Transcript takaful - Dr Azman Mohd Noor

UNDERWRITING AND
MANAGING RISKS IN
TAKAFUL
Azman Mohd Noor
International Islamic University Malaysia, Seminar on Insurance
and Risk in Asia Pacific
Kyoto International Community House
24 September 2010
Some Common Risks in Takaful
 Underwriting Risk.
 Transferring/ sharing of risks
 Shariah non Compliance risks
 Operational Risk.
 Credit Risk.
 Liquidity Risk.
 Capital Adequacy Risk
 Market Risk.
 Moral Hazard Risks
Takaful Underwritting
 Introduction
 Each insurance company has its own set of
underwriting guidelines to help the underwriter
determine whether or not the company should accept
the risk. The information used to evaluate the risk of
an applicant for insurance will depend on the type of
coverage involved.
intro
 Insurance underwriters evaluate the risk and
exposures of potential clients. They decide
how much coverage the client should receive,
how much they should pay for it, or whether
even to accept the risk and insure them.
Underwriting involves measuring risk
exposure and determining the premium that
needs to be charged to insure that risk.
Takaful Underwriting: Key
Points for Consideration
 Concept and Objectives.
 Contractual relations between the takaful
operator and the policyholders and the
participants among themselves.
 Shariah Governance
 Adopting conventional Insurance principles and
actuarial skills in underwriting as long as they are
not against Shariah.
Adopting conventional Insurance
principles and actuarial skills in
underwriting as long as they are
not against Shariah
 -Conventional insurance principles includes insurable
interest, subrogation, proximate lost, indemnity, utmost
good faith and contribution.
 -Conventional insurance principles in determining risks
such as being definable, probable of happening,
accidental, non-catastropic, a large number of
homogenous, measurable and lawful.
 Other actuarial skills and applications.
Shariah Requirement in ccepting
Risks (Underwitting)
The requirements are very essential to:
 Ensure acceptance, validity and enforceability from
Islamic Law (Shariah) point of view.
 Ensure that any risk to be accepted comply with the
Shariah principles
 Fulfill the goal and objectives of takaful operator to
be Shariah compliant business entity.
 Meet the religious requirements of Muslims in line
with their belief and faith
Impacts of Shariah Non
Compliance
 Against the command of Allah
 Possibility of cancellation of the company’s




registration
Impediment from Allah’s barakah or blessing
Business reputation
Invalidation of contract (Akad)
Non-halal income
Accepted and Rejected Risks
Accepted Risks

Risks permitted by the Shariah.

Risks not forbidden by the Shariah or not harmful.

Risks which may secure public interest.

Risks which give good images.
 Rejected Risks
Risks prohibited by the Shariah :
Risks involving riba
Risks involving gambling
Risks involving liquor
Risks involving element of syirik.
Cont’.. Rejected Risks
Risks on producing impermissible things or bringing
harmful
effects to the community.
 Risks relating to musical instruments.
 Risks on non-permissible activities like
entertainments activities which contradict with the
Shariah, working in
liquor factories, entertainment
centers, discos.
 Risks relating to tobacco goods
 Risks that bring bad image to takaful operator as an
Islamic financial institution

Risks for mixed
activities/services/products/revenues
 The risk could be accepted, however, the non-permissible
portion needs to be excluded to be covered by insurance
companies subject to the following requirements :
 Non Shariah compliant portions for activities or rental or
products i.e. riba, gambling, liquor, pork , rental payments
from premises used in gambling, sale of liquor, tobacco
related activities with less than 5%,
For hotel and resort operations, conventional share
trading, stockbroking not exceeding than 25%.

If the percentage of non permissible exceeds the
percentages as mentioned above, the risk can not be
accepted.
Cont’ Risks of mixed
activities
 The public perception or image of the company is
good, and,
 Core activities of the risk owner are important and
considered maslahah (benefit) to the Muslim
ummah and the country and the non-permissible
elements are very small and involving matters
such as umum balwa common plight and difficult
to avoid), `uruf (custom) and the rights of the nonMuslim community which are recognised by
Islam.
Non Shariah Compliant Businesses
According to Malaysian Securities
Commission Guidelines
First Criterion
The primary activity of the company is based on
riba as practised by conventional financial
institutions, including commercial banks,
merchant banks, finance companies, etc.
Second Criterion
A company whose primary activity is gambling,
such as companies running, casinos, gaming and
others.
Third Criterion
The primary activity of a company is the production
and sale of goods and services that are prohibited in
Islam, including:
(a) Processing, producing and marketing alcoholic drinks;
(b) Supplying non-halal meat like pork, etc.; and
(c) Providing immoral services like prostitution,
pubs, discos, etc.
Fourth Criterion
The primary activity of the company is gharar
(uncertainty) such as conventional insurance
trading.
RISK SHARING TROUGH
RETAKAFUL/REINSURANCE
Takaful Holders
• Individuals or companies that purchase
takaful products by paying an agreed upon
contribution to the takaful operator.
Takaful
Operator
• The operator will use some amount from the
takaful fund to pay a contribution to the
retakaful operator
Retakaful
Operator
• Retakaful operators cannot operate without
the operation of takaful operators. Thus, the
competitiveness of retakaful markets depends
on the competitiveness of takaful markets.
The Importance of Retakaful in
Takaful Business
Generally, to assist takaful operators
by:
 Protecting the solvency of the takaful operator
and its participants.
 Providing underwriting flexibility and the
capacity to accept risk.
 Stabilizing claims cost and therefore giving
greater stability to takaful contribution pricing
 Allowing takaful operator to effectively utilize
the assets of the retakaful provider to give
coverage to its clients
16
TYPES OF RETAKAFUL
1) Treaty
retakaful
Retakaful is placed
under a standing
agreement.
All risks within the
agreement are
automatically
accepted by the
ratakaful companies
2)
Facultative
retakaful
Case by case basis.
No obligation for
both takaful and
retakaful operators
to enter into the
arrangement.
TYPES OF TREATY RETAKAFUL
Treaty
a) Proportional
Quota
Surplus
b) Nonpropotional
Excess of loss
Stop loss
a)
Proportional Treaty

Quota share
- It is the basic form where the retakaful operators accepts all the
risks within the defined categories.
- It’s usually for new companies and new risks that operator has not
dealt with.

Surplus
- It is the excess of assets over liabilities.
- Under this type, the primary takaful operator cedes the surplus
liability above a specified retention.
b) Non- proportional

Excess of loss
- Recoveries are available when loss exceeds a cedant’s retention.
 Stop loss
- Reinsurer pays a cedant’s aggregate retained losses in excess of a
percentage contribution.
- Now, it is not being actively practiced in Malaysia compared to the
excess of loss process.
Retakaful Operators in
Malaysia
 In Malaysia, for the time being, there are four
Retakaful operators, namely, ACR Retakaful
SEA Berhad, MNRB Retakaful Berhad,
Munchener Ruckversicherungs-Gesellschaft
(Munich Re Retakaful) and Swiss Reinsurance
Company Ltd. (Swiss Re Retakaful); and one
International Takaful Operator in AIA Takaful
International Bhd.
Contractual Relationship Between
Takaful Company and Retakaful
 It is again based on wakalah bi ajr (agency with
fee/hire on services) contract. But the
particpants are the takaful operators on behalf
of the participants
 Collection of premium from takaful operators,
investment of funds, maintenance and
reimbursement of reserves when they are not
needed, handling the risk and settlement of
claims of the takaful operators
22
Model of Retakaful:
 Essentially about handling risk (takaful
operators) by sharing the risk with the
retakaful company.
 In principle, its operation is similar to that
of takaful .
 Therefore, all Shari’a principles applying to
takaful must apply to retakaful operations
23
Retakaful or reinsurance?
 Sec. 23 (1), Takaful Act provides: “ An operator
shall have arrangements consistent with sound
Takaful principles for r-takaful of liabilities in
respect of risks undertaken or to be undertaken by
the operator in the course of his carrying on
takaful business. “
 Shortage of retakaful capacity with paid-up capital
at about USD250M. Also issue of a viable,
reputable and effective retakaful with good rating
 Result  Re takaful capacity is constrained –
perhaps fulfilling less than 14% of takaful primary
gross premium.
24
cont’
 “With total gross written premiums by
Takaful operators of approximately US$3.9
billion in 2006, and a total reTakaful capacity
of about US$400 million, it is evident that
Takaful operators must avail themselves of
reinsurance from conventional reinsurers”
 Dr Omar Fisher, Islamic Finance News, page
28, 9th may 2008
Cont.. Retakaful or Reinsurance
 Based on doctrine of necessity (darurah) or at
least needs (hajah), the jurist has allowed for
reinsurance, but the allocation must be made
within the limits (The exercise of darurah must
be made within its limits)
 Abuse of doctrine of necessity by putting all the
reinsurance portion (or the biggest portion) to
reinsurance only without any proper
investigation to the capacity and risk allocation.
 Boosting and accelerating the retakaful capacity:
Takaful Operators are required to cede its takaful
needs within retakaful as far as possible and only
to cede with reinsurance to the extent that
retakaful companies cannot fulfill their needs.
Parameters for Ceding to
Conventional Reinsurance
 AAOIFI standards:
 1. The ceding should be done initially with retakaful
operator at the maximised level.
 2. The takaful operator should not hold the reserves belong
to the reinsurance operator if it is interest bearing. It is
allowable to keep and invest if the arrangement is based on
mudharabah and wakalah.
 3. It must be on short term basis, the volume must be small
compared to the total portfolio and on top of that, must be
approved by their respective Sahriah Committee.
 4. Takaful operator cannot take any ceding or profit
commission from reinsurance company as it is not it’s
agent.
Can Retakaful underwrite
conventional insurance?
 According to AOOIFI standards it is allowable
with the following conditions:
 1. The contract used must be the Retakaful
contract (where the concept, terms and
conditions were approved by the Shariah
Committee).
 2. It is not based on treaty arrangement.
 3. The subject matter/insurable interest is not
against Sahriah
THE END
THANK YOU FOR YOUR KIND ATTENTION
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