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Reinsurance in its most basic element is a contract under which a company agrees to indemnify an insurance company, the ceding company, against all or part of the primary insurance risks underwritten by the ceding company under one or more insurance contracts. Put simply, it is ‘insuring the insurer’. In effect, it can provide a ceding company with several benefits, including a reduction in net liability on individual risks and catastrophe protection from large or multiple losses. Retakaful is the Islamic alternative to this reinsurance industry.
Takaful, which has emerged as a Shariah compliant counterpart to conventional Insurance, reflecting the practical manifestation of the Quranic injunction for mutual co-operation and assistance for the common good, has seen immense growth over the last few years. The field has been expected to clock a CAGR of nearly 20% till 2019. However, Retakaful, is yet to take off.
As Adeel Mushtaq, Director Financial & Accounting Advisory Services, EY, notes, ‘Takaful has been a successful story and Retakaful is an essential component for the continued development and growth of the Takaful sector, however, Retakaful has not been able to get the mainstream limelight. This is despite a continued shortage of Retakaful capacity.’
Even though the first Retakaful operator, Sudan National Reinsurance, was established way back in 1979, the sector has garnered interest only since the mid 2000’s largely owing to the emergence of Retakaful window operations through players including Swiss Re (England), Hannover Re (Germany), Trust Re (Bahrain) amongst others. The Retakaful model largely involves the retakaful operator indemnifying the takaful company by way of a Qard-hasan or an interest-free loan, to cover the liability on account of unexpected claims by its participants. This protection is provided against the receipt of contributions or premiums collected from the takaful operators which are then invested based on the Shariah accepted investment models including Wakala, Mudaraba or the likes.
So what has hindered the growth for the Retakaful model and what still remains the reason for conventional reinsurance companies remaining active participants within the field of Takaful? Adeel stresses reasons including ‘the limited availability of desired qualities such as financial and credit strength of the operator, lack of specialist expertise, necessity for diversification, maturity of the retakaful model and, above all, the governing standards in themselves making the adoption of conventional reinsurance as a viable alternate to Retakaful.’ Here it is essential to highlight that Retakaful involves risk-sharing while conventional reinsurance involves risk-transfer – thus, inherent is an existential difference.
Emerging out of these is inadequate retakaful capacity to support the takaful growth. A major reason for the same has been the lack of governing standards within the industry. However, recent developments have involved the Council of the Islamic Financial Services Board (IFSB) resolve to approve the adoption of a new standard, Guiding Principles for Retakaful (Islamic Reinsurance) (IFSB-18). A key feature of IFSB-18 is that it provides Retakaful stakeholders with guiding principles on the conduct of the Retakaful business. These guiding principles touch important elements of the Retakaful practice including governance, Shariah principles, transparency, disclosure and supervisory review process. Adeel outlines, ‘IFSB has issued recommended best practices and this has been a good step in the right direction; however, more needs to be done to further enhance the operating standards of the sector. Furthermore, there is a pressing need for globally accepted accounting and reporting standards together with the need to enhance awareness of Takaful & Retakaful stakeholders.’
On the regional front, there is continued interest from large global names to fill the identified Retakaful gap – the move of Lloyd’s London to Dubai in 2015 to target the MENA region is a visible step in this direction. The region has seen a number of regulatory developments recently that are expected to enhance the regulatory standards in the region. This coupled with enhancements to financial reporting from Retakaful entities will help stimulate opportunities for capital markets to take interest in the sector and drive for growth.
Retakaful sector is striving to gain a foothold and a wider role to play in the overall Islamic finance space – and while it is mired in certain teething issues, its future does hold promising growth potential.