Retakaful: Compatibility and Other Principles

Bearing in mind the limited resources of retakaful available and the fact that there are several operational models being used by cedants, it is vital to have retakaful models that are compatible with any underlying models used by takaful operators.  The situation of a retakaful contract not being concluded solely because of model incompatibility should be avoided as far as possible.  Otherwise, the retakaful industry would not be able to maximise its role in supporting the growth of takaful, and the development of the retakaful industry itself will be slowed down.

Importantly all three models of takaful operate on the basis of tabarru’, particularly in defining the relationships amongst participants of the pool.  What makes them different from one other is the relationship between the takaful operators and participants, which then leads to the question of how to remunerate the takaful operators.  Under the mudharaba model, the relationship is defined as between investor (rabb ul maal) and entrepeneur (mudharib) and the remuneration of the operator is paid from its agreed share of profit.  Under the wakala and waqf models, the takaful operator acts as the agent or representative of the participants and is remunerated by a pre-determined fee.

In addition to compatibility, the following basic principles should be fulfilled by retakaful in order to be shariah compliant:

-   There should be no element of risk transfer from the pool/participants to  the retakaful operator.

-   The retakaful pool must operate on a basis of Tabarru’ (doing good deeds) amongst participants.

-    None of the prohibited elements under Islamic Shariah law should manifest itself in the retakaful model such as riba, dhuluum (injustice), concealment etc.

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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