Basic Principles for Takaful PDF

Basic Principles for Takaful  Learning outcomes At the end of the chapter, the candidate will be able to: ❑ List the various basic principles of Takaful. ❑ Understand Takaful business model adopted by Takaful Operators. ❑ Explain the various principles and m...

Basic Principles for Takaful  Learning outcomes At the end of the chapter, the candidate will be able to: ❑ List the various basic principles of Takaful. ❑ Understand Takaful business model adopted by Takaful Operators. ❑ Explain the various principles and model to the prospective client  Basic Principle of Takaful ❑ Principle of Permissible Takaful Interest ❑ Principle of Duty of Utmost Good Faith ❑ Material Fact ❑ Principle of Indemnity ❑ Principle of Subrogation ❑ Principle of Contribution ❑ Principle of Proximate Cause ❑ Tabarru’ (Donation) Principle 1: Permissible Takaful Interest ❖ Permissible Takaful Interest” refers to the benefit (or interest) a person has on a covered object or person. This benefit refer to financial benefit. ❖ A person has permissible Takaful interest in a thing when he or she would experience some kind of loss (financial or otherwise) if the thing were to be damaged or lost. ❖ Permissible Takaful Interest exists when there is a relationship between participants and the subject matter, normally arising from several situations as follows: Ownership of Property - Owners of property will lose financially if their property is damaged or destroyed Potential Legal Liability - exist when there is a financial loss arising from legal liability.  Principle 1: Permissible Takaful Contractual Right - The interest can be established if there is a provision in the contract that one party is financially responsible for any loss or damage to the property and third party liability. ❖ Permissible Takaful Interest must therefore be capable to be measured or valued financially in order to be covered by Takaful  Principle 2: Duty of Utmost Good Faith ❖ Duty of Utmost Good Faith can be defined as a positive duty to voluntarily disclose, accurately and fully all facts material to the risks being proposed, whether requested or not. ❖ All parties are required to disclose all relevant facts, whether asked for or not, that are material to the other party’s decision to enter into the contract. ❖ Under the doctrine of Utmost Good Faith both parties i.e. the participants and the Takaful Operator must disclose all the material facts fully and truthfully. ❖ According to this principle, takaful contract must be signed by both party (participants and operator) in an absolute good faith or belied or trust.  Principle 2: Duty of Utmost Good Faith ❖ The doctrine of Utmost Good Faith also entails that there should be no concealment, misrepresentation or fraudulent intention about the material facts. ❖ In a Takaful contract, for the enforcement of the certificate, the parties involved in it should have good faith. ❖ Utmost good faith is breached when a proposer who knows or is reasonably expected to know a material fact: Fails to disclose the material fact, or Misrepresents the material fact  Principle 3: Material Fact ❖ It is defined as any fact that would reasonably influence a Takaful Operators underwriting decision on a certificate, i.e. would influence their underwriter’s decision whether to issue a certificate or the contribution for the certificate. ❖ When a breach of utmost good faith takes place, the Takaful contract becomes void irrespective of whether the breach has been committed innocently or fraudulently. ❖ Example: If the proposer applies for a Medical and Health Takaful certificate and declared that he has no existing serious illnesses, when in fact he is a diabetic. His misrepresentation is considered material as the Takaful Operator would not have issued the certificate if in possession of the facts.  Principle 4: Principle of Indemnity ❖ Indemnity means security, protection, compensation given against damage , loss or injury. ❖ It is defined as a mechanism used by the Takaful Operator to provide compensation in an attempt to place the participant in the same pecuniary position after the loss as enjoyed immediately before the loss. ❖ The principle of indemnity requires the Takaful Operator to restore the participant to the same financial position as he had enjoyed immediately before the loss. ❖ Takaful contracts promise to make good the participant‟s loss or damage. ❖ When a loss takes place, the sum which the participant can recover is called the „measure of Indemnity‟.  Principle 5: Subrogation ❖ Subrogation means substituting one creditor for another. ❖ Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies to all contracts of indemnity. ❖ This principle refers to right of the Takaful Operator to stand in place of the participant, after settlement of the claim, in so far as the participant’s right of recovery from a third party. ❖ The subrogation right may however, be exercised by the Takaful Operator before payment of the loss.  Principle 6: Principle of Contribution ❖ Principle of Contribution is corollary of Principle of Indemnity. It applies to all contracts of indemnity, if the insured has taken out more than one policy on the same subject matter ❖ Principle of Contribution can be defined as the right of an insurer to call upon other similarly but not necessarily equally liable to the same participant to share the cost of an indemnity payment. ❖ According to this principle, the insured can claim the compensation only to the extent of actual loss either from all insurers or from any one insurer. Principle 6: Principle of Contribution Example Mr. John insures his property worth Rs.100,000 with two insurers "AIG Ltd." for Rs. 90,000 and "MetLife Ltd." for Rs. 60,000. John's actual property destroyed is worth Rs. 60,000, then Mr. John can claim the full loss of Rs. 60,000 either from AIG Ltd. or MetLife Ltd., or he can claim Rs. 36,000 from AIG Ltd. and Rs. 24,000 from Metlife Ltd. Principle 7: Principle of Proximate Cause ❖ The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest) and not the remote (farest) must be looked into ❖ It is defined as the active efficient cause that sets in motion a train of events which brings about a result, without intervention of any force started and working actively from a new and independent source. ❖ A loss may not be occasioned from a single event. Principle 7: Principle of Proximate Cause ❖ There may be concurrent causes or chain of causes which may occur in sequence or in broken chain. Thus, the cause of a loss must be established because only risks specifically covered (not excluded risks as mentioned in the Takaful certificate) can be compensated. ❖ In the event of a loss, the onus or burden of proof that the loss occurred was the result of a covered peril rests on the Participant. ❖ Example: A cargo ship's base was punctured due ot rats and so sea water entered and cargo was damaged.Here there are two causes for the damage of the cargo ship - (i) The cargo ship getting punctured beacuse of rats, and (ii) The sea water entering ship through puncture. The risk of sea water is insured but the first cause is not. The nearest cause of damage is sea water which is insured and therefore the insurer must pay the compensation.  Principle 8:Tabarru (Donation) ❖ A shared responsibility and shared guarantee principle which explicitly mentions that the money collected is to be used for the purpose of assisting “fellow participants who require assistance according to the terms agreed as long as these terms are not in conflict with the shariah”. ❖ In Takaful business, tabarru‟ (Takaful donation) is a contract where a participant agrees to donate a pre-determined percentage of his contribution (to a Takaful fund) to provide assistance to fellow participants. ❖ This concept also eliminates the element of gharar from the Takaful contract.  Takaful Operational Framework (TOF) In Malaysia, the following principles be adhered to when conducting takaful operations: ❖ Principle 1 – Ensure uniformity with Shariah principles and consistency with the essential feature of takaful. ❖ Principle 2 – Promote prudence management of takaful funds to enhance the fund financial resilience. ❖ Principle 3 – Promote fairness and transparency to protect the interest of participants ❖ Principle 4 – Ensure appropriateness of fees and charges impose don participants and takaful funds. ❖ Principle 5- Instil good governance and risk management practices