What is the difference between conventional insurance and Islamic insurance?

The underlying concept and objective are the same. Both are effective tools of risk mitigation. However, with conventional insurance, there is a process of risk transfer; with Islamic insurance, policyholders share the risk amongst themselves. An Islamic insurer will also structure its processes so as to remove the three components in conventional insurance which contravene the principles of Shariah: uncertainty, speculation and interest.

As an organisation providing Shariah compliant insurance, do you have to be regulated?

Yes, you must be approved by the relevant regulatory authority in the territory in which you are based.

How do the UK regulators deal with Shariah compliance?

The UK Regulators are secular regulators.  It is not within their remit to decide if a particular product is Shariah compliant or not.    Ensuring compliance with Shariah is the responsibility of Shariah scholars (see below).  More generally, the UK regulators’ approach is to provide a level playing field for all regulated entities to ensure that there are ‘no obstacles, no special favours’ whether conventional or Islamic.

Law and jurisdiction: does English law and jurisdiction take precedence over Shariah principles?

Yes. The interpretation of the policy wording will remain subject to English law if that is what the policy provides for as the governing law. If Shariah principles are compatible with English law, the courts will enforce them.  However, if they are not, then English law will prevail.

What are the business models of Islamic insurance?

There are various recognised Islamic insurance business models. The popular ones are Agency (Wakalah) and Investment Manager (Mudharabah) models. Many companies combine both models to create a hybrid version (Hybrid Model). There is also the Trust (Waqf) model as favoured in countries such as Pakistan whilst in Saudi Arabia, the Cooperative (Mutual) model is endorsed by the state.

Which model is the most suitable?

Which model is chosen will be based on what best meets the business needs of the (re)insurer and that also complies with the regulatory environment in which the business operates. Whichever structure is chosen, the model must be approved in the form of a ruling (fatwa) provided by the relevant Shariah Supervisory Board.

Islamic insurers in the London Insurance Market have generally chosen the Hybrid model as this can be adapted to conform to UK regulation, including Lloyd’s structures.

Why are we producing the IIAL Standards?

In a market that has built its reputation on operating to the highest standards, it is highly desirable that all providers operate to a single consistent set of rules.  At IIAL we are producing a set of standards for the London Market that all participants can subscribe to, to ensure:

• Consistency of approach;
• A level playing field for all;
• Reduction in frictional costs; and
• Compliance with best practice and regulatory requirements

We are a conventional insurer/syndicate - what do we have to do to provide Shariah-compliant Insurance?

To provide Shariah compliant insurance, an insurer needs to either establish an Islamic (re)insurance window or establish a wholly Shariah compliant insurer.  The latter will require separate authorisation by the UK regulator.

To be wholly Shariah compliant, every aspect of the organisation’s structure including the company assets and liabilities, income, expenditure and processes, as well as the sources of capital must be fully Shariah compliant.  For a Window operation, the organisation does not have to go quite so far but must always ensure a clear segregation between policyholders’ funds and those of its own shareholders. They must also ensure that the internal processes employed to transact insurance comply with Shariah and that there is also provision in place for regular Shariah audits.

It will be important here to employ or consult a suitable Shariah Advisor. He will help guide, advise and prepare the organisation in order to provide products and services in accordance with applicable Shariah principles.

What is a Shariah Advisor?

Every institution providing Shariah compliant products is responsible for its own Shariah compliance and governance. Each institution asserting that it provides Shariah compliant products must demonstrate its adherence to applicable Shariah principles. To do this requires employing or consulting a Scholar with the appropriate qualifications and expertise to fulfil this requirement. 

Shariah scholars qualify after completing and passing an extensive course in Shariah.

A suitable advisor will not only be a Shariah Scholar but he will also have an understanding of the London insurance market and how it operates.

What role do Shariah scholars play in the life cycle of a Shariah-compliant (re)insurance policy?

Amongst other things, a Shariah scholar will review and approve the nature of the risks that are presented to ensure that they are acceptable under Shariah; ensure the policy wording meets with Shariah requirements and certify the policy to confirm that the insurer has followed the prescribed Shariah processes. If a claim is made against the policy, the Shariah scholar will ensure the settlement payment is paid from the correct fund.  The Shariah scholar will also supervise the insurer’s operations from a Shariah compliance perspective and monitor its financial transactions and its investment policy to ensure that no investments are prohibited.

Do we need to employ Scholars in-house?

No.  However, this may be advantageous in order to manage the processes in a fast-moving insurance business unless a contracted advisor has the capacity to provide these services on an outsourced basis.

How does Islamic insurance cover differ from conventional cover?

Coverage is broadly identical, although there are some differences. For example, Islamic insurance does not permit coverage to be provided relating to subject-matter that is prohibited by Islam, such as alcohol, the proceeds of gambling or other forbidden activities.  This is why an insurer’s risk selection must be approved by a Shariah Advisor.

Is there a Shariah compliant form of reinsurance?

Yes, just as insurance can be provided directly in a Shariah compliant way, reinsurance, both facultative and treaty, can be provided in accordance with principles of Shariah.

Are special wordings required?

In most cases a special wording is unnecessary and London market standard wordings can be used.  However, to demonstrate Shariah compliance, a policy wording should contain an Insurer Protocol which will contain information to demonstrate to the policyholder how the insurer complies with Shariah and how it will discharge its obligations under the contract. This Protocol will usually take the form of an endorsement to the policy wording.

What about claims?  Will they be handled differently?

No, as with conventional insurance, the (re)insurer must always establish liability in accordance with the policy conditions.  When calculating claims payments, the (re)insurer will seek to avoid payment of interest unless required to do so by the courts or legislation.

Does a policyholder have to be Muslim to purchase Islamic insurance?

No. Islamic insurance is available to anyone who wishes to benefit from the product regardless of religion, creed and colour. The only requirement is the risk itself must be Shariah compliant.

How does the policyholder have comfort that the policy being provided is Shariah-compliant?

All policy documentation should contain the Insurer Protocol and certification from a Scholar that the insurer complies with Shariah in its internal processes.

I’ve heard that Shariah compliant insurance involves mutuality.  Does this mean that there might be a call on policyholders if funds are not sufficient or a bonus payable to policyholders if profits are good?

Under the Hybrid model, any shortfall in the policyholders’ fund is covered by the (re)insurer’s own capital, provided in the form of an interest free loan, until such time that it can be reimbursed out of future surplus.  This ensures that the participant’s contribution is limited to the amount paid in premium at the time a risk is bound.

If there is a surplus generated, periodically, the insurer in conjunction with its Shariah Advisors, will make an informed decision as to what to do with that surplus. They have several options available (including retaining the surplus to build up reserves in the policyholders’ fund; providing policyholders with a discount on their renewal premium or making a distribution of surplus to policyholders).

What if there is not enough Shariah compliant capacity. Can the risk be insured partly on a Shariah-compliant basis?

Yes.  The remainder of the risk can be insured conventionally out of necessity. Having the risk partly insured on a Shariah compliant basis will also help demonstrate the effort made to acquire Shariah compliant coverage and assist in validating the need to rely on the principle of necessity.

Do brokers have to be Shariah compliant?

No. Brokers simply facilitate the transaction and act as agent for the policyholder.  They do not perform the functions of a (re)insurer.  MGAs, on the other hand, do have to put in place Shariah compliant processes, as they are deemed to be operating as an agent of the (re)insurer.

How should the broker handle Shariah compliant premium?

If a policyholder is seeking a Shariah compliant solution, they will expect the premium to be handled in a Shariah compliant manner: that is, the premium should not accrue interest. It is therefore advisable for the broker to hold the premium in a separate non-interest bearing bank account or transfer the premium directly to the insurer concerned, who will itself hold the premium in a non-interest bearing account. If interest is accrued, this must not be passed on to the insurer or paid back to the policyholder.

Will brokers be entitled to brokerage?

If the broker works on a commission basis, this will be included in the premium contribution and will be paid to the broker once payment is received from the policyholder or cedant in the normal way.

The purpose of these Frequently Asked Questions is to provide general guidance only. They do not contain a full analysis of English law and regulation or Shariah law nor do they constitute an opinion of the IIAL on any aspect of English law and regulation or Shariah law discussed. This material may not be relied upon and the IIAL accepts no responsibility for any reliance placed upon it.  You must take your own specific legal, regulatory and Shariah advice on any particular matter which concerns you.  Neither the IIAL nor any individual who is a committee member or member, accepts or assumes responsibility, or has any liability, to any person in respect of this material.