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Presenter:
Swiss Re Retakaful :- Marcel Omar Papp
Fidrus Sukor
Organizer:
Association of Shariah Advisors in Islamic Finance (ASAS)
Date/Place:
4th June 2014/Lanai Kijang, Kuala Lumpur
Questions on Retakaful
Introduction
Swiss Re is a leading and highly diversified global reinsurance company
The World's Leading Reinsurers
Swiss Re At A Glance
You will find that the terms reinsurance and retakaful are used
interchangeably at many parts of the presentation. This is because the
purpose and technical nature of reinsurance/retakaful are largely the same.
However, the specific Shariah issues which will be highlighted are specific to
retakaful.
Headquarters, Zurich
We deliver both traditional and innovative offerings
in Property & Casualty and Life & Health that meet our
clients' needs
Top Ten Reinsurers based on net Net Premium P & C (USD mil) L & H (USD mil)
premium earned 2012 (USD mil)
Examples of Risks
What retakaful does?
The Origins of reinsurance
How Does reinsurance Work?
How Risks are transferred in reinsurance
How Risks are shared in retakaful
Basic structure of retakaful
Living life and running business involves risks. To mitigate these risks,
individuals and companies buy insurance. Insurers too, need to protect
themselves and do so by buying reinsurance. This industry touches almost
every part of our lives and draws on insight from virtually every scientific
discipline. It's also one of the few industries that is, and always has been,
truly global in nature. Retakaful is the Shari'a compliant 'version' of
reinsurance.
Examples
Financial
Credit, Equity,
market risks
RTOs provide coverage against all kind of risks all over the world
Risk is shared with individual and companies on the primary side, and with primary TOs to
the RTO on the retakaful side
RTO allows those parties to reduce risk exposure risk & owned capital requirement
Freeing up capital allows TOs to write more business, thus enabling economic growth &
creating more stability
First reinsurance contract written in Latin (14th Century) affected in Genoa in July
1370
Even though first retakaful operator was established in 1979 retakaful only took off
starting from 2005 with the setting up of several retakaful operators.
May involve a sharing of all premium and losses or may just cover
losses exceeding a certain threshold
Spreading the risk around the world, can cover particularly large
one-off risk
Note:
Broadness of risk spread
is as important as
capacity
Non-permissible risks
Takaful Takaful Insurer Takaful may enter the system in
1 2 3 may ways at various
levels (especially for P&C
or General Retakaful)
Retakaful 1
Claims or
Contribution Surplus
Distribution
Claims or
TAKAFUL FUND Surplus RE-TAKAFUL FUND
Mutual pool for the Distribution Mutual pool for the collection
collection of contribution of contribution and payment
and payment of claims of claims
Contribution
Dividends Dividends
Marcel & Fidrus | ReTakaful Technical Workshop | June 4, 2014
Roles
Risk sharing function Diversify risks on a global Make takaful more broadly
basis available and affordable; enable
economic growth
Information function Put a price tag on risks Set incentives for risk-adequate
behaviour
PROPORTIONAL
FACULTATIVE
NON - PROPORTIONAL
BASIC FORMS OF
QUOTA SHARE
RETAKAFUL
PROPORTIONAL
SURPLUS
OBLIGATORY
TREATY
EXCESS LOSS
NON -
PROPORTIONAL
STOP LOSS
Proportional Facultative:
Cedants and RTO divide the premium and
losses between them at a contractually
defined ratio.
FACULTATIVE:
Case by Case risk sharing
The term 'risk' is not only to
specific hazards but the actual
object insured
'faculty' means to have the
option to accept or refuse to
take
Non-Proportional Facultative:
Free to choose which risk to
cover
As opposed to proportional facultative
no set of predetermined ratio to divide the
premium and losses
Share of losses depending on actual
amount loss incurred
Labuan Based
Retakaful
Operator
Kuala Lumpur
Based Retakaful
SCOR Reinsurance Group Operator
Labuan Islamic
Financial Services Section 129. The Authority shall not approve an application for an Islamic
and Securities Act banking or Takaful licence by any applicant under this Act unless
(2010)
it is satisfied that
(a) the aims and operations of the business which such applicant
desires to carry on will not involve any element which
is not in compliance with Shariah principles; and
(b) there are, in the articles of association of such applicants, provision for
establishment of an internal Shariah Advisory Board to advise such applicant
on the operations of its business in order to ensure that its operations do not
involve any element which is not in compliance with Shariah principles
Islamic Financial Services 2013 (IFSA) Same legal framework, systems, models & processes
AAOIFI Shari'a standard No. 41 Islamic reinsurance - Damage to integrity & image of Islamic insurance
Islamic insurance companies should reinsure first with Islamic industry if conventional reinsurance is used
reinsurance companies, to the largest possible extent
1. One 'fund': Shareholders' fund 1. Two funds: Shareholders' and Participants' fund
Pooling dilemma
The provision of interest-free loan (Qard) is the main connection between shareholders'
and participants' fund (besides of Wakala fee).
Implicit assumptions:
Qard is provided rarely.
Amounts are small.
Loan is paid back quickly and completely.
Participants stay in fund even if fund is in deficit.
Participants stay in fund even if rates have to be increased.
Retakaful/reinsurance mostly needed for volatile risks which tend to have high limits
(especially in general retakaful).
Takaful operators often demand that no pooling is applied for their portfolio
Retakaful pool becomes a single operator 'pool' as practised in traditional reinsurance
Leakage
Practices
RT Wording
Recapture
Financing Arrangement
4%
60.23%
5 Maintain business
relationship with reinsurers
Big
When are these reasons valid and when are they just an excuse (e.g. is it
acceptable to go for reinsurance if a retakaful operator offers the same
terms and conditions for a rate which is just 10% higher?)
Current retakaful wordings worldwide do not accurately reflect the legal relationship between the
involved parties (e.g. retakaful contracts are between TO and RTO whilst they should be between
the risk fund of the TO and the risk fund of the RTO).
However, the risk fund in the Wakala model is not a legal entity and by this cannot enter into a
legally binding arrangement.
One option to overcome this is to set up the risk fund as a Waqf fund.
Waqf is recognised by Islamic law & tradition as legal entity in its own right.
It can accommodate and own the risk fund in form of cash waqf.
A committee has been set up by the Malaysian Takaful Association to look further into this issue.
Financing TM ventures in Takaful is challenging because of the separation between Shareholders and
Risk Fund (tabarru')
management expenses,
Shareholder's commissions, profits, etc
Fund
Contribution
can only be used for claims (and
Participants Risk Fund claims related expenses) and
retakaful.
From the diagram above, unlike conventional insurance, we can see that the Risk Fund cannot be
used to pay for any other expenses except for those related to claims
Whilst there are some similarities between reinsurance and retakaful there are also some distinct
differences (e.g. risk transfer vs risk sharing).
There are no harmonised retakaful practices many retakaful contracts contain elements which
are contentious from a Shariah perspective.
Several Shariah issues have still to be addressed in retakaful (e.g. leakage; contentious practices;
wording; recapture).
The retakaful industry needs the support from Shariah scholars and advisors
to address the challenges (e.g Shariah issues) and
to ensure that credible and Shariah-compliant retakaful solutions are used
by Takaful operators.
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