The Sudanese Experience In Takaful

1
The Sudanese Experience In Takaful The Model and
Practice
Osman El Hadi Ibrahim Managing
Director Shiekan Insurance Company
2
SUDAN Outperforming the Region
GDP Growth

• Significant growth
• Strengthened fiscal policy
• Improved political stability
• Increased oil production
• Increased oil prices
• Emerging Markets in the region lacking behind
• Traditional oil exporters far from close
• Sudan as the new locomotive driving MENA growth?

SUDAN
LIC
OE
MENA
EM

• LIC Low income Countries
• OE Oil Exporters
• MENA Middle East North Africa
• EM Emerging Markets

Source IMF, 2006
3
Introduction

• This presentation is not a case study on Shiekan
  Insurance Reinsurance Company, it is on the
  market experience since the whole market is a
  Takaful market. But at the end I will submit a
  short presentation on Shiekan as successful model
  in the Sudanese Insurance Market

4

• Sudan started Islamic Insurance in 1979.
• In 1992 a new supervision law was issued under
  which all companies are required to operate
  according to Sharia principles.
• The 1992 Act activated article 487 of the Civil
  Transaction Act 1984.
• The 1992 Act was replaced by the 2001
  Supervision Act. In 2003 Insurance and Takaful
  Act was issued. This latter act is implemented by
  the courts.

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Major Difference between Traditional and Islamic
Contracts

• Traditional Ins. Contract is the contract of
• financial exchange containing Gharar Uncertainty)
  which made the ins. Sale contract void as per
  Sharia rules
• The uncertainty is the core of ins.
• Islamic cooperative contracts are donation
  contract

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• 1- The Framework
• 1-1 The Model
• Islamic Cooperative Insurance and Takaful
  are practiced under a mixed model.
• Wakala for insurance activities and Mudaraba
  for investment.
• 1-1-1 Alwakala
• The Company as Manager for policyholders
  account look after the technical and
  administrative activities of the policyholders
  fund for a fee which is a portion of the
  contributions (actual management expenses).

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• 1-1-2 Almudaraba
• The company invests the shareholders fund
  according to Mudaraba agreement in which the
  company is the Mud rib and the shareholders are
  the owners of the money (arbab almal) Profits
  are distributed between shareholders and
  policyholders.
• 1-2 The Principles
• Sudan experience is based on the common
  principles of Takaful cooperative
  insurance which are distinguished from
  traditional insurance , these are-

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• 1-2-1 Sharia Compliant transactions
• Not only the contract between the company and the
  participant has to be
• sharia compliant, but all activities of the
  company have to be free from any
• contravention of sharia rules e.g. the subject
  matter of the contracts, the
• investment avenues etc.
• 1-2-2 Contributions are paid as donations in
  whole or in part to a common fund
  
• participants (policyholders) fund.

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• 1-2-3 Technical and management expenses are met
  from the participants fund. The
  
• surplus in the fund belongs to the
  participants , the company has no claim on
  
• it. Participants meet the deficit in the fund
  themselves if it can not be met from reinsurance,
  reserves or "Quard Hassan" from shareholders.
• 1-2-4 Share capital is to be kept in a separate
  fund. Shareholders are under no
• obligation to make good bad underwriting
  results.

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• 2- The Practice
• We highlight hereunder the main
  characteristics of cooperative Islamic insurance
  practice
• 2-1 Sharia Supervision
• Compliance with sharia is controlled at
  two levels The High Sharia Supervisory
  
• Board (HSSB) and the companies Sharia
  Supervisory Boards. These Boards are not ad hoc,
  their work is continuous.

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• 2-1-1 The High Sharia Supervisory Board (HSSB)
  Formed under Article (7) of 1992 Act, its
  members come from sharia, legal, economics and
  insurance professions. The HSSB is part of ISA
  structure.
• The objectives of the Board are-
• To give sharia point of view fatwa on all
  matters raised to it.
• To remove from the insurance system any non-
  Islamic transactions.
• To unify the concept of Sharia Supervisory Boards
  of the insurance companies on Islamic
  transactions in insurance, finance and economics

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• The order detailed the functions of the Board as
  follows-
• To revise policy wording for all types of
  insurance in collaboration with the Insurance
  Supervisory Authority and the specialized people
  in the insurance sector.
• To approve Islamic models of insurance
  transactions.
• To advise and to give opinion on matters referred
  to it by the Insurance Supervisory Authority.
• To study and suggest solutions for the problems
  that face the insurance sector with regards to
  the application of sharia principles to
  insurance.
• To revise all laws that regulate insurance to
  remove any contradictions with sharia principles.

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• To follow up the implementation of sharia with
  regards to insurance and investment transaction.
• To help the Insurance Supervisory Authority in
  formulating appropriate training programmes for
  its staff in Islamic insurance models and Islamic
  aspects of other financial transactions.
• To submit to the Minister of Finance annual
  reports on the consistency of insurance
  transactions with sharia principles.
• To prepare studies and researches that enhance
  implementation of Islamic insurance.
• Any other functions which the Board deems
  necessary to achieve its objectives.

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• The High Sharia Supervisory Board has the final
  decision in cases where there are different
  opinions on an issue specific to insurance.
• To carry out its functions, the Board is
  empowered to read any document, register,
  contract or correspondence belonging to the
  Insurance Supervisory Authority or any other body
  regulated by the Insurance Supervision Act. The
  Board is also empowered to inspect insurance
  companies to ensure proper implementation of
  Sharia principles.

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• 2-1-2.Companies Sharia Supervisory Boards
  (SSB)-
• Every company has its SSB. Consist of three, two
  of whom must be sharia Scholars, the third from
  the legal profession but must be well versed in
  sharia.
• Nominations to the membership of SSB are made
  by the management after
• approval by the general assembly, they have to
  be ratified by HSSB.
• Vacancies are filled in the same way.

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The role of SSB covers the following

• Revising policy wording and all text that the
  company uses.
• Examining and revising all company transactions.
• Issuing fatwa on matters refered to it by the
  company.
• Attending the shareholders and policyholders
  general meetings.
• The chairman or any SSB member has the right to
  attend a BOD meeting. SSB certifies conformity of
  the companys performance with sharia principles.
  It discusses with management the contents of the
  financial statements and the directors report.

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• The Insurance Supervisory Authority will not
  check the audited accounts of a company unless a
  certificate from SSB that there is no
  contravention with sharia is attached thereto.

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• 2-2. Technical Aspects
• Islamic Insurance practice touched the
  technical aspects of insurance in very
  
• few areas
• 2-2-1. Underwriting and claims settlement
• Underwriting remains the same except
  for the limitation that the insured

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• subject matter should not contravene any sharia
  rule, bars and breweries are typical examples.
  HSSB has banned insurance of certain risks such
  as performance guarantee
• 2-2-2. Reserves
• Technical reserves are kept as required by
  the Insurance
• Supervision Regulations of 2002. HSSB
  directed the companies not to distribute surplus
  to the policyholders until there are enough free
  reserves in the policyholders account.

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• 2-2-3. Reinsurance
• Reinsurance with non Islamic reinsurers is
  allowed only due to necessity.
• Reinsurance is transacted in the following
  priorities-
• Local Islamic reinsurer (the National Reinsurance
  co.).
• Foreign Islamic reinsurers (e.g. Takaful Re.)
• Cooperative reinsurers.
• Mutual reinsurers.
• Others.

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• HSSB allowed reinsurance with reinsurance
  companies which are established under regional
  agreements to which Sudan is a signatory,
  (national interest) When dealing with a
  conventional reinsurers an Islamic insurer should
  not-
• Receive any commission from reinsurer, to deal on
  net premium basis.
• Pay any interest on the premium reserves
• Receive any profit commission from reinsurers.

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• 2-2-4. Accounts
• The most important feature of the accounts is the
  clear distinction between Policyholders and
  Shareholders funds. Starting 2006 results,
  companies have
• to disclose their financial performance
  according to AAOIFI standard 12.
• The detailed information required by the
  statements and the accompanying
  explanatory notes will give a transparent view of
  the financial positions of the
  companies

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• 2-3. Investment
• 2-3-1. Investment Model
• The company under Mudaraba arrangement invests
  Shareholders fund. The company is the mudarib and
  participates in the profits at a preagreed rate
  as explained earlier.
• Shiekan Insurance Company SSB has recently issued
  a fatwa, on the co-investment of policyholder and
  shareholders funds. The fatwa which has been
  ratified by HSSB and implemented by many
  companies, put the following conditions

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• Shareholders should establish an independent
  investment department (independent from the
  company) and bear all its management expenses.
• Profits are divided equally or at preagreed rates
  between shareholders and policyholders.
• Shareholders are responsible for any loss
  attributed to the negligence or incompetence of
  the investment department appointed by them

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• Investment returns under this fatwa proved to be
  very rewarding for
  shareholders. It mitigated their complains that
  the Islamic system has
  deprived them from what they used
  to get from the companies which they had
  established long before the practice of Islamic
  Insurance.

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• 2-3-2. Investment Avenues
• HSSB and companies SSB check
  investment contracts for conformity with sharia
  principles. The companies select the avenues that
  they deem best. The Insurance Supervisory
  Authority decides on the investment of the
  statutory reserves. So for Sudanese companies
  have no problem in finding sharia compliant
  instruments since all economic activities in the
  country are sharia compliant and the companies
  are investing in national portfolios. All civil
  transactions are governed by the Civil
  Transaction Act 1984 which is enacted
• according to sharia rules.

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• 2-4. Policyholders Rights
• Policyholders have the right to monitor
  the performance of the company in two ways
• 2-4-1. Policyholders General Assembly
• Before the shareholders general assembly
  convenes, every company should
  
• invite its policyholders for a general
  assembly. In principle every policyholder
  
• is a member of this assembly, but in practice
  only policyholders with a minimum contribution
  (premium) as fixed by the BOD are invited. The
  meeting agenda are

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• The annual audited accounts and the directors
  report .
• Comments and recommendations to the shareholders
  and BOD on the performance of the company and all
  relevant matters.
• BOD recommendation on surplus.
• Election of representatives to the shareholders
  general assembly and the BOD.
• Distribution of surplus is always a hot
  item in the agenda of the policyholder assembly.
  The attending of the general assembly is fixed by
  the company.

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• 4-2. Policyholders Membership in the BOD
  Policyholders elect one or two members from the
  policyholders general assembly for membership of
  the BOD.

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• 2-4-3. Insurance and Takaful Act 2003.
• This piece of legislation, which is implemented
  by the courts is issued for the
  protection of policyholders by regulating
  the contractual relationship between the parties
  to insurance and takaful contracts.
• Some articles of the law state the void and
  violable conditions in the policies which affect
  the policyholder rights to indemnity e.g. any
  condition in an insurance or takaful contract
  which deprives an insured from his right to
  indemnity due to a law offence, as far as that
  offence is not a crime committed intentionally,
  is void etc

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• 2-5. Policyholders Protection
• 2-5-1. Policyholders Protection Fund
• Insurance Supervision Act 2001 has
  recently been amended to give the Minister of
  Finance and National Economy the right to
  establish the fund. The fund
  will help Islamic Cooperative Insurance companies
  to meet their obligations towards policyholders
  in case the policyholders fund is short of
  meeting such obligations. The main source of
  the fund is contributions made by Islamic
  Cooperative companies from their gross premiums.
  Donations and other payments can be
  made subject to the consent of the HSSB. The fund
  will be engaged by the Insurance Supervisory
  Authority the companies are represented in its
  Board of Trustees.

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2-5-2. Supervisory Measures

• Examples of these measures are
• The Insurance Supervisory Authority may revoke a
  licence of a company if that company proved,
  among other things, to be unable to meet its
  obligations towards its policyholders. The Act
  details the steps to be taken by ISA in case of
  revocation. ISA revoked two licenses in 2002 for
  insolvency, it suspended two licenses temporarily
  during 2005.
• A company should get the approval of ISA before
  it change or amend any information contained in
  its application for licence. ISA may not approve
  the change if it affects the policyholders rights.

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3- The Stakeholders

• 3-1 Shareholders
• The rights and obligations of shareholders
  are dealt with in detail in the Companies Act.
  These rights and obligations are not specific to
  shareholders in insurance companies. The standard
  memorandum and articles of association of
  insurance companies are drafted within the
  requirements of the Companies Act..
• The only reference to shareholders under The
  Insurance Supervision Act 2001 is under Credit
  and Finance whereby a company should not give
  credit to or finance any of its directors or
  shareholders or guarantee their debts to others
  before it gets the approval of ISA.

Shaken Ins.-Agri Ins.2000-2007
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3-2 Employees

• Each company has its terms and conditions of
  service which are governed by the provisions of
  the Employment Act. The benefits in the Act are
  minimum.
• Insurance companies are among the best
  employers in the country.
• 3-3 The Insurance Supervisory Authority (ISA)
• ISA implements the Insurance Supervision
  Act 2001 and the Insurance Supervision
  Regulations 2002. Both Act and Regulation need to
  be redrafted to incorporate the standards of
  corporate governance, risk management, solvency
  and all issues relevant to prudent insurance
  supervision.

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Challenges Facing Sudanese Insurance Industry

• Low of disposable income
• Lack of Insurance awareness
• Islamic Reinsurance (Retakaful)
• Training and Human resources
• Marketing Problems

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Shiekan Insurance Reinsurance Co. Ltd.

• Established 1983.
• 62 Market Share 2006
• 125m Prem. Income 2006
• 1000 employees
• 28 branches all over Sudan
• All Traditional Classes of Insurance, plus
• Agriculture (Crops Livestock)
• Medical (Group Family), Travel
• Export Credit Insurance

37
Shiekan Ins.-Agri Ins.2000-2007

• Agricultural Ins. Is known worldwide as one of
  the most difficult among all types of ins.
  Covers. Agri. Hazards are considered catastrophic
  with enormous losses. That is why most insurance
  companies stay away from it. That is why Agri.
  Cover is almost impossible in developing
  countries where the support is hardly available
  in addition to this the diversity of crops and
  Agri. System to hydroponics and biotechnology.
• With respect to the national responsibility of
  supporting the national economy Shiekan Ins. Co.
  ventured to practic the complex agri. cover

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Global Agricultural Ins. Market

• North America 44
• Latin America 5
• Central/East Europe 5
• West Europe 31
• Asia/Pacific 7
• Asia 3
• Africa/Meast 5

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Government subsidy

• 2002/2003 1,000,000 50
• 2003/2004 1,016,747 50
• 2004/2005 2,444,839 50
• 2005/2006 2,560,394 50
• 2006l2007 6,904,000 50
• Total 13,925,981

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Medical travel Insurance

• 2003 2004 2005
  2006 2007
• Premium 3,7 4,6 12,8
  16,1 25,0
• Insured
• Members 11879 17875 19085 42152
  58000
• Loss
• Ratio 51,7 97 60 79
  70
• 
  In Thousand SDG

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Shiekan Branches
15
14
22
21
28
23
6
10
2
3
16
1
9
5
8
27
4
13
11
7
19
24
12
18
17
20
26
29
30
25
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•  Rating
• Shiekan has been rated BBB (Stable Outlook) - by
  a regional rating agency- . reflecting a good
  liquidity position and a good underwriting
  profitability of the company as compared to its
  peers in the Arab region.
•  The regional rating comes as preparatory to SP
  rating which the company will conduct soon.
• Shiekan Member of CreditAllinace
• In an endeavour to enhance its export credit
  insurance business, Shiekan has joined the Coface
  CreditAlliance network in 2007, thus benefiting
  from a fabulous worldwide source of credit
  information.

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Shiekan acquired the ISO 9001-2000 certification

• Shiekan acquired the ISO 9001-2000 certification
  in April 2006 in management systems, Provision of
  Insurance Services, by the British Standards
  Institute (BSI) London.
• Shiekan, being the fist Sudanese insurer to have
  obtained such a certification, is pursuing to win
  the Excellence Quality Award 2007 of European
  Foundation for Quality Management (EFQM) in Sudan.

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Sudanese Market Shiekan Insurance Co.Premium
Income Growth (in Thousand SDG)
45
Sudanese Market Shiekan Insurance Co.Group
Life Takaful Premium Income Growth (in Thousand
SDG)
46

• Today Takaful is gaining an ever-increasing
  global recognition, major players stepping in
  Munich Re, Honover Re , HSBC, Lloyd .
• The global premium income is estimated to reach
  US7,5 billion,

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The effects of application of cooperative
Insurance in Sudan

• First
• The Social Effects
• Second
• The Economical Effects

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Conclusion

• ?Applying the cooperative Insurance has had a
  very great and positive impact on the field of
  Insurance Industry in Sudan. The outlook towards
  Insurance has changed drastically from something
  against Islamic Sharia to a kind of good and
  pious activity seeking the benefit of the
  society. This has persuaded the Insurance
  companies to promote their activities and develop
  different types of Insurance to meet different
  needs of their clients.

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• I hope the greatest success for your conference.
• Thank you
• Osman El Hadi Ibrahim
• Managing Director
• Sheikan Insurance Reinsurance Company
• Khartoum / Sudan