PRESENTED BY AHMAD SAUFE NAWIMOHAMED ABDULLAHI JAMA MOHAMED SAYED SADEQ
“takaful for takaful operators”. It is a way for a primary insurer to protect against unforeseen or extraordinary losses. serves to limit liability on specific risks, to increase individual insurers’ capacity, to share liability when losses overwhelm the primary insurer’s resources, to help insurers stabilize their business in the face of the wide swings in profit and loss margin inherent in the insurance business.
Facultative / Treaty Proportional Non-proportionalQuota Surplus Excess of Stop LossShare Loss
Fire/Property Misc Accident Marine Motor Engineering Special risk
Total gross written premiums by Takaful operators of approximately US$3.9 billion in 2006, and a total Re-Takaful capacity of about US$400 million, it is evident that Takaful operators must avail themselves of reinsurance from conventional reinsurers. Some Takaful companies depend on reinsurance for as much as 65% to 85% of total coverage written - except for auto coverage, for which retention of risk generally ranges between 55% and 80%. Hence premium retention could be as low as 15% of gross premiums written.
Bases of Re Takaful Scheme; Cooperation & Solidarity. Guidelines for Islamic reinsurance operations: TO must give a portion of money as a donation based premiums to establish a Re-takaful fund; This payment shall be equal to the defined risks of each TO The person or individual who manage the fund will be paid on the basis of ijara (hire contract) or according to the rules of Profit Loss Sharing (mudharaba).
TO also may defer payment of their premium instead of advanced payment of contributions but with a pledge to settle their financial obligation at a later date.
The insured (ceding company), that is, the direct insurer, which desires to relieve itself from the part of the risks, insured. This party we call it as Takaful operator The insurer that is the company, which accepts that portion of risk, which is reinsured. This party we call it as Retakaful operator.
Protecting the Takaful operator from the threat of insolvency, underwriting and interest of the participants, forging co-operation among the participants and investing the accumulated fund in an Islamic way Provides underwriting flexibility and further consolidating the financial stability of the Takaful operator in order to compete with conventional insurance companies in accepting risks. This means Retakaful “build a very close continuing business interest in common between the Takaful ceding company and the reinsurer because they are both at risk.” It may allow the Takaful operator to utilize the retained deposit reserves of the Retakaful fund in the interest of its clients without paying interest as a process of making the reinsurance industry an interest free business.
Important elements of ReTakaful that must be present for Shariah compliance: Risk sharing within ReTakaful pools as between ceded Takaful risks Segregation of assets between ReTakaful operator and the ReTakaful risk pool(s) ReTakaful shareholder capital available to respond to deficits in risk pool(s) through Qard Hasan Supervision by Shariah supervisory board or Islamic scholar knowledgeable in insurance/ reinsurance Underwriting Shariah accepted risks.
Some Islamic scholars have begun to raise serious doubts as to whether contributions ceded to ReInsurance are permitted under the Shariah. The Islamic principles that apply to Takaful operations apply equally to ReTakaful. In other words, preference should be given by Takaful operators to utilize reTakaful arrangements over conventional reinsurance. Shariah boards implementing a “right of first showing” to Retakaful operator. The transfer of these risk exposures to reTakaful must follow the start-up of additional reTakaful companies to allow for a diversity of geographic risks and asset classes to individual reTakaful.
Regulated by the law of necessity (Darura) which means the transaction is unavoidable and must be carefully evaluated as to its purpose and urgency; No commission is paid to ceding Takaful company from reinsurer. Ceding achieved on a net (risk) premium basis profit-sharing arrangement. Portion of profit-sharing/annual surplus to be distributed back to policyholders. Contributions/premiums invested in Islamically acceptable investments so that profit sharing produces halal income.
1. Limited Capacity – Insufficient to cover all Takaful needs. Peak risk capacity - Takaful operators should be able to rely upon their ReTakaful providers for significant risk capacity under treaty associated with certain peak risks – especially in energy risks. Natural disasters capacity- adequate capacity to absorb financial shocks from such natural catastrophic events as earthquake, tsunami, windstorm, flood, fire, etc. Certain regions with high concentration of Muslim populations suffer such misfortunes regularly - Iran, Turkey, Indonesia, parts of China, Bangladesh, etc.
Re-takaful companies have an advantage in terms of Shari a compliance, but insufficient to counter competition from conventional insurers, because of the size and expertise of conventional reinsurers and their historical and/or personal relations within the markets. Pricing risks and treaties are the keys to enable Re-takaful companies to gain substantial market share, supplementing capacities with expertise, pricing tools and the ability to explore specialized, niche markets. Re-takaful operators must find their own way to increase penetration by anticipating and meeting the demand from direct Takaful companies, and building partnerships with new takafulstart-up companies from the beginning, to secure business.
none of the ReTakaful providers today carry an A rating, which is the minimum rating demanded by some regulators to approve the risk sharing treaty for a Takaful operator. ReTakaful companies must strengthen their financial condition and improve their underwriting practices in order to qualify for A or better ratings, and hence position themselves to compete effectively with long-established conventional reinsurers. The ratings will enhance the attractiveness as established securities. The Re-takaful operator must insist, and the direct takaful operators understand, that the first requirement for a, takaful company from a Re-takaful operator is Shariah compliance. The security or the rating is a general requirement for all of the insurance industry.
The lack of human resources is one of the major weaknesses of the industry. This is visible especially in the MENA region. The backgrounds of underwriting, accounting and marketing staff are in conventional insurance. This tends to negatively affect their ability to develop an appropriate takaful profile needed for better service to the clients and the cedant companies. The takaful industry must develop a proper educational tools to ensure professionals within the industry are able to fully develop and market takaful products and the concept of takaful. Only then can differentiation develop within the industry.
Globalization requires the standardization of accounting methods, management and corporate governance. Takaful operators, as financial corporations looking for credibility, must comply with internationally accepted corporate governance principles. As takaful and re-takaful operators are in a sense the promoters of Islamic values, they must pay maximum attention to and have great respect for the ethical aspects of takaful operation. Transparency and corporate governance are the basis of this approach
Product development and innovation offer innovative products addressing consumer demands. Underwriting support and capacity Re-Takaful can also play an important role in providing underwriting support and capacity. Commitment to syariah compliance necessary to set some benchmarks for Syariah compliant re-Takaful practices and a more consistent application of re- Takaful. E.g: Malaysia Takaful Association Involvement of syariah scholars Syariah scholars need to be better informed about re- Takaful so that they can understand and highlight questionable re-Takaful practices. Favorable Re Takaful regulation New regulation has to ensure the “ease of doing” Re Takaful business is maintained.
Re-Takaful operation is a must for Takaful operators to share their risk and protect against unforeseen and extraordinary losses. The method of Re-Takaful is actually similar to method of Conventional Reinsurance. The only differences between the two reinsurances ie; Conventional Reinsurance and Islamic Reinsurance (Re-Takaful) are in term of the operational procedures where in Conventional Reinsurance, it involve a high degree of gharar and riba through reinsurance commission which the direct reinsurance company get from the reinsurance treaty. On the other hand, the Re-Takaful operation is depend on actual expenses spent by the Takaful operator in the process of Re-Takaful. Furthermore in Conventional Reinsurance, insurable interest is vested. On contrary, under Islamic laws, the reinsured party doesn’t get an insurable interest or to reinsure the property of the original insured party without permission from the policyholder.