Insurance ordinance 2000

The President of Pakistan had promulgated the Insurance Ordinance, 2000 on

19th August 2000 repealing the Insurance Act 1938. The objectives of this
ordinance are said to be:

* To regulate the business of the Insurance industry.

* To ensure the protection of the interest of insurance policyholders.
* To promote sound development of the insurance industry.

The new ordinance has divided life insurance business and non life insurance
business into following classes:

LIFE INSURANCE BUSINESS:

1. Ordinary Life Business.

2. Capital Redemption Business.
3. Pension Fund Business.
4. Accident and Health Business.

NON-LIFE INSURANCE BUSINESS:

1. Fire and Property Damage Business.

2. Marine, Aviation and Transport Business.
3. Motor Third Party Compulsory Business.
4. Liability Business.
5. Worker’s Compensation Business.
6. Credit and Surety-ship Business.
7. Accident and Health Business.
8. Agriculture Insurance including Corp, Insurance.
9. Miscellaneous Business.
A public company or a body corporate can start insurance business in Pakistan.
A certificate of registration as insurer will be obtained within six months for life
business and non-life business separately. The registered insurer will meet the
requirements of minimum paid up capital, statutory deposits, solvency,
requirements, and reinsurance: arrangement appointment of auditors and to
comply with Provisions of this Ordinance.

A registered insurer shall have to pay an annual supervision fee to SECP at the
rate of Rs. 1 per thousand of gross premium written in Pakistan during the
calendar year with a minimum of Rs. 100,000.

For sound and prudent management fit and proper persons with appropriate
experience and qualification will be employed to conduct their duties with due
diligence and skill. The minimum paid- up-capital required for registered insurer
is as under:

LIFE INSURANCE BUSINESS: (150 MILLION RUPEES).

1. 100 Million Rupees will be attained up to 31st December 2002.

2. 150 Million Rupees will be attained up to 31st December 2004.

NON-LIFE INSURANCE BUSINESS: ( 80 MILLION RUPEES).

1. 50 Million Rupees will be attained up to 31st December 2002.

2. 80 Million Rupees will be attained up to 31st December 2004.

Every insurer will maintain a minimum deposit equal to 10% of its Paid-Up-
Capital with State Bank of Pakistan. The deposit in excess of amount required
can be asked for with permission from SECP for refund.
 REINSURANCE ARRANGEMENTS

There are provisions for appointment of agents and brokers. The brokers should
have obtained license from the commission. The requirements of Paid-Up-
Capital, statutory deposit professional indemnity insurance and other matters are
to be prescribed by the Government for registration of brokers.

The Commission should license the persons acting as insurance surveyors. A

person can apply for a license after fulfilling the following conditions:

* The person is a company with a prescribed minimum share capital.

* The person carries professional indemnity liabilities.
* The person should be a member of the approved professional Association.
* The Person complies with the conditions to be prescribed.

In addition to Authorized the Commission will register surveying Officers

according to the prescribed procedure.

Special provisions have been laid down for protection of policyholder’s interest.
The Government of Pakistan will appoint the insurance Tribunal and the
Insurance Ombudsman. This Ordinance also provides for appointment of
administrator and winding-up of an insurer. The penalties for offence against the
Ordinance are also prescribed.

This ordinance has almost changed the insurance structure of Pakistan. Wide-
ranging powers have been granted to the Federal Government and SECP. This
will promote sound development of insurance industry. New types of insurance
will be introduced in the country like credit Insurance and Crop Insurance etc.
The culture of Insurance Broker will be introduced in the market. The small
insurance companies may amalgamate with large companies or those may be
converted into broker houses.
The formation of Insurance Rules and Regulations are necessary to implement
the Insurance ordinance 2000 in letter and spirit. The SECP has published in
Gazette of Pakistan a Draft Notification in February 2002 with the title of "Draft
Insurance Rules, 2002" for information of all persons likely to be affected and
notice has been given that these draft Rules shall be taken into consideration
after 30 days of its publication in the official Gazette. The SECP will consider any
objection or suggestion received from any person in respect of this draft before
expiry of the said period.

Draft Insurance Rules although have been prepared and hoped to be finalized
and implemented within a period of one month. However still the Insurance
Regulations are required to be made.

In the recent past the economic environment for trade and industry was sluggish,
unemployment was on rise, inflation and price spiral was soaring, exports were
stagnant, imports were rising and number of sick industries was shooting up. In
such conditions the stock markets of the country were not attracting investments
both foreign and local. So, it was difficult for insurance companies to generate
further capital.

On analysis of 39 insurance companies registered at Karachi Stock Exchange,

only 9 companies have the capital more than the amount required as per
Insurance Ordinance, 2000. There are other 22 companies, which have Paid-up
Capital as required for brokers. These companies can easily convert themselves
into brokerage houses or they can also make mergers.

However, now the economic environment of the country is changing. The foreign
exchange remittances have been increased and the exchange rates have been
stabilized. The sick industries are being revived through CIRC (corporate and
Industrial Restructuring Corporation). The public and private sectors are
expected to be involved in the reconstruction of Afghanistan. The Motorway and
other highway projects are being completed. The construction of the third seaport
at Gwadar has also been started. Foreign investments are also anticipated.
Takaful (Islamic Insurance):

Introduction:
Takaful business is still at its introductory stage whereby there were 60 Takaful
operators (including under windows) worldwide (in 23 countries). There is a huge
potential which must be explored by Muslims to take the advantage of this
opportunity. A lot of effort, studies, compromises to be endured and must be
undertaken to promote more Muslim participations in Takaful services. Business
Model e.g. Sales agency model which can result in quantum-leap growth should
be explored by scholars and put into practical applications to cover the needs of
various levels of society
Islamic scholars has began to agree on the viewpoint that Takaful is compliant to
Shariah principles, with various Shariah councils and Islamic Conferences
endorsing the Islamic values in the operation of Takaful

Main objections to conventional insurance:

As the concept of insurance did not exist in the time of the prophet, many
scholars are not in agreement whether insurance is permissible or prohibited in
Islam. While pro-insurance scholars agree that insurance provides protection
which is beneficial to the public, the Malaysian National Fatwa Council deemed
insurance, especially life insurance, as a Fasid practice which is prohibited
(Haram) as it contains elements of Gharar, Maisir and Riba’.

Takaful-- aims to resolve the following elements which exists in conventional

insurance.
Gharar – Gharar is defined as “uncertainty” where the results are hidden or not
known, and in an insurance contract, the uncertainty are as follows:
* Uncertainty in the outcome – The contract is deemed invalid as neither
the insurer nor the insured knows the outcome of the contract
* Uncertainty in the existence – The contract is deemed as invalid as the
insured do not know if there will be compensation as the outcome of the contract
is not known
* Uncertainty in the Results of the exchange – The contract is deemed
invalid as at the point the contract is made, the result of the exchange is still
uncertain.
* Uncertainty in Contract Period – The contract is deemed invalid as the
time frame of the contract is not known, especially in instances of life insurance.
Maisir: – Maisir is defined as “gambling” where in the context of insurance, the
benefit is derived on luck. If the mishap happened to the insured, the insurer
loses while if no mishap occurs, it is the insured that loses.

Riba: – Riba is explicitly prohibited in Islam. Generally, Riba is defined as

“interest” or “late payment” which is above the agreed payable sum of two similar
product i.e. gold against gold, silver against silver or, more appropriately in
modern times, money against money.
Definition of Takaful:
Takaful is a form of mutual assistance (Ta’awun) in furthering good virtues by
helping others who are in need or in hardship. It can also be further explained as
participants mutually contribute, as a donation, for the purpose of mutual
indemnity to other participants in cases of peril or harm.

The AAOIFI definition is as follows:

“Islamic insurance is a system through which the participants donate part or all of
their contributions which are used to pay claims for damages suffered by some of
the participants.”

Origins of Takaful:
The alternative to conventional insurance, Takaful, is based on the concept of
Ta’awun meaning mutual assistance. This concept pre-dates the Islamic era
when the rough model of Takaful was practiced by Arabic tribes, holding to the
principle of pooled resources to help the needy on a voluntary and gratuitous
basis. Among the examples of early Takaful were the merchant of Mecca pooling
funds for victims of natural disasters and assistance extended to families of
murder victims.

The concept of Takaful has also been incorporated in its earliest form in the
constitution of Medinah by the Prophet (PBUH) where social insurance by the
Jews, Christians and Ansars were introduced, the responsibility imposed among
the immigrants for their word, and the provision for ransom for the rescue of life
of a prisoner.

The concept of Takaful:

The principles of guarantee, derived from the word “Kafala”, is the basis of
Islamic insurance i.e. Takaful. Takaful means that the majority guarantees the
loss of the minority i.e. the majority shares the burden of the unfortunate minority
via the pooling of funds. This form of co-operative insurance is already in
existence in several countries, permissible by Shariah.
This principle is further enhanced to incorporate the concept of “Tabarru’”
meaning donation, which explicitly mentions that the money collected is to be
used for the purpose of assisting “fellow participants who require assistance
according to the terms agreed as long as these terms are not in conflict with the
Shariah”. Taking into account these basic Takaful concepts, practitioners have
taken the step further to expand the model into a more commercially viable
model of Takaful.
This model of Islamic Insurance follows closely the concept of cooperative
insurance, where a group of subscribers contribute to a pool of funds.Whenever
one of the members makes a legitimate claim, they draw money out of the pool.
In the meantime, the funds in the pool are invested in an Islamic manner and
without exposing the policy holders to any extra significant risk. Unclaimed profit
are then distributed among the policy holders.
Common terminologies used in the Takaful:
Terminology changes:

Life Insurance/ Life Assurance - Family Takaful

Policy - Certificate / Scheme
Premium - Contribution
Life Assured / Insured - Person Covered
Assured - Participant
Policyholder - Certificate Owner
Sum Assured - Sum Covered
Insurance Charge/Fee - Contribution
Payer - Contributor
Life Proposed - Person Proposed
Premium-Redirection- Contribution-Redirection
Policy Document - Participant’s Membership Document
First Premium Receipt - First Contribution Receipt
Premium Notice - Contribution

Key elements of Takaful:

A Takaful system of risk protection consists of the following elements:

* Sharia compliance in Takaful operations and investments

* Financial and Risk sharing under the principle of Shariah
* Contributions are in the form of Tabarru', or donations for mutual assistance to
the needy members of the group
* Application of ethics and full disclosure
Parties in a Takaful Contract:

A contract is made between two parties but a Takaful scheme involves:

* The Takaful Operator: Providing the service to the community.

* The participant: Who wishes to have cover against risk of suffering a financial
loss resulting from fire, accidents, burglary, death, etc.?
* Waqf: An endowment which is setup and collects all the contributions which
come from the participants.
Regulatory framework of Ttakaful in Pakistan

• Shari’ah Supervisory Board.

• Fatwa Archive.

• SECP Insurance Rule2002

• Takaful Act 1984-Malaysia

• Takaful Rules 2005

• Insurance Ordinance 2000

• Security Exchange Commission of Pakistan, 1997

• Companies Ordinance 1984

Controversies and Refutation in Takaful:
Prominent writer, Prof Dr Mohd Ma’sum Billah, in his writing on ulama
acceptance to the concept of Takaful, has categorized ulamas broadly into three
categories in respect of their stand on the validity of insurance:

• Those that rejects insurance entirely;

• Those that accepts general insurance but rejects life insurance; and
• Those that accept insurance so long as they are in conformity with
Shariah.
• There is an element of betting involved i.e. the participants hopes for
material gain from his contribution
• There are elements of uncertainties or Gharar
• There are elements of gambling (Maisir)
• There are elements of Riba
• There is no justification for insurance from the Quran or Sunnah
• Insurance is contrary to Tawakkul i.e. putting one’s trust in others instead
of Allah (S.W.T.)
• There are claims that life insurance means to ensure one’s life against
death
• There are some contradiction to the concept of Wasiyah (bequest) and
Mirath (inheritance)
• The Islamic insurance does not contain Riba but is based on the concept
of al-Mudharabah which basically means profit sharing
• Life insurance is not meant to determinate one’s life expectancy, or to
promote the idea that participants are protecting his/her life, rather the
participants and the insurance operator work hand in hand to provide for
unexpected calamities, which is allowed in Islam.
• There is no element of gambling (Maisir) in insurance. In gambling, the
gambler hopes to gain materially at the expense of other co-gamblers
whereas in insurance co-operation is emphasized for the benefits of all
parties involved.
 • There are no uncertainties or Gharar in insurance as the insurance
contract is definite and certain.
• In response to claims that there is no divine justification for insurance per
se, the author has pointed out provisions in the Quran as well as Sunnah
on the concept of co-operation and concept of Al-Mudharabah financing

Prof. Dr. Ma’sum Billah further augmented his arguments on the validity of
Islamic insurance by pointing out that the foundation of Islamic insurance is
derived from the Arab custom (“urf”) of Al-Aqila. So long as the urf does not
contravene any provisions in the Quran or Sunnah, the urf is permissible.
Islamic Insurance is also based amongst others on the doctrine of (Masalih al-
Mursalah) or public interest. The primary purpose is to lessen the burden of
members of the community caused by the occurrence of certain loss or damage.
The Holy Prophet (S.A.W.) said
The basic notion of Takaful is to provide an avenue to share responsibility,
solidarity and mutual cooperation to safeguards participants against a defined
risk. Based on this, Shariah ruling that came to support the concept of Takaful
placed the following conditions which must be adhered to:

* Takaful doesn’t protect, but ensures financial security.

* The concept of shared responsibility, mutual cooperation and solidarity makes it
more significant compared to conventional insurance
* Takaful transaction is free from element of uncertainty, unjust enrichment, riba,
all of which makes Takaful invalid.
Concepts of beneficiaries in Takaful:
Beneficiary in a policy is usually determined on the test of whether the person
has an insurable interest on the subject matter. This is determined under the
following principles:
1. Al Milkiyah (ownership)
2. Al Mirath (inheritance)
3. Al Wasiyah (bequest)

Under Takaful, the benefits of the policy are the sole ownership (Al Milkiyah) of
the policyholder

After death, the principle of sole ownership remains true but the benefits of the
policyholder is moved to the beneficiaries of the properties left by the
policyholder, as follows:

* the total benefits are calculated together with other wealth held by the
policyholder while he/she is alive, except in instances of waqaf (charitable trust).
Under waqaf, the property becomes the ownership of Allah and no longer
belongs to an individual.
* the total wealth is used to pay off any outstanding debts by the policyholder as
debts to other individuals is considered as “debt to creatures”, which needs to be
settled immediately
* the surplus is to be used to pay off any funeral expenses, which should be
separated from the distributable surplus

With the distributable surplus, the distribution will be made according to the
principles of bequest (Al Wasiyah) and inheritance (Al Mirath) respectively.
* Al Wasiyah:
Of the surplus properties, only up to 1/3 of the surplus can given away via a “will”.
This is to reduce the possibility of injustice where the policyholder, while is the full
owner of the benefits of the policy when alive, may choose to “will away” the
whole surplus properties to third parties or in favour of certain heirs and not in
favour of the policyholders rightful heirs. Therefore, under Islamic law, only 1/3
can be given away as per policyholder’s bequest.

* Al Mirath:
After deduction for payment of debt, funeral expenses and execution of the
policyholder’s will, the remaining property is to be distributed to the living heirs
according to Islamic law, based on the pre-determined share, guided by the
provisions in the Quran.

Types of Takaful Model:

Ta’awuni Model (Co-operative Insurance):

* Originating from Sudan and Saudi Arabia, this model emphasizes cooperation
where donors contribute to the fund, which is used to generate profits (in net
surplus situations after deduction of claims). The profits will be shared
accordingly between the operators and the contributor
* However, the profit to be distributed does not include deduction of expenses
(such as staff costs, establishment and administrative expenses) which means
the profit distributed to customers are actually “gross profits”. The expenses will
instead be deducted from the operators share of profit, which means the returns
to the operators is the net profit, after deduction of expenses.
Wakalah Model (Agency):
Wakalah is the contract of agency where the company appoints representative,
either full-time or part-time, to sell the Takaful product. The model operates as
follows:
* The agent is responsible to identify potential participants and disseminate
information regarding the product concept and policy to avoid misconceptions.
The agent can also collect the contribution on behalf of the company. The major
difference between a conventional insurance agency and a Takaful agency is
that in a conventional agency, the agent is only entitled to commissions whereas
a Takaful agency views its agents as employees of the company, thus entitled to
a salary.
* In this model, the expenses such as agent’s salary will be deducted upfront
from the Takaful pool of funds. The net funds (underwriting surplus) will be used
for investments and the profits will be distributed accordingly. This model is
applicable for both general Takaful and family Takaful (with minor variation).

Tijari Model (Business):

* Commonly used in Malaysia, this model uses both the Pure Mudharabah and
Modified Mudharabah approach.
* The family Takaful portion of the business uses the Pure Mudharabah approach
where the participants are entitled to 100% of the surplus as no operational
expenses are deducted i,e, participants enjoy the gross surplus of the funds.
* As for the general Takaful, the Modified Mudharabah approach is used where
deduction of expenses in taken into consideration, which will result in a more
expensive premium contribution from participants as to cover operational
expenses.
General Structure of Takaful Company:
A Takaful General Manager oversees 4 major departments i.e. Family Takaful,
General Takaful, Finance & Administration, and Marketing Division.

Life Takaful Division (Family Takaful):

Consist of two classes i.e. individual Takaful and group Takaful. Individual
Takaful protects the individual participants while a group Takaful protects an
individual and also his/her family or other groups from a defined risk. The
contribution paid will be divided into 2 distinct account with principles of
Mudharabah in one and Tabarru’ in the other.

General Takaful Division:

The operation of the contributions is managed by 3 different functions, defined as
underwriting, claim and re-Takaful. The various underwriting plans are grouped
into several main classes i.e. fire Takaful, motor Takaful, miscellaneous or
accident Takaful, and equipment all-risk Takaful

Finance & Administration Division:

The finance division is divided into 2 key parts i.e. “Investment” and “Account”.
For “Investment”, the division is responsible to invest the contribution paid by
participants to earn profits, which will be distributed to participants based on the
Mudharabah principle. For “Account”, the division manages the different
accounts in the company’s book such as Participant’s Account (PA) based on the
Mudharabah principle and the Participants’ Special Account (PSA) based on the
Tabarru’ concept.
The Administration division caters for other functions in the company such as
employees, business transactions and other matters, including reporting and
recording. Key factor in this division is trust (amanah) and well trained people

Marketing Division:
The company’s marketing division is responsible in planning the promotion of
Takaful products and services, either using agency or corporate promotion.

Claims:
The claims procedures falls under two categories which are payable or not
payable, and quantum. To determine whether a claim is payable, the following
are considered: whether the policy is enforced (expired or not); whether the risk
is covered; whether there is a warranty or limitations based on regulations and;
whether there is excess. To determine the quantum and avoid excess in claims,
the company considers whether the cover is adequate and whether it meets all
other conditions, such as self-insurance conditions.

Accounting Treatment:
Various companies use various accounting treatment such as cash-basis, actual
realised profit and accrual-basis. Although not widely acceptable, the accrual-
basis method is used by Takaful National in Malaysia based on estimates on the
quantum of cover.

Responses:
I think that conventional insurance and takaful are working in the same manner,
though Takaful restrict themselves from investment in riba but still for re
insurance they are approaching the same place as are going the conventional
operator. The employees of Takaful at upper level are all from conventional
insurance who join takaful mainly to get benefit of their worldly gain like higher
salary, higher position etc though then post themselves as Islamist but by heart
they are still the same. Further Takaful offer more monies to their agents like,
salary plus higher commission to grab more share of the market but to give
losses to the contributors (insurers). The main purpose of both takaful agent and
also for insurance agent is the same to grab the monies by motivating the
innocent people, and not to save the innocent people from possible hazards of
life. The actual tabarau and actual cooperation can only be achieved if the
Muslims are steadfast in paying their zakat regularly and in full and then by
contributing generously in any disaster and emergency. But alas! even in Islamic
countries business are making two balance sheets to prevent themselves to pay
themselves by paying compulsory zakat to the government and making three
balance sheets if are going to amagamate or affiliation with another foreign
entity. So at all fronts we are deceiving nobody but ourselves.