Accounting, Auditing and Governance for Takaful Operations

Sheila Nu Nu Htay, Mohamed Arif, Younes Soualhi, Hanna Rabittah Zaharin, Ibrahim Shaugee

• Publisher: Wiley
• Year: 2012
• Print ISBN: 9781118503959
• eBook ISBN: 9781118503966
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Finanzas

A comprehensive guide to current issues and practices in governance for Takaful and re-Takaful operations

As the global demand for Islamic insurance products increases, a thorough understanding of Takaful principles is vital for accountants, auditors, and leaders of companies offering these products. This book covers the basic accounting principles and practices of Takaful operations, including the segregation of assets, liabilities, income, and expenditures between the Takaful operator and participants; the setting aside of cash reserves for meeting outstanding claims and future claims; and the management of revenue and expenditure. Featuring extensive case studies from real-world situations, this book is the perfect primer for accounting students and practitioners unfamiliar with Islamic finance and Takaful operations.

• Written by experts from the International Islamic University Malaysia, the leading organisation in research in Islamic finance
• Covers all the major accounting principles and practices
• Based on real-world experience and packed with illustrative case studies

For practicing accountants and business leaders, this book offers a thorough education in Takaful operations while also serving as an excellent guide for undergraduate students and researchers.

CHAPTER 1

Introduction to Takaful and Retakaful

Learning Outcomes

After reading this chapter, you will have:

1 A basic understanding of the history and development of insurance (conventional insurance) and takaful as well as an awareness of the differences between these two concepts.

2 An understanding of Shariah, the legal and regulatory framework behind takaful, including Shariah principles, legal requirements, and regulatory agencies.

3 Knowledge of the basic takaful models being practised around the world.

Introduction

Although this book is mainly aimed at explaining the accounting treatment for takaful operators, it is important for readers to acquire a basic understanding of the history and principles behind takaful operations in order to fully appreciate the setup of takaful operators. For this reason, Chapter 1 provides a brief history of insurance and takaful as well as a brief look at the principles behind takaful.

History of Insurance and Takaful

History of Insurance (Conventional Insurance)

Conceptually, insurance is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss from one entity to another in exchange for a premium and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating, loss. An insurer is a company selling the insurance; an insured or policyholder is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium.

Historically, the Chinese and Babylonian traders practised the early methods of transferring or distributing risk as long ago as the third and second millennia b.c., respectively. A thousand years later, the inhabitants of Rhodes invented the concept of the “general average.” “Merchants whose goods were being shipped together would pay a proportionally divided premium which would be used to reimburse any merchant whose goods were jettisoned during storm or sinkage.”1 The Greeks and Romans introduced the origins of health and life insurance around 600 a.d. when they organised guilds called “benevolent societies,” which cared for the families and paid funeral expenses of members upon death. Before insurance was established in the late seventeenth century, “friendly societies” existed in England, in which people donated money to a general sum that could be used for emergencies. The devastating effects of the Great Fire of London in 1666 (which destroyed more than 13,000 houses) converted the development of insurance “from a matter of convenience into one of urgency.”2

And modern insurance can be traced back to its beginnings in the 1600s, when British merchants and ship owners began to meet at a coffeehouse near Lombard Street in London, called Lloyd’s, where they made an agreement to mutually share in the profits and losses of sea voyages (Fisher, 2009). It became the meeting place for parties wishing to insure cargoes and ships and those willing to underwrite such ventures. Today, Lloyd’s of London remains the leading market for marine and other specialist types of insurance. And risk management has evolved as a discrete field of study and practise in the appraising and controlling of risk.

History of Takaful (Islamic Insurance)

Takaful is derived from the Arabic word kafalah, which is a pact that guarantees individuals in a group against loss or damage sustained by anyone of them. It is also described as guaranteeing each other or joint guarantee, which encompasses the elements of shared responsibility, joint indemnity, common interest, and solidarity. Muslim jurists conclude that insurance in Islam should be based on principles of mutuality and cooperation. Hence, Islamic insurance or takaful is a concept of mutual cooperation to guarantee mutual protection of the members. Anchoring the takaful system is tabarru’, which means “donation, gift, or contribution” to be made to the community risk pool. This defined fund makes takaful free from uncertainty and gambling. The purpose of this system is not to generate profits but to uphold the principle of “bear ye one another’s burden.” The principles of takaful are summarised as follows: (i) As a cooperative insurance, members (certificate holders or participants) contribute a certain sum of money to a common pool so as to cooperate among themselves for a common good; (ii) Every certificate holder pays his subscription with the intention of helping those that need assistance; (iii) Losses are divided and liabilities spread according to the community pooling system; (iv) Uncertainty or gharar is eliminated in respect to subscription and compensation; and (v) It does not derive advantage at the expense of others. The objective of takaful is to pay a “defined loss” from a “defined fund.”

Takaful was established in the early second century of the Islamic era when Muslim Arabs expanding trade into Asia and other continents mutually agreed to contribute to a fund to cover or compensate anyone in the group who suffered losses through any mishap such as robberies or piracy during the numerous sea voyages. The concept of marine insurance had its humble beginnings in this mutual help for those who faced the risk of loss on treacherous sea voyages. In fact, mutual insurance had evolved much earlier under the ancient system of aqila as practised by Arabs of Mecca and Medina. It was based on shared responsibility where payment of blood money or diyyah had to be made by the paternal relatives of the slayer as compensation. The doctrine of aqila was approved by the Holy Prophet (SAWS) in a dispute between two women from the tribe of Huzail, which gave continuity to the culture of mutual cooperation and was applied in takaful.

The development of takaful in modern times was initially undertaken in Sudan in 1979 followed by Malaysia in 1984. The Malaysian National Fatwa committee determined that conventional insurance is haram due to the presence of the elements of gharar (excessive uncertainty), riba (interest), and maisir (gambling). A special task force was formed by the government to look into the viability of setting up an Islamic insurance company. Following its recommendations, the first takaful operator (Syarikat Takaful Malaysia Sdn. Bhd.) was incorporated to meet the needs of its Muslim population for a Shariah-compliant alternative to conventional insurance in Malaysia. It commenced operation in 1985. The year before, Malaysia gazetted its Takaful Act 1984. Several takaful operators emerged in the early 1990s providing a healthy competition and cooperation among players in this industry. In the early 2000s, the Financial Sector Master Plan (FSMP) was implemented to enhance the capacity of takaful operators in Malaysia as well as to strengthen the legal, Shariah, and regulatory framework to ensure sustainability of the takaful industry.

As of 2011 there are 10 licensed takaful operators in Malaysia:

1. AIA AFG Takaful Bhd. (foreign)

2. CIMB Aviva Takaful Bhd. (local)

3. Etiqa Takaful Bhd. (local)

4. Great Eastern Takaful Sdn. Bhd. (local)

5. Hong Leong Tokio Marine Takaful Bhd. (local)

6. HSBC Amanah Takaful (M’sia) Sdn. Bhd. (local)

7. MAA Takaful Bhd. (local)

8. Prudential BSN Takaful Bhd. (local)

9. Syarikat Takaful M’sia Bhd. (local)

10. Takaful Ikhlas Sdn. Bhd. (local)

Differences between Takaful and Conventional Insurance

Risk Management under Islam

Although Muslims believe in predestination as “only God knows one’s future and faith,” there is a hadith that sends a strong message to Muslims that they should put in effort to reduce the risk of loss before leaving it to God:

Prophet Muhammad (SAWS) asked a Bedouin who had left his camel untied, “Why do you not tie your camel?” The Bedouin answered, “I put my trust in God.” The Prophet then said, “Tie up your camel first then put your trust in God.”

(Narrated by Al-Tirmidhi and Ibn Majah, Book 6...

Table of contents

• Cover
• Contents
• Title
• Copyright
• Foreword
• Preface
• Acknowledgments
• Chapter 1: Introduction to Takaful and Retakaful
• Chapter 2: Takaful Companies and Their Accounting Environment
• Chapter 3: Prevailing Accounting Standards and Accounting Entries for Takaful Operators
• Chapter 4: Financial Statement Analysis
• Chapter 5: Zakat Computation and Distribution for Takaful and Retakaful Companies
• Chapter 6: Auditing and Governance for Takaful Operators
• Appendix 1: Sample Audit Proposal
• Appendix 2: Audit Plan Timeline
• Appendix 3: Audit Program
• Appendix 4: Report on Shariah Compliance Audit for Takaful X Sdn. Bhd. as of 31 March 2011
• About the Authors
• Index