principle behind the Aquela system is to create a mutual fund. Members make annual contributions and out of this fund Deya will be paid on behalf of the fund member who is liable to pay. This system is not used in modern practice in Muslim countries. 6. Tabarru means to donate, to contribute, to give away. Under Islamic insurance (Takaful) contracts policyholders pay premiums to a co-operative fund with the intention of it being a donation to those who will suffer losses. The Islamic concept is the core of the Islamic insurance (Takaful) contract because Gharar does not invalidate Tabarru or donation contracts in Shariah. 7. Gharar can be defined as an ambiguity or lack of clarity surrounding the subject matter or consideration of a contract. It is a game in which whatever one party gains the other loses. Islamic law avoids ambiguity in contracts, although Islam does not require the transaction to be so clear to the extent that it is risk free. Conventional insurance contracts involve Gharar because there is a high degree of ambiguity with regards to: whether the insured will receive the claim or not; when the claim may be paid; how much the insured will get. From Shariah scholars point of view, Gharar is an inherent defect in insurance contracts. In Insurance contracts, a certain amount of premium must be paid by the insured at the inception of the contract but the claim which the insured may receive on occurrence of a loss is not certain. There is therefore a high degree of Gharar. 8. The concept of Mudaraba is an Islamic partnership where one partner gives money to another to invest it in a commercial enterprise, not prohibited by Islamic law. The money (Ra's-ul-Mal) is provided by the first partner who is called the investor (Rabb-ul-Mal), while the management and entrepreneurial skills are the responsibility of the other partner, who is called Mudarib. For the validity of the contract, it is necessary that the parties agree at the inception of the contract on a proportion of the profit to which each one of them is entitled. There are no portions suggested by Shariah itself; it is up to the partners. Any losses accruing are borne by the first partner (Rabb-ul-Mal). The Mudarib will only be liable in the case of negligence. 590SP 8

9 9. (a) Surplus treatment methods: Distribution of the surplus to all policyholders Under this method all policyholders are entitled to get a proportion of the surplus, if any, whether they made claims during the financial year or not. Therefore if: SR: Surplus (Total for the fund) GPW: Gross premium written (Total for the fund) GPWr: Gross premium written (Total for the policyholder, r) Then the surplus due to the policyholder, r = (Sr) Distribution of the surplus to only policyholders with no claims This method only allows surplus to the policyholders who did not make any claims during the financial year in question. In this case the abovementioned equation can be used only for the policyholders who did not make claims during the financial year. GPW will be the total premium written, minus the total premium of policyholders who received claims compensation from the insurance company. Distribution of the surplus to all policyholders based on the net result of each policyholder This method mixes the rationale of the two previous methods. It allows all policyholders to share the surplus proportionally, based on the underwriting result of each of the policyholders (premiums-claims). For this case the previous equation must be amended as follows: GPWr Sr = S GPW ( GPWr - ( C + R) ) Sr = S ( GPW - TC) Where C: Claims paid to policyholder (r) R: Reserves belonging to the policyholder s (r) business TC: Total Claims Paid (b) Surplus distribution Policyholder Method I $ Method II $ Method III $ A 85, ,000 B 85, , ,000 Total 170, , , SP 9 PTO

10 10. Supervisory role Reviewing all insurance contracts and clauses to be used by the company to insure their compliance with the Shariah Standard, as well as reinsurance treaties and set out any needed recommendations. Reviewing all investment transactions for the Shariah conformity and ensuring that they are free of Riba, Gharar and Miser. Answering any questions by the board of directors or company employees in relation to Shariah conformity. Supervising the compliance with the Shariah standards and requirements. Reviewing any new Fatwas issued by any recognised council or academy and its impact on the company operation. Innovative role Shariah itself is very elastic and adaptable so the scholar can apply original principles of Islamic law (Shariah) to current practice and needs of markets today, in order to offer constructive and creative recommendations to develop new products and Shariah compliant solutions for customer needs. The detailed design of products (set clauses, rates, warranties etc.) is a pure technical function. It must be done by the insurance experts and underwriters. Supplementary roles Calculating the Zakat on shareholders and policyholders funds. The board determines the subject matter of Zakat and calculates the amount of Zakat in cooperation with the company accountants. Support an insurance company in analysing the Shariah training needs for the employees and reviewing the Shariah training contents. Conformity with Islamic law (Shariah) is the essence of Islamic financial services; therefore, any Islamic insurance (Takaful) company must have a mechanism to insure that all dealings (underwriting, claims and investment) are complied with Shariah. Shariah Supervisory Board (SSB) usually appointed in Annual General Meeting upon the recommendation of BOD. 590SP 10

11 11. There are two types of objections raised by a group of Islamic scholars against conventional insurance: Major objections (related to the insurance contract itself) (a) Riba: Islamic law objects to conventional insurance on the grounds that a small amount of money (premium) is being exchanged for a larger amount of money (claim). Scholars consider this as an unjustified increase of money and Riba. (b) Gharar (Ambiguity): One of the main objections against conventional insurance is that it involves Gharar because there is a high degree of ambiguity with regards to: whether the insured will receive the claim or not; when the claim may be paid; how much the insured will get. Technically, this statement needs more clarification, because under some conditions, like endowment life assurance, the insured is entitled to get a certain amount of claim under all circumstances. To complicate matters, Gharar can be seen to exist in the premium too for life assurance because an insured does not know how much he will pay to the insurance company each year or for how many years. The insured knows about the monthly or yearly premium but he does not know about the whole amount which will be paid to the insurance company (for example, he may die after paying the first or second premium). In general insurance the premium is preagreed but there is Gharar in the claim amount. Therefore, Gharar exists in all insurance contracts, either in premiums or claims. (c) Miser (Gambling): Some arguments against insurance are based on the grounds that insurance contracts are (Miser) gambling contracts. This argument is not as strong as other arguments against insurance contracts because of the principle of insurable interest. Other groups of objection are the minor objections, which are related to market practice and insurance companies behaviour and can be easily overcome. Therefore, they do not affect the insurance contract itself. Life insurance breaches Islamic inheritance rules by distributing the sum insured among the beneficiaries. The investment policy of insurance companies is an interest-bearing policy. Because of Shariah compatibility, Islamic insurance products have a niche position in Muslims insured segment of the market but it can not stand alone as a successful marketing strategy. It must be combined with high quality service and competitive rates and clauses. 590SP 11 PTO

12 12. A Co-operative is defined by the International Co-operative Alliance (ICA) as: A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly owned and democratically. Mutuality or co-operative risk sharing is at the core of Islamic insurance but it can not alone create an Islamic insurance (Takaful) operation. Mutual insurance contract for Islamic insurance operation must be based on the Islamic concept of Tabarru. Islamic insurance (Takaful) is based on more than one contractual relationship: The main features of Islamic insurance (Takaful) are: co-operative risk-sharing by using charitable donations to eliminate Gharar and Riba; clear financial segregation between the Participant (insured) and the Operator (insurance company); Shariah compliant underwriting policies and investment strategies. So in Islamic insurance (Takaful) operations two other contracts are needed to organise the relationship between insurance company and the policyholders. Under Islamic insurance (Takaful) the insurance company s role is restricted to managing the portfolio and investing the insurance contributions for and on behalf of the participants and to invest any surplus or reserves. The relationship between the participants and the insurance company (as an operator, not as an insurer) is problematic. There are four different models in operation: Mudaraba model; Wakala model; Mudaraba-Wakala model; Pure co-operative model (non-profit). 590SP 12

13 13. The example below is just one of a number of acceptable answers: The Takaful operation, as successfully developed and practiced in Malaysia, is based on the profit sharing contract of al Mudaraba combined with the donation or Tabarru agreement. The Malaysian model has been in operation for almost 23 years following the incorporation of Takaful Malaysia. According to Insurance Insight 2007, their report is indicating that the growth rate of Takaful in Malaysia has been extremely impressive. After an initial expansion from a very low base, the growth rate has settled down to an average 25 percent annually over the last five years. Currently, there are seven Takaful operations in Malaysia. These are mainly local companies but the potential of the market is increasingly attracting international players. This could be explained by the fact that such international players are beginning to see Malaysia as a sound base from which to expand their Islamic insurance (Takaful) business into the rest of the region and local players have also instituted progressive measures in anticipation of overseas expansion, such as rating of products, which is an industry first. Malaysian government, on the same regard, is giving all needed support for such companies seeking to establish Islamic insurance (Takaful) businesses in the country. 590SP 13 PTO

14 14. (a) In Islamic insurance (Takaful), all aspects of underwriting process are the same as conventional insurance companies. The difference will be in acceptance criteria and some terms and condition to reflect Islamic insurance (Takaful) nature. It is essential for any insurance company to set out its underwriting policy which means: What are the risks we can accept? What are the risks we can not accept? When can we make exceptions? The main point that must be taken into consideration regarding Islamic insurance (Takaful) underwriting policy is that the underwriting policy in Islamic insurance (Takaful) company must comply with Shariah principles. The main principle that governs the Islamic business must be applied to the underwriting policy. The Islamic modal of business can be described through the following rules: the basic principle is the permissibility of things; to make lawful and to prohibit is the right of Allah Alone; whatever is conducive to the haram is itself haram; good intention does not make the haram acceptable; doubtful things are to be avoided; necessity dictates exceptions. Based on the above mentioned principles, the main guidelines of underwriting policy of Islamic insurance (Takaful) company can be formed. (b) Based on the rules of whatever is conducive to the haram is itself haram, good intentions do not make the haram acceptable and doubtful things are to be avoided, insurance companies can not accept any of the following risks: alcohol and drugs related trades and industries; prostitution; haram: prohibited goods; any transaction involving Gharar, Riba, Miser; fraud is strictly prohibited. 590SP 14