Introduction

The purpose of this chapter is to reflect upon opportunities available to takaful operators 1 to think out of the box and leverage their unique strength to offer something above that offered by conventional insurers. Some of the concepts discussed below, although unconventional, are put forward on the assumption that there are customers who expect more than the usual material benefits. It is important to understand that, to some customers, spiritual benefits can be as important if not more important in their buying decision.

Background

The first takaful operator in Malaysia was established in 1985 following the recommendation by ‘Badan Petugas Khas’ (BPK), the special taskforce commissioned by the Government in 1982 to study the feasibility of setting up Islamic insurance in the country. The provision of a separate legal framework to regulate the takaful business in the country was also recommended. The Malaysian parliament legislated the Takaful Act 1984 2 for this very purpose. This is one example of the Malaysian government’s response to a number of demands from faithful Muslims who prefer to conduct their economic activities according to Shari’a principles.

The demand for takaful is a clear indication that conventional insurance is not able to serve the spiritual needs of Muslim customers. This provides opportunities for takaful operators to fill the spiritual gap and have competitive advantage over their conventional counterparts.

Having said that, it must be clarified at the outset that this does not mean takaful is exclusively for Muslims. People of all faiths are eligible to join.

Shari’a compliance

Whilst conventional insurance and takaful may have a number of practices that are similar, the Shari’a law also contains fundament principles which need to be observed. To ensure this is correctly applied, the Takaful Act 1984 makes it mandatory for each licensed takaful operator in Malaysia to be supervised by a Shari’a Committee comprising approved Shari’a scholars. Muslims who are conscious of their religious obligations derive comfort from such an assurance and consider this as an important factor in their buying decision.

Indeed Shari’a compliance was the main value proposition that takaful operators relied upon from the very beginning.

Surplus sharing

Another value proposition upon which takaful operators in Malaysia leverage is the practice of surplus sharing. At time of writing, all takaful operators in Malaysia, irrespective of whether they practice under the mudharaba or wakalah models, offer to share the net surplus of income over liabilities in the takaful funds according to a pre-agreed ratio such as 50:50, 40:60 or the like. The prospect of receiving a refund is an attractive value proposition to many customers, irrespective of faith. Since conventional insurers in Malaysia do not offer this, many Malaysians assume that surplus sharing is a feature unique to takaful .

However after 20 years, customers tend to take these two features for granted and expect all takaful operators to offer them refunds and Shari’a compliance as a matter of course. With competition becoming more intense, takaful operators can no longer rely on these two features as the only value proposition. Muslim customers expect takaful operators to offer the same benefits as conventional insurers, yet remaining Shari’a compliant. Such high expectations cannot be avoided in Malaysia as the country operates a dual financial system where both Islamic and conventional financial institutions battle head on in a highly competitive environment.

To compete successfully, takaful operators need to differentiate by offering value-added services that conventional insurance cannot. The key is to understand the needs, behaviour and preferences of the targeted customers from their perspective, and not that of the takaful operators. Only when these are fully understood can takaful operators strive to innovate and achieve greater customer satisfaction.

Differentiation strategy

According to conventional wisdom, innovation is usually limited to fulfilling customer’s material or worldly needs with benefits such as lower prices, higher returns, faster delivery, wider scope and the like. Spiritual needs, which can be as important to certain customers, do not receive a lot of attention.

It is believed that the spiritual dimension of takaful is one area where takaful operators have unique abilities on which they can leverage to delight a certain customer group. Herein lie opportunities for takaful operators to innovate. This does not mean that the so-called material benefits are not important to takaful customers. In fact they are just as important. This chapter, however, focuses on meeting the spiritual needs of takaful customers and potential customers.

The following paragraphs highlight some unconventional ideas on innovation on which takaful operators can leverage to achieve a competitive advantage over conventional insurance.

Some of these ideas are founded on the belief that people would ‘feel good’ (and thus, derive value) while helping those in dire financial need.

Critical to this discussion is the fundamental difference between conventional insurance and takaful . Understanding this is necessary to enable readers to follow, even if they do not agree, with the thoughts put forward in this chapter with respect to innovation in the takaful arena.

The fundamental difference between takaful and

conventional insurance

At first glance there does not appear to be considerable difference between insurance and takaful as both use the concept of the common pool where the fortunate many help the unfortunate few. However, Shari’a scholars are generally of the opinion that for insurance to be Shari’a compliant, the premium must be paid on the basis of tabarru’ (an Arabic word meaning donation, gift or contribution).

In the BPK report, for example, it was recommended that for insurance to be permissible according to the Shari’a , part of the contribution (premium) must be made on the basis of tabarru’ . The following is an English translation of the relevant paragraph of the BPK report:

“Under the Islamic insurance system, part of the contributions from every participant must be made with the intention of tabarru’ – not for buying/selling, the existence of tabarru’ , makes the transaction permissible and valid according to the Shari’a .” ’3

This is consistent with the view of a contemporary Muslim Scholar, Dr. Yusuf al-Qaradawi who also suggests that donation should be the basis of the contract, if insurance is to be Shari’a compliant.

“In my view, insurance against hazards can be modified in a manner which would bring it closer to the Islamic principle by means of a contract of donation with a condition of compensation. The insured would donate his payments to the company with the stipulation that the company would compensate him, in the event that he is struck by calamity, with an amount which would assist him and reduce the burden of his loss. Such a type of transaction is allowed in some Islamic schools of jurisprudence.”

In view of the above, it is reasonable to conclude that the fundamental difference between takaful and insurance boils down to the fact that the premium must be paid on the basis of tabarru’ (contribution).

In practice, all takaful operators in Malaysia clearly mention the term tabarru’ in their proposal forms 5 as the basis for the payment of the premium (or contribution). By agreeing to tabarru’ or donate part of their contribution, participants in various takaful schemes agree to cooperate and be mutually responsible to help one another should a member suffer a defined loss.

This is in harmony with the definition of takaful in Section 2 of the Takaful Act 1984 which describes takaful as:

‘a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose.’

From the above definition, it is clear that the basic aim of takaful is to provide mutual financial aid to participants who have contributed to a common pool called the takaful fund. Participants who suffer a loss that is defined in the policy ( takaful certificate) are entitled to claim for financial aid from the takaful fund in a kind of co-operative scheme.

On the assumption that people are generally charitable and have the natural tendency to help fellow human beings in need of aid, takaful operators have ample opportunities to leverage on the tabarru’ factor. If done innovatively, this could bring about a more positive attitude towards takaful in comparison to conventional insurance. First, let us consider how it is that tabarru’ has the potential to solve a common criticism levied against conventional insurance relating to the intangible nature of the insurance product.

The intangibility of the insurance product

The concept of insurance is sometimes described as a social device where the fortunate many help the unfortunate few, as does takaful . However, unlike takaful , this spirit of mutual help is no longer apparent in the commercial insurance contract. The commercial insurance transaction today is based on a contract of exchange whereby customers pay the premium in exchange for a promise by the insurer to pay financial compensation should a loss as defined in the policy occur. The technical definition is:

“An agreement whereby one party, the Insurer, in return for a consideration, the premium, undertakes to pay to the other party, the Insured, a sum of money or its equivalent in kind on the happening of a specified event, which is contrary to the Insured’s financial interest.” 6

However, it is fairly common to hear customers who did not suffer any loss i.e. the fortunate many, complain that they receive ‘nothing’ tangible from the transaction and have ‘lost’ the premium to the insurer. From their perspective, only the unfortunate few receive tangible benefits in terms of compensation as the result of a claim. In other words, no exchange had taken place as far as the majority of those insured are concerned. The fact that insurance had given them security (in the form of a promise of compensation) is so intangible that many of them cannot appreciate its value. This criticism, although not quite correct, must still be respected as value or the lack thereof is judged (rightly or wrongly) from the perception of the customers.

Takaful on the other hand is not a contract of exchange. Instead of buying a promise based on an event that may or may not happen, takaful customers make a contribution to a common pool on the basis of tabarru ’ (donation), with the intention ( niah ) to participate in a mutual aid scheme. The feeling of ‘getting nothing’ even if no claim occurs is less likely to arise. Instead, participants who understand the concept of takaful would derive satisfaction from having helped fellow members and at the same time feel grateful that no loss had befallen them.

The cooperative nature of takaful provides some opportunities for takaful operators to make the intangible more tangible thereby achieving an even deeper and meaningful relationship with customers (including the fortunate many) in comparison to conventional insurance. As an alternative to conventional insurance, takaful has the potential to provide greater satisfaction to customers who care for the well being of fellow human beings.

Good deeds as a value proposition

Tabarru’ or donation can be an attractive value proposition to people, provided the concept is properly explained at the outset. If this is done properly, participants can appreciate the fact that their contribution would be used to help other participants who have suffered a loss as defined in the takaful contract. We can see this from the example of how people of different faiths generously responded to calls for donations following an earthquake, hurricane, tsunami and the like. The difference is that in those incidences, the donations were only collected after the tragedy had occurred. Under the takaful concept however, contributions are collected in an orderly fashion before the occurrence of the tragedy.

This would be especially meaningful to Muslims who believe that helping those in need with the sincere intention of seeking the pleasure of Allah is deemed an act of piety in Islam. This spirit of helping one another is enjoined upon Muslims as can be seen from a number of Quranic verses and Hadith or sayings of the Prophet Muhammad (PBUH) such as:

‘Help one another in furthering virtue and God-consciousness (taqwa), and do not help one another in furthering evil and enmity.’ (Surah Al-Maidah verse: 2)

‘Verily a believer is one who can give security and protection to the life and property of mankind.’ ( Hadith reported by Ibnu Majah)

The challenge to takaful practitioners is to make participants relate doing good deeds to the worldly act of buying takaful . In the following paragraphs it can be seen what other opportunities exist in which takaful operators can endeavour to innovate.

More unconventional ideas for innovation

We sometimes hear the slogan that ‘life insurance is for the living’, meaning that it is the living family members who would benefit from the life insurance cover taken out by the deceased. However, for takaful versions of life insurance, it is not just the living that can benefit but also the deceased. This can be explained by the following.

Muslim customers can derive spiritual benefits by leaving specific instructions on how the monetary proceeds from the takaful cover should be used in the event of his or her ‘untimely’ death. The following are some examples:

To help settle his or her debts, which can be of enormous value to the deceased, because Muslims believe that people who die with debt cannot go to paradise, no matter how pious or faithful, until all debts are settled.

To pay outstanding zakat (tithes), which are obligatory for Muslims with certain level of wealth.

To pay someone else to perform the Haaj on behalf of the deceased. Performing the haaj is another obligation on Muslims who are able both physically as well as financially.

To purchase property such as mosques, hospitals or schools for the purpose of waqaf (benevolence) or to do other good deeds such as helping orphans, feeding the poor and the like. Although not obligatory these acts are highly commendable from the perspective of not only Muslims, but all non-Muslims as well.

The above examples demonstrate that with some unconventional creativity, takaful products can be designed to provide additional utility (value) to faithful Muslims. This is because of the belief that the deceased can derive benefits in the form of rewards in the hereafter. Thus, if conventional insurance can offer products from ‘the cradle to the grave’, then takaful operators can go beyond that by offering benefits, literally, from ‘the cradle to the hereafter’.

There are therefore many opportunities to foster deeper relationships not only between the takaful operators and participants but more importantly between the participants themselves.

Having discussed above some opportunities to leverage on spiritual aspects of takaful , we must also be mindful that not everybody would perceive them to be of value. There are those who would still prefer conventional insurance while some others may be indifferent. Whatever their perceptions, a commercial enterprise must try to decipher what their targeted customers would value and, if viable, endeavour to fulfil it. In this respect, takaful operators are here to offer potential customers with the freedom of choice.

Concluding remarks

In Malaysia, like in most developing economies insurance is sold and not bought. This could be due to lack of awareness on the importance of insurance. For some Muslims, misunderstandings on religious grounds probably compounded the situation. To some extent, this problem has reduced with the introduction of takaful but much work has still to be done to educate the Muslim population on both the ‘worldly’ and ‘spiritual’ values of takaful including financial planning.

Achieving success in an open market like Malaysia depends very much on the ability to innovate and provide enhanced value proposition for consumers. However, innovation need not be limited to material benefits only. There are customers who would perceive spiritual benefits to be of value too. The key is to understand what the targeted customers consider to be of value from their perspective.

Although Shari’a compliance is obviously important to many Muslims customers, it is also clear that takaful operators are expected to offer much more. Merely mirroring the ‘worldly’ benefits offered by conventional insurers is no longer enough.

What Muslims, especially, may find attractive about takaful are the double benefits they can receive. First, they receive an insurance solution comparable to that of conventional insurance, with the additional benefit that it is in compliance with the Shari’a . Secondly, they also have the opportunity to benefit from doing good deeds as the premium is paid on the basis of tabarru’ . This can be a very powerful motivation factor to Muslims as they believe the benefits of doing good deeds are of great value. As the Quran says:

‘The parable of those who spend their substance in the way of Allah is that of a grain of corn: it groweth seven ears and each ear has a hundred grains.Allah giveth manifold increase to whom He pleaseth: and Allah careth for all and He knoweth all things.’ (Quran 2:261)

The expectations of non-Muslims customers have not been discussed in detail, but it should be stressed that, particularly in Malaysia, they are also important to takaful operators. Selling takaful on the basis of doing good deeds can be attractive to people of all faiths, as people would by nature derive satisfaction knowing that their contributions would be used to help fellow participants who are less fortunate. In the global village that we live today, people are becoming more conscious about ethics, transparency and justice, irrespective of their religious beliefs. Such people would find the universal values that are fundamental to the takaful concept attractive.

Companies licensed to do takaful business under the Takaful Act 1984 are known as takaful operators