Takaful - Basis for Permitting Conventional Reinsurance

The main basis for permitting a Takaful operator to use conventional reinsurance is practical necessity. This situation may arise when there is not enough suitable Retakaful or Islamic reinsurance coverage available in the market to protect the operator against large or specialised risks.

If the Takaful operator cannot obtain sufficient Retakaful protection, keeping the entire risk may expose the Participants’ Risk Fund to serious financial loss. In such circumstances, using conventional reinsurance may become necessary to protect participants and maintain the financial stability of the Takaful operation.

This is also connected to the concept of dire public need. If the absence of reinsurance protection could cause serious harm to participants, businesses, or the wider community, that need may be treated as reaching the level of necessity (darurah) under Shari’ah.

Example

Suppose a Takaful operator covers a large industrial project worth RM1 billion.

The operator can safely retain only:

RM100 million

Available Retakaful providers can cover:

RM600 million

There is still:

RM300 million

of risk that cannot be covered through Retakaful.

If the operator keeps this RM300 million exposure, one major loss could seriously weaken the Participants’ Risk Fund. Therefore, conventional reinsurance may be used for the remaining amount because of practical necessity.

The permission is therefore not based on a preference for conventional reinsurance. It arises because the operator has no adequate Shari’ah-compliant alternative and needs protection against serious financial harm.

Simple Idea

Insufficient Retakaful coverage + Serious need for protection = Necessity

Therefore:

Conventional reinsurance may be temporarily permitted

Easy Formula

**Lack of Islamic Reinsurance Coverage

• Dire Public Need
• Risk of Serious Harm
• = Necessity that may justify limited conventional reinsurance**

The permission should remain limited to the amount and period genuinely required, and Retakaful should still be given priority whenever it is available.