Principles and profit

As British Muslims come under the spotlight as never before, there is a very real way that insurers and brokers can build bridges with the fastest growing community in the UK.

Two million Muslims live in this country, the vast majority of whom come from a Sunni background in Pakistan and Bangladesh. Traditional western forms of insurance are not permissible under the Sunni interpretation of Islam, unlike their Shia counterparts.

Insurance contravenes three central tenets of Shariah law:
•Uncertainty (Gharar)

•Gambling (Maisir)

•Interest (Riba).

British Muslims therefore represent a great untapped market for UK brokers. But how to change their fatalistic belief of "What will be will be" into a recognition of the benefits of insurance?

The answer could be Takaful insurance products that comply with Islamic Sharia law.

Takaful means "shared responsibility, joint guarantee, mutual security, joint indemnity, mutual assurance or surety and co-operative assurance", according to the International Cooperative and Mutual Insurance Federation (ICMIF).

Sabbir Patel, vice-president of the ICMIF, points out that there is a "big potential market in Europe" for Takaful products, no more so than in the UK, which has an increasingly settled Muslim population. Currently, "there is nothing of significance in the UK", says Patel.

While Creechurch launched a Shariah-compliant Syndicate 3786 in January, it remains to be seen what impact Canopius' takeover will have on the Takaful start-up.

The first Takaful product was launched in 1979. Since then, the global Takaful sector has increased to encompass 80 operations, 120 "windows" (a separate division within an existing insurer) and 12 Retakaful (Takaful reinsurance) providers. Companies such as AIG and Munich Re have launched Retakaful operations internationally, says Patel.

One estimate has the global Islamic insurance sector growing from its present $2bn to $14bn by 2015.

Patel indicates the FSA is discussing a profit-sharing model with a proposed Islamic insurance provider, British Islamic Insurance Holdings (BIIH). He says there should be "more clarity from the FSA" in the next six months. The ICMIF has provided £15m to help the start-up, which is expected to launch an IPO once it gains FSA approval.

No special favours
While unable to comment on specific applications, an FSA spokesman was very supportive in general of Islamic financial products: "We try to regulate in as sympathetic a way as possible."

He added: "The FSA has published a detailed briefing note covering Islamic banking and the same basic approach would apply in insurance.

"We check whether the providers have financial security and assets to cover business. We wouldn't really be looking at other factors. Any prospective Takaful provider would also have to meet our conduct of business requirements and prove they are fit and proper people, have sufficient capital and conform to treating customers fairly requirements."

The FSA's briefing note encapsulates its policy as: "No obstacles, no special favours."

This has been true of the banking sector, which, as in other areas, seems to have stolen a march on the insurance industry, with major providers such as HSBC and Lloyds TSB already having launched Islamic banking products.

The Takaful model (see box) differs from conventional insurance in the sense that "shareholders will cover liabilities if a profit isn't made", says Patel's colleague, Iqbal Asaria. And Takaful operators need to establish a Shariah advisory board to protect policyholders.

As Patel says: "The Muslim population needs reassurance that products are compliant." He advises operators to "choose the Shariah board to reflect the diversity of the Muslim population".

Of course, this is a tricky area. The creation of a kind of "shadow board" sitting above or beside the company's board creates potential issues surrounding compliance and authorised persons.

And in a business environment that is becoming ever more mobile and fleet of foot, referring each case separately to a board could rapidly become unwieldy.

Malaysia has come up with an innovative solution to this by establishing a national Shariah advisory board that can advise on general principles, but it's difficult to see how this could possibly work in a non-Muslim country.

And on a local level, this issue of representation can create cross-cultural problems in a regulated environment. One Yorkshire-based broker says that many Muslims in the local community prefer to deal via a person that they will take a lead from in financial matters.

"All placing decisions, often premium and cover instruction are channelled via this person. They also want remunerating but are not FSA authorised," the broker says.

Understandably, most brokers would consider this unacceptable and therefore shy away from dealing with Takaful products and the Islamic community. Unfortunately, there is the perception out there that it is a "closed shop".

But if brokers can surmount these barriers, there is a potentially lucrative market out there if the right profit-sharing, mutual framework can be created with insurer partners.

Another preconception is that Takaful operators are prohibited from investing premiums in a wide variety of financial products.

Not so. Although Patel admits that investment is "a key challenge", as Shariah law debars Takaful operators from investing in fixed interest bonds, Takaful products have many similarities with the burgeoning range of ethical financial instruments in that investments in equities such as alcohol, gambling, pornography and tobacco are prohibited.

There are obvious conflicts inherent in deposits by Takaful providers in Lloyd's central fund, but Patel believes these can be overcome: "I assume they can separate the investments."

And increasingly, Islamic bonds are being developed internationally as a Shariah-compliant investment alternative to fixed interest bonds.

Indeed, brokers and insurers could find that the mutuality and ethical nature of Takaful products make them attractive to non-Muslims who are concerned about the use of their money.

Multiculturalism is here to stay in Britain. Rather than passively waiting for Muslims to change their devout and sincere opposition to traditional insurance, the cannier regional brokers should view the growing Islamic population as a huge potential market for those prepared to invest in innovative products tailored to Islamic principles.