Reinsurance
Reinsurance is a form of company-to-company insurance whereby an insurer transfers part of the risk to another insurer to limit the total loss it would experience in case of a disaster; the insurer pays an agreed upon premium from the insurance fund to the reinsurance company, and in return, the reinsurance company will provide security for the risk reinsured. Similarly, Retakaful, which is the Islamic form of Reinsurance, has a close relationship with Takaful operations and the same Shari’ah principles apply to both. The Takaful operator takes a portion of policyholders’ contributions in General and Takaful schemes and pays premium to the Retakaful operator to get reinsurance protection to spread its risks.
The Retakaful operator plays the key function of risk carrier and fund provider to direct Takaful operator; it also gives advice and assistance in the design and structuring of specific insurance contracts to the direct insurers. Accordingly Takaful operator can spread its risks based on different criteria such as location and class of insured assets. This would enable the Takaful operator to stabilise claims ratios from one year to another and would therefore be able to hedge against possible insolvability or incapability to meet a large number of Takaful indemnities that may occur simultaneously, by using the coverage of a financially capable reinsurer.
In addition to the important role of the risk mitigation played by Retakaful, this mechanism enables the primary Takaful operator to raise its underwriting capacity over and above the usual limitations imposed by statutory regulations. Retakaful operator can also help new insurance companies who may reshuffle their contracts in reinsurance until they gain enough experience and credibility. This will lead to greater Takaful capacity for Takaful operators and thus to strengthening of the Takaful form of risk coverage. Besides, Retakaful operator can use the additional financial resources and invest them in Islamic financial markets in a Shari’ah compatible way using profit-sharing arrangements with Takaful Operator.
The Retakaful operator plays the key function of risk carrier and fund provider to direct Takaful operator; it also gives advice and assistance in the design and structuring of specific insurance contracts to the direct insurers. Accordingly Takaful operator can spread its risks based on different criteria such as location and class of insured assets. This would enable the Takaful operator to stabilise claims ratios from one year to another and would therefore be able to hedge against possible insolvability or incapability to meet a large number of Takaful indemnities that may occur simultaneously, by using the coverage of a financially capable reinsurer.
In addition to the important role of the risk mitigation played by Retakaful, this mechanism enables the primary Takaful operator to raise its underwriting capacity over and above the usual limitations imposed by statutory regulations. Retakaful operator can also help new insurance companies who may reshuffle their contracts in reinsurance until they gain enough experience and credibility. This will lead to greater Takaful capacity for Takaful operators and thus to strengthening of the Takaful form of risk coverage. Besides, Retakaful operator can use the additional financial resources and invest them in Islamic financial markets in a Shari’ah compatible way using profit-sharing arrangements with Takaful Operator.
Retakaful Operator
The two parties involved in Retakaful operations are the direct insurer, which desires to relieve itself from a portion of risk burden, and the Retakaful operator, which accepts to cover that portion of insured risk. The Retakaful Operator role is mainly to strengthen the Takaful sector by covering large accumulation of risks subject to possible loss for direct Takaful operators and hence enabling them to raise their underwriting capacities without involving conventional reinsurers that may propose mechanisms that do not adhere to Shari’ah principles and could use a high degree of Gharar and Riba.
The Retakaful operator functions include carrying risk of ceding insurers by being a partner of insurance contracts to take part of the insured risks and providing funding for the risk to allow direct Takaful companies, especially new companies intending to offer new lines of business products, to take on further payment obligations and hence protecting the Takaful operator from the threat of insolvency.
The Retakaful operator may enter into profit-sharing arrangements with the ceding companies and would distribute the balance of the shareholders’ surplus, if any, amongst them; it can also allow their participants (Takaful operators) to utilize the retained deposit reserves of the Retakaful fund in the interest of their policyholders without paying interest. Most importantly, the Retakaful operator will provide the direct insurers with a wide range of technical advice and support that may vary from helping in new reinsurance contracts design to assisting in the structuring of the total reinsurance programme.
In case there is a need to cover a large amount of risks that is over the capacity of the Takaful operator, the latter can enter into profit-sharing arrangements with other Retakaful operators or even some conventional reinsurance companies. However, its reinsurance requirements should be regularly reassessed in order to decrease its reliance upon the conventional reinsurance to the maximum, until the Retakaful operator could be strong enough to put an end to its relations with the conventional reinsurers or eventually replace them using other coinsurance agreements with other available Retakaful operators.
The Retakaful operator functions include carrying risk of ceding insurers by being a partner of insurance contracts to take part of the insured risks and providing funding for the risk to allow direct Takaful companies, especially new companies intending to offer new lines of business products, to take on further payment obligations and hence protecting the Takaful operator from the threat of insolvency.
The Retakaful operator may enter into profit-sharing arrangements with the ceding companies and would distribute the balance of the shareholders’ surplus, if any, amongst them; it can also allow their participants (Takaful operators) to utilize the retained deposit reserves of the Retakaful fund in the interest of their policyholders without paying interest. Most importantly, the Retakaful operator will provide the direct insurers with a wide range of technical advice and support that may vary from helping in new reinsurance contracts design to assisting in the structuring of the total reinsurance programme.
In case there is a need to cover a large amount of risks that is over the capacity of the Takaful operator, the latter can enter into profit-sharing arrangements with other Retakaful operators or even some conventional reinsurance companies. However, its reinsurance requirements should be regularly reassessed in order to decrease its reliance upon the conventional reinsurance to the maximum, until the Retakaful operator could be strong enough to put an end to its relations with the conventional reinsurers or eventually replace them using other coinsurance agreements with other available Retakaful operators.
Retakaful operations
As a Shari’ah compliant alternative to conventional reinsurance, Retakaful operations should be fully adhere to Islamic principles of co-operation, protection and mutual responsibility; it is imperative that the Retakaful operator ensures that all transactions are dealt without involving elements of Riba, Gharar or Maysir and that the arrangements do not include non-proportional clauses where risk is unfairly shared between the different parties; any non-proportional reinsurance arrangement should be based on a strict profit commission plan or on a reciprocal basis. In addition, the Retakaful operator is required not to engage the invested contributions in any prohibited activities.
If there is a need for more resources to cover large sums to help the primary Takaful undertakings to spread the risk inherent in some segments of the Takaful business, the Takaful operator can engage into profit-sharing arrangements with commercial insurance and reinsurance companies. This is justified by the fact that currently there are not enough Retakaful companies capitalised to the levels required by insurers and especially not enough "A" rated Retakaful operators; this authorisation is conditioned by the unavoidable necessity to protect the interests of its participants and its shareholders and not causing financial injury to Muslims or destabilising the financial systems of Muslim countries. Furthermore, Retakaful operators are not allowed to pay or receive any reinsurance commission from or to a conventional reinsurance or insurance company, such a commission is only accepted in the case of Takaful or Retakaful operators. The Takaful Operator should also regularly review its reinsurance requirement with the conventional reinsurers to gradually reduce its dependence on them.
In addition, in order to remain compliant with Shari'ah principles, Retakaful operators can sort sorting to Shareholders or Islamic banks for Qard Hassan to serve as a deposit reserve for the Takaful operator. This fund will be invested as a part of the Retakaful fund and will be used to the best of the interest of all participants and can; this reserve can also be used to cover any extraordinary losses. A Shari'ah Supervisory Board should be designated to control and monitor all operations of the Retakaful operator in accordance with Shari'ah rulings, in particular in regard to its reinsurance contracts with conventional reinsurance companies.
If there is a need for more resources to cover large sums to help the primary Takaful undertakings to spread the risk inherent in some segments of the Takaful business, the Takaful operator can engage into profit-sharing arrangements with commercial insurance and reinsurance companies. This is justified by the fact that currently there are not enough Retakaful companies capitalised to the levels required by insurers and especially not enough "A" rated Retakaful operators; this authorisation is conditioned by the unavoidable necessity to protect the interests of its participants and its shareholders and not causing financial injury to Muslims or destabilising the financial systems of Muslim countries. Furthermore, Retakaful operators are not allowed to pay or receive any reinsurance commission from or to a conventional reinsurance or insurance company, such a commission is only accepted in the case of Takaful or Retakaful operators. The Takaful Operator should also regularly review its reinsurance requirement with the conventional reinsurers to gradually reduce its dependence on them.
In addition, in order to remain compliant with Shari'ah principles, Retakaful operators can sort sorting to Shareholders or Islamic banks for Qard Hassan to serve as a deposit reserve for the Takaful operator. This fund will be invested as a part of the Retakaful fund and will be used to the best of the interest of all participants and can; this reserve can also be used to cover any extraordinary losses. A Shari'ah Supervisory Board should be designated to control and monitor all operations of the Retakaful operator in accordance with Shari'ah rulings, in particular in regard to its reinsurance contracts with conventional reinsurance companies.
