TAKAFUL PRODUCTS AND SERVICES IN SAUDI ARABIA: AN EXPLORATION INTO POLICYHOLDER’S PERCEPTIONS AND REGULATORY FRAMEWORK

Abstract

Takaful is the Islamic counterpart of conventional insurance, where it relies on a combination of tabarru (donation) and agency or profit-sharing. The takaful fund is considered a musharaka (partnership) among participants (policyholders). The relationship between the takaful operator and participants’ fund is based on either wakala contracts to manage the underwriting activities, and/or a mudaraba contracts to manage the underwriting or investment activities. Participants (Policyholders) in the takaful scheme are the main stakeholders; their equity consists of ownership of the underwriting activities and the investment funds. Participants’ relationship with Takaful Operators (TOs) depends on the percentage of the contributions premium they pay. They have a claim on assets of these funds in case of liquidation and they are entitled to have their claim paid if there is enough underwriting funds to finance payout; they are also entitled to share in the distribution of any investment and underwriting surplus. However, the only right that participants can exert on the takaful scheme is to disconnect their contractual relationship with the company in case of dissatisfactions. Participants’ undeserved rights might be due to management prioritizing interest towards shareholders as they are the main stewards of the takaful company. In other words, one of the main challenges faced in the takaful industry is shareholders and management discretions, power and activities due to the unclear structure of the takaful operational scheme. The Takaful operational scheme should follow the two-tier hybrid structure (mutual and proprietorship) as it has been identified by the prominent regulatory bodies such as AAOIFI and IFSB. However, almost all regulators, of which the Saud Arabian Monetary Agency (SAMA) is one, treat the TOs as a proprietorship, as it can be easily regulated and supervised which requires an identified share capital and shareholders.

The main aim of this study, hence, is to recommend proper protection channels for participants, by conducting two parallel ways research, (i) exploring participants’ perceptions, knowledge, preferences and satisfactions levels about the service and products presented by the TOs in Saudi Arabia (ii) reviewing and comparing the current directives and laws imposed by the Saudi insurance regulatory authorities with the standards and polices imposed by the international insurance and takaful bodies.

In fulfilling the aim of the study, primary data collection research was adopted through a survey questionnaire technique. The questionnaire was structured with 4 main dimensions (Disclosure, Knowledge, Preference and Satisfaction) with a total of 26 variables to cover the research objectives and themes. The survey questionnaire was distributed to 9 TOs in Jeddah, Saudi Arabia. A total of 300 out of 500 returned questionnaires were complete and found fit for analysis purposes. The data were analysed using various statistical analysis techniques ranging from simple frequency distribution analysis to the more advanced analyses such as non-parametric statistical analysis, Spearman’s correlation and multinomial logistic regression. In general, the results of the study show that participants’ overall perceptions and knowledge on TOs services and products is low, while participants reported high overall preferences which implies that participants are demanding more services from the TOs as they have more wants and needs. In term of satisfaction levels, participants reported a weak to moderate satisfaction levels, as a result of participants’ low perception, weak knowledge and high preferences which was obvious from the significant relationship between participants perceptions, knowledge and preferences as independent variables with participants’ satisfaction levels as dependant variables. In other words, in order for the TOs to satisfy their participants, they need to disclose more detailed information about different sorts of financial returns (investment return and underwriting surplus), as participants are financially motivated and there is no effect at all for religious motivation. The results of reviewing and comparing SAMA with the international insurance and takaful bodies, indicated that SAMA did not implement directive laws that address the takaful business nor any directive that address Shari’ah issues. Accordingly, it is highly recommended that SAMA adopts the well-established Corporate Governance and Market Conduct & Disclosure standards and polices that have been set by the international bodies such as AAOIFI and IFSB for better protection for the takaful participants in Saudi Arabia.

The results of the research have established effective instrumental tools to measure the desired environment that should be available for the perspective policyholders and participants for their ultimate protection. These tools are based on participants’ perceptions, knowledge, preferences and satisfaction levels and based on the country’s regulatory assessments to support and protect participants’ and policyholders’ rights in the takaful fund.