Cooperative insurance is gaining solid ground. Sherine Nasr reports Takaful "co-operative or Islamic insurance" has steadily been growing as a legal financial tool to serve the poor in Islamic countries. Based on a decree issued by the Islamic jurisprudence congregation which stipulated that commercial insurance is believed to be illegal, takaful has been introduced as the legitimate alternative. Last week, Cairo hosted the first " Takaful Forum" where prominent Arab figures in the takaful business met their Egyptian counterparts to discuss means to enhance cooperative insurance with the aim to increase its contribution to the economies of different Islamic countries. In Egypt, takaful as an insurance process carried out by an authorised comapany was first introduced to the market when the Egyptian Saudi Insurance House opened in 2002. Among stakeholders are the Islamic Fisal Bank in Egypt, the Arab Islamic Insurance Company (AIAC) and Dallah Group. The company started with an issued capital of LE100 million and a paid in capital of LE30 million. "In less than three years premiums paid by individuals who subscribed to the scheme, have grown from LE1 million in the first year to LE15 million," said Abd El-Raouf Kotb, Vice- Chairman and Managing Director of the company. It is worth noting that takaful grew and matured even faster in other Arab countries. The first ever takaful company was inaugurated in Sudan in 1979. However, Malaysia is considered the pioneering Islamic country in the takaful business with a share of at least 34 per cent of all takaful premiums worldwide. According to Mohamed Youssef, head of the Egyptian Insurance Supervisory Authority, takaful has been gaining solid ground in the majority of Islamic countries throughout the past decade. Youssef further indicated that the global takaful premium could grow by $7.4 billion in the next 15 years at a rate of 20 per cent per annum. It is worth noting that the takaful business in the Middle East has been growing by 10 per cent per annum, while in Malaysia, it has been growing by 60 per cent. "With concentrated efforts on the part of the takaful operators worldwide, a growth rate of 20 per cent should be very possible," commented Youssef. Islamic banks have always played an effective role in establishing and supporting Islamic insurance companies and contributed to their success. Moreover, they provide the legal platform for these companies to guard their deposits and run their investment. "Islamic banks have $100 billion in deposits in general. It is only natural that these funds should be invested in establishing and operating more takaful companies in the rest of the Islamic countries and for the best interest of their people," commented Ahmed Sabbagh, general manager of the Islamic Insurance Company in Jordan. The most important pillar of cooperative insurance is the Islamic Law (Sharia). Accordingly, there are major differences between takaful and commercial insurance as far as the nature of contracts, the methods of investment and compensations are concerned. While takaful includes property insurance, responsibility insurance and social solidarity insurance, it excludes life insurance as it is prohibited according to Sharia. Takaful is void of usurious interests. Investment of the capital should be carried out only through legal Islamic terms. The relation between the insured and the insuring group is based on solidarity as they are partners in profits and losses. According to Sabbagh, the company keeps all the insured premiums in one account, "so as to achieve the idea of takaful which means solidarity," said Sabbagh who added that damage is paid through this account and the company's profits are distributed among participants, each according to his own quota. Unlike commercial insurance companies whose only capital is that of the shareholders, Islamic cooperatives have a fixed capital, that of the policyholders and a variable capital that belongs to the shareholders. "This is why complete separation between the rights of policyholders in the company and the rights of the shareholders is a must for absolute transparency," commented Sabbagh. Insurance operations are run through Islamic insurance companies as a separate party on the basis of proxy. Operations are done in return for a fixed fee which is paid through the premiums committed by the insured. Unlike commercial insurance, the value of the original premium returns to the insured while the profits for investing assets belongs to the insured after deducting the company's share for running the business. In case of catastrophes or natural disasters, all insured members have an obligation to cover the losses. "Thus, profitability to Islamic cooperatives is not the ultimate goal. What really matters is solidarity and cooperation among members of the one society," said Kotb. Although takaful insurance companies have succeeded in capturing a significant share in the markets where they have been set up, from a purely financial viewpoint, much criticism has been directed towards the whole process. According to Robert Naudi, consultant to international insurance companies in London, capital is a commodity that tends to gravitate towards the most attractive and secure opportunity of investment. "Capital hates anti-selection and restrictive environment. It embraces the principles of reward as well as risk. This is the corner stone of all business and insurance is no exception," said Naudi. Naudi does not share the view that some risk must be borne by an industry like insurance on the basis of a free or subsidised service or social obligation. "Insurance is a business not a convenient vehicle to answer social needs," he commented. One big difficulty of insurance and re- insurance is that even though tremendous progress has been achieved in improving the perception of risk probability, no one has yet been able to define precisely the cost of a product or of protection or define beforehand whether the product produces a profit or a loss, particularly in incidents of natural catastrophes or unusually large losses. "If our products are lacking in precise definitions of cost price, how can we then identify with ease the element of profit for distribution to our policyholders?" enquired Naudi. The earthquakes in Turkey, tsunami in Indonesia, floods in Bangladesh are all major catastrophes to predominantly Islamic countries. "It is questionable if these losses could have been comfortably sustained within a restricted takaful environment without the wider mechanisms of non takaful risk distributions."
