Halal Money Matters Podcast

Episode 31 - The Benefits of Takaful with Dr. Omar Fisher

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Monem Salam:
Welcome to Halal Money Matters, sponsored by Saturna Capital. I'm Monem Salam, and today we have another special guest, Omar Fisher, who in my opinion, is one of the leading experts in the industry of takaful. And for those of you that are not familiar with it, takaful is basically Islamic insurance. I get a lot of questions sometimes about insurance—is it halal or not, what makes it halal, and relative to the conventional space, what is differentiating between takaful and insurance? I'm really excited about having Omar as a guest today on the podcast. So let's get into it.

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Monem Salam:
So, Omar, thank you so much for joining the conversation. 20 years ago, when I joined the industry, your name came up over and over again about the leading expert in takaful in Islamic finance. It's really an honor to have you here and I'm really excited about the conversation that we're going to have.

Omar Fisher:
Monem, thank you very much for the invitation. And, yes, I'd been blessed to have experience as co-founder of three takaful companies in three different parts of the world. So I'm happy to be here to share some insights into life insurance and family takaful.

Monem Salam:
That's great. Thank you so much. So I mean, I wanted to kind of dive right in and start off from a historical perspective. Right? In this particular case, I'm going to use the word takaful and insurance interchangeably sometimes. And when we need to make a distinction, we'll kind of do that. Insurance as a concept, some people think that, you know, and really started with Lloyd's of London and, and in back in the 1800's or something like that. But I think it goes back a lot further than that from an Islamic perspective. So can you just shed some light on that historical context as well?

Omar Fisher:
Certainly. And you're absolutely correct. In fact, I like to talk about, under certain circumstances, the fact that today's conventional insurance is an outcropping from the mutual takaful type of insurance, which started in the 7th century and actually is codified, for those who would like to look into it in actual written form, in the first constitution of Medina, in the fourth year of Hijra, of our beloved prophet Muhammad (salla Allahu alayhi wa-sallam) and the others who emigrated from Mecca to Medina to establish the new Medina community. And the first Constitution of Medina was addressed to the different tribes in Medina, which were the Christians, the Ansar, Jews were even there at the time, as well as to the Quraysh team that came to establish that community. And what's interesting to me is that there are three specific mentions of the idea of takaful and how it should be carried out as a system of support after the Baytul maal (Ministry of Treasury), which is the first line of defense, let's call it, in terms of social impact and taking care of the community. And the second was the takaful. But actually, the roots of takaful were drawn from the habits of the nomadic Arab tribes in the peninsula of Arabia that goes back centuries, even before the seventh century that I just alluded to. And so I'm kind of working backwards, and those would include Akilah, which is wergild, or blood money, as a way to stop the killing and retribution between the tribes in the case of accidental injury or death.

Monem Salam:
Is that where the tribe would actually gather the resources and pay the blood money? The tribe was acting as the takaful part of it, I guess.

Omar Fisher:
Yeah. So they collected resources, which might not have been coin. It might have been camels, it might have been, silks or whatever. Right. And that's important to recognize because today I think all of us associate insurance with monetary compensation. So going back, there's also the hilth, which is the way that the tribes would create confederations to help each other and support each other against bandits, against, you know, certain hazards that occurred, and then if we go further back, it's called bottomry. Contracts of the Phoenicians and the Babylonians, which goes back to about 3000 BC. And there, there was some kind of pooling of resources. And I'll use the word assurance, which is a kind of a guarantee which again, might not be expressed as money. It could be that if the cargo is lost at sea because of a storm or because of pirates, then the group of merchants would collect means to support the trader. And you can easily see that even though it was a single ship, let's say that was affected, and therefore it might be the property of a single merchant, that it's in the interest of the community at large to cooperate to put that merchant back in business. Now, again, this is not a capitalist view that we have today, which is only the strong survive, right? Instead, it's a cooperative, collaborative effort to look after the social impact and really the well-being of the community as a whole.

Monem Salam:
Yeah. And sorry, I was going to say it's interesting that even to this day, the similar types of takaful happen. I know that, when I visited Indonesia and other Muslim countries, you know, it's usually that, you know, somebody falls sick in a family or in a small community, it's the community raises money to be able to help pay for the expenses of the person that's ill or, or something along those lines. So that's actually still happening on an informal basis, even to this day.

Omar Fisher:
Right, which, which has echoes of this, let's call it an attitude. Right? But also, here because we're in the US, when there's a cancer victim, particularly a child, and there's inadequate form of income to cover the increasingly costly kind of medical care that goes on in this country, Americans typically get asked, and it's a kind of a crowd sourcing of help, but there's no structure for that. So it's kind of done on an individual, as needed basis. But that is, yes, it's an echo from what we're talking about the early roots of takaful.

Monem Salam:
So thank you. So now we talked about a little bit about you know in the Medinan Constitution. Now kind of fast forwarding a little bit, what was the major form of takaful that you found, let's supposing in the Ottoman Empire or the Abbasid Empire?

Omar Fisher:
Well, actually, my research doesn't single out the Ottoman Empire. Europe picked it up, this idea of mutual collective assurance. And we saw that in the 1600s. And it was actually these roots which led to the response to the London Fire, 1666, I think it is, which then resulted in Lloyd's of London, actually. And Lloyd's of London is known around the world as a collective of capitalists that had funds and they pool them to back discreet kinds of risk, whether it's cargo, whether it's, you know, ships hulls, whether it's the certain form of property, major infrastructure, etc. And the real strength of Lloyd's of London is the fact of reinsurance, an ability to transfer that risk. The conventional system operates on the principle of risk transfer for a price, which means there's a buyer and a seller. In the takaful system, it's a risk sharing on the principle of indemnification. So if there's an event which is covered by the terms of the understanding, then the risk pool will share that risk by offering some form of compensation to the needy.

It was in 1693, so a little after the formation of this Lloyd's of London, that astronomer Edmund Haley created the basis for underwriting life insurance. And he did that because he was a mathematician, among other things, and he noticed a certain, let's call it statistical relationship. And, of course, he would notice that because of the movement of the planets is predictable on a mathematical scale. And this, for those who pay attention to that, is one of the clear signs that there is, you know, one creator to all of these, hundreds of thousands of universes that were exploring. But I found that pretty fascinating because he combined the statistic laws of mortality, since mortality is speaking to a species event which we call death, or, you know, passage from this life to something else. And, if you examine the species as a whole, then there can be some, a statistical, predicted outcomes.

Now, what's interesting is that mutual insurance in modern times, in the 21st century is not extinct. Fortunately, mutual insurance, even within the conventional marketplace, is still alive and well, and it represents about 23% of those total global, you know, 6 trillion in premiums that I mentioned to you.

Monem Salam:
Conceptually, the mutual is what the takaful is. Is that what you're alluding to here?

Omar Fisher:
Yes. What I'm alluding to is that these conventional mutual companies have borrowed or grown out of many of the takaful principles that we're about to talk into in some detail.

Monem Salam:
You talked about mutual type of insurance. And it's a good segue into modern day, because as an American Muslim, I come across insurances all the time, and some of those are required, you know, that I have to do by law, other ones are voluntary that I can choose to do or not to do. And I think what we should do is maybe start off and really talk about the voluntary ones. And the most common one that we have is life insurance. Realizing that none of us are scholars here, I think it's important to have a discussion about the distinguishing features between a conventional life insurance and maybe something that we would call a life takaful.

Omar Fisher:
Well, actually, in thinking about it and in preparation for this podcast, there are four types of life insurance. There is the term life, which is a fixed period of risk protection. There is so-called whole or universal life, which has a sum assured plus a saving component over time. And usually, from the insurance point of view, it either could be a lump sum that grows or it is something which grows on its own because of continuous investment. The third area is an annuity. And in an annuity, as somebody comes close to retirement, then they offer an insurance company a sum of money or again, a series of payments, but usually it's the former rather than the latter, in exchange for the insurance company to manage that and then pay them essentially a monthly stipend for the remaining duration of their life. And the last is called long term care, which is a form of risk protection not so much related to mortality, but related to disability related to other aspects of what happens when, you know, someone lives an extended period of time, which could be 120.

Monem Salam:
Sure. So now, generally speaking, all of these have general terms that have something in common. It's important for us to be able to kind of look at those and the difference between the premium that you're putting in versus the extra what you talked about in the whole, universal, or variable life policies. And if you're just basically putting in for the premium, that makes it a little bit more digestible from an Islamic perspective than you would have it from the savings perspective, because the savings part of it you don't have control over, you might be investing it in bonds or those other types of things, whereas the premium is going towards the actual insurance of everybody in that pool. Am I pretty accurate there?

Omar Fisher:
Yeah, that's, I would say that's certainly correct the way you stated it. However, it perhaps needs some clarification. And so I had prepared a way to look at conventional insurance in the life so-called area and takaful in the family takaful area, basically in four categories. The first category is how is the insurance structured? So what is the formation capital and how is that put together that backs the engine of this enterprise? And who are the owners? What are the associated risks that the owners are taking? A second area is looking at cash flows. You mentioned just now investments. What is the type of portfolio that's allowed? Does it involve interest? Does it involve riba? Does it involve any prohibited areas from Sharia point of view and what happens to deficits? That's why I said cash flow. And also tax issues come into the second bucket. The third bucket is a more technical aspect looking at the underwriting, what's allowed, what's not allowed, what's exclusions, what about fair disclosures, etc. And importantly, the net result of all of this from a pure financial standpoint, is the surplus. That is, what's left over at the end of the year when all reconciliations have happened between the inflows and the outflows. And who owns the surplus? And then the fourth bucket is governance. And looking at the requirement for something to fit into the field of takaful that there be an SSB, a Sharia supervisory board, which is absent in the case of conventional insurance and other issues related to compliance. Keeping those four buckets in mind, we can start to look at conventional life insurance versus the family takaful.

When we talk about a conventional life insurance company, typically it's a stock company, not a mutual company. And in fact, there's been a lot of, you could say, progress or advancement in the de-mutualization in the last 80 years in the US and in Europe for certain, you know, managerial and economic reasons. And so today we have holding companies for State Farm, which used to be a mutual, and for Mutual of Omaha. So there is a collective risk pool under a conventional mutual company, but it's now owned by some shareholders that have listed that whole enterprise on to a stock market. The risk pool is owned by the shareholders. The risks are traded, as we said. There is a transfer of risk, not a risk sharing. The shareholders appoint the manager and they make all the decisions for the enterprise.

Monem Salam:
Let's define what transfer of risk means. What you're basically saying is I have a risk that I want to mitigate, and I'm transferring that risk over to the company. For them to accept that risk, I'm having to make a payment.

Omar Fisher:
Correct. There's a price that they have literally underwritten. Statistically they've determined the price of accepting your risk, and you have agreed to transfer the risk to them. You don't share the risk. Right? In exchange for that price, which typically it's annual, but it's broken down into monthly or quarterly payments. Now, what's important is the fact that the cash flow of that transaction includes its built-in profit margin, based upon their algorithms and the statistical analysis. Now, importantly, the investments on the conventional side involve interest and involve bonds. And we've also mentioned that the surplus or the net profit from the conventional insurance operations belongs only to the shareholders, not to the policyholders, because we said just now you're transferring your risk. You've you pushed it away from you to the company. And then lastly, what is the intention of the enterprise? It's profit maximization. For whom? For the shareholders, not for the policyholders, not for the community.

Monem Salam:
And so I do remember, back in during the COVID times, I think it was Humana, that was the health insurance company that was asked to forcibly reduce their premiums because they had basically logged in such a large surplus for that year because of the fact that there were no knee surgeries going on and a lot of elective stuff wasn't going on. So that wasn't really, I mean, a built in profit and they didn't keep it. They and they were forced to pass it on. Are you saying that was more government related and not the internal policies of the company?

Omar Fisher:
Oh, absolutely. It was, you know, an external compulsion pulling money out of their pocket that they probably in their own minds were getting ready to spend. So the risk pool is owned by the policyholders and is created by donations.  Now, this is a bit controversial and we could get into it again later. In Arabic it's called the Tabar'ru. And it's one of the ways that getting involved in an insurance risk protection mechanism is addressing the risk of gharar which is uncertainty. And by making your involvement, your contribution to be a charity that reduces the uncertainty, the gharar, to a level which scholars have deemed to be able to be forgiven. It's not eliminated. It's still there. Why? Because you don't know when the event is going to occur, and you don't know when you're going to stop paying. So it's not like a clear buy-sell where I'm buying, you know, a kilo of dates, and I know exactly what's inside. I know what I'm paying. I know when I get the delivery. That's all a very certain kind of commercial transaction.

Monem Salam:
And so, but the term insurance there would be from your definition, there would be no gharar then because there's a set period of time.

Omar Fisher:
There would be less. But that's correct. It's a fixed period. But you don't know if you're going to be injured in that period, you don't know if you're going to die in that period. And it could be, you take a five year or ten year policy and something happens in month three, right? And also the takaful company that's doing the underwriting and did the pricing for the contribution doesn't know either. So there's always in the fundamental nature of this risk protection, an element of uncertainty which ideally is kind of, circumscribed or at least part of it, by probability. And, that's the definition of risk. Risk is where you can apply probability to the unknown future. Now, risks are shared mutually as we said, shared risk sharing. Then the manager is an agent, agent of the policyholders using different takaful models. Could be Mudareb. It could be a Wakala model. So it's Al-Wakil. And typically these managers, make all the decisions. Then you have governance as we said, includes the SSB, the Sharia supervisory board, cash flow and investments should be, and from the SSB point of view, must be always with Islamically approved contracts and the subject matter of that investment must also be permissible. The surplus, the net result at the end of reconciliation, belongs only to the policy holders. This is a major distinction with the conventional, we said, their surplus goes to the shareholders. The shareholders or the agent that might be helping to manage the takaful risk pool has no legal right to any of that surplus. Now some of our takaful businesses using Wakala, and this is what we did with Bank  Aljazeera Takaful Taawuni when we set that up in 2000 to 2004, is we put an incentive in for good underwriting. So the manager would have a piece of the surplus after an allocation to reserves, technical reserves, general reserves and also calculation of something that would go to the policyholders. We wanted an incentive in there.

Monem Salam:
So I mean, I think you've kind of broken down the four points very, very well from a takaful and from an insurance perspective. So I just want to kind of quickly summarize that. Right. So the first one was the structure of the enterprise. In the conventional side it's more shareholder driven. Whereas on the on the on the takaful side it's more like a charitable driven. Then you have the cash flows and investments. That's pretty obvious. The conventional is going to be doing bonds and maybe some haram stocks in there, from the investment side. And from a takaful, they're going to be investing in a Sharia-compliant way. On the underwriting part, we did talk about the surplus, which is, you know, in the conventional, the shareholders keep it. In the takaful side the policyholders, if you want to call it, are going to be getting that benefit back if the underwriting is good. And sometimes, as you mentioned, there's a bonus structure that's set up for the takaful manager, in the Wakala agreement that incentivizes him to do a better job of the managing of the underwriting.

Omar Fisher:
And a better job managing for the benefit of the policyholders.

Monem Salam:
Correct.

Omar Fisher:
Making sure that the pricing and how the claims are settled and new products all are geared toward the benefits of the community that's being served. And what we've seen in the banking crisis of 2008 to 2011 is you had many bankers who were doing what I just mentioned in ways which boosted their bonuses or the stock option plan of how the enterprise is a publicly traded entity, whatever bank it might be, how that gets rewarded. So those are two very different end results. Now, I'd like to point out, now that we have some operating assumptions between conventional life insurance and mutual takaful, I'd like to just highlight a couple of things in in more detail. So on the subject of the transaction, it's similar, which is the mortality or disability risk of the insured. In the case of having whole life or variable life where you have an investment portion, as we said, then on the conventional side, that brings in additional factors which might be not approved, not permissible for Muslims to get involved in because the investment involves riba or it involves, you know, casinos or something else, which is impermissible. You don't have that on the side of the sum assured and the saving component from a Sharia-approved point of view. And in fact, one of the things we did with Bank Aljazeera is we invented at that time an education saving plan. And we also were the first ones, to my knowledge, to put together a waqf saving plan, which meant that there was a sum assured when the insured person would pass on and that sum assured would go to the family. But a portion of it, agreed in advance, would go to and it could be up to a third as we know. Right. That you can allocate a third of your estate, before death, to support a course so that amount of money could go into a financial waqf and you could designate how you wanted that to be, to support a library or a hospital, an orphan, a school, whatever. And so those are exciting innovations that were done in 2000 at that point in time. But different, as I just said.

Monem Salam:
That's a very beautiful idea that you came up with. So that's really great. But I want to go back to, this idea of the savings pool that's in the conventional versus the takaful one. And some have argued that, well, you know, I'm turning the money over to the insurance company. I cannot control how they're going to be managing that money. And so, what's the kind of the counterargument to that? Am I owning that money, am I getting a benefit from that one? When I'm owning is that why I should choose not to invest there?

Omar Fisher:
In the conventional?

Monem Salam:
Yeah.

Omar Fisher:
I would say avoid in instances where that operator cannot assure that the moneys are not being used in a way that harms Islamic interests. For example, that they support polluters of clean water. It doesn't have to be, you know, investing in casinos. Although when I was founding First Takaful USA in 1997, I did quite a bit of research, and I was a bit surprised to find out that the Catholic Church in the United States, which is a huge community and very well respected, that they ran their own mutual insurance company in order to insure the churches. However, they had no restrictions on the investment securities that they purchased. So we know that the vices and I'll just come back to casinos, right, because there are a number of listed securities which own one or several casinos, and they make all kinds of money. And so now you have the Catholic Church, which is benefiting the investment pool and portfolio of its mutual company is benefiting from an activity which on the pulpit, I'm quite sure many of the ministers would discourage if not outright, you know, criticize. So I hope that puts a fine point on it.

Now, I did want to mention that in the pricing, in the underwriting, there is a difference between conventional and we alluded to this a bit earlier, that the transfer price of that risk always has a margin. So it has a profit margin built in, which varies according to the policies of that insurance company. Now ideally in the takaful operation, there shouldn't be a profit margin. And one of the main distinctions between a conventional stock company and a mutual takaful is here on the conventional side, it's all about profit maximization for the shareholders. On the takaful side, it should be about affordability.

And I put together in April 2000, the first meeting in the United States, which was speaking into takaful and re-takaful, we attracted 110 participants from 11 countries. We met in the College of Insurance, which I arranged in the city of New York, and we met for a day and a half. We had delegates from Malaysia, from Kuwait, from Bahrain, and different places to talk about takaful and this re-takaful notion. Now, at that meeting, there was an interesting talk which I encouraged one of our Muslim professors to present on what is the underlying economics and the difference between stock companies and mutual companies. And he identified and defended, from an economics point of view, very articulate, that a mutual company's reason for being is affordability and the breadth of coverage. So we see some of that still existing among the mutual companies that I described earlier. But it should not be about profit. It should be about serving your mutual community with the best possible services. However, of course it needs to be self-sustaining. Because the alternative to underpricing, let's say the risk that comes in is the fact that there would be deficits naturally because it's a statistical game, so to say. And what happens with those deficits means that either it's an assessment mutual whereby the deficit is then pushed back to the policyholders and they need to come up with more contribution, which, of course, in this day and age, I'm pretty sure you'd find that kind of difficult. You thought you paid for your term policy, and then you found out that the that the pool needs more. Or what happens in practice today is that deficit is shared with the shareholders who are running the managerial company. But this causes a lot of accounting issues and it creates a tension now between the shareholders of the takaful that are taking a commercial risk and the policyholders of the takaful that are looking for the best possible and most affordable coverage. Now it goes without saying, another comparison is that the legal contract of a conventional company is following the principle which is commonly acknowledged called adhesion. As the name implies, the conventional company has its terms and conditions, many of which are in very small font and deliberately so. Right? And they say you want this policy, that's it. You take it or you leave it. In the takaful side, from the Sharia point of view, we should have full disclosure, we should have fair dealings, and we should have an ability to negotiate. Now, in practice, I think we're still a bit away from that. But you've asked me to illuminate differences between the type of cover. In terms of who bears the risk of loss, so with the conventional company, we said it's a risk transfer, so losses that go on and on belong to the shareholders. Whereas in the case of mutual takaful, where is the loss? The loss goes to the risk pool. And now, a moment ago, we said what happens if the risk pool in any particular year has inadequate funds to automatically cover that. Now in the case of a qard hasan (goodly loan) which is the mechanism by which the manager of the mutual pool would add capital to the pool, it's a benevolent loan to the policyholders. And Sharia rules say that if there is a surplus in ensuing years, first it must go to recover that loan without interest, without any premium back to the net, provided that to keep the self-sustaining operation, and only then secondarily any leftover surplus would go to policyholders.

Monem Salam:
Yeah, but in practically, as you know, the taxpayer ends up footing the bill for everybody because the government usually ends up bailing out all the insurance companies. So. So at the end of day, they take their profits and then they make it a mutual company because everybody ends up paying for the risk.

Omar Fisher:
Well, yeah. And we see that most glaringly with banks. I read this week that 246 banks have already gone bust, last year and the start of this year. And that's a very serious ongoing issue, which most of us are not familiar with and not well-educated on basic economics to understand that that's where the tax dollars are going. And is that really what we want as opposed to funding hospitals, you know, schools and etc.?

Monem Salam:
So, Omar, we're kind of coming close to time. As you mentioned, you were pioneering this work and getting people together to be able to, you know, talk about insurance and takaful and those type of things. If you're an American Muslim sitting in a city which has a fairly large local community, let's say Dallas or Chicago, Houston, New York, that type of thing. What advice would you give them on how to start thinking about or even starting up some kind of a mutual company that's based on takaful?

Omar Fisher:
Monem, well, thank you. That's an excellent question. And gives me an opportunity to encourage startups. And my answer to that and I've been approached on a couple of occasions, to be advisory, and I'm ready for that. I would suggest a captive. Now, a captive is a technical form, a legal form of insurance. We don't have time to go into that detail, but the point is that the captive, it would have shareholders, but it could create through an SPV or through an affiliated entity, it could create a mutual risk pool. So then you have a takaful model as we described earlier. And there are more benign rules and regulations state by state, because this is a disadvantage, I would say in the US, when you want to form a new insurance entity. If you want to form one in Egypt, there's only one regulator. If you want to form it in UAE, United Arab Emirates or in Nigeria, there's only one regulator. In the US there are 50 regulators. Now there is some reciprocity. You could start in New York and you could get approved for branch operation in California. But it's very legal intensive and costly to hire lawyers, etc. But a captive is a lighter touch. And it also would give you the capability in the articles of association to insert some of these mutual takaful principles we're discussing today.  

Monem Salam:
So yeah, I mean, I think it's the captive is a good part. So, you know, really having maybe, people get together and talk a little bit about how, you know, maybe they insure a group of mosques within a certain community or they…

Omar Fisher:
And that's a key point, is the right way to start is to bring your affordable premiums on the table that today is already being paid into a conventional insurance company. Bring that as part of the formation capital. And there are resources even beyond myself who understand and have had a bit of experience in takaful. And we're ready to pitch in and help out because the data of whatever is 6 million Muslims, maybe 10 million Muslims, in the United States. And this is a need unfulfilled.

Monem Salam:
Well, thank you so much for your time today. I think there was a lot of information that was given. But I think it's important to, for people to realize there are significant differences between, you know what a takaful is and what the conventional insurance is and hopefully this will cause some people to have an idea of starting some kind of a takaful in the future and maybe benefiting the Muslim community. So thank you so much for spending the time with us.

Omar Fisher:
Peace and blessings.

Monem Salam:
Thank you for listening to Halal Money Matters. If you like what you hear, please do rate us on the app stores and also leave us a review. It helps other people find us a lot easier.

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