Standardisation needed for takaful mart

By Habhajan Singh
Standardisation of some takaful practices may be necessary to usher the industry to the next level of market penetration, a takaful Shariah expert told a conference recently.
Shariah compliance is the ultimate goal of all products innovated in the takaful industry while juristic differences must be viewed positively and considered as a main driver for product innovation, said Associate Prof Dr Younes Soualhi from the International Islamic University Malaysia (IIUM).
He noted that there are a few issues in the contracts of takaful and retakaful that would raise some Shariah concerns, including those regarding the type of contracts (whether it be individual or combined) and the nature of contracts (exchange or tabarru). Dr Younes, who is a Shariah advisor at Munich Re Retakaful, also highlighted issues regarding the underwriting surplus.
The sharing of the underwriting surplus by the takaful operator has been discussed for some time. The debate is whether any surplus in the special accounts should be returned to the participants or paid as a performance fee to the operator. In one explanatory note, the central bank said that one unique feature of a takaful plan is the sharing of the surplus of the fund between the takaful participant and operator based on a pre-agreed ratio. The surplus is arrived at after deducting expenses such as claims, retakaful, technical reserves and management expenses.
The participant is entitled to this surplus if he had not made a claim during the period of the takaful. Dr Younes was one of the presenters at the Isra Shariah Conference on Takaful (ISC 2009) organised by the International Shariah Research Academy for Islamic Finance (Isra).
Takaful, a protection plan based on Shariah principles, consists of customers contributing a sum of money to a common takaful fund in the form of a participative contribution (tabarru).
Another presenter, Dr Asmak Ab Rahman from Universiti Malaya (UM), discussed Shariah views on the practice of a takaful company reinsuring with conventional reinsurers. She said it is time for regulators to have a standard parameter on what conditions the takaful business could reinsure under so that the industry would be able to operate within the right framework with Shariah stability.
She noted that Shariah permits Muslims to do what is prohibited in the situation of 'darurah' (loosely translated as necessity), adding that measuring and determining the darurah situation in the industry must be based on consultation with professionals.
However, she said practitioners in the takaful industry have to be aware that, if there is adequate capacity among retakaful operators to reinsure the takaful operators, then the darurah law will be abolished and conventional reinsuring will be forbidden by Shariah.
"If we strictly disallowed takaful operators from reinsuring with conventional reinsurance it might harm the whole takaful industry especially during unpredictable risks like major catastrophes or even the insolvency of a takaful company.
"It will affect policyholders as well when they are not able to pay compensation to customers who are in need of help," she said. On offering Islamic REITS in the Islamic capital market, she said the Securities Commission (SC) allows real estate to be insured by conventional insurance only when takaful schemes are unable to provide the insurance coverage.
At present, she said most Takaful operators still have to reinsure with conventional reinsurers, as a consequence of the lack of retakaful companies that are capitalised to the levels required by insurers, and more particularly the lack of 'A' rated retakaful companies.
"The 'authorisation' from Shariah scholars to deal with conventional reinsurers however is temporary and conditional. Only in situations when Shariah compliant capacities are not available and there is no practicable Shariah compliant alternative is it permissible to use a conventional reinsurer," she wrote in her paper.
The one-day seminar ended with a panel discussion comprising the CEO of Etiqa Insurance and Takaful Tarmizi Ahmad Nordin, MNRB Retakaful CEO Ismail Mehboob, ACR ReTakaful CEO Zainal Abidin M Noor and Shariah scholar Associate Prof Dr Engku Rabiah Adawiah Engku Ali. The session was chaired by ISRA research head Dr Asyraf Wajdi Dusuki.

(This story appeared in The Malaysian Reserve on May 25, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)