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The Islamic Insurance Conference calls for boosting legal and technical regulations to promote the Islamic insurance industry

: 3/9/2015

The Islamic Insurance Conference calls for boosting legal and technical regulations to promote the Islamic insurance industry


Abu Dhabi on March 9, 2015


The Islamic Insurance Conference (IIC), which was organized by the Insurance Authority under the patronage of His Highness Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, concluded on Monday, March 9. Participants called for increasing the number of legal, Sharia (legitimate), and technical regulations to develop the Islamic insurance rules and promote the Takaful industry.


The participants affirmed the importance of boosting cooperation between the supervisory bodies and the financial and Sharia boards, in order to overcome the challenges that Islamic insurance companies face. Further cooperation can also meet other objectives, such as increasing the contribution of companies to the insurance sector and the gross domestic product of Arab countries. Furthermore, participants recommended that a Shari’ah and Fatwa Advisory higher committee be formed in the countries adopting Takaful insurance, in order to standardize the general Sharia controls and standards applicable to Takaful insurance operations.


The participants indicated the importance of developing Takaful insurance regulations. This would enable governing bodies to set a regulation that ensures that participants contribute to the supervision of Takaful insurance companies' activities, rules that would be binding on everyone. They pointed out that setting a system for the governance of Takaful insurance companies will guarantee the rights of all Takaful insurance parties and will highlight its benefits and boost transparency as per international best practices.


The participants further called for setting a world Takaful law to achieve sustainable development in the Takaful industry, boost awareness methods, and promote Takaful culture as a means to serve the best interest of all parties. They also called for holding similar conferences continuously, as their results can serve the Takaful insurance industry locally and globally.


At the conclusion of the IIC, the participants extended thanks to the UAE’s leaders for their efforts in developing the Islamic insurance industry. Thanks were also offered to His Highness Sheikh Mansour bin Zayed Al Nahyan, Deputy Prime Minister and Minister of Presidential Affairs, for sponsoring the IIC, and participants wished further progress and prosperity for the UAE’s leaders and its people.


International figures representing supervisory and oversight bodies, companies, experts, specialists, universities, and specialized institutions across the Arab region and the Islamic countries took part in the IIC, in addition to organizations and councils that are specialized in Islamic financial services worldwide.


The IIC was inaugurated by H. E. Eng. Sultan Bin Saeed Al Mansouri, Minister of Economy and Chairman of the Insurance Authority (IA), who asserted the importance of holding the IIC. He described its importance as a means to look for modern tools and methods that can achieve a significant breakthrough for the development of the Islamic insurance industry and the Takaful industry in general.


On its first day, the IIC held four sessions. The first session discussed governance in Islamic insurance companies and was attended by Dr. Abdel Sattar Al-Khowailady (Secretary General of the Islamic Center for Reconciliation and Arbitration), Dr. Younis Al-Sawalehi (Head of the Islamic Legitimate Body of the Munich Islamic Re-insurance Company), and Dr. Mahmoud Mosleh Al-Sartawy (Faculty Member at the Faculty of Shari'a, University of Jordan).



Dr. Abdel Sattar Al-Khowailady, Secretary General of the Islamic Center for Reconciliation and Arbitration, asserted that the governance or organizational controls used in management is a management and control system that achieves the goals of institutions by adopting the most successful methods. Governance is a package of relationships that bond the institution’s managers, board, shareholders, and other parties dealing with the institution.


He then identified the benefits of governance. Good governance helps to avoid financial breakdowns through the preventive measures provided by governance mechanisms, such as disclosure and transparency. These factors minimize the number of errors and ensure that the clientele of the institution have an adequate level of assurance, which is a social stability factor. They also contribute to avoiding a conflict of interests, which is a factor of equity and justice for all related parties. In addition, governance measures encourage the clientele of the institution to make more effort and bestow trust, because all participants will be convinced of the integrity of the institution’s direction. Furthermore, the benefits include improving competitiveness and the scientific and practical value of the employees. In addition, institutions will be better able to regulate and state the standards of good behavior in management and oversight, in accordance with specific standards and techniques.


In view of the governance appropriate to Takaful insurance companies, Al-Khowailady addressed the key pillars related to the sector. These include the cooperative insurance management and insurance surplus formulas and the ways that these are distributed, in addition to the methods used to cover insurance deficits and the legal and Sharia (legitimate) problems that they raise. He also addressed the importance of Takaful insurance transactions complying with the rules and principles of Islamic Law. The speaker mentioned the importance of enabling participants in Takaful to monitor the activity of the Takaful institution, in addition to the possibility of subjecting the Takaful insurance and re-Takaful companies to ratings.


Furthermore, Al-Khowailady set the principles which he deemed  imperative to consider when governing Takaful insurance companies, all of which were divided into eight categories. One category relates to the control and understanding of duties and rights between the contracting parties and stakeholders in Takaful insurance, regardless of the model adopted. Other categories include compliance with the rules and principles of Islamic Law, setting standards and principles to determine the insurance company’s financial rights framework (in accordance with all models), the basis of transparency and disclosure, and setting controls for the loan contract whenever it is needed (like when there is a deficit in the participants' fund).


In turn, Dr. Mahmoud Mosleh Al-Sartawy addressed the importance of governance for the insurance sector in his paper on this issue. He also addressed the reasons that warrant governance, and the efforts made by the institutions and international organizations to create governance structures.



He pointed out that Islamic insurance companies have established their ability to provide insurance protection in the economic fields, thereby becoming one of the pillars of the national economy. He added that these companies have lived up to competition offered by traditional insurance companies in the market thanks to the successes that they have achieved, their credibility ,and the ethical dealings which mark their relationships with their shareholders and clientele.


Al-Sartawy pointed out that Islamic insurance companies are the financial economic institutions that are more likely to be exposed to risks due to the activity that they practice. In order to ensure that cooperative insurance companies continue in business, sound and effective governance systems should be in place for all types of insurance companies, to prevent auditors from colluding with parties that have connections and interests in the company.


He added that extensive attention has been paid to corporate governance recently. This is due to many reasons, including the drastic crises and depressions that are taking place in the large international financial and economic companies. The disruption has given rise to many negative repercussions in global economies, casting dark shadows on national economies worldwide. These problems have been due to a lack of control on the works of such a major structure; therefore, an effective system is needed for companies to be able to practice their activities safely and achieve their desired goals.


He asserted that the objectives of governance include fueling the incentives and motives of the Board of Directors. The Board’s aim often involves pursuing the achievement of goals which achieve the best interest of the company. Examples include ensuring sound financial performance and good use of company funds, reviewing compliance with the law, supervising the social responsibility of the company in light of corporate governance rules, and minimizing the risks related to financial and administrative corruption that companies and countries face. These objectives are achieved by:


Improving corporate performance levels, promoting the consequent development and economic progress of the countries hosting insurance companies, attracting foreign investment, encouraging local capital to invest in national projects, improving the ability of national companies to compete internationally whilst opening new markets for them, observing transparency and clarity in the financial statements issued by institutions (which increases the confidence of investors who will consequently rely on them to make decisions), and protecting the shareholders in general (whether they are a minority or a majority) and maximizing their returns, amongst other actions.



Al-Sartawy noted that the corporate governance principles are the sum of rules, regulations, and procedures which provide optimum protection and balance between the interests of managers and shareholders of the company, as well as the interests of other relevant stakeholders. This consequently achieves the overall governance objectives. He indicated that the good will principle is one of the most important principles serving as a legal foundation of the Takaful insurance industry. He stated that risk management is one of the key functions of sound company management, as per the principles of governance.


 In the conclusion of his paper, Al-Sartawy presented many recommendations to boost the principle of governance. He recommended that cooperative insurance companies commit to establish and reinforce disclosure and transparency in addition to stakeholder protection. Companies must also look to issue the governance regulations and emulate Islamic banks, and must comply with the rules and principles of Islamic Law whilst carrying out their insurance activities (this being one of the core principles of governing cooperative insurance companies). Other recommendations include requiring that the Board members of the insurance companies have knowledge and experience of financial, funding, accounting, and Sharia areas.


He called upon countries to speed up the reformation of regulations and laws that govern cooperative insurance activities. Countries should also issue regulations that establish Sharia control over the insurance industry, and should establish an independent higher Sharia board that oversees, monitors, and develops the activities of cooperative insurance companies.


On his part, Dr. Younis Al-Sawalehi addressed the governance standards adopted worldwide and reviewed other international experiences, including the Malaysian experience.


He noted the importance of boosting the concepts and principles of transparency and disclosure in relation to insurance surplus and technical accounts.



Informing the participants of work progress in the companies


The fifth session focused on informing the participants of the work progress made in Takaful insurance companies and how to involve them in the technical and financial controls placed on the company's activities. The session was attended by Dr. Ased Al-Kilani, Executive Member of the Fatwa & Shari’a Supervisory Board at Abu Dhabi National Takaful Company and Dr. Mohamed Omar, Director of Shari’a Department at Al Hilal Takaful Insurance.


Dr. Ased Al-Kilani, Executive Member of the Fatwa & Shari’a Supervisory Board at Abu Dhabi National Takaful Company, affirmed that the common formula of Takaful insurance is based on dedicating a Takaful fund (or account) in which the Takaful subscriptions are collected and paid to fix the damages sustained by any of its parties. The insurance company assumes the management of insurance operations related to the fund along with all of their requirements. It invests its balance (or assets) in accordance with Sharia rules without having a separate legal personality representing the fund abroad.


"The participants (policyholders) are the ultimate beneficiaries of the efficient management of insurance operations and they invest their own Takaful fund assets. Given this fact, and the fact that the existence of the fund is the essence of the Takaful insurance company’s work (which adds this capacity to the company), it is justified that a formula is sought to involve the participants in the management of the company. Participants must have some control over its operations that lie within the scope of insurance operations and the investment of the aforementioned fund balance", he pointed out.


In his paper, Al-Kilani examined justifications like these. He also reviewed some of the formulas presented by other researchers and the regulations related to Takaful insurance that indicate the formula’s active and practical requirements.


In his paper related to this issue, Dr. Mohamed Omar Abdel Ghani (Director of the Shari’a Department at Al Hilal Takaful Insurance), addressed the relationship between the participant and the Takaful company. He defined the participant as the party that donates a part of the subscription amount to be paid in the Takaful account, after deducting the Wakala (agent) fees, and who donates from his investment returns. The amount donated must be enough to cover the damage sustained by him or by other parties that are exposed to a common risk, due to the occurrence of risks covered by the insurance.


He highlighted the characteristics of the participant of a Takaful contract. The insured must commit to donating the subscription to others to cover the damage sustained by other participants. He said that participants should have a representative in the Takaful companies.


He determined the rules and conditions of selecting the representative of a set of participants and his powers. He should have minimum experience, should be a participant in a Takaful company, and should be appointed by the supervisory and auditing departments in the company.


The speaker presented many proposals of developing a mechanism to inform the participants of the work progress made by the Takaful insurance company. Most importantly, he highlighted the importance of appointing a representative for the participants that can protect their rights and cater to their interests through a supervisory and oversight body. It is important to select one or more qualified participants on an annual basis, to appoint them according to specific rules, and to grant full independence to the participants' account.


The technical calculations of the participants' account

The sixth session focused on the technical calculations of the participants' accounts (inputs, outputs, outcomes, and how to determine the costs the participants' account is charged with). The session was attended by Dr. Hatem Al-Taher, Manager of the Islamic Financial Group Deloitte & Touche in Bahrain, and Mr. Zeal Cassy, an Actuarial from Malaysia, among others.


Rules governing the distribution of the surplus on the participants' account

Dr. Refaat El-Sayed El-Awadi, professor of Islamic economy at Al-Azhar University, asserted that the studies established that the Islamic economy constitutes three sectors: the private, public, and Takaful sectors. In the latter, equity is not classified under private or public equity; rather, it is an equity of a special nature which can be identified from equity in the endowment.


He pointed out that equity in the endowment fund is neither private nor public. The endowment funds belong to the beneficiaries but they do not enjoy the rights associated with the private equity that exists in the private sector. Furthermore, the endowment funds do not belong to the state in the manner of public equity applicable in the public sector.



El-Awadi pointed out that the Islamic insurance company is classified under the private sector and involves two parties. The first party is that of the founders (shareholders) of the company who provide the company with capital. The second party is that of the participants (policyholders) who pay the premiums. Both parties seek to receive a return. For the shareholders, the return has a clear name, which is “profit”. For the participants, the return is called a surplus, which is also a profit in reality.


He asserted that this is the economic adjustment of an Islamic insurance company, which sets the rules governing the distribution of the surplus in an Islamic insurance company. He indicated that both of the founders and policyholders sustain a risk.


He pointed out that the rules governing the distribution of the insurance surplus are carried out through the shareholders (founders) who run the company and receive a consideration for management. This is not considered a distribution of the surplus because the surplus is generated later on. Secondly, the insurance surplus is distributed to the shareholders and participants proportional to their share of the capital. Thirdly, the issue of risk needs discussion. It may appear that the shareholders sustain the risk, but this is not an admissible fact because both the shareholders and the participants sustain risk. Therefore, risk does not have a share in the insurance surplus.


In the conclusion of his paper, he asserted that the Islamic insurance company is admissible under that name, whilst the title of ‘Takaful insurance company’ or ‘Cooperative insurance company’ may be argued.


El-Awadi then further affirmed that the insurance surplus may be named as ‘profit’, because it is shared by the shareholders and participants proportional to their share in the capital. This indicates the importance of conducting studies on how to achieve solidarity and cooperation within the Islamic insurance company between the shareholders and participants on one hand, and between the participants on the other hand.


He pointed out the importance of conducting studies on the economic efficiency of Islamic insurance companies, on the economic factors used to measure efficiency, and on the Islamic insurance companies currently operating in many countries (with the objective of reforming and rationing them).


This international conference was organized amidst the growth and increasing penetration of the Islamic insurance industry in the UAE, the region, and other international markets. This growth is due to the rising demand for the products of Islamic insurance by large segments of customers in all markets of the world.


The IIC aimed to achieve a pool of objectives to serve the Islamic insurance industry. The most important of these was to introduce the important role of the Takaful insurance sector in protecting the national economy and providing economic protection to the members of the society. Other objectives include improving awareness, boosting the confidence of markets in Islamic insurance products and the Takaful industry, and boosting the opportunities for growth in the Islamic insurance industry worldwide. The IIC aimed to achieve these objectives by setting the legislation and laws that promote development from the legal and Sharia (legitimate) aspects.


The IIC further aimed to identify the real challenges that the Takaful insurance industry faces, pinpoint the methods and tools to face and overcome them, and present ways to develop the security provided by the Takaful insurance company to its participants. The IIC also aimed to expand the base of transparency in the operations of Takaful insurance companies, thereby creating more bonds between the company and the participants. It was hoped that this would consequently increase the overall contribution the insurance industry makes to gross domestic product.





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