Focus on Retakaful: The Case of UAE and Malaysia

In UAE, the Insurance Authority has set out instructions stating the conditions under which a conventional reinsurance company can accept retakaful business. The conditions are:

  • The reinsurers articles of association must include the practice of Takaful reinsurance.
  • All operations relating to takaful reinsurance must be compliant with the Shariah.
  • It must comply with Takaful insurance regulations issued by the Insurance Authority to the extent consistent with takaful reinsurance business.
  • There must be complete technical and financial separation between the conventional and takaful reinsurance business.

In Malaysia, new Takaful Operating Framework (TOF) guidelines have been issued by Bank Negara Malaysia (BNM), inforce July 2020, which also allows for takaful operators to cede to conventional reinsurers but subject to the following conditions:

  • No takaful operator or retakaful operator is known to accept the particular risk;
  • No takaful operator or retakaful operator has the capacity or expertise to accept the particular risk; or
  • A retakaful arrangement with takaful operator or retakaful operator creates potential detrimental effects to the takaful funds.

The term ‘detrimental effects’ is spelled out as those which leave the takaful operator or retakaful operator unable to meet its financial obligations towards the takaful funds, including where the takaful operator or retakaful operator is:

  • Not established or incorporated in accordance with the laws of its home regulator;
  • Not properly regulated or supervised by its home regulator;
  • Not managed by a competent board and senior management;
  • Not financially strong, as may be evidenced by its financial statements or financial rating; or
  • Based in a country that is experiencing political or financial instability which has the potential to affect the takaful operator, retakaful operator or industry.

Whenever conventional reinsurance is used, senior management must provide justification and evidence report to the Board on each session.

Conversely, a retakaful operator may accept reinsurance from a conventional insurer if the risk is permissible under Shariah and is based on a retakaful contract between the retakaful operator and the insurer or reinsurer.

In line with the concept of mutual assistance and collective ownership of the retakaful risk fund, any profit commission paid to a cedant must be based on the experience of the entire risk fund. Such profit commission must be fairly redistributed to the relevant funds of the takaful operator based on the source of the retakaful contributions.

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