The need for more life takaful (insurance) provision

Most of the media coverage of Islamic finance, especially in the UK, is about Islamic banking. The other main components of finance (insurance and asset management) also have their Islamic equivalents, but get far less mention.

I have always regarded insurance against the financial consequences of unexpected death as essential. Sadly many people neglect this, and in my view most people have far less life insurance than they need.

While that applies to non-Muslims in Britain, I believe it applies even more strongly to Muslims, many of whom have religious concerns about life insurance.

Accordingly I made this my topic for my February column in the magazine Islamic Finance News. You can read it below.

Letter from Amin February 2017 - The need for more life takaful

Most of us do not like to think about dying. That is probably why so many people fail to make wills. Most of us have dependants: elderly parents, non-working spouses, young children – all of whom would suffer from the loss of family income if we died unexpectedly.

Many non-Muslims fail to buy life insurance term policies to protect against the financial impact of sudden death. These are the simplest sort of life policy, paying out a large lump sum if you die during the insurance term, and nothing if you survive. Structurally, they are just like buying fire insurance on your house, except that the term of the insurance may be 10 or 20 years instead of one year as with most fire policies.

There is a saying in the conventional insurance industry: “Life insurance is sold, not bought.” i.e. customers only take out life policies when persuaded to do so by a salesman. Even when people buy life insurance, they often buy much less cover than they really need. I recommend cover of a lump sum payment on death of at least 20 times your annual income, since if you die unexpectedly, the insurance money needs to last for a very long time.

I would hope that Muslims would be more prudent than non-Muslims. Actually, they are less prudent. Surveys show that insurance penetration (the percentage of GDP paid in insurance premiums) is lower in Muslim majority countries than in countries where Muslims are a minority, even when allowing for differences in per capita income between countries. (It is well established that richer people spend a higher percentage of their income on insurance than poorer people.)

Part of it must be religious attitudes. Undoubtedly some people will feel that buying life insurance indicates a lack of trust in God to protect them. They should remember the hadith of the man who said to the Prophet (peace be upon him) that he trusted in God for his camel to not wander away. The Prophet told him to first tie his camel and then trust in God.

Other Muslims appreciate the need to cover against the risk of unexpected death but consider conventional insurance to be religiously impermissible. When Islamic finance first started, all of the emphasis was on banking. However, over the last 30 years, Islamic forms of insurance, known as takaful, have developed in Malaysia and the Gulf. Accordingly, absence of available products to provide cover against the financial impact of unexpected death is no longer an acceptable excuse for Muslims in Malaysia or the Gulf to leave their dependence exposed.

The situation is worse in countries where Muslims are a minority. For example, in the United Kingdom there are several Islamic banks but, as far as I am aware, nobody currently offering life takaful. (One company offered takaful motor policies a few years ago, but it was under-capitalised and unsuccessful in the very competitive motor insurance market.)

In my opinion, this is a market where there is a meaningful customer need which is not presently being met.