by Azim Mithani

An insurance and takaful business leader with more than 30 years of experience including 6 years
as CEO of a major takaful operator in Malaysia. He currently provides advisory services and is a non
Executive Board member of a takaful operator. Azim is a UK qualified Chartered Actuary (FIA C.Act).
His profile can be found at www.linkedin.com/in/azimmithani.

In my previous blog, I advocated for a profitable takaful industry; for earned profit that arises from the successful provision of services that are valued and wanted by customers. The involvement of large, financially strong companies is a good thing for the takaful industry. As is the entry of challenger businesses with different business models and approaches. All of this will make the industry richer and stronger.

Let’s remember that Islam says profit can only come from the assumption of legitimate risk. And in takaful, when it comes to the risk fund, the participant (i.e. the customer) and provider (i.e. the operator) together share the underwriting risk and so should share in these profits or surplus.

The corollary of this is that if a risk fund makes a loss, then either the company’s shareholders will have to provide a loan (Qard), inject permanent capital, and/or the amounts customers contribute will have to rise. The reputation of the company may be tarnished, and it may even fail. No one is a winner in such a scenario. This applies equally to the daily non-underwriting operations of the company. So we need profitable businesses. And that’s before we even get to Zakat.

None of which is inimical or a contradiction to the necessary objective of a purpose filled and value-driven industry. For takaful businesses, and Islamic Finance more generally, this imperative is fundamental, especially if we are to have financial inclusion for all segments of society.

The Value of Surplus

At the same time, this simple truism offers the industry a real distinct edge. Few businesses genuinely share profit in the fundamental way that takaful does.

Let’s take it as read that the risk fund meets its primary objective to provide protection and pay claims. Beyond this, by prioritising the regular return of surplus to customers, takaful can be revitalised and its appeal renewed. Make surplus a real focus rather than the incidental by-product of liability valuation and capital management.

The operator can offer to use this surplus to support social enterprises and communities on behalf of participants if they so choose. It’s not just a financial return, but a social one that gives participants a tangible sense of belonging to a community that helps itself and others. This is precisely what takaful is all about.

Build in genuine transparency so customers can properly understand how their surplus emerges and how it is used, and you have something truly differentiated.

It’s crucial we avoid a situation where surplus is not rightfully returned to customers when it should have been, and so builds up in the risk fund until it’s unclear who owns it. This will create many complications and inequities.

Harnessing Shariah and Business Knowledge

The intersection of Shariah knowledge and the business management of an operator is another area to seek out advantage. Those on the commercial side of the business understandably and necessarily leave the deeper Shariah considerations to dedicated Shariah professionals. That said, the more they can leverage their own Shariah and broader Islamic Finance knowledge in tandem with their commercial skills, the more they can drive innovation and improve takaful fund approaches, product propositions, and entire business models.

As an actuary, I believe our profession should be a thought leader in the industry, at the forefront of developing sophisticated approaches to address the issues discussed here. Much more needs to be done to establish a coherent body of takaful actuarial science.

It’s worth noting that we now have large cohorts of professionals who have essentially spent their entire careers within the takaful space. This subtle yet significant development is important because these cohorts have a different frame of reference. Earlier cohorts sought to build the basics often with never-tried-before approaches, while today’s cohorts have a different problem statement. They can see what works, what doesn’t, and what gaps exist, enabling them to create something better. This is precisely what we should expect to see when we look at the experience of other industries.

AI

The relevance and importance of AI is undeniable. Like it or not, it will be a vital aspect of many businesses and its clever, relevant, and empathetic use offers numerous benefits to customers and operators. This isn’t about efficiency gains; it’s about reimagining what’s possible with the infinitely scalable resources that “agentic AI”, for example, offers.

It’s easy to see how it could be deployed to develop and manufacture low-cost schemes for the economically disadvantaged, such as peer-to-peer schemes, community-specific programmes, and public-private partnerships.

By making takaful and Islamic Finance more easily understood by the general public, AI can also democratise access to financial services. There is early evidence of chatbots being developed to address this.

Conclusion

In many ways takaful is in a wonderful position in that the principles it deploys – voluntary contributions, pooled sharing of risk, an agent-principal relationship with aligned incentives – are straightforward and intuitive. They lend themselves to and demand the development of compelling, purpose-driven propositions.

But perhaps more importantly, when properly implemented, takaful, with its inherent equity and alignment of interests, represents something truly special. A solution for the ages.