The new guidelines address a number of concerns that Takaful firms have, but none more important than the limitations of the Shari’ah compliance rules on the investments available to Takaful firms and the lack of Shari’ah compliant fixed income products like Sukuk.
The guidelines also highlighted the increased risks for Takaful firms from a ratings perspective as a result of their smaller size, higher expenses and the limited reTakaful capacity available, although A.M. Best noted that the firms were able to, in certain cases, use conventional reinsurance.
However, A.M. Best conceded that Takaful firms can get higher ratings than their business would otherwise dictate if the operator’s funds are financially stronger, offering greater resources to be able to cover fund deficits through Qard Hassan.
On the other side of the equation however, Takaful companies with weaker operator funds will not see their ratings lowered because the policyholder’s individual Takaful fund is ring-fenced and cannot be tapped by the Takaful company or its shareholders if its expenses exceed its Wakala or Mudarabah fees.
A.M. Best did raise questions about the lack of experience with troubled Takaful funds to see if the segregation of the operator’s and Takaful funds would be respected in practice. Overall, A.M. Best’s draft ratings methodology highlight the higher growth rates of Takaful, albeit from a lower base, and should provide both Takaful firms and other Islamic financial institutions with a clear list of items needed to strengthen Takaful companies: more Sukuk, greater reTakaful capacity, internet distribution and the use of bancassurance as a distribution platform.