Takaful - Permissibility of Conventional Reinsurance and Non-Proportional Retakaful

The use of conventional reinsurance by a Takaful operator may be permitted when there is a genuine practical necessity. This usually arises when there is insufficient Retakaful capacity or when suitable Islamic reinsurance protection is unavailable. In such circumstances, the need to protect participants and maintain the financial stability of the Takaful fund may become serious enough to be treated as necessity (darurah) under Shari’ah.

The justification is therefore not that conventional reinsurance is preferred, but that there may be no adequate Shari’ah-compliant alternative available for a particular risk. If the Takaful operator cannot obtain enough Retakaful protection, retaining the entire risk could expose the Participants’ Risk Fund to excessive financial loss.

Example

Suppose a Takaful operator needs RM500 million of external protection for a large industrial risk.

Available Retakaful capacity is only:

RM300 million

The remaining:

RM200 million

may potentially be placed with a conventional reinsurer if there is a genuine need and the relevant Shari’ah conditions are satisfied.

Simple Idea

Insufficient Retakaful + Serious need for protection = Conventional reinsurance may be temporarily permitted

Non-Proportional Retakaful

In a non-proportional Retakaful arrangement, the Takaful operator does not share every claim with the Retakaful operator according to a fixed percentage.

Instead, the Takaful risk pool first absorbs losses up to an agreed retention limit. The Retakaful risk pool only becomes responsible when the loss exceeds that retention.

This means that the Takaful operator uses its own protective provisions and Participants’ Risk Fund first. Only the amount above the agreed retention is passed to the Retakaful operator, subject to the maximum Retakaful cover.

Example

Suppose:

Takaful retention = RM1 million

Retakaful cover = RM4 million

If a covered loss is:

RM700,000

the entire loss is below the retention.

Therefore:

Takaful risk pool pays RM700,000

Retakaful pays RM0

If the loss is:

RM3 million

the Takaful risk pool bears the first:

RM1 million

The Retakaful operator may then pay:

RM2 million

So:

RM3 million loss = RM1 million Takaful + RM2 million Retakaful

This is different from a proportional arrangement because there is no fixed percentage sharing of every claim.

For example, under proportional Retakaful:

Takaful = 40%

Retakaful = 60%

Every covered claim would normally be shared using those percentages.

Under non-proportional Retakaful:

Takaful pays first up to retention

Retakaful only steps in after the retention is exceeded

Easy Way to Remember

Proportional Retakaful

= Both sides share every risk or claim by percentage

Non-Proportional Retakaful

= Takaful bears the first layer, Retakaful covers the excess

Simple Formula

Loss − Retention = Retakaful portion

subject to the agreed Retakaful limit.