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Shahzad Chaudhary / MEDILL

 Islamic insurance, known as Takaful, adheres to religious tenets that ban interest-bearing investments, speculation or uncertainty.


Islamic insurance gains toehold in U.S.

by Shahzad Chaudhary
Aug 26, 2009


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American International Group Inc., the U.S.-based insurer that nearly imploded in 2008 because of its exposure to risky financial instruments, is taking a different tack these days.

Earlier this year, the insurance giant became the first company to offer Islamic homeowners insurance, known as Takaful, in the U.S. with plans to expand into auto and other insurance products in the next six months.

The concept of Takaful insurance was first introduced in Malaysia about 15 years ago and has since spread to other Muslim countries, such as Saudi Arabia, Indonesia and Pakistan.

Takaful in the U.S. is currently issued through AIG’s underwriting subsidiary, Risk Specialist Companies, Inc., along with Lexington Insurance Co. The exclusive broker for the product, New York-based Islamic financial services firm Zayan Finance, is currently offering Takaful in 13 states.

“We hope to be in every state by the end of the year,” said Nasser Nubani, spokesman for Zayan Finance, who says that so far only several hundred policies have been sold.

That number is expected to increase substantially. According to the 2009 Takaful Report compiled by Ernst and Young L.L.P., the global market could reach $7.7 billion in 2010, more than doubling from $3.4 billion in 2007. This expected growth is what prompted AIG to begin offering the product.

“We are pleased to offer socially responsible solutions to this segment of the domestic market,” said Matthew F. Power, president of Risk Specialist Companies, in a news release.

AIG first began offering Takaful health, auto, and property and casualty products in Bahrain in 2006 through AIG Takaful Enaya. The company maintains a Shariah board made up of Islamic scholars who have given legitimacy to the Takaful alternative to conventional insurance.

Many Islamic scholars believe conventional insurance contracts are forbidden by Islam, except for what’s required by law, such as car insurance in the U.S.

The Cheshire, England-based International Cooperative and Mutual Insurance Federation cites three reasons conventional insurance is unacceptable under Islamic law: uncertainty within a contract, gambling or speculation, and investment in interest bearing assets.

With conventional insurance, a policyholder is uncertain whether he’ll receive anything in return for the premium he’s paid, and the insurance company doesn’t know if it will have to pay out more than the policyholder has contributed.

To avoid this type of uncertainty, Takaful pools are jointly owned by the policyholders and are “a separate entity from the insurance company,” Nubani said. The policyholders pay into the pool with the intention of helping the community in case of accidents, fully expecting that the money may not be returned.

This means that at the end of each year, if the pool of money runs out, the insurance company provides an interest-free loan that must be paid back by the policyholders through regular premiums. In case of a surplus, the money is distributed back to the policyholders.

However, that’s rare, said Karen Hunt-Ahmed, assistant professor of finance at DePaul University. “In theory the customers may get a profit from it, in practice I don’t think it’s ever happened,” Hunt-Ahmed said.

Nubani admits that Takaful doesn’t completely eliminate uncertainty, but he maintains that it’s the intention of the policyholder in Takaful to contribute money to the pool as a donation that is most important.

“The intention becomes an important designation,” Nubani said.

But Muzammil Siddiqi, chairman of the Fiqh Council of North America, an organization that helps to educate and advise its members on matters related to Islamic law, disputes the need for Takaful as an alternative to conventional insurance.

“[Conventional insurance] is a cooperative type of venture, where people are paying money so they can be safe and secure,” Siddiqi said. “It’s like if somebody pays to hire a guard.”

Siddiqi points out that the intention to “donate” could apply to conventional insurance as well, and doesn’t need to be restricted to Takaful.

As for using Takaful as a way to avoid gambling or speculation, experts are also divided.

“Conventional insurance is based on speculation in the sense that you’re speculating how long a person may live or whether or not your home will be damaged,” said Hunt-Ahmed. She sees Takaful insurance as a way of managing risk without the troubling aspects of speculation.

However, Siddiqi sees little difference between the two. “I do not believe [conventional insurance] is gambling because the purpose of gambling is to hope that you’ll win,” he said. “The person who gets insurance is doing it to avoid risk.”

The point that’s least in dispute is that conventional insurance companies invest policyholder premiums in interest-bearing assets, something that is strictly forbidden for Muslims.

It is for this reason that Takaful companies must not invest their policyholder contributions in banks and other companies that earn profits through interest. They may invest in real estate, stocks of companies that don’t deal with interest and other non-interest investments.

Another potential hurdle for Takaful is that it operates for the most part outside the reach of state insurance regulators. AIG’s underwriter, Lexington Insurance Co., is a surplus lines insurer, which means it is only regulated in its headquarters state.

“Surplus lines are free of rate and free of form,” said Rich Dunlap, assistant executive director of Surplus Lines Association of Illinois, meaning that a surplus line company can charge whatever it wants, free of review by the state insurance department.

It is for this reason that the National Association of Insurance Commissioners warns consumers to be careful before purchasing such policies. “[We] strongly recommend that you thoroughly investigate such plans before joining,” said a spokesman for the NAIC.

Still, Takaful’s success in other countries, combined with the success of Islamic banking, which reached $729 billion in global assets in 2007, a 37 percent increase from 2006, has raised hopes for similar success with Takaful insurance.

“The American Muslim population has grown and so has the demand for Shariah-compliant products,” Nubani said.

But the success of Takaful insurance in America may hinge less on business, and more on the outcome of the religious debate.

If a pronouncement is made against Takaful insurance by an influential Islamic cleric or organization, many potential customers could be deterred.

The Fiqh Council of North America’s Siddiqi sees the difference of opinion as a difference between literal and objective interpretation of Islamic law. “The objective interpretation is to look out for people’s well-being,” he said.