Deciding on the right level of insurance for your company – and the right kind of insurance – are important considerations for you as a business owner in Kenya.
Takaful insurance is relatively new to the Kenyan market, but your company could be missing out if you haven’t included it among your insurance options.
Takaful is a form of insurance based on the principles of mutual protection, co-operative risk and profit sharing. Although its origins lie in Islam, it’s available to customers holding any religious belief, not just Muslims. In fact, based on its mutuality principle and other practical features, takaful can be an appealing insurance option for businesses regardless of the religious beliefs of their owners and managers.
In this article we explain how takaful insurance came about, what sets it apart from other types of insurance, and how it could benefit your organisation.
The origin of takaful
The concept of takaful has been around for around 1,400 years, with the first reported instance of its use in some form dating back to the first generation of Muslims. The word itself comes from the notion of ‘mutual obligation’ or ‘mutual guarantee’. It has connotations of shared responsibility.
The concept of takaful has been around for around 1,400 years, with the first reported instance of its use in some form dating back to the first generation of Muslims.
In modern times, takaful insurance products first became available in Sudan in 1979, in response to a growing need for alternatives to conventional insurance that were sharia-compliant and consistent with Islamic banking. In 1985 the Grand Counsel of Islamic Scholars gave takaful insurance their seal of approval, declaring it the correct alternative to conventional insurance and fully compliant with sharia law.
Since then takaful has become increasingly popular in the Middle East and South East Asia, particularly Malaysia. However it has only fairly recently become available here in Kenya.
What makes takaful insurance different
The contemporary form of takaful insurance was developed in response to concerns from Islamic scholars that traditional insurance may involve three forbidden aspects:
- Gharar – excessive uncertainty
- Al-maisir – gambling
- Riba – usury or unearned income
To provide insurance while at the same time avoiding these three elements, takaful works in a distinctly different way from conventional insurance products.
Policyholders pay into a fund, on the basis that their fees will be used to give help to fellow members who need it. At the end of the term, any money that has not been paid out in claims is distributed between the policyholders, rather than being invested with the aim of making a profit for the company and its shareholders.
Depending on whether the scheme is run on a wakala (agent) or mudarabah (profit sharing) basis, the insurer will either take a cut from the policyholders’ contributions or a fixed percentage of any surplus and investment profits received.
During the term of the insurance, the money paid in by members may be invested, but only in adherence with sharia principles and following strict rules. Any surplus is shared with the policyholders, and the operator cannot keep more than it pays out to participants. Any loss is written off against the provider’s reserve.
So it’s an insurance product, but not as we know it: it’s guided by ethical principles, which genuinely work to the benefit of the policyholders. It’s an ethical option from the policyholder’s point of view because they’re paying into the fund in the knowledge that it will help others when they are most in need.
The range of takaful insurance products available
There is a wide range of takaful insurance products available. These include:
- Medical insurance
- WIBA (Work Injury Benefits Act) insurance
- Professional indemnity insurance
- A variety of property insurance options (including all risk, fire and burglary)
- Products aimed at engineering and heavy industry
- Livestock insurance
How might takaful insurance benefit your business?
Takaful insurance products tend to be competitively priced. And, unlike conventional insurance products, you also stand to receive something back at the end of the term, or when you renew, if there is money left in the risk fund. In this sense it can even act as a form of investment.
Takaful insurance products tend to be competitively priced. And, unlike conventional insurance products, you also stand to receive something back at the end of the term, or when you renew, if there is money left in the risk fund.
Also, while conventional insurance providers use underwriters to assess an applicant’s level of risk before setting their premium, takaful products are generally offered at a set price. There are a few exceptions to this rule. For example if someone develops a serious health condition, the provider may ask them to increase their contribution to the medical takaful fund. But a request of this kind will always be based on solid medical evidence. All the participants take their equal share of the risk, in the interest of supporting the community of users.
Your company doesn’t need to have any connection with the Muslim faith to benefit from takaful insurance. It’s essentially, simply, an ethical product line. Whether you are taking out insurance to protect your business assets or the wellbeing of your staff, this emphasis on ethics could work in your company’s favour from a business perspective, as well as being the right thing to do for its own sake. For example you could mention it in your marketing and recruitment materials as an example of your commitment to social responsibility. Customers like an ethical business.
Developments in the Kenyan takaful market
The insurance industry in Kenya has faced some challenges in recent years. First a wave of insurance fraud seriously dented public confidence. Then a number of firms went out of business as a result of strict new requirements introduced by the regulator to whip the industry into shape.
Against this background the government is now keen to increase the effectiveness and availability of insurance in the country, and recognises that takaful could play a role in this objective. The Insurance Regulatory Authority (IRA) Strategic Plan 2013-2018 actually cites takaful as an emerging trend which presents a good opportunity to increase insurance penetration. The regulator’s strategy document also includes a section dedicated to the promotion of an inclusive, competitive and stable insurance industry, and mentions takaful specifically in this context.
Yet not everyone realises it. A 2013 study for the University of Nairobi found that 89% of the Kenyan general public who were aware of takaful insurance regarded it as suitable only for Muslim customers. This study recommended that government and providers aim to raise awareness of the products available and the fact that they are actually suitable and available for customers of all different religious beliefs, not just Muslims.
Following up on this recommendation, in 2015 the IRA opened up the takaful market to conventional insurers, subject to the requirement that they would ring-fence their takaful funds and treat them in accordance with relevant sharia principles. This concept is known as a takaful window. The fact that takaful insurance products can now be offered alongside conventional ones has further helped to break down the barriers between takaful insurance providers and non-Muslim customers.
In 2015 the IRA opened up the takaful market to conventional insurers, subject to the requirement that they would ring-fence their takaful funds and treat them in accordance with relevant sharia principles.
As a result, today there are a number of brokers and agents in Kenya offering takaful products as well as conventional ones. There is even sharia-compliant reinsurance for takaful providers available which helps manage risk better and improve service for customers, which further increases the appeal of the takaful product across the Kenyan insurance market.
In short, takaful insurance has established a firm foothold in Kenya and its future is looking bright.
An ethical business insurance option
Choosing insurance for your business is not just a box-ticking exercise. The mix of products you select can make a real difference to your financial performance and outlook, particularly in the event of making a claim. And with takaful, you could even receive some of your premium back if you and your fellow customers have a fortunate year.
However there are also more subtle benefits to be had. By opting for takaful insurance you demonstrate a commitment to ethical principles, including co-operation and mutual support, which help to set your business apart from your competition.