The document discusses issues related to the regulation and supervision of takaful (Islamic insurance). It provides background on the typical structure of takaful, which consists of both mutual and commercial aspects. It outlines different contractual models used in takaful, including mudaraba, wakala, and combinations. The document also discusses the concept and nature of retakaful (Islamic reinsurance). It notes issues in the retakaful market like a lack of well-capitalized providers, forcing some takaful companies to use conventional reinsurance. Research from Standard & Poor's is presented, finding the takaful sector grew in 2009 but competitive pressures and investment returns still pose challenges to sustainable development.
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The document discusses issues related to the regulation and supervision of takaful (Islamic insurance). It provides background on the typical structure of takaful, which consists of both mutual and commercial aspects. It outlines different contractual models used in takaful, including mudaraba, wakala, and combinations. The document also discusses the concept and nature of retakaful (Islamic reinsurance). It notes issues in the retakaful market like a lack of well-capitalized providers, forcing some takaful companies to use conventional reinsurance. Research from Standard & Poor's is presented, finding the takaful sector grew in 2009 but competitive pressures and investment returns still pose challenges to sustainable development.
The document discusses issues related to the regulation and supervision of takaful (Islamic insurance). It provides background on the typical structure of takaful, which consists of both mutual and commercial aspects. It outlines different contractual models used in takaful, including mudaraba, wakala, and combinations. The document also discusses the concept and nature of retakaful (Islamic reinsurance). It notes issues in the retakaful market like a lack of well-capitalized providers, forcing some takaful companies to use conventional reinsurance. Research from Standard & Poor's is presented, finding the takaful sector grew in 2009 but competitive pressures and investment returns still pose challenges to sustainable development.
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as DOCX, PDF, TXT or read online from Scribd
The document discusses issues related to the regulation and supervision of takaful (Islamic insurance). It provides background on the typical structure of takaful, which consists of both mutual and commercial aspects. It outlines different contractual models used in takaful, including mudaraba, wakala, and combinations. The document also discusses the concept and nature of retakaful (Islamic reinsurance). It notes issues in the retakaful market like a lack of well-capitalized providers, forcing some takaful companies to use conventional reinsurance. Research from Standard & Poor's is presented, finding the takaful sector grew in 2009 but competitive pressures and investment returns still pose challenges to sustainable development.
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Issue paper by ISLAMIC FINANCIAL SERVICES BOARD and INTERNATIONAL
ASSOCIATION OF INSURANCE SUPERVISORS
ISSUES IN REGULATION AND SUPERVISION OF TAKAFUL (ISLAMIC
INSURANCE)
BACKGROUND TO TAKAFUL
Takaful is the Islamic counterpart of conventional insurance, and exists in both life (or “family”) and general forms. It is based on concepts of mutual solidarity, and a typical Takaful undertaking will consist of a two-tier structure that is a hybrid of a mutual and a commercial form of company. This in itself poses significant issues for regulation and supervision. In addition, all the functions of a Takaful undertaking should conform fully to Islamic law (Shari’a), and this has implications in other areas of regulation and supervision. This section sets out the background.
There are several forms of contract that govern the relationship between the participants (policyholders) and the Takaful operator. The most widely used contracts are the mudaraba (profit-sharing) contract and wakala (agency) contract. • Pure Mudaraba Model: In a mudaraba model, the Takaful operator acts as a mudarib (entrepreneur) and the participants as rab ul mal (capital provider). The contract specifies how the investment profit and/or surplus from the Takaful operation
IFSB & IAIS – Issues in Regulation and Supervision of Takaful (Islamic Insurance) Page 5 of 16 are to be shared between the Takaful operator and participants. Losses are borne solely by the participants as the providers of capital on the condition that the operator is free from any misconduct and negligence actions, and in that case the mudarib is not entitled to receive any compensation for his efforts. • Pure Wakala Model: under this model, the principal-agent relationship is used for both underwriting and investment activities. In underwriting, the Takaful operator acts as an agent on behalf of the participants to run the Takaful fund. All risks are borne by the fund and any operating surplus belongs exclusively to the participants. The Takaful operator does not share directly in either the risk borne by the fund or any surplus/deficit of the fund. Instead, the operator receives a set fee called a wakala fee for managing the operation on the participants’ behalf, which is usually a percentage of contributions paid. However, the operator’s remuneration may include a performance fee, charged against any surplus, as an incentive to manage the Takaful fund effectively. The investment of the Takaful fund is also based on a wakala contract whereby the operator charges the participants a fee in exchange for services rendered. • Combination of wakala and mudaraba contracts: In this model, the wakala contract is adopted for underwriting activities, while the mudaraba contract is employed for the investment activities of the Takaful fund. This approach appears to be favoured by some international organisations and is widely adopted by Takaful undertakings in practice.
In all models the Takaful operator will usually provide an interest-free loan to cover any deficiency in the Takaful fund. The loan has to be repaid from any future surpluses of the Takaful fund.
CONCEPT AND NATURE OF RETAKAFUL
Re-takaful has a close relationship with takaful operations where retakaful is
a form of takaful and the competitiveness of retakaful market is depend on the competitiveness of the direct takaful market. Actually Retakaful is a form of insurance whereby the Takaful operator pays an agreed upon premium from the Takaful fund to the reinsurance company or Retakaful operator, and in return, the Reinsurance company or the Retakaful operator will provides security for the risk reinsured. Reinsurance is best thought of as "insurances for insurance companies”. Or we also can say that Retakaful is a “takaful for takaful operators”. It is a way for a primary insurer to protect against unforeseen or extraordinary losses From the above diagram, takaful holders are individuals or companies that buy the Takaful products either General Takaful products or Family Takaful products and pay an agreed upon premium to the Takaful operator to protect them from unforeseen risk and also extraordinary losses. Then, the Takaful operator will take a portion of money from Takaful fund and pays premium to the Retakaful operator to get reinsurance protection to spread its risks. Reinsurance contracts may cover a specific risk or a broad class of business.
Retakaful or Islamic reinsurance is essentially about handling risk. It is a risk
aversion method in which the Takaful ceding company resorts to either a conventional reinsurer or a Retakaful operator to reinsure original insured risks against an undesirable future situation if the risk insured were above the normal underwriting or claim. Thus, a Takaful ceding company may, based on limited financial resources, hedge against possible incapability to meet all Takaful reinsurance protection from a financially capable reinsurer, which will take over the coverage of the large proportion of the risk.
ReTakaful Worldwide
• Sudan (1979) National Reinsurance.
• Sudan (1983) Sheikhan Takaful Company. • Bahamas (1983) Saudi Islamic Takaful and ReTakaful Company. • Bahrain/Saudi Arabia (1985) Islamic Insurance and Reinsurance Company. • Tunisia (1985) B.E.S.T. Re • Malaysia (1997) ASEAN ReTakaful International. • Dubai (2005) TakafulRe.
Issue in retakaful
The main problem worldwide is the lack of retakaful companies that are capitalised to the levels required by insurers and more particularly the lack of ‘A’ rated retakaful companies. This has resulted in takaful companies having to reinsure on a conventional basis, contrary to the preferred option of seeking cover on Islamic principles. The Shari’ah scholars have allowed dispensation to takaful companies to reinsure on conventional basis so long as there are no retakaful alternatives available. Takaful companies therefore actively promote co-insurance. A number of large conventional reinsurance companies from Muslim countries take on retrocession. Therefore a large proportion of risk is placed with international reinsurance companies that operate on conventional basis. The retrocession from takaful companies ranges from some 10% in the Far East where Takaful companies have relatively smaller commercial risks (so far), to the Middle East where up to 80% of risk is reinsured on conventional basis. Retakaful companies need to ensure that they are capitalised sufficiently to enable them to: protect the financial stability of takaful companies from adverse underwriting results stabilise claims ratios from one year to the next minimise claims accumulation from losses within and between different classes geographically spread risk increase capacity increase the profitability of insurers through permitting greater flexibility in the size and type of risks accepted secure technical support and help
Research by standard & poor
Standard & Poor's Ratings Services continues to view the long-term growth and development of the takaful sector positively. 2009 was broadly a profitable year for companies we rate in the sector on a technical basis, excluding the results of start-up companies. 2009 showed continuing strong premium growth, generally ahead of the conventional insurance sector, although rates remained soft. Compared to three years ago, investment portfolios have lower exposure to equities, mainly due to falling valuations in our view rather than active de-risking. Saudi Arabia continues to be the main growth area for takaful. Around the Gulf Cooperation Council (GCC) region, medical business is pushing growth. Profitability in Malaysia's takaful sector improved in 2009, after a lackluster performance in both life and non-life sectors during 2008. Family business continues to show potential, but 2009 development has only been gradual. We expect greater operational efficiencies to develop, which could lower expenses and allow true economies of scale. Takaful fund surpluses could also develop more consistently for distribution to participants. We anticipate the development of surpluses on takaful funds, which will then be distributable back to participants. In the GCC region, an increasing obligation to employ local staff may be difficult to fulfil in the medium term in our opinion given the limited supply of suitably qualified candidates.
After another positive year in 2009, Standard & Poor's believes the takaful and retakaful (Islamic insurance and reinsurance) sector is likely to continue to grow in 2010. We believe that the long-term viability of these sectors remains supported by high expected levels of growth, broadly positive technical results, and an increase in profitability, particularly in the GCC region and Malaysia.
Nevertheless, while these positive factors should support the growth of the sector, we believe that the highly competitive and, in some cases, developing, nature of the local marketplace, as well as the impact of global investment markets on returns, continue to place an ongoing strain on sustainable development. At the same time, we believe competitive pressures from within the sector, and from conventional insurers, means that success in this market requires careful navigation.
Since our first takaful rating in 1997, we have monitored the rapid development of an industry that we believe has benefited from the ongoing economic development in its core regions. Having grown from a niche product servicing limited demand, we believe that takaful has reached a critical mass in the past five years and is now firmly established within the global risk management markets. We consider the potential for sustained growth in this market is significant, buoyed by the still-low insurance penetration and the growing recognition and acceptance of
TAKAFUL AND RETAKAFUL OPERATORS & ISLAMIC FINANCIAL
INSTITUTIONS WORLD-WIDE (in alphabetical order: by country)
• Islamic Commercial Insurance Co., B’desh • Far east Islami Life Insurance Co. Ltd. Bangladesh, • Islamic insurance Bangladesh Ltd. • Takaful Islami Insurance Ltd., Bangladesh • Prime Life Insurance Ltd., Bangladesh • Takaful IDBB Brunei • Takaful IBB Berhad, Brunei • Insurans Islam TAIB, Brunei
Egypt, Ghana, Indonesia, Iran, Jordan
• Egyptian Saudi Home Insurance • Metropolitan Insurance Co. Ltd, Ghana • Asuransi Takaful Keluarga Indonesia • PT Syarikat Takaful Indonesia • Takaful Umum Indonesia • Asuransi MUBARAKAH Indonesia • Alborz Insurance Co. Iran • Asia Insurance Co. Iran • Bimeh Iran • Bimeh Markazi Iran • Dana Insurance Co. Iran • SCAs of Iran • Islamic Insurance Co. Jordan Takaful: Potential Demand and Growth 67
Kuwait, Luxembourg, Malaysia, Qatar, Pakistan
• 1st Takaful Insurance Co. Kuwait • National Takaful Insurance Kuwait • Wethaq Takaful Kuwait • International Insurance Co. Luxembourg • Takafol S.A. Luxembourg • Syarikat Takaful Malaysia Berhad • Takaful Ikhlas Malaysia • Takaful Nasional Berhad • Mayban Takaful Berhad Malaysia* • HSBC Amanah Takaful, Malaysia* • Prudential-Bank Simpanan Nasional, Malaysia* • MAA Takaful, Malaysia* • CIMB AVIVA Takaful, Malaysia* • Hong Leong Tokio Marine Takaful* • Islamic Takaful Qatar • First Takaful Insurance Pakistan
Saudi Arabia • Al-Tawfeek Co. Saudi Arabia • Family Takaful Saudi Arabia • SACIR Saudi Arabia • Takafol Islamic Insurance Co. Saudi Arabia • International Islamic Insurance Co. Saudi Arabia • Al-Aman cooperative insurance (Al-Rajhi) Saudi Arabia • Arab Eastern Insurance Co. Ltd, E.C. (registered in Bahrain), Jeddah Saudi Arabia • Arabian Malaysian Takaful Saudi Arabia • Islamic Security Saudi Arabia • Global Islamic Insurance Co. Saudi Arabia • Islamic Arab Saudi Arabia • Islamic Corporation for insurance of investment and export credit, Saudi Arabia • Islamic Insurance Co., Riyadh, Saudi Arabia • Islamic International Company for Insurance Saudi Arabia • Islamic International Insurance Co. (Salamat) Saudi Arabia • Islamic Takaful & Re-takaful Co. Saudi Arabia/ Bahamas • Islamic Universal Insurance Saudi Arabia • Bank Al Jazira Takaful Ta’awuni Saudi Arabia
Sri Lanka, Sudan, Switzerland, Trinidad, Turkey
• Amana Takaful Ltd, Sri Lanka • Dar Al Maal Al-Islami, Geneva, Switzerland* • Islamic Insurance Co., Sudan • Sheikhan Insurance & Reinsurance, Sudan 68 Zuriah Abdul Rahman • Middle East Insurance Co., Sudan • National reinsurance Co., Sudan • Al-Baraka, Sudan • The United Insurance Co., Sudan • Watania Co-operative, Sudan • JUBA Insurance Co., Sudan • Takaful T & T Friendly Society, Trinidad & Tobego • Ihlas Sigorta A.S., Turkey • Isik Insurance Co.,Turkey
South Africa • Al-Noor Risk Solutions, South Africa**** United Arab Emirates • Abu Dhabi National Takaful Co., UAE. • Oman Insurance Co.,UAE. • The Islamic Arab Insurance Co., UAE. • Dubai Islamic Insurance & reinsurance Co. UAE.
ReTakaful companies • Islamic Takaful & Retakaful Co. (IRTCo.), Bahamas • Asean Re-Takaful International Malaysia • Islamic Insurance & Reinsurance Co. (IIRCo.) Saudi Arabia • Islamic Takaful and Re-Takaful Co. (ITRCo.) Saudi Arabia • Tokio Marine Nichido Retakaful Pte Ltd Singapore National Re-insurance Co. (NRICo.) Sudan. • BEIT Iaadat Ettamine Tounsi & Saoudi • Re-insurance (B.E.S.T. Re) Tunisia ARIG, Dubai • SCOR Asia Pacific (Singapore-French based reinsurance group)** • Hannover Re, Germany (Retakaful Unit) • Swiss Reinsurance (Retakaful Unit)
United Kingdom · Lloyds Syndicate* · Principle Insurance (previously known as British Islamic Insurance Holdings)**
Takaful Education and Training Institutes
• Islamic Banking and Finance Institute Malaysia, Malaysia • Institute of Islamic Banking & Insurance, UK • Universiti Teknologi MARA, Malaysia* • International Islamic UniversityMalaysia, Malaysia* • International Center for Education in Islamic Finance (INCIEF)* • Chartered Insurance Institute, United Kingdom in association with the Bahrain Institute of Banking and Finance, Bahrain***
Source: icmif.org/takaful, * Resource derived from the author’s knowledge and research, ** Business Insurance, 2007, *** Post Magazine, 2008, **** Business Day (South Africa), 2007, The International Herald Tribune, 2006.
