Insurance Post

Faith in the Islamic market

Despite the large number of Muslims living in the UK, the insurance industry has been slow to realise the opportunities this offers. Jeremy Golden investigates the customs and beliefs behind Takaful - Islamic insurance products - and how they fit into the landscape of British offerings

There are almost two million Muslims living in the UK, comprising 350,000 households. Yet despite the size of this population and its increasing affluence, so far Islamic insurance products known as Takaful are not widely available or known about within Muslim communities.

Rakiya Sanusi, director or the Institute of Islamic Banking and Insurance, an independent academic and research organisation based in London, feels confident that the level of awareness and demand will eventually change. "I am certain that if the market conditions are right, there will be a substantial growth for these niche products over the long term."

How is Takaful or Islamic insurance defined? Takaful is broadly similar to conventional mutual insurance in that it involves several participants sharing risk on a co-operative basis. The main difference from conventional insurance is that Takaful companies and products must be Shariah-compliant, meaning they closely adhere to Islamic law.

Among the general principles applied first and foremost is the requirement for a so-called 'ethical investment' policy. For example, it is not permitted to invest stock in companies with interests in pubs and gaming. Moreover, any financial transaction earning interest - or Riba - whether the interest is fixed or floating, simple or compounded and at whatever the rate, is strictly prohibited and this applies both to interest paid to the policyholder or interest generated through investments by the service provider.

Maysir restrictions

Another fundamental principle that carries particular weight in the insurance world is the restriction on all business activities, which are regarded as Maysir or gambling. There is concern that insurance premiums amount to bets, as payments are dependent on specific events occurring. Therefore, it is considered a form of gambling to lose an insurance premium to an insurance company if the insured event does not take place.

Ikram Shakir, a partner at the FWU-Group, an entrepreneurial financial services group headquartered in Munich, says insurance companies can get around this prohibition by establishing a pooling system between policyholders. He explains that this should be "based on solidarity principles, rather than probabilities or principles of gambling. This pooling arrangement means that once all claims have been settled, the insurer is obliged to pay back a certain amount to participant policyholders who did not make any claims over the year."

Mr Shakir has extensive experience in advising Western and Middle Eastern companies in this line of business and says Islamic financial products first began to be marketed strongly in Western Europe in the early 1980s. "The early types of products were typically unit-linked savings plans where the benefits of the policy were notionally linked to the value of the underlying assets in the internal funds of the Takaful company. However, the savings products only offered a small amount of life insurance cover, which apparently limited their appeal to prospective customers."

So how have product development and availability moved on? "It was expected that in time, other Islamic products would be made available to cater for a variety of insurance needs among the Muslim community, such as term assurance, mortgage protection or old age annuities," explains Mr Shakir. "But the process of introducing new products has been very slow and, to some extent, non-existent."

Birmingham-based Takafol UK, an affiliate of Takafol SA Luxembourg, was established in 1983, is registered as an independent financial adviser and is among the longest-serving intermediaries for Islamic financial services in Europe. Takafol SA is a wholly-owned subsidiary of Faisal Finance, a member of the Dar Al-Maal Al-Islami Group.

Savings and investments offerings

According to the company's senior representative and financial adviser Ali Amjad, Takafol UK mainly offers savings and investments products that contain an element of life protection. The products are mostly - but not exclusively - targeted at the Muslim communities concentrated throughout the UK. The company in Luxembourg underwrites life insurance through its unit-linked savings.

Takafol UK's savings products conform to Islamic principles of finance, meaning they follow the principle of solidarity and do not earn the customer interest. Mr Amjad explains that his customer base is fairly broad in geographical terms, but mainly concentrated among middle-class professionals and their families, with a high proportion of demand for new business among doctors. "Our clients are not necessarily strict Muslims, but they hold certain principles dear, and they are not comfortable with earning interest. They want to buy products with a clear conscience in other words," he says.

Takafol UK does not currently market insurance, but the company is considering introducing a range of options in the future, including mortgage protection. However, Mr Amjad says this product launch is contingent on the future success of Islamic mortgage products currently being offered by several UK-based banks including HSBC, United Bank of Kuwait and United National Bank.

Double stamp duty abolished

He adds that, so far, the uptake for Islamic mortgages has not been as high as anticipated - although last year, the government abolished the practice of paying double stamp duty, making Islamic mortgages far less expensive.

Yet despite Islamic financial products being mainly restricted to savings products and mortgages, Ms Sanusi believes there is market potential for insurance, which is so far not being exploited, but definitely should be. "There are two million Muslims in the UK so a quite large consumer base proportionately speaking. If there is a viable Islamic alternative that is competitive on price, there is no reason people will not go along with it - providing consumers are satisfied it is Shariah compliant, that it has official Shariah approval."

Mr Amjad is also upbeat, but cautions: "In order to be successful and profitable, it is imperative for a Takaful company to offer a wide range of products at competitive rates and Takaful should not be seen as a very narrowly-based product operation."

Gambling on life insurance?

As far as the prospect for marketing life insurance is concerned, there is a considerable aversion that must be overcome, as it is seen by many to be a form of gambling with one's life. Some view the calculation of probabilities relating to death as inappropriate and in this context there is distrust of actuarial work.

However, this stigma would certainly not apply to general insurance. The potential demand for Takaful, therefore, is likely to reflect that for conventional insurance - mainly relating to vehicle, building and home contents insurance. Car insurance is, of course, compulsory in the UK and with the lack of any alternative, Muslim motorists will insure with mainstream UK insurers. Most Muslim families also take out conventional property and home insurance, largely because they are buying their own homes.

One core issue to address is whether Takaful in the UK should be provided by companies that are dominant players in the major Takaful market - that is to say, in the Middle East and in countries with high Muslim populations in South-east Asia. Several of the major players currently operating in this region include Syarikat Takaful in Malaysia, Keppel Insurance in Singapore (a subsidiary of HSBC), Qatar Islamic Insurance Company and Bank Aljazira.

Malaysia currently has the highest penetration of Takaful compared to conventional insurance of any country. In addition to Malaysia, Iran and Saudi Arabia account for a substantial part of worldwide Takaful premium. However, the per capita consumption of Takaful insurance among the Muslim population as a whole remains insignificant.

For such companies setting up UK operations, is Takaful likely to fall within the UK regulatory net? Martin Mankabady, a lawyer at international commercial law firm Norton Rose, replies: "Takaful insurance involves the pooling of resources out of which claims are settled. Rather than being construed as the payment of premium, the contributors are seen to be making a 'donation with a condition of compensation'. Notwithstanding this, it is likely Takaful insurance will have all the essential hallmarks of a contract of insurance for UK purposes.

"Therefore, in the UK, it is likely Takaful will be considered to be a regulated activity for the purposes of the Financial Services and Markets Act 2000 and a Takaful operator will consequently be required to be authorised by the Financial Services Authority," Mr Mankabady concludes.

However, such companies would be of limited size and lack an adequate resource base. By contrast, Ms Sanusi says there exist opportunities for a mainstream insurer to market Takaful insurance such as Aviva or Royal & Sun Alliance. Takaful provision by established companies would bring the advantage of a national sales network and brand recognition, as well as more general insurance expertise.

For any mainstream players wanting to open 'Islamic windows' there are, however, likely to be complex issues involving the segregation of premiums, investments and benefit payments between conventional and Islamic policyholders.

In such circumstances, they should be looking to appoint a Shariah board or at least employ a Shariah adviser. However, interpreting the application of Shariah law - even among experts - can be controversial. For instance, some advisers are stricter in their interpretation, prohibiting investment in a company engaged in any activity connected to alcoholic drinks, while others are more lenient - providing alcoholic drink is not the main line of business.

So far, no UK insurer has publicly declared an interest in offering Takaful products. HSBC has been marketing Islamic mortgage services and bank accounts through the company's Amanah Home Finance. And there are unconfirmed reports that HSBC may also offer Takaful at some future date, after first testing the market possibilities elsewhere, in Singapore, Saudi Arabia and the US. Other UK companies could well follow suit, but probably not for several years to come.

Interestingly, Mr Mankabady believes Takaful may not only appeal to a core market of Muslims, for whom it will offer a welcome alternative to conventional insurance, but also to those who may consider a Takaful operation's investment policies to be more 'ethical' than those policies adopted by many conventional insurers.


Below are definitions of major Islamic finance instruments and terminology.

Maysir: Gambling. One of three fundamental prohibitions in Islamic finance. The prohibition on Maysir is often used as the grounds for criticism of conventional financial practices such as mainstream insurance products, speculation and derivatives.

Musharaka: Profit and loss sharing. An equity financing arrangement widely regarded as the purest form of Islamic financing: partners contribute capital to a project and share its risks and rewards. Profits can be divided up in an agreed ratio. Losses must always be borne in proportion to the capital of each partner.

Riba: Interest. The legal notion extends beyond just interest, but, in simple terms, riba covers a return of money on money - whether the interest is fixed or floating, simple or compounded, and at whatever the rate. Riba is strictly prohibited in the Islamic tradition.

Shariah: Compliance with Islamic law. A Shariah compliant product meets the requirements of Islamic law. A Shariah board is the committee of Islamic scholars available to an Islamic financial institution for guidance and supervision.

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