In such never-before-seen circumstances, new routes are opening up for Shari’ah products
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 COVID-19 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 Arabian 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 just 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 for our loved ones – an unequivocal need that is central to our quest for a better life.
Let’s get the cover
Takaful policyholders put money in a common pool of fund claims and benefit if the pool is left in surplus, similar to mutual insurance but with clear segregation of the assets owned by policyholders and those owned by the insurer.
The key difference between takaful and conventional insurance is that takaful is a risk-sharing (cooperative model) whereas conventional insurance is a risk transfer model. Under the takaful model, the takaful insurance company manages the risk on behalf of the policyholders but does not transfer the risk to itself.
Handling operational risks
The Takaful market is expected to grow to USD 40 billion by 2023 from roughly USD 19 billion in 2017, with the largest segment being the life and family market. In addition to the compliance with the principles of Shari’ah, cooperative insurance as a concept is gaining popularity across the world.
Recently, Lemonade Inc. (NYSE:LMND) went public on NYSE to a successful listing. Lemonade offers its insurance policyholders an option to select a non-profit or charity to receive an 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 dollars 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.
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