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Cover Story

The risk assumption philosophy in terms of Islam

Muhammad Sharif
Director, Heritage Insurance Company Limited
Sep 27 - Oct 03, 1999

Traditionally all economies of the world rest on the healthy functioning of (four pillars, so referred to) banking, insurance, co-operatives and infrastructure-bonds. Pakistan was no exception to the rule until awareness set in, with the demand of our ideology, inflicting the operations of all these four activities. While banking has made commendable progress and an evolutionary cycle is fairly primed, insurance the fail-free pillar remains incapacitated.

In the sprit of Islam, certain steps are required to be taken towards Islamization of insurance in Pakistan, and one may call this ''real insurance''. We believe, in the out-set, that "life and property of the Ummah must be protected by the Ummah"; and therefore, in line with our belief, we have to engineer a mechanism through which we could re-insure our domestic risk at home. Moreover, we could use the re-insurance pool to assume cross-border risk just as much. This would enable the insurance industry to become an export revenue earner and also enable (multi-currency based) domestic resource mobilization.

Here is a serious challenge for a defeated industry stagnating under the Act of 1938 to spring back to the fore-front of the insurance concept and address the challenges of the new millennium, providing directional leadership globally.

In categorizing the insurance business we should first take up evaluation of risk and being an integral part of insurance restrict it with the insurer in place of banks.

Next is "securitization" of the risk. This activity provides a very futuristic money management technique and in all cases real asset based synchronization. Risk assumed, should be first securitized and then insured. There cannot be a safer way to protect, and a better way to trigger an evolutionary invention oriented industrial base for the country. The indigenously revised standard will automatically swim to the front-end of material technology.


The corner-stone of the re-insurance philosophy is based on the notion that the "life and property of the Ummah must be protected by the Ummah". A multi-currency domestic re-insurance pool on a profit / loss sharing basis should be put into place at the stock exchange as an original Islamic financial instrument. This plus the offering of all insurance products duly securitized will mean that whenever we insure a fire risk (for example) we would place a fire suppressing system simultaneously, and/or whenever we should assume the risk of a motor vehicle, that should be put on satellite tracking system. All told the insurance industry in Pakistan could Inshallah see state-of-the-art REAL INSURANCE!

Franchised Marketing Concept

The owners, developers and managers of special services and products, today are increasingly leaning on franchising to extend quality products and service to clients throughout the globe. This works both ways. The investors or the unemployed, cautious and conservative people seeking enterprise in place of RIBA based income are seeking dependable franchises that can compensate the deployment of their labour and capital both. Towards 'real insurance' we find both the needs, met viz. very personal service relations with clients'; and the sale of securitized products by trained people for reasons of careful handing. Both issues warrant a man-on-the-spot who has stakes in the trade, a commitment and institutional continuity, and the answer to both these requirements is franchising. This in-effect means sharing our piece of bread with others. We should do this happily to broad-base insurance awareness and to fight the RIBA regime. This is the concept. The way forward. The exclusivity of a marketing regime. The conventional insurance sales-man should still live but now he should work for, or as an, insurance franchisee and with greater dignity and more returns for his hard labour.

'Islamic Re-insurance Bond':

Domestic Pool: The need of creating a multi-currency domestic re-insurance pool is based on the very nature of insurance which is business that is a determined on the law of probability. Here premiums for acquired risks without securitization, we have seen a traditional loss of 30 % max. of the premium receipts (at an average) over the last four decades. This means we as a poor, so-called third world country, are subsidizing the economies of the developed world. This is not on. A domestic pool is necessary. Islamization if you like is necessary.

Product Profile: Islamic Re-insurance bond should be denominated apart from Pakistani Rupees, in most hard currencies like USA Dollars, Japanese Yen and Euro. These financial instruments are totally RIBA free and totally denied of guaranteed returns. Of the four pillars of any economy viz. banking, insurance, cooperatives and bonds, these instruments must be viewed as representing only insurance. This has in the history of all economies never failed. Insurance works on the law of probability and it is often said that it is only when the world dies the law of probability will fail. The premises of assumption being what it is, and the floatation representing a win situation, it is assumed that the bonds can play three significant roles:

a) become export revenue earners for the country;

b) become responsible for domestic resource mobilization in four or more currencies representing total re-insurable risk; and while

c) becoming an unprecedented source of profitably for the buyers the bond, rated as the highest yielding will eliminate all re-insurance cession, which this country cannot afford anyway.

Private Placement and under writing arrangement with banks: For the present it is envisaged that the Islamic Re-insurance bond can be sold to banks globally. The banks commissioned for the purchase should eventually be required to hold the purse (for periodical appropriations), on the basis of a musharika, dove-tailed to various insurance marketing risk/exposures. The present placement can start with banks and stock exchanges can be used after a certain tenure.

Capacity to absorb unlimited risk: The proposed Islamic re-insurance bond is a specially engineered Islamic instrument without an upper limit for its volume afloat. This reason alone, should enable insurers to assume any volume of risk towards insurance. All risk acquired is for real and it is certainly covered with real asset-based liquidity at hand. That is why one can call this initiative Islamic and truthfully 'real insurance'.

Securitization of Insurance Products

While the law of probability is fail-free, securitized insurance products are non-multiple and only cover single direct losses. Consequential losses are often far in excess of the actual risk covered and it warrants securitization of insured risks/assets for the benefit of both the insurer and the insured. Globally this could be our exclusive focus, initiative and patent.

Since Islam prohibits game-of-chance and riba, both, all rules for spreading the risk, which relate to the two, have to be circumvented. One is elated with this initiative to find securitization as the ultimate alternative to the conventional in selling the products, all of which are reinsured on an in-house Islamic Reinsurance bond. This is not deposit taking, on the contrary it is "domestic resource mobilization", by activation of a dormant debt market and the actual principal of premia meaning contribution to a fund that can sustain loss, by probability of a small percentage. The more insurance companies venture into a common philosophy the greater will be the Pakistan market for global management of insurance.

Securitization means that all risk assumed should be backed by such prevention and surveillance systems as would minimize, if not eliminate, the possibility of loss. This is of course not 100% - nothing is, but indeed close to 100%. The concept therefore rests on 'real insurance' where all risk assumed is pegged with re-insurance and re-insurance in-turn has a myopic exposure because of securitization.

It should be the endeavor of R&D at companies to remain in the pursuit of new products and new mechanisms such, that more sooner than later, insurance can start bringing home to Pakistan export revenue and that national assets where-ever they be remain insured within the meaningful Islamic principles of 'Real Insurance'.


The above concepts were professed by our chairman in re-constituting the business plan of Heritage Insurance Co Ltd. which new board has since approved and with a new proposed name for the company called BEEMA - PAKISTAN LTD., In writing this article I have tried to disseminate information to the community of insurers and the people. This again is in line with the Islamic spirit of Tabligh. It is my convection that information and findings as a consequence of research erode if they are not shared and we as Muslim people must unite in our ranks to develop all technologies indigenously developed, sharing our knowledge freely. Standing on the doors of the next millennium it is ridiculous to persue bigotry or for that matter servitude in any faculty of knowledge.

I would like to take this opportunity to reach out to the people of the insurance community, the under writers, actuaries, surveyors and evaluator's to all unite and become the support arm of the insurance knowledge-base such that leadership in the industry should rest with what we engineer, equitably and with material justice. The insurance Act should only be altered, and it must be based on our domestic home work and not repealed to be re inacted for the benefit of those who wish to retain Pakistan as a captive market. There is no need for an apologetic approach and it is time to assert our place and role in insurance globally.