These are not unprecedented times. Yes, you heard me right.
For those who are wondering why I say this – and especially for those tired of the overused phrase – let me explain in the words of Stephen Covey, who said: “If there’s one thing that’s certain in business, it’s uncertainty.”
While no one could have predicted the breadth of the devastation to lives and livelihoods caused by the pandemic, much less prepare for it, we aren’t strangers to disasters or disruptions either.
Hurricanes, wildfires and floods around the world cost hundreds of lives and billions of dollars last year. Closer to home, escalating tensions in the Gulf aren’t new - markets have also felt the impact of missile strikes in Iraq, drone strikes in Saudi Arabia, and the seismic shock in oil prices over the past year.
Isn’t some level of uncertainty to be expected?
COVID-19’s impact on the economy and society is still rapidly evolving, but there is no doubt the effects will be severe, underlining the critical value of ensuring safety and protecting livelihoods.
Let’s get the cover
Suitable insurance cover is an obvious but often ignored way of mitigating many of the risks and coping with the circumstances people found themselves in during the outbreak. And if there’s one thing the virus has taught everyone, it’s that healthcare and life insurance simply cannot be overlooked.
But when seeking a suitable provider, it is important to understand both the long-term benefits and structures of different types of insurance products.
For example, the operational principles of the Islamic insurance industry, or takaful, place more emphasis on the principle of help as compared to conventional insurance products.
Based on principles of mutuality, the Sharia model focuses on shared responsibility, joint indemnity, common interest and solidarity. Takaful works on the premise that all human activities are subject to risk of loss from unforeseen events. (Takaful originates from the word ‘Kafalah’, which means “guaranteeing each other” or a “joint guarantee”.)
Clear demarcation
Takaful policy holders put money in a common pool of fund claims and benefit if the pool is left in surplus, similar to mutual insurance but with a clear segregation of the assets owned by policy holders and those owned by the insurer.
The key differences between takaful and conventional insurance is that takaful is a risk-sharing (cooperative model) whereas conventional insurance is a risk transfer model. The takaful insurance company manages the risk on behalf of policyholders but does not transfer the risk to itself.
Handling operational risks
In conventional insurance, the insurance vendor takes on the risk in return for premiums. The policyholders take on the risk of the liquidity and solvency of the conventional insurer to pay the policyholder in the event of a claim.
In addition, if the takaful fund goes into a deficit to pay the claims, the operator finances the deficit by way of “Qard Hassan” (zero interest loan). These loans are repaid from future surpluses that arise from the fund, and in some cases forgiven by the operator if the takaful fund does not generate a surplus. The takaful concept prioritizes policyholder payments over the takaful provider’s equity capital.
Insurance, especially amid volatile market conditions and public health concerns, has become a necessity. There is increasing demand for a Sharia-compliant insurance system among the ethically minded because Islamic principles put strong emphasis on the economic, ethical, moral and social dimensions, to enhance equality and fairness for the good of society as a whole.
The Takaful market is expected to grow to $40 billion by 2023 from $19 billion in 2017, with the largest segment being the life and family market. In addition to the compliance with the principles of Sharia, cooperative insurance as a concept is gaining popularity across the world.
Recently, Lemonade Inc. went public on NYSE to a successful listing. Lemonade offers its policyholders an option to select a non-profit or charity to receive annual payout from the unclaimed premiums of their cohort. The Lemonade model is similar to the cooperative insurance model followed by takaful insurance providers.
With more than $12 trillion of negative-yielding debt worldwide, insurers with exposure to developed market policyholders may be forced to take additional risks to generate a higher return to meet their future insurance obligations. With increased life expectancy and population de-growth in the developed world, global insurers may not be able to replace their inflows at the same rate as before.
Policyholders should be mindful of the risk and benefits of different product types and structures before making an important long-term decision designed to protect themselves and their loved ones.
- Ajit Joshi is Head of Public & Private Markets at Shuaa Capital.
