The concept of Takaful Insurance is very new in Nigeria, but not globally. Our reporter examines its impact and how it will deepen financial inclusion in the country.
In 2013, the National Insurance Commission (NAICOM) released guidelines on Takaful Insurance, which it said was in line with the provisions of the 1997 Insurance Act and the need to complement the current drive for financial inclusion to increase insurance penetration in Nigeria. The apex insurance regulator issued two licences to commence services in 2016.
Takaful is an Arabic word, which means to take care of one another’s needs, or guaranteeing each other. Accordingly, the Takaful Insurance scheme is a mechanism in which the members or participants jointly agree to protect themselves against loss or damage. Participants would assist the person in need to indemnify his or her loss and provide him with financial help.
Takaful Insurance is a legally binding agreement by all the participants of the scheme to pay any of its members who suffers a loss as specified in their policy document.
At the end of 2014, the global Takaful assets were estimated at $33 billion. Gross Takaful contribution was estimated at $14 billion by the end of that year.
Takaful market is highly concentrated in the Middle East and South-East Asia, with Saudi Arabia and Malaysia dominating. In 2015, there were about 308 Takaful companies around the world.
The entrance of Takaful in Nigeria has attracted the attention of many financial analysts who believe there are huge deficits in insurance coverage due to ethical concerns in the conventional insurance practice.
There are four key differences between Takaful and the conventional insurance: In Takaful, the company belongs to the participants (clients), but in the conventional insurance, participants are just customers who have no stake in the business. An insurance company belongs to shareholders and management. With Takaful, risk is shared among participants (clients), but in the conventional insurance, the company takes the risk alone. However, where a client suffers a loss or gets involved in an accident, he or she may be indemnified or compensated. But in the absence of a loss, he or she loses the premium paid in the past and must pay again to renew his policy. With Takaful, surplus (profit) belongs to the participants (clients), but in conventional insurance, the company or shareholders take the profits alone. In Takaful, profit generated or realised is shared among participants (clients), but in conventional insurance, the surplus profit is shared among shareholders only.
According to Professor Busari Shaamsuddeen Akande, the chief executive officer of the Islamic Institute of Accounting and Finance, the word Takaful is derived from the Arabic verb, kafala, which means to take care of one’s need. It is free from uncertainty and gambling. Theoretically, it is perceived as cooperative or mutual insurance where members contribute a certain sum of money to a common pool. The purpose of this system is not to make profits but to uphold the principle of cooperation.
In an interview with Daily Trust on Sunday recently, Akande said the emergence of Islamic financial products in Nigeria, such as Sukuk or Takaful, had nothing to do with “Islamisation of Nigeria’’ as reported in some quarters. The visiting professor of finance at American Trinity University, California and Cambridge Institute of Technology said the scheme was about new financial products to cater for the diverse financial needs of the populace and government at various levels. He said Sukuk, for instance, was an alternative means of financing public expenditure, just as Takaful was covering the huge gap in insurance participation by many Nigerians.
However, expressing fears on the regulators, Professor Akande said, “For the banking sector, there are no fears, except for the reporting of Islamic financial statements. The major concern is on the Takaful business. The National Insurance Commission will have to be vigilant and proactive in managing this sector. We now have overnight Islamic finance professionals everywhere in Nigeria claiming to be experts; and I wonder how come.”
Also, the chief executive officer of Jaiz Takaful Plc, Momodou Musa Joof said Takaful was not coming as a competitor to the conventional insurance.
“We have a niche. There are so many other people out there, who only insure their vehicles to satisfy the law of the land, but they don’t insure their shops, houses etc. When there is a disaster, they end up asking for assistance from the government. But now, they have full Shari’a compliant products,” he said.
Joof said Takaful was open to Muslims and non-Muslims, adding that there are Christians among the members of staff of their company. He said it is transparent, fair and open to all. “The only thing is that we are guided by Islamic principles; hence you can’t call us to insure a brewery, a firm that rears pigs, or a cigarette company,’’ he explained.
Emir of Kano Muhammadu Sanusi II said Takaful was for all groups of people and it allowed equal participation and opportunity. At the launch of Jaiz Takaful in Kano, the emir, who was among the key promoters of the concept, said the scheme would assist people with small scale businesses to replace their lost property, especially in the event of a disaster. He said government, private business owners, as well as small and medium scale enterprises could benefit from the concept, adding that it would help to mitigate the huge losses in business.
Challenges and solutions
Takaful operators, like all insurers in emerging market economies, depend on commodity prices, therefore, its strength or otherwise is determined by the commodity market. Because the concept is new in the world, it faces additional challenges from inadequate regulation and enforcement, severe price competition from conventional insurers, and questions concerning the optimal structure of the business.
In a paper he presented recently, Dawud Abdus-Saboor, the director of Takaful Outsource Limited, London, said the Takaful industry was nearing a milestone in its growth trajectory, where a natural convergence of regulatory guidelines would pave the way for a much needed standardisation of Takaful operational models, terminology, preferred methods of preparing financial statements, and actuarial considerations for risk-based capital frameworks, among other concerns.
The pricing of Takaful products is one of the important concerns. There’s an overview of the current regulatory environment for six selected countries – Pakistan, United Arab Emirates, Indonesia, Nigeria, Kenya, and the Maldives.
“Takaful operators shall exercise diligence in product design and ensure that the products offered include adequate coverage and are suitable and appropriate to the targeted market segment. In determining the price of the products, prudence must be maintained to avoid under-pricing, as well as balance with due care to protect participants from being charged excessively. Key factors, such as the expected frequency and severity of risk exposures and expected management costs and expenses must be considered in pricing Takaful products,” Abdus-Saboor said.
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