Need for Retakaful
As mentioned earlier,
reinsurance is simply defined as insurance of insurance. From a legal perspective, a contract of
reinsurance is basically a contract of insurance. All doctrines that apply to insurance also apply
to reinsurance.
In
principle, takaful operators are not allowed to reinsure with a conventional
reinsurer, as reinsuring with a conventional reinsurer impairs full compliance with shariah principles
which is of crucial important in takaful.
However, in the absence of capacity and of financially strong retakaful undertakings
in the market, shariah scholars do grant temporary permission to reinsure with
conventional reinsurers as a matter of dharuraa
(necessity). As the takaful industry continues
its rapid growth, the need for adequate and financially-strong retakaful capacity
becomes more evident.
Adopting the same logic facilitates
the description of what retakaful actually is.
Retakaful can simply be defined as ‘takaful of takaful’. The retakaful contract is essentially a
contract of takaful, so that all the basic principles of takaful must also be
followed.
While the definition of
retakaful as the ‘takaful of takaful’ is simple, it does bring with it an in-depth
meaning and consequences. The takaful
pool of risks being managed by a takaful operator is a translation of the principle
of tabarru’/takaful among individual participants. Similarly, a retakaful pool of risks, which
is managed by a retakaful operator, is a real implementation of tabarru’/solidarity
among takaful pools of risk.
Taking the view from a different
angle, retakaful is actually a means of widening the spectrum of the principle
of solidarity or mutual help.. Without
retakaful, implementation of the principle of tabarrru’ is limited within the boundary
of a single takaful pool being managed by a takaful operator. However, through retakaful, a participant in
one takaful pool essentially helps or is being helped by other participants in
the other takaful pools. This concept is
a unique dimension of retakaful that is` not to be found in conventional
reinsurance.
The technical functions of conventional
reinsurance as discussed previously also apply to retakaful. As with conventional reinsurance, retakaful plays
the role of spreading risks from one pool to others and at the same time of providing
underwriting capacity to the takaful pool.
Using the appropriate techniques, retakaful will also be able to protect
a pool from the effects of a catastrophic event.
The capacity provided by the
retakaful industry will allow takaful operators to underwrite large industrial
and mega risks and hence to be in a
position to compete with established conventional insurers, while reducing the
need to raise huge amounts of capital.
Retakaful is an effective and convenient way of spreading the risk
portfolio over different takaful pools as well as territories. It also reduces the probability of the risk
of ruin for the industry when large catastrophic losses, either natural or
man-made, occur.
From the takaful operator’s
perspective, retakaful is a cost-effective substitute for capital. Whilst not assuming the risk, takaful
operators remain obliged to set aside capital to support the pool under their
management through the mechanism of Qard (benevolent loan) in the case of a deficit
in the pool.
Considering the high rate of
growth of the global takaful industry, it is therefore equally important for
the industry to reflect long-term sustainability. The existence of an adequate and financially
strong retakaful industry is an essential factor for sustainability. No insurance market, globally, is able to
flourish and sustain itself on a long-term basis in the absence of the support
of reinsurance, and takaful is no exception.
The retakaful industry is in
the development stage. Up to the end of
2007, there were six fully-fledged retakaful operators and seven retakaful
windows in the market. Estimates
indicate that retakaful contributions amounted to US$ 570 million in 2006, and this
figure is projected to double by around 2010.
Not all of this volume is absorbed by retakaful operators as, for
historical and capacity reasons, many takaful operators reinsure their
portfolio with conventional reinsurers.
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Adopted from Akoob, M. (2008). Reinsurance and Retakaful. In S. Archer, R. Karim, & V. Neinhaus, Takaful and Islamic Insurance: Concept and Regulatory Issues. Singapore: John Wiley & Sons (Pte) Ltd
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