Takaful - Darurah and the Changing Need for Conventional Reinsurance

In the past, the global Retakaful market had only a small number of active Retakaful operators. Their financial capacity, geographical reach, and technical ability were limited compared with large conventional reinsurers. Because of this shortage, many Takaful operators could not obtain enough Shari’ah-compliant Retakaful protection for all of their risks.

As a result, Takaful operators often had to cede part of their risks to conventional reinsurance companies. This was generally justified under the Shari’ah principle of darurah, or necessity.

The relevant maxim is:

“Necessities render the prohibited permissible.”

This means that when a genuinely necessary Shari’ah-compliant alternative is unavailable, a normally prohibited option may be temporarily permitted to the extent required to remove the hardship or danger.

Example - Situation in the Past

Suppose a Takaful operator needed:

RM500 million of external risk protection

but available Retakaful operators could provide only:

RM150 million

The remaining:

RM350 million

might have been placed with a conventional reinsurer because the Takaful operator did not have a sufficient Shari’ah-compliant alternative.

In this situation:

Insufficient Retakaful capacity → Genuine need → Limited use of conventional reinsurance

However, the Retakaful market has developed significantly. There are now more multinational Retakaful operators and Retakaful windows with stronger capital bases, greater technical expertise, wider international operations, and stronger financial ratings.

This means that some of the circumstances that previously justified the use of conventional reinsurance may no longer exist.

If a Takaful operator can now obtain sufficient protection from a financially sound and technically capable Retakaful provider, it becomes more difficult to justify conventional reinsurance purely on the basis of necessity.

Example - Situation Today

A Takaful operator requires:

RM500 million of protection

Suppose suitable Retakaful operators can now provide the full:

RM500 million

at an acceptable financial rating and technical standard.

The operator can no longer simply argue that conventional reinsurance is necessary because a lawful Shari’ah-compliant alternative is available.

This is connected to another important Shari’ah maxim:

“Necessity is assessed and treated proportionately.”

This means that even when necessity exists, permission to use a prohibited arrangement is only given to the extent necessary. It is not an unlimited permission.

Example of Proportionality

Suppose a Takaful operator needs:

RM1 billion of protection

Retakaful providers can supply:

RM800 million

but there is still no suitable Retakaful capacity for the remaining:

RM200 million

The necessity argument might apply only to the RM200 million shortfall, rather than allowing the entire RM1 billion to be placed with conventional reinsurance.

Simple Idea

Use the lawful alternative as much as possible.

Only the unavoidable portion should potentially rely on the necessity exemption.

Therefore, if the harm or difficulty can be removed through a lawful Shari’ah-compliant means, the justification for using the prohibited alternative disappears.

In other words:

When Retakaful becomes genuinely available and adequate, conventional reinsurance should not continue to be used merely because it was previously permitted.

This means the permissibility of conventional reinsurance should be reviewed continuously as market conditions change. A ruling based on necessity is not necessarily permanent because the underlying necessity itself may disappear.

Easy Way to Remember

Past situation

Few Retakaful operators

→ Insufficient capacity

→ Conventional reinsurance needed

→ Darurah may permit limited use

Present situation

More multinational Retakaful operators

→ Stronger capital and ratings

→ Greater Shari’ah-compliant capacity

→ Less need for conventional reinsurance

Two Important Shari’ah Maxims

1. Necessities render the prohibited permissible

Used when there is a genuine necessity and no adequate lawful alternative.

2. Necessity is assessed proportionately

Only the amount required to remove the necessity should be permitted.

Simple Formula

No Suitable Retakaful + Genuine Need → Limited Conventional Reinsurance May Be Permitted

But:

Suitable Retakaful Available → Necessity Removed → Conventional Reinsurance Exemption Should Be Reconsidered

And:

Partial Retakaful Availability → Use Retakaful First → Conventional Reinsurance Only for the Unavoidable Shortfall