Riskonomics, Uncategorized

We don’t Need Insurance and Takaful (part 2)

We end part 1 with a million dollar question, where is takaful?  If we have such a strong and efficient inner and outer layers of economic security system, does the World really need takaful or even insurance? 

I would say Yes, for following reasons:

  • All layers discussed in part 1, with waqf being an exception, focus on fulfilling basic needs and emphasize on the importance of everyone to have access to minimum basic needs such as food, clothes and shelters.  As to waqf, it has tremendous potential to expand beyond charity and may be becoming next big thing in commercial realms.  Hope we have time to discuss it later.
  • Even if we have solid five layers of economic security, they may never be able to achieve objective of every single person having access to minimum basic needs, mainly due to fast growing of population.   Fast growing population puts heavier pressure on environment through industrialization and excessive exploitation of natural resources.  This will lead to more frequent and severe disaster, being natural or man-made.  On the other hand, economy may not be properly and fairly running as it should be in providing opportunity to earn and creating jobs.
  • As life get more sophisticated, so does risk. Emerging risk has been hot topic in recent years, they are brought about mainly by advance of technology.  While benefit of new technology can easily be seen and understood, but not nature and behavior of risks associated with it.  We have to admit that layer 1 to 5 of economic security are not design to deal with this situation, although they may indirectly reduce the impact to society, because by ensuring everyone having access to basic need they are in a way strengthening the society.

Therefore, additional tools to deal with risks are needed, on top of layer 1 to 5 that we have discussed earlier.  In other word, we do need other layer(s) to economic security system.  Being additional, this layer is a complement to existing layers and its position must be outer than them.  This is layer for takaful, the sixth layer.

Islamic Economic Security System

The point that takaful is merely additional layer to the system is critical mindset to understand and then adopt.  It simply means takaful must co-exist and strengthen the existing five, not to replace them.  At this very point lays the main problem of takaful and retakaful today.  

Since being introduced more than three decades ago, modern takaful has been built in completely wrong mindset.  Takaful has positioned itself as Islamic or shariah-compliant version of insurance.  Takaful was born on the premise that Muslims do need insurance in dealing with variety of risks, however it was delivered using techniques or mechanism or components that are prohibited by Shariah.  So, all we need to do is to identify those haram stuffs, dismantle them and replace with halal ones.  Here we go, we have insurance without haram ingredients and we call it takaful. At the end of the day what we have is another version of insurance.  Solution found and case closed.  

Today, takaful and retakaful community start wondering why takaful development seems to be stagnant and remain inferior toward its big brother, insurance?  Takaful is nowhere near from ambition to be better alternative to insurance?

Actually, there is nothing wrong with takaful development todate, it has been developing toward right direction it is meant, realized or not, to be.  Takaful now present as Islamic version insurance.  Yes, it remains subset of insurance, nothing more.  We are the one who intentionally put takaful as part of insurance, so why are we now complaining and expecting takaful to give more?

What is wrong actually? Our mindset!  Takaful is born and being developed within the mindset of insurance so by right we should not expect takaful to over take insurance.  

If we think about it, takaful today is being sold exactly in the same way as insurance is.  Try to recall what your takaful agent told you when trying to convince you to join their scheme. Yes, you are right, they threaten you with the worst scenario of something very unfortunate happens to you or your spouse (death or permanent disablement), how your children will then be completely helpless and family living standard and quality suddenly falls to the bottom.  You are not alone, they did exactly the same to me.  They completely ignore the existence of those five layers of Islamic economic security we discussed earlier, despite they are offering Islamic product and most of the time, to Muslims.  Not only ignoring, by selling takaful this way, we actually put takaful in head-to-head competition against Islamic economic security system.  This is real evidence that takaful is sold using conventional insurance mindset.   

If we want takaful to be superior to insurance, we must change our mindset.  We have to go beyond insurance universe.  It is going beyond insurance mindset that has been missing component from takaful development so far.  

Mindset Change

Therefore putting takaful as integral part of Islamic Economic Security System, despite being additional component and the most outer layer, is an effort to rebuild takaful under new mindset.  It forces us to really search and research beyond the limited horizon of insurance.  It leads us to dig deeper into valuable heritage of Islam, extract the essence, study its implementation in the past and rejuvenate them into today setting.  

Islamic economic security system is described as layers that forming a ball from inside out.  Inner layers are considered more vital than outer ones.  In fact, outer layer is very much dependent upon its inners.  For a particular layer to be solid and strong, its immediate inner one must be solid and strong at the first place.  In other words, outer layers has vested interest on the strength of its inner one. 

Therefore, accepting takaful as the most outer layer of Islamic Economic security system bring logical consequence that takaful has vested interest to the solidity of its five inner layers, from core family to waqf.  Otherwise, takaful will never be solid itself.  This understanding automatically remove the option of takaful to compete with other layers.  In fact, takaful should play active and constructive role in strengthening other layers.

Hold on a second, does it mean we are now downgrading takaful from main risk management tool to mere additional component of the system?  Not at all.  In reality, we are actually expanding takaful role to go beyond insurance as conventionally understood.  

But how? Ok, let us now look at how takaful can possibly play active role in strengthening other layers and at the same time financially benefit from it.

Core and extended family: It goes without saying that takaful has to put family (in format as approved by religion and government) at very center of whatever it does.  All products or schemes must be designed with this concept in mind.  This is not new to takaful.  In fact, we use family takaful instead of life takaful, for example. 

Zakah and sadaqah: Takaful operator can play active role by adding function of Baitul Maal into its operation.  It will run amil zakah function by collecting, distributing and managing zakah.  It also collects sadaqah and any other form of charitable fund and channel it to target groups or programs such as poverty eradication, education, promoting small business etc.  Takaful operator should view running Baitul Maal function as their natural expansion and would not bring major disturbance to their operation since set of skills and capability needed are not far differ from those in managing takaful.  However, regulation review and revision in both areas, takaful and zakah/sadaqah, will definitely needed.  By running amil zakah function, takaful operator is eligible to take 1/8th of zakah collected since amil zakah is one of 8 hasnaf (people eligible to receive zakah money).  Takaful operator should also be allowed to charge fee for managing sadaqah and other charitable fund.

Waqf: The term waqf literally means to prevent or restrain. In legal terms it means to protect a thing or to prevent it from becoming the property of a third person. Waqf could be defined as the permanent dedication by a Muslim of the corpus of a valuable property to the ownership of Allah SWT with a declaration of dedicating its usufruct perpetually for religious, charitable and or pious purposes as recognized by Shariah.  Waqf is inalienable or made in perpetuity. The corpus of the property made the subject of waqf cannot be sold, mortgaged, donated or alienated even by inheritance.  There are three main components of waqf, namely founder (waqif), administrator (mutawalli or nazir) and beneficiaries.  There is possibility for takaful operator to act as mutawalli of any relevant waqf entity.  Takaful operator may receive renumeration for managing waqf.

As you might notice, our discussion so far is more related to family takaful and personal lines of general takaful.  We will touch upon commercial lines general takaful in the next discussion.                    

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