Basic Model of Retakaful
Having recognized the
importance of retakaful to the takaful industry, a significant issue is to
determine how retakaful is to be modelled in order effectively to play its role
of supporting the industry while complying with shariah principles.
The
basic model of retakaful is as shown in the diagram below.
Diagram above shows how the
principle of mutual help within the takaful pool is extended to the Retakaful Pool. No part of the risk is being shifted to the retakaful
operator as a company, which acts as the manager of the retakaful pool. The role of the retakaful operator is similar
to that played by the takaful operator to the takaful pool. The retakaful operator cannot claim all of
the contributions payable from the takaful pool to the retakaful pool as its income. In fact, its income is limited to the fee (wakala)
and/or profit sharing (mudharaba).
Once participants decide to
join a takaful pool, they pay a certain amount of contribution to the takaful
fund for the risk they place into the pool.
This contribution is mainly used to pay claims and all other expenses
arising out of the management activities of the takaful operator such as
acquisition costs and administration costs.
The takaful operator is also entitled to receive a portion of this
contribution as its fee. This fee is income
for the operator and is credited to its account. All claims made by the participants will be
paid out of the takaful fund.
As manager of the takaful fund,
the takaful operator is obliged to take all reasonable measures to ensure that
the takaful mechanism amongst participants is managed in a sound and
professional manner for the benefit of the participants. It must exercise prudent underwriting so that
the quality of the portfolio being managed remains sound. It also has to invest the funds in shariah
compliant investment instruments and earn a reasonable investment yield at acceptable
levels of risk and diversification.
The takaful operator has to
monitor the health and robustness of the takaful fund in relation to the
liabilities attached to it. If, in its professional judgment, the assets
available in the Takaful fund are likely to be inadequate to pay expected claims,
the operator has an obligation to take proper and corrective action to resolve
the issue. Retakaful is one of the
mechanisms the takaful operator will use to manage this situation. In this way,
Retakaful mitigates problems of capital adequacy of Takaful funds, which may be
particularly troublesome in the case of a new Takaful fund which has not had
time to build up prudential reserves to provide a solvency margin. The use of
Retakaful also reduces the potential dependence of a Takaful fund on a Qard
facility from its operator.
When arranging retakaful, the
takaful operator basically shifts a part of liability assumed by the Takaful
Fund to the other fund, namely the retakaful fund. Although retakaful contracts are concluded
and signed between the takaful operator and the retakaful operator, it is fundamentally
a contract between the takaful fund and the retakaful fund. In this contract, both takaful and retakaful operators
are acting on behalf of their respective funds.
By shifting liability to the retakaful
fund, the takaful fund must transfer a part of its fund, as a contribution to
the retakaful operator. Expenses that relate
to all retakaful activities, such as claims, acquisition costs and
administration costs, are paid out of the retakaful contribution received. The retakaful operator will also receive its
fee or profit sharing from the retakaful contribution. The percentage or amount of contribution to
be allowed for the retakaful operator’s fee should be agreed at the inception
of the contract between the takaful operator and the retakaful operator.
Shifting partial liabilities by
using retakaful means reducing the possibility of the takaful fund experiencing
a deficit that may lead to the takaful operator triggering the Qard facility, a
benevolent loan that has to be granted by the takaful operator to the takaful fund
in case the fund is in deficit.
Retakaful therefore protects the takaful fund as well as the capital of the
takaful operator.
The retakaful pool has the same
characteristics as the takaful pool. Given
that the takaful pool is built on the basis of Tabarru’ among the participants,
the retakaful pool will follow this. The
retakaful pool widens the spectrum of mutual help by combining participants of many different takaful
pools which are managed by different takaful operators. Through its global nature, retakaful reduces the
risk volatility across geographical boundaries.
The retakaful operator plays an
important role as a manager of the retakaful pool, similar to the takaful
operator (cedant) who is the manager for the takaful pool. In this role, the retakaful operator is
entitled to be remunerated. The
remuneration depends on the model adopted in the underlying retakaful contract. If the mudharabah concept is applied, then their
remuneration will be based on profit sharing.
Under the wakala or the waqf model, the retakaful operator will receive
an agreed fee, regardless of the result of the pool. A combination of models is possible, in
particular the wakala model for the pool underwriting management contract and the
mudharabah for managing the fund investments.
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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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