Takaful

• Surah Yusuf Verse 67: '"O my sons, do not enter from one door; enter through separate doors. However, I cannot save you from anything that is predetermined by Allah. To Allah belongs all judgment. I trust in Him, and in Him shall all the trusting put their trust."'
• Risk


  • Chance
  • Peril
  • Hazard
• Risk


  • Uncertainty about financial loss from an exposure
• Permissible risk


  Muslim jurists developed a legal maxim "al-ghunm bil-ghurm" or "gain is justified with risk" or "entitlement to profit is accompanied by responsibility for attendant expenses and possible loss."
• Prophet (s.a.w): '"[Entitlement to] profit is dependent on responsibility [for attendant expenses and possible loss and defects]."'
• Non-Permissible risk


  Jurists link this risk to the element of excessive uncertainty, gharar caused by elements of gambling (maysir), which is a zero-sum game forbidden by the Shariah.
• Aspects in which gharar may occur

  • Uncertainty or risk related to existence
  • Uncertainty or risk related to taking ownership
  • Uncertainty or risk related to quantity
  • Uncertainty or risk related to quality
  • Uncertainty or risk related to the time of payment
• Manageable risk


  • The instrument or approach used to manage risk must not contravene the Shariah principle of al-ghunm bil-ghurm
  • The instrument employed to manage this risk does not involve excessive ambiguity (gharar)
  • The instrument or approach to be used must comply with Shariah principles and only be used to avoid or manage risk allowed by Shariah

  
• Risk Management


  • A decision making process involving the identification and assessment of risk
  • All activities performed within a business or by an individual to identify, assess and control the uncertainties
  • A systematic approach in setting the best way of action under uncertainty
• Risk Management in Takaful Industry

  • Process to identify LOSS EXPOSURES faced by an Operator and to select the most appropriate techniques for treating such exposures
• Key areas of risk management in Takaful

  • Shariah Compliance
  • Investment Management
  • Human Resources
• Key Objectives of Risk Management Specific to Takaful

  • Quality underwriting & Shariah compliance
  • Prudent investment management
  • Quality human resources
  • Meet claims & expenses
  • Grow lifelong savings
  • Generate profitable returns
• Processes in Risk Management

  • Identification of risk
  • Evaluation of risk
  • Development of risk management plan
  • Implementation of risk management plan
  • Review and monitoring of risk management plan
• Classes of risk or loss exposures

  • Property
  • Liability
  • Personal
• Frequency


  The number of potential occurrence of loss within a certain period of time
• Severity


  Refers to the magnitude of the losses
• Risk Management Techniques


  • Risk Avoidance
  • Risk Control (Loss prevention, Loss reduction)
  • Risk Retention (Active retention, Passive retention)
  • Risk Transfer (Insurance transfer, Non insurance transfer)
• The processes must comply with shariah principles
• Risk Sharing


  • Should be based on three elements: Belief (I'tiqadiyyah), Dealings ('Amaliyyah), Morality (Akhlaqiyyah)
• Categories of Risk


  • Enterprise Risks
  • Pure Risk vs Speculative Risk
  • Fundamental Risk vs Particular Risk
• Types of Pure Risk

  • Personal (Risk of premature death, Risk of poor health, Risk of unemployment, Risk of longevity)
  • Property
  • Liability
• Enterprise Risks


  • Strategic Risk
  • Operational Risk
  • Financial Risk
• Fundamental Risk


  • A risk when it occurs, the whole society or a large number of people within the economy is affected
• Particular Risk


  • A risk which when it occurs, only individuals and not the entire community are affected
• Benefits of Effective Risk Management

  • Shariah Compliance
  • Protection of participants' interests
  • Prudent investment management
  • Profitability
  • Sustainability
  • Reputation
• Risk


  Possibility of loss or injury
• Types of Risk


  • Pure Risk
  • Speculative Risk
• Pure Risk


  • Loss
  • No Gain
• Pure Risk


  • Risk of damage to property and even human lives resulting from a fire, lightning, flood or other natural disasters, death
• Speculative Risk


  • Loss
  • No Loss
  • Profit/Gain
• Speculative Risk


  • Investments in the stock market, price movements of foreign currencies, agricultural & other commodities
• Types of Pure Risk

  • Personal
  • Property
  • Liability
• Fundamental Risk


  A risk when it occurs, the whole society or a large number of people within the economy is affected
• Particular Risk


  A risk which when it occurs, only individuals and not the entire community are affected
• Categories of Risk


  • Strategic Risk
  • Operational Risk
  • Financial Risk
  • Enterprise Risk
• Enterprise Risk


  Refer to all major risks faced by a company/firm
• Benefits of Effective Risk Management

  • Shariah Compliance
  • Protection of participants' Funds
  • Fair and equitable distribution of surplus
  • Ensuring that all activities are in accordance with shariah

  
• Shariah Compliance


  Ensures that funds are prudently managed and invested, minimizing the financial losses
• Fair and equitable distribution of surplus


  Surpluses are distributed based on a pre-agreed ratio
• Benefits of Effective Risk Management

  • Financial stability of takaful operators
  • Enhanced takaful governance
  • Market confidence and credibility