Need for Islamic Insurance in Saudi Arabia and the UK - Dissertation Example

?Introduction In the contemporary environment of fast changing socio-economic and political dynamics, insurance has become of the most important elements of reducing financial risks. It has greatly facilitated in improving the living standard of people across the globe. Insurance products provide people with a safety net against various financial risks in different areas of their life (Clarke, 2005; Thomson, 2001). Hence, insurance products are designed to cater to the widespread need of people that provides them with financial security to cope under crisis situation. Indeed in the current scenario of uncertainties and risks, both within and outside the home, insurance in various areas of business and personal domain has increasingly become critical part of improved lifestyle (Ward, 2000). But interestingly, while the concept of insurance is similar the format of insurance, especially the criteria of framework and regulation of insurance differs significantly in Islamic countries like Saudi Arabia and western countries like UK. In the recent times, Islamic insurance has rapidly emerged as one of the most popular and also a highly effective strategy to reduce financial risk of the individuals and the government as a whole (Anderson, 1976; Habshi & Othman, 1997; Ahmad, 1972). Indeed, the growth and penetration of Islamic insurance across the non Islamic countries has been seen as a positive trend in the insurance sector. The paper would therefore, be focusing on the question as to why should there be development of Islamic insurance in Saudi Arabia and UK? Meaning of Islamic Insurance Islamic insurance is mainly guided by Shariah or Islamic laws that forbid business based on unethical practices. Various products of insurance are strongly influenced by Shariah principles that prohibit gain through means like gambling, uncertainties or interest income (Mortuza, 1989; Ismail, 1997,98). Uncertainties are involved in life insurance as the outcome is unknown at the time of entering into contract and could vary. Gambling refers to gain of wealth under some defined conditions and interest income is unethical as it is not reward against hard work (Maysami, 1998; Sharif, 1997; Siddiqui, 1971). Thus, new concept of insurance emerged under ‘Takaful’ that worked within the precincts of Islamic laws. Islamic laws fundamentally rely on equitable distribution of wealth. Takaful is based on the ethical practices and is free from gambling, uncertainties and interest income (Ahmad, 2009: Anwar, 2008; and Saleh, 1986). It broadly refers to contributions made by individuals to be used in times of crisis or need. Rather than individuals, the family as a whole becomes the main beneficiary. Stagg-Massey (2007) state that Takaful has been taken from ‘kafal’ which is an Arabic word that means guaranteeing each other and taking care of each other’s needs. Thus, Takaful is a cooperative mechanism that promotes fair practice and spreads the risks and reduces financial loss suffered by an individual within the group. Need for Islamic insurance in Saudi Arabia and UK Middle East and African nations have lagged behind in insurance primarily because of the restraints imposed by religion and the prevalent poverty of the region. The development processes and growth have become major paradigms that necessitate insurance coverage. After 1970s, the discovery of oil and gases in the Gulf region has transformed the economy of the region. The large investment in the infrastructure and rapid growth in international trade has spurred the need for insurance amongst the working and non working population of the oil rich countries. Takaful not only facilitates the poor to survive with dignity under excruciating circumstances but also encourages ethical practices that are fair and justified (SAMA). Saudi Arabia being a leading Islamic nation is therefore morally bound to promote Takaful. In western countries like UK, insurance has fast transformed into major industry that is motivated by vested interests of making profit by exploiting the health and other needs of the individuals. Insurance, especially healthcare has increasingly become market driven and consumers or people decide what goods (health module) to buy and at what cost (Hardwick, 1997). The prices and the level of services become critical factors in the exchange of goods or the healthcare services. This adversely impacts the population that is not financially equipped to buy the best product for its health (Van der Noll, 2005). Thus, they are either left out of the mainstream population that is insured or is forced to compromise with its health. In the current environment of tough economic conditions, Islamic insurance or Takaful can provide UK government with the most attractive and viable option that would encourage wider penetration of insurance amongst the population that needs it most. Framework of insurance law and regulation in Saudi Arabia Saudi Arabia had initially no formal law of insurance but promoted Takaful through well defined regulations that allow foreign investment within the parameters of its Islamic principles (Asherman, 1982). In 1985, Takaful was a formally approved by Council of Islamic Scholars in Mecca as an alternative to traditional insurance system (Anwar, 2008; Al Bayan, 2006). In 2004, it started formulating legal structure for insurance sector in consultations with Islamic scholars. Saudi Arabian Monetary Authority or SAMA was developed as major agency that issues licenses to new insurance agencies and acts as regulatory body to supervise their work. The rules and regulations conforming to Islamic principles and land laws are important features of Islamic insurance within the country. The legal framework was necessary to protect the policyholders’ rights and the regulatory authority overseas the enforcement of law and regulation by various insurance firms. While in the recent times, foreign investment has become important part of development processes, role of Shariah remains an intrinsic part of Islamic insurance within Saudi Arabia (BMI, 2006). Framework of insurance law and regulation in UK After the ravages of WWII, UK had become a welfare state which is broadly defined as one that advocates social policy that would ensure ‘that everyone had employment and thus an income’ (Lovell, p8). The concept of social security system provides financial support when people are unable to support themselves. The insurance was thus initially a government sponsored program. With reforms mandate by successive governments, the insurance has now become a public-private partnership that derives its revenues from the market. The government acts as law enforcement agency and regulatory authority that ensures compliance of laws and regulation in the insurance sector. It has well defined insurance contract law where contract between the insurer and insured are drawn. The insurance products are evolved by evaluating the needs and requirements of the people and premiums or payments are decided as per the demands of the customer and the time period for which insurance is sought. Comparative analysis of insurance methods and insurance laws between Saudi Arabia and UK In Saudi Arabia, the insurance system under Islamic principles follows more holistic approach. SAMA is the major authority that ensures that insurance companies act as per Islamic insurance guidelines. It has explicit ethical structure and relies on contributions from the policyholders to a common risk pool (Ali, 2008: Fergusan, 2008; DiVanna, 2009). Any surplus/ profit or deficit/ loss is shared by the group members. Thus, profits or loss may vary. In case of emergency or crisis situation, the policyholder is entitled to the percentage of his contribution to the fund. Policyholder can also avail interest free loan. Another very important element of Islamic insurance is that its assets are always invested in instruments that are approved by shariah laws. The Islamic insurance also does not differentiate people and ensures that insurance risk is equally distributed to a wide range of people. In UK, on the other hand, Insurance Contract law is the major act that issues laws and regulations for insurance products. The individuals and companies can take up insurance in various areas like life insurance, health, cars, travel etc and have security against financial risks in case of crisis. The individuals are covered against predefined criteria and for fixed amount that cannot vary (Trebilcock, 1985). There is also no provision for interest free loan against insurance products. There is huge sense of philanthropy within Islamic insurance that is not present in conventional insurance package as prevalent in UK. The insurance industry is poorly disposed towards the underprivileged segment of society as its products are not always designed towards the needs and requirements of poor. There are primarily three major types of insurance contract between the policyholder and insurer or Takaful operator in Saudi Arabia (Manjoo, 2007; Tolefat, 2006). The Mudaraba model ensures that operator acts as mudarib or entrepreneur and policyholder or participant is capital provider. As entrepreneur, the operator decides on investment process and sharing of profit but loss is solely borne by participant and operator does not get any compensation. In Wakala model, operator gets a fixed fee and runs the Takaful fund as agent. Third model combines Mudaraba and Wakala models where underwriting is done as per Wakala models and Takaful funds are invested under Mudaraba model. IN UK, there is common contract law approved by the law and insurance are sold by agents who works on behalf of the insurance companies. The insurance agencies are regulated and supervised by the DTI and HM Treasury which has now been done by the FSA (HMRC). The underwriting for the insurance products are done by experts which are then used for setting premiums for various insurance products. Thus, risk coverage depends on the amount of risk, policyholder wishes to undertake while buying insurance products. There is uniformity in the premiums and loss is not shared by the insurer. Disclosure of all relevant information is desired in all insurance products which is not pre-requisite for Islamic insurance. Conclusion Insurance is cornerstone of all development processes. Thus, development of Islamic insurance in Saudi Arabia and UK is desirable for two key reasons: it provides people from all demographic segments a fair and equity based risk coverage. Islamic insurance has become attractive proposition for Muslim and non-Muslim population mainly because it is ethically delivered and spreads equally across people from different segment. Saudi Arabia is predominantly an Islamic state and a large part of its population is still not covered under any insurance program. Thus, introduction of Islamic insurance would enhance their security against any financial risk. In UK, the increasing population of Muslims is strong reason for marketing Islamic insurance as it not has religious sanctity but low premiums become critical elements of buying decisions. 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