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Regulatory Issues in Takaful

Regulatory Issues in Takaful

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Published by Muhammad-Suhaini

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Published by: Muhammad-Suhaini on May 06, 2011
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11/28/2012

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Regulatory issues in Takaful
The differences between Takaful and conventional insurance clearly have regulatoryimplications. For example:1) A Takaful operator has an obligation to ensure that all aspects of the insuranceoperations are compliant with
Shari‟a rules and principles. To do so, it will draw on in
-
house religious advisers, commonly known as a Shari‟a board.
 2) The Takaful operator will be representing to policyholders, either explicitly orimplicitly, that its operations are in accordance with
Shari‟a rules and principles.
Some regulators would consider they had a responsibility to ensure that suchrepresentations are well-founded.3) In a Family Takaful plan there are generally no guarantees (i.e. they operate on a
„defined contribution‟ rather than a „defined benefit‟ basis). This implies that the risk
profile is different from the standard insurance product, where guarantees arenormally given in terms of maturity benefits, surrender benefits and death benefits.This has implications both for capital adequacy and for disclosure to consumers.4) The solvency regime needs to reflect the location of risk. For example, if there is adeficit in the underwriting fund, how strong is the obligation on the operator to give aninterest free benevolent loan, and what account should be taken of this in thesolvency regime. This raises the issue in practice of whether liability can be extended
to policyholders‟ investment accounts.
 5) Because policyholders share in any surpluses and, in principle, meet any deficits inthe underwriting pool, there is a need to determine how their shares should bedetermined. At present different companies follow different policies in this respect.6)
Because investments must be Shari‟a compliant, a Takaful firm cannot invest in
conventional interest-paying bonds, or in certain types of equity (brewers being anobvious example). There are also limitations on the use of derivatives, for example to
 
hedge currency risk. The asset risk profile will therefore be different from that of aconventional insurer.7)
Takaful firms might be on the wrong end of “a number of shortcomings” in audit
procedure. While we determined that the audit firms inspected had put in placesystems and processes in line with global best practices, some specific areas forimprovements were identified. Other than instances where there was insufficientdocumentation for the audit evidence obtained, there were instances where thenecessary audit procedures and evidence were clearly not performed or obtained.8) The restriction in Shariah regarding commercial conventional insurance has led tothe establishment of a number of Takaful (Islamic insurance) company worldwideproviding insurance coverage for the general public. In the majority of cases thecompanies are run as limited companies owned by shareholders. Some Takafulcompanies are also listed on the stock exchange, where their shares are activelytraded, and thereby going public.9) Generally, many Takaful companies (especially those using the Mudaraba principle)claim that their operations are based on the concept of mutual or co-operativeinsurance as approved by the Muslim jurists. This claim is on the basis that:
o
They receive the premium or contribution from the insured on the basis of theMudaraba principle, whereby the company becomes the entrepreneur(Mudarib) and the insured party the capital provider (Rab al-Mal).
o
The insured party agrees to donate a certain percentage (or in some cases asin General Takaful the whole of the amount paid) of the premium/contributionto a special fund used to pay compensation or benefits to contributors.
o
Any surplus left in the fund after settlement of all claims is shared by thecompany and the insured as profit in a ratio as agreed in the contract. Aninsured party who has received compensation, the amount of which is greaterthan what he could have received as a share of the surplus had he made noclaim, is not entitled to share such a surplus.
 
o
The company uses normal actuarial principles to calculate risk and premium.Since this Takaful company operation is claimed to be based on theMudaraba principle, the question arises as to whether such an operation canbe considered to be Shariah-compliant.10) In this case, the parties to the contract are the company (which is owned in mostcases by the shareholders) on the one hand and the group of the insured parties onthe other hand. In other words, the company does not belong to either the insuredparties or the contributors. In fact, the company is a separate legal entity distinct fromthe shareholders. Since the operation of the Takaful company is based on theMudaraba principle (as claimed), the insured parties are considered capital providers(arbab al-amwal), and the company as an entrepreneur (Mudarib). Therefore, boththe insured parties (Arbab al-amwal) and the company (Mudarib) according to thescheme are entitled to share the surplus (or profit) in line with the contract, based onan agreed ratio or percentage.11) Compensation or benefits to the insured parties are paid from the amount in theTakaful fund, receiving the money from the premium or contribution paid by theinsured, which agree to pay the whole amount (or part thereof) as a donation
(Tabarru‟). This Takaful operation up to this point, is Shariah
-compliant, but theMudaraba contract should be examined in greater detail. Under the Takafuloperation, the money in the Takaful compensation fund belongs legally to thecompany and not to the insured-cum-investors (as in the case of A Family takafulfund), and it is claimed (in line with the t
abarru‟ principle) that by making the donation(Tabarru‟), that is when the insured pay the premium or contribution, an individual
insured party is considered to waive his/her right to the money paid. However, if ageneral view of Shariah is to be relied upon with regard to all the insured parties as agroup, the whole amount collected by the Takaful fund (particularly in the case of thegeneral takaful i.e. the compensation fund) must be considered either as trust money

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