Rabat – The American International Group (AIG) advised by the global law firm Norton Rose Fulbright has launched its first Shariah-compliant insurance policy in the MENA region, amid public confusion and expert concerns about Takaful insurance in Morocco.
Through the policy, AIG, a leading global insurance organization, offers a range of market-leading Islamic insurance solutions for Merger and Acquisitions M&A transactions. In partnership with Shariah-compliant managing general agent Cobalt Underwriting, AIG’s Warranty and Indemnity (W&I) insurance product aims to rescue clients and marketers alike from financial losses in case of misrepresentations or inaccuracies in representations or warranties.
The group hopes through the implementation of its policy to help buyers distinguish bids and sellers reduce their indemnity obligations, so that both can close their deals more efficiently.
Mark Storrie, Emerging Markets M&A Manager at AIG explained that “Sharia-compliant W&I insurance provides a unique and exclusive solution for MENA clients investing both in the region and globally,” adding that “this insurance product offers a practical solution, and we are very pleased to have placed the first policy in the region.”
In Morocco, while the operating principles of participatory banking products have gradually begun to be known by the general public, much work remains to be done in terms of Islamic insurance, known as Takaful.
How does this activity guarantee its conformity to Shariah? According to experts from the Moroccan Association of Participatory Finance Professionals (AMFP), participatory insurance stands solely on the fact that conventional insurance contradicts Shariah law on two points. The first is the uncertainty and the hazard on which the industry is based by force of circumstances. The second is the investments and savings products offered by insurers and that are very likely to include interests, which is still forbidden by Islamic law.
Takaful insurance, however, treats the last point by switching the nature of insurance contracts, with a studied investment universe and by sorting its product catalog. Thus, instead of operating under exchange contracts, as is customary, the Takaful insurance contracts follow a system of donation, in which uncertainty and chance are tolerated by Shariah. “In practice, the Takaful is funded by the donations of participants who own these funds,” summarize the AMFP experts.
Beyond this general principle of operation, Takaful operators can obey different economic models. Law 59-13, which introduced Takaful in Morocco in 2015, does not explicitly impose a precise model on national operators.
However, in interpreting the regulations, the AMFP specialists ensure that the scheme for the national industry is that of the Wakala. In this configuration, the operator is mandated by participants to manage the Takaful funds (hence the name Wakala, which in Arabic means substitution). This management covers the technical and investment aspects of the funds, subject to a management fee deducted from contributions made by the participants.
This is the only remuneration of the operator. Otherwise, they have no right to the technical and financial results of the fund, which are distributed to participants after the payment of claims and reinsurance expenses, the constitution of the regulatory and prudential reserves, and the integration of the total financial return from the investments.
The surplus may be distributed to participants in cash, as a decrease in future contributions, or in any other agreed form. The operator is only affected by the technical and financial results if they are in deficit. In this case, the Takaful fund manager must cover the deficit by providing an interest-free loan from its own funds. This loan is repaid by the future annual surplus of the Takaful fund.
The Wakala approach will not be without some problems, according to the expectations of the AMFP.
“Restricting the operator’s remuneration to commissions will make them more expensive than conventional insurance, where the remuneration comes mainly from the technical surplus. The premiums of Takaful products will therefore be higher than those of conventional products, which constitutes a major competitive disadvantage,”says the association.
Another problem is that, by not offering any kind of interest to the operator on surpluses, the system does not encourage the optimization of its technical management (acceptance of risks, compensation of the victims, reinsurance) and financial (investments) funds, estimates the AMFP.
The risk is that the Takaful operator, satisfied with administrative management, will neglect this important aspect of his mission. To solve these problems, the specialists recommend encouraging a modified Wakala more appropriate to the national context, especially as the new industry is just starting.