The Islamic Financial Services Board (IFSB) has requested comments on its exposure draft 25: Disclosures to Promote Transparency and Market Discipline for Takaful / Retakaful Undertakings by 25th May. This is a good time to make your voice heard by commenting on this draft. There are a number of points in this draft which are directly relevant to ongoing discussions of IFRS17 for Takaful in Malaysia.
At the heart of discussions of IFRS17 for Takaful is the question: from a technical point of view is are there really any differences between Takaful and conventional insurance? Point 5 of the IFSB draft starts the discussion on this:
“A number of distinguishing features of takāful/retakāful mean that the disclosures required of conventional insurers/reinsurers are not sufficient to meet this need. These features include the models within which most modern TUs/RTUs operate, with multiple funds within a single legal entity, some attributable to participants and some to shareholders, but with financial flows between them. They also include the requirements of Shari’ah governance, including a Shari’ah-compliant investment programme, and the possibility of surplus distributions to participants.”
Stating the question differently: all of the shariah models, interactions between participants and the operator and other unique aspects of Takaful, are they simply a means to an end or do they result in technical differences? I tend to use the example of comparing a participating (par) policy in conventional insurance with Takaful to give my view on this. My question: “Which is fairer to the policyholder: a conventional insurance par policy or a Takaful policy?” The answer is clear from a technical point of view: The conventional insurance policy is fairer. Let me explain. Let’s say there has been a pandemic in 2020, and this caused huge losses in the par fund of the conventional insurance company as well as the Takaful fund (causing a qard). A policyholder purchasing a policy in 2021 would not be affected by the losses from this pandemic as his asset shares (the basis for the value of his policy in Malaysia) will only start in 2021 after the pandemic is over (hopefully!). For the Takaful policy however, the participant entering in 2021 would most likely need to help repay the qard. This is not to say Takaful is not being designed properly, but rather the focus in Takaful is on people helping people, not individual fairness. This is a technical difference in Takaful which needs to be kept in mind when discussing what disclosures in Takaful should look like.
If we can accept that Takaful is technically different than conventional insurance the next aspect to consider is: what is the purpose of financial statements? Point 7 of the IFSB draft gives some thoughts from a Takaful point of view:
These disclosures have a mainly prudential aim, in order to ensure the soundness and stability of the industry. They provide information to stakeholders, whether shareholders, participants, investors, intermediaries, analysts or others, to enable them to make judgments about the TU/RTU’s soundness and how it is being managed. Their decisions based on the disclosed information will put pressure on the firm to manage itself prudently.
This makes it clear that financial statements do more than just provide a fair and accurate picture of the company for a potential investor, but rather for all stakeholders including participants. Also integral here is the term “soundness”. In Takaful this surely goes beyond painting a fair and accurate picture of the profits to shareholders. Any financial statements we put together must clearly show the levels and reasons for qard at a minimum as this will demonstrate prudence in managing the welfare of participants as shareholders are being given a sacred trust in Takaful to manage the risk funds prudently. Point 16 of the IFSB draft makes this clear:
Public disclosure of material information is expected to enhance market discipline by providing meaningful and useful information to participants to make decisions on insuring risks with the TU, and to market players (which includes existing and potential investors and other creditors) to make decisions about providing resources to the TU.
Whereas in conventional insurance the underlying issue for a potential policyholder is whether the insurer is strong enough to pay claims (and thus the financial statements should be focused on the shareholder position), in Takaful there are deeper concerns such as the management of the Takaful risk funds. Whilst it is true that in conventional insurance there are par funds, these par funds generally operate within very strict rules as to payouts to policyholders and shareholders such as the 90:10 rule in Malaysia and many other countries. In Takaful there is significantly more freedom in setting wakalah fees and in cross subsidizing differing product types. This is the beauty and challenge of Takaful: participants helping participants.
One point being discussed is how much should be mandated in the presentation of financial statements and how much should be left to the discretion of the Takaful operator. The IFSB draft point 17 states that consistency between Takaful operators is best:
So far as practical, information should be presented in accordance with applicable jurisdictional, international standards or generally accepted practices so as to aid comparisons between TUs.
Unfortunately this is precisely the challenge we are facing and why Takaful is at a crossroads. There are so many types of Takaful worldwide. The inner workings of a cooperative model in Saudi Arabia are fundamentally different from that of Sudan. The Sudan mudharabah model is different than mudharabah as it is practiced in Egypt, and both are different from the mudharabah which had been practiced in Malaysia and neighboring countries. The Wakalah model as well can involve surplus sharing (in the form of performance fees) on the part of the operator, no sharing by the operator or even no sharing by any party. Even when the model looks identical, such as models used in Brunei versus Malaysia, there are subtle but important differences. Our challenge as an industry is to ensure these differences are also reflected/accounted for in any international accounting standard involving Takaful. Without this there will be simply no way to effectively compare the practices of differing Takaful operations as required in IFSB draft point 17.
Point 30 of the IFSB draft discusses the types of information required in audited financial statements and includes financial performance. We feel this needs to be clarified to segregate the performance of Takaful risk funds separately from the operator fund as this is the only way to satisfy the information needs of participants. Point 35 though does allude to this, that the experience of individual funds should be given:
Information should be sufficiently comprehensive to enable participants and market players to form a well-rounded view of a TU/RTU’s financial condition and performance, business activities, and the risks related to those activities. In order to achieve this, information should be:
• well-explained so that it is meaningful;
• complete, so that it covers all material circumstances of a TU/RTU and, where relevant, those of the group of which it is a member; and
• both appropriately aggregated, so that a proper overall picture of the TU/RTU and of individual funds within it is presented, and sufficiently disaggregated, so that the effect of distinct material items may be separately identified.
Section 2.1.5 of the IFSB draft makes this even clearer when it states that “Disclosure should be made for each risk fund, bearing in mind that where there are multiple PRFs the risk profile may vary from one PRF to another”.
Section 2.1.9 goes on to further require that capital adequacy be disclosed for both the SHF and PRF (operators fund and risk funds), and section 2.1.11 requires various disclosures on financial performance of each fund.
Point 125 provides an example of a source of earnings analysis for family Takaful. We feel this should be integrated into IFRS17 required formats, as this draft guideline will be effective at the same time as IFRS 17 in many jurisdictions.
We are at a crossroads for Takaful. Will Takaful be considered identical to conventional insurance or will Takaful be considered unique (and beautiful)? The time is now for you to express your views to IFSB on exposure draft 25 which discusses these points and to demand that the interpretation of IFRS 17 for Takaful take into account this and other guidelines at IFSB.
The exposure draft 25 of IFSB in English and Arabic can be found at this link: