Takaful And Actuarial Practices
The development of tactful industry in Malaysia is being shaped by the regulation. The latest regulations issued aimed to develop level playing field with its conventional counterparts.
However, these regulations has also come with few implication and drawbacks. 1. 1 Insurance Insurance has existed for many centuries, some historian trace the origin of insurance to 21 ICE, when Roman government required by military supplies to accept all risks arising from enemy attacks, storm and other natural disaster for supplies aired on the ships Modern insurance can be trace to begin in sass’s, when British merchants and ship owners began to meet at a coffee house called Load’s near Lombard Street in London.
They made agreement to mutually share profit and losses of sea voyages (Omar Fisher, 2009). Insurance is a risk sharing arrangement between 2 parties. It is an agreement between the insurers that agrees to indemnify the insured against losses specified by a contract. It is an economic device by which individuals or organization, transfer pure risk (uncertainty about financial losses) to others (Abdullah, 2005). Technically, insurance is where individuals (insured) to company (insurer) and in return insurer received premium.
The insurer then take the chance that it will indemnify insured up to certain limit specified in the policy (contract). The insured does not get any benefit except an undertaking stated in the policy that will take care of any loss suffered by insured if risk materializes. If risk does materializes within the period covered, company takes all the premium and insured gets nothing. Conventional insurance contains 3 elements that contradict to Shari:- Uncertainty (Gharry) It arises when insured pays premium but does not know whether he will makes claims in future, vice versa.
Gambling (Massif) It occurs when policyholder hopes to get large sum from his small amount of premium. However, policyholder would lose money if the insured event does not occur and insurer will get all the profit. Interest (Rib) When the policyholder expect to get a fix amount (rate) of profit greater than his contribution it is considered as Rib. In addition, the investment of insurance company involves element of Rib. In view of the elements mentioned above, Muslim needs an insurance scheme protection scheme) that is in compliance to Shari.
On 24 March 1977 the Saudi Arabian Counsel of Head Scholars denouncing conventional insurance contract are being imbued with Gharry. It is followed by fatwa in numerous Islamic countries 1. 2 Islamic Insurance (Tactful) Tactful is defined as a scheme based on brotherhood, solidarity and mutual assistance which provides mutual financial aid and assistance to the participants in case of need whereby the participants mutually agreed to contribute for that purpose (BIN, 1984) The origin of tactful is derived from several practices from ancient Arab tribal custom and companions of the Prophet.
For example; under the custom of “Al- Gullah”, it is mutually agreed among the tribes that if a person is killed unintentionally by a person of another tribe, accuser’s paternal relatives will take the responsibility to make a mutual contribution for the purpose of paying the blood money to the victim’s relatives. The first Islamic insurance was introduced in Sudan in 1979, based on cooperative model similar to conventional mutual insurance and later implemented in other countries I. E. Malaysia and Saudi Arabia. The 3 mutuality aspects in Tactful are; mutual help, mutual responsibility and dual protection from losses.
It is an arrangement in which participant contributes regularly to a common pool of funds with the intention to Jointly guaranteeing each other. When participant enter into a scheme, he is seeking protection as well as cooperating with other participants and contributing to help those in needs. Hence, unlike conventional insurance, tactful is ideally not a contract of buy and sell. 1. 3 Fundamental differences between Insurance and Tactful The fundamental difference between conventional insurance and tactful is its contract.
Conventional insurance involves in bilateral contract between insured and insurer. The nature of the contract is at the best probable compensation depending on the event that may occur or may not occur. Whilst, tactful operator is only an administrator of tactful fund responsible in managing and investing fund in accordance to Shari. The other significant features that distinguish tactful and conventional insurance is the existence of Shari Supervisory Board and separation of 2 funds (risk fund and shareholder’s fund) in tactful. 1. Regulation In general regulation is define as principle or rule (with or without the coercive power f law) employed in controlling, directing or managing an activity, organization or system. Law define regulation as rule based and meant to carry out a specific piece of legislation. Regulation are enforced usually by regulatory agency formed or mandated to carry out the purpose or provisions of a legislations (regulatory requirements). Regulation are indispensable to the proper function of economic and society. Regulation public goods and services.
In Islam we are commanded to obey Allah, The Messenger and the authority. Islam recognized authority and the need of mankind to have some order and rules, as Shari itself is about moral code of conduct and Islamic Religious Law. 1. 5 Tactful and Regulation Tactful similar to conventional insurance is a service whereby both industries requires their customers to “pay’ in advance for the services/benefits in the future (payment of claims should loss occurred). This feature makes tactful a must be regulated industry.
Tactful is different from conventional propriety (company with shareholder) insurance, whereby the participants (policyholders) in tactful shares insurable interest among themselves rather than transferring risks to shareholders. How Kabul is implemented determines the level of risk sharing among participants, unless tactful operation is based on pure mutual model, shareholder do carry some risk in the operation. The complexity in determining where risks actually resides makes regulation of tactful important. Tactful system embodies the element of mutual cooperation, Joint indemnity and common interest.
Tactful will consist of 2 tier structure that is a hybrid of a mutual and commercial form of company. This poses significant issues of regulation and supervision. In addition, all functions of tactful undertaking should obey the rules Lully to Shari and has in other areas of regulation and supervision (Dire, 2011). The global credit crisis has in one way or the other negatively impacted all financial institutions including tactful. The direct consequences were felt on both top line and bottom line, with lower returns to both shareholder’s fund and risk fund.
In addition, there was slower new business growth on the back of slowing economy. This crisis has highlighted the need for regulatory bodies to strengthen their supervisory role to ensure stakeholders of tactful industry are protected and buffered from another crisis. Growth and profitability prospects for tactful operators vary significantly by market and sectors depending on market economics, maturity and regulatory structures (Ernst&Young, 2013). The decision of the regulator as to how tactful is regulated will have significant impact on whether tactful is simply a change of name or develop into a different offering to the customer. . 0 Regulatory Framework for Tactful There are 3 levels of regulation and supervision of tactful industry: I. Local Jurisdiction – Countries like Malaysia, Bahrain has special legislation for tactful industry whilst other countries I. E. UK has single legal and regulatory framework for Among key objectives of IFS are to: Encourage and further craft and develop transparent and prudent Islamic Financial Services Industry and to introduce new or existing international standards that is in line with Shari Set up criteria for standardizing institutions offering Islamic finance services and products. Ii. International Association of Insurance Supervisors (SIS’S) – SIS’S is a voluntary membership organization of insurance supervisors and regulators from more than 200 Jurisdiction in nearly 140 countries. The mission of SIS’S is to promote effective ND globally constant supervision of insurance industry in order to develop and maintain fair, safe, stable insurance market for the benefit and protection of policyholder and contribute to financial stabilities. SIS’S develops principles, standard and other supporting materials for supervision of insurance sector. . 0 Development of Tactful in Malaysia Malaysia was already well a long way to an Islamic Finance System when Tabbing Hajji being established in 1963. The first tactful fund was started in Malaysia in 1984 a year after the establishment of the first Islamic bank, Bank Islam Malaysia Bertha. The prevailing need of Malaysia’s Muslim towards Islamic insurance and the issuance of fatwa by Malaysian National Fatwa Committee (MFC) has inspired the development of Tactful Industry in sass’s.
MFC has ruled out that conventional life insurance policies were basis due to presence of excessive uncertainty (Gharry), Usury (Rib) and Gambling (Massif). The decision by the Jurist to formulate the tactful program as in agreement with the Shari legal maxim “all things originally are permissible unless there is evidence to prove their prohibition”. According to the Quern (Verse 31 :10): “Do not see that Allah has subjected to you whether is in the heavens what is on earth and has showered upon unseen?
Allah has given man control over their use and it is not logical that (may He be glorified) their use is forbidden as He has bestowed man with His “favors”. In fact He has prohibited only few things for specific reasons because they are harmful to man, the true negative repercussion of which is in the hands of Allah. Allah know what man does not. ” In 1982, a Special Task Force was established by Malaysian Government to study the ability of the setting up of tactful fund. Following the recommendation, in 1984 the Tactful Act was enacted and the first tactful operator Assyrian Tactful Malaysia was incorporated in November 1984.
After 30 years, tactful industry has shown tremendous growth. As at to-date, there are 11 tactful operators and 4 retaliate operators in Malaysia. As at 31 December 2013, total assets of tactful and retaliate industry in Malaysia stood at ARMS. Billion and RMI . Billion respectively. The average growth for family business is at 14. 7% whereas, for general business at 9. 1%. Net contribution for family and general businesses stood at RMI . Billion and ROOM. 41 billion respectively.
The growth and success of tactful industry in Malaysia was achieved as a result of Malaysia (BIN) and tactful operators in developing resilient and efficient industry. 4. 0 Regulatory Framework for Tactful Industry in Malaysia Malaysia is among pioneering Jurisdictions that have successfully developed and incorporated Islamic Finance into its modern financial system (Islamic Finance News, 2012). The regulatory part of Islamic Financial Institutions including tactful is being carried out by BIN. Regulatory framework for insurance and reinsurance are broadly applicable to tactful and retaliate.
However, it requires adaptation to be more tactful and retaliate attuned whereby, specific rules has been put in place to address tactful peculiarities: I. Shari compliant in all aspects of tactful and retaliate operations it. Balance between interest of shareholders and participants iii. Separation of funds between shareholders and tactful/retaliate fund Gradual approached has been adopted by BIN in developing tactful industry in Malaysia. Basically the development can be divided into 3 stages: I. Stage 1 (from 1982 to 1992) – mainly focusing on establishment of basic tactful infrastructure.
BIN has established Tactful Act and Framework in 1984 (Tactful Act 1984) to provide clear guidance and direction on how tactful operators should conduct their business to in in accordance to Shari as well as Law of Malaysia. In addition various guidelines and circulars were issued to tactful operators to provide updates on latest requirement as well as clearer direction on how tactful operators should run their business. Establishment of the first tactful operator in November 1984, Assyrian Tactful Malaysia. It. Stage 2 (from 1993 to 2000) New entrance of tactful operator in 1993(Tactful National Sad.
Bad. ) SEAN Tactful Group was established in 1995 Sean Retaliate International (L) Ltd was established to facilitate retaliate arrangement among tactful operators in Malaysia and in the region. Appointment of Members of Shari Advisory Council for Islamic Banking and Tactful iii. Stage 3 (from 2001-2010) Introduction of Financial Sector Master Plan in 2001 – partly aim to enhance capacity of tactful operators and to strengthened legal, Shari and regulatory framework, Establishment of Malaysia Tactful Association in 2002 to improve industry self- regulation through uniformity in market practices. New tactful licenses issued by BIN between 2005 to 2007 Malaysia Islamic Financial Centre (MIFF) was established in 2006 to develop linkages to the global marketplace. Liberalizing of tactful industry in 2009, which then resulted in 4 new foreign based family tactful operators given a licenses to operate in Malaysia. ‘v. Stage 4 (2011 to current) Financial Sector Blue Print (FSP) was introduced in 2011 – it is a strategic plan that hart the future direction of Malaysia’s financial system, as Malaysia aspires to transform into a develop and more competitive economy in 2020.
The transformation will rely largely on private sector to drive greater productivity and innovation. Among Islamic financial institutions’ knowledge of different markets to support internationalization of Malaysian business. Enhance capacity and capability of insurance and tactful industry to provide higher value added medical and health insurance Established well developed financial infrastructure to facilitate cross border financial intermediation.
Enactment of comprehensive legislative framework for conventional and Islamic Financial System Strengthened institutional structure of financial institutions to provide adequate safeguard against contagion risk and excessive leverage. Participate in greater cross border arrangement and supervisory cooperation to support the development of International Islamic Financial Industry Introduction of various regulation that took place within 2011 to 2013 to support the objectives of FSP, among others: Islamic Financial Services Act 2013 (IFS) Shari Governance Framework (SGF)
Tactful Operational Framework (OTF) Risk Based Capital Framework for Tactful Operators (REBUT) Guidelines on Appointment and Duties of Appointed Actuaries 5. 0 Regulation and its Impact to Tactful Industry In ensuring continuous growth and to further develop the tactful industry, various regulation have been introduced in recent years. A. Islamic Finance Services Act (IFS) 2013 IFS which took effect on 30 June 2013 replaces previous Tactful Act 1984. IFS is a combination of both regulation of Islamic Banking and Tactful.
The purpose of IFS is to: Promote financial stability and compliance with Shari Strengthen regulation of Islamic financial Institutions Protects right and interest of consumer services and products IFS enables more comprehensive regulation and supervision of the tactful and retaliate industry. Areas of coverage under IFS are: Shari Governance Prudential Requirement Business conducts and consumer protection Financial Groups Intervention and remedial actions I. E. Winding up Among key changes under IFS requirement which will affect the tactful industry are: I.
Composite tactful operators are required to split its general and family business into 2 separate entities. Tactful operators are given 5 years from effective date of IFS to comply with this requirement. It. Tactful operators are required to held separate capital requirement for its general and family business (previously Room capital requirement for both businesses) iii. Requirement to set-up financial holding company whereby, any tactful operator that is subsidiary of financial holding company will be subjected to a capital requirement in Malaysia. Lb.
Principle based framework based on the nature and complexity of its business. With new and enhanced requirements being put towards tactful operator under IFS t is expected that: There will be further merger and acquisition as few operators may find difficulties to get to hold separate capital requirement. Nevertheless, it may encourage growth of general business. It will raise the issues as to whether tactful operator’s subsidiaries outside Malaysia will also be subjected to Malaysian capital required though Malaysia’s capital requirement are less stringent?
Tactful operator need to come up with their own capital framework that is robust enough depending on the nature and complexities of its business. It may require them to engage external consultants to come up with an extensive framework. As some responsibilities of appointed actuary being shifted to Board of Directors of the tactful operator there might be increased in numbers of independent director with technical expertise I. E. Actuarial, accounting etc. B.
Risk Based Capital Framework for Tactful Operators (REBUT) REBUT sets Bum’s expectation for tactful operators, maintenance of capital adequacy level to commensurate with risk profile of tactful operations and act as financial buffer for tactful exposure. The framework aims to achieve the following objectives: Enable all obligations under tactful contract to be met Provide flexibility for a tactful operator to operate at different risk levels in line with its business strategies, so long as it holds appropriate level of capital and observe prudential safeguards.
Industry that promotes public confidence and contribute to us overall financial system stability. The major changes in requirement is that, under REBUT is all payment of dividend is subjected to prior approval from regulators regardless of tactful operator’s capital position. Previously, dividend payments were permitted without prior approval from coagulator subject to the capital position of tactful operators being above its internal capital target level (ITCH). C.
Tactful Operational Framework (OTF) Tactful Operational Framework (OTF) was issued to achieve the following purposes: To enhance operational efficiency of tactful business To build healthy tactful funds which are sustainable To safeguard interest of participants To promote uniformity in tactful business practice The most significant changes upon implementation of OTF is that, tactful operators are permitted to distribute surplus from the risk fund to shareholders’ fund sugarless whether there is an outstanding Card position in the risk fund.
Shari Advisory Council (SAC) of BIN resolved that, surplus from risk fund can be distributed despite an outstanding Card position in the risk fund due to the clear distinction between the obligation of the risk fund to distribute surplus to tactful subjected to different requirement by regulator. However, the requirement that surplus distribution payable to the operator must not exceed the amount paid or accrued to participants remain. D. Appointed Actuary: Appointment and Duties
The policy documents provide for the duties of an Appointed Actuary and the Bank’s expectation of the roles and responsibilities of the Board and the Board Nominating Committee in respect of Appointed Actuary. The policy aims to reinforce the professional standards expected of an Appointed Actuary in carrying out his specific duties and overall responsibilities as a control function. There are various significant potential areas that can be highlighted: Potential requirement for Appointed Actuary to be employed by tactful operator rather than being an external consultant. Pricing Actuary role to be separated from Appointed Actuary role.
In view of the above potential, tactful operator might view it as challenges as there are limited number of Actuary with sufficient experience in Malaysia. In addition, as there will be a separation between general and family businesses there will be increasing demand for Appointed Actuary. Though the development in tactful regulation has tremendously improve the performance and growth of tactful business in Malaysia, new regulations has also comes with few drawbacks as below: Regulation on tactful ensures that tactful operators meet its obligation to the same extent as Islamic Bank.
This “certainty’ comes with cost. Additional regulatory cost and capital are likely to be passed on to consumers, thus making tactful putouts more expensive compared to its conventional counterparts. IFS requires tactful operator to be established as public companies. However, given the nature of mutual assistance in tactful, it will be more appropriate for firm to be set up as cooperative or mutual. By being public firms, tactful will become wholly commercial venture which will eventually focus more of profitability rather than fulfilling social needs.
There will be a possibilities that few tactful operators might withdrawn products that require high capital I. E. Annuities and long term care and replace it with products with lower capital I. E. Investment Linked Products to fulfill Orbit’s requirement. IFS requires tactful operators to be established as public companies. However, given the nature of mutual assistance in tactful, it will be more appropriate for firm to be set up as cooperative or mutual. By being public, tactful firms will become wholly commercial venture. Thus, make profitability as main aim of tactful operator rather than fulfilling social needs.
Lower income group will continuously be undeserved as premium/contribution are small in size. In addition the tactful operator has to bear the distribution cost as regulatory compliance cost. The issue here is whether there is still room to accommodate the need of the society if regulation that govern tactful as business still applies. IFS requires stricter Shari requirement as these are the foundation of tactful. Efforts in ensuring Shari compliance will increase operation costs. Therefore, in principal tactful will have to charge higher price compared to conventional.