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Sharia-Compliant Insurance 101

Sharia-Compliant Insurance 101


The Community Principle is the Same

3,000 years ago, Phoenician sea merchants formed trade communities. Each community member agreed to contribute a portion of his profit to compensate a member who had lost cargo at sea. This was the origin of insurance.


Sharia-complaint insurance today is based on the same community principle: the losses of the few are met by the contributions of the many. Members of the community bear one another’s misfortunes.


In a Sharia-compliant fund, the concepts of community and charity are paramount. It is understood that policy holders are members of the fund’s community. So, each community member “donates” money to the Sharia-compliant insurance fund, with no expectation of repayment. If a member of the fund suffers a loss, those donations are used to restore him fully to his original condition.


How Does a Sharia-Compliant Policy Work?

Sharia-compliant insurance is no more complicated than conventional insurance. In fact, Sharia-compliant insurance is remarkably transparent. The way funds are perceived and managed is only different. In addition to the concepts of community and charity, Sharia-compliant insurance policies are structured according to the principles of purity, certainty, and mutuality.


Purity is preserved by segregating Sharia premium donations from non-Sharia premiums. Sharia funds must also be kept in an account separate from the insurer’s capital funds. This assures Sharia clients that their donations are neither used to derive interest through lending, nor used to conduct any business, like the sale of alcohol, which contravenes the Sharia precepts of community and purity.


Insurers offer certainty to Sharia clients by explicitly stating the exact the amount of fees, deductions, commissions, earnings, and expenses for each party on the policy: the cover holder, the insurer, and the policy holder. This way all transactions can be traced back and compared to the original policy. Aside from these explicit numbers, which are not all recorded in conventional insurance policiesthe wording for Sharia-compliant policies is identical to standard policies.


Insurers then manage Sharia-compliant funds to satisfy the principles of mutuality and certainty, which benefit both policy holders and insurers. The community fund should never run out. So, if losses (claims) temporarily exceed the sum of the donations (premiums) in the fund, the insurer will make an interest-free loan to the fund, to bring the balance up to zero. Once the insurer has collected enough donations for the fund to register a surplus (profit) again, his loan is repayed.


It is solely up to the discretion of the insurer to determine when the underwriting year for a policy is actuarially “certain”. After the term of the policy is over, the insurer will wait until all the donations have been collected, and the losses compensated, to see if there is a policy surplus. The original policy wording then prescribes what percentage of the surplus the insurer keeps as a profit. After that, the insurer decides whether to redistribute the remainder of the surplus into the fund to offset future losses, or to distribute the remainder of the surplus to policy holders, according to the amount of their donations.


Good Business is Good Business

Risk evaluation and underwriting for Sharia-compliant policies are no different from standard insurance. First and foremost, Sharia clients are looking for smart, well-connected, global insurers, who offer subject expertise, risk-engineering and underwriting excellence, broad coverage, high capacity, and longevity. Because of the principles of community, certainty, and mutuality, Islamic investors are always exposed to risk at the first-party level, so they choose insurers carefully.


The Islamic economy is growing rapidly in 57 developing countries. A wealth of infrastructure and commercial projects are underway in markets which are severely underserved by global insurers. In fact, regional Sharia insurers struggle to provide the level of coverage and global policy coherence demanded by multinational Islamic companies.


Islamic assets are expected to grow from USD 1.8 trillion in 2013 to USD 6.5 trillion by 2020. With its consolidated capital core, the Islamic community is also looking for more opportunities to contribute to real estate and commercial enterprises worldwide. The potential for smart insurers is enormous.


The Global Community

It has been interesting to observe that Sharia opportunities are not always obvious at first. The more we reach out to the market, the more it reveals itself. Relationships are crucial. Trust and reputation are powerful allies that are already helping us to establish an economy of scale in Sharia-compliant coverage.


Cobalt and XL Group are currently at the forefront of global Sharia-compliant insurance. Cobalt acts as the gateway between insurers and clients, ensuring transactions are Sharia-compliant from start to finish.


XL Group was the first insurer to back Cobalt’s products, launching property and construction coverage in May 2013. In July of this year XL Group added financial lines (professional) coverage, and last month XL Group launched Fine Art and Specie coverage. Fine Art & Specie is a particularly important coverage to offer Sharia clients, who invest heavily in physical assets, and who are building wonderful new art galleries in several countries.


Lloyd’s of London is about to join us, which will further expand the coverage for Sharia clients. Ultimately, our goal is to offer a full suite of seamless Sharia-compliant coverage. This will help empower Islamic investors to integrate into the mainstream economy, for the benefit of the global community.

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AXA XL is the P&C and specialty risk division of AXA.