Takaful - Reinsurance Capacity vs Retakaful Capacity

• The global reinsurance market is much larger than the Retakaful market.
• This means conventional reinsurers generally have a much greater financial capacity to absorb very large losses than Retakaful operators.
• The difference is mainly caused by:
• Larger premium pools
• Larger shareholder capital
• Longer market history
• Greater number of reinsurance companies

1. Global Insurance Premiums

• In 2020, total global insurance premiums were estimated at approximately:

USD6,300 billion

• This represents premiums collected by insurance companies around the world.

Simple Idea

Global insurance market = USD6.3 trillion in premiums

2. Global Reinsurance Premiums

• Total global reinsurance premiums were estimated at approximately:

USD320 billion

• This is approximately 5% of total global insurance premiums.

Calculation

USD320 billion ÷ USD6,300 billion ≈ 5%

• This means that part of the risks originally accepted by insurance companies was passed on to reinsurers.

Simple Process

Policyholder → Insurance company → Part of risk → Reinsurance company

Simple Idea

Insurance premiums = USD6,300bn

Reinsurance premiums ≈ USD320bn

3. Global Reinsurance Capacity

• Global reinsurance capacity was estimated at more than USD500 billion.
• Reinsurance capacity does not come only from reinsurance premiums.
• It is supported by:
• Reinsurance premiums collected
• Shareholder capital
• Accumulated financial resources

Simple Structure

Reinsurance Premiums + Reinsurance Shareholder Capital → Reinsurance Financial Capacity

• In simplified terms, this large financial base determines how much loss the global reinsurance industry can absorb.

Example

• A large earthquake causes losses across many insurance companies.
• Those insurers may have transferred part of their risks to reinsurers.
• Because global reinsurers have hundreds of billions of dollars of financial capacity, they can absorb a substantial portion of these losses.

Simple Idea

Large financial pool → Greater capacity to absorb catastrophic losses

4. Global Takaful Contributions

• By comparison, total global Takaful contributions were estimated at only around:

USD30 billion

• This is significantly smaller than the conventional insurance market of USD6,300 billion.

Comparison

Conventional Insurance = USD6,300bn

Takaful = USD30bn

• Therefore, the total pool supporting the Takaful industry is much smaller.

5. Estimated Global Retakaful Contributions

• If we assume Retakaful represents approximately the same 5% share of Takaful contributions as reinsurance represents of insurance premiums:

5% × USD30 billion = USD1.5 billion

• Therefore, estimated global Retakaful contributions would be approximately:

USD1.5 billion

Simple Calculation

USD30bn × 5% = USD1.5bn

6. Reinsurance vs Retakaful

Reinsurance

• Reinsurance premiums ≈ USD320 billion
• Financial capacity exceeds USD500 billion
• Very large global risk pool
• Greater ability to absorb catastrophic losses

Retakaful

• Estimated contributions ≈ USD1.5 billion
• Much smaller risk pool
• Lower financial capacity
• More limited ability to absorb very large losses

Simple Idea

Reinsurance pool = Very large

Retakaful pool = Much smaller

7. Why the Size of the Pool Matters

• Reinsurance and Retakaful exist to help insurers and Takaful operators manage large risks.
• The larger the financial pool:
• The more risk can be accepted
• The larger the claims that can be absorbed
• The greater the ability to support insurers/Takaful operators

Example

Suppose an aviation loss produces a claim of:

USD500 million

For a large global reinsurance market:

• USD500 million is relatively small compared with its total financial capacity.

For a much smaller Retakaful market:

• A USD500 million loss represents a much larger proportion of the industry’s available resources.

Simple Idea

Same claim + Smaller fund = Much greater financial impact

8. Why This Is a Challenge for Takaful Operators

• Takaful operators may want to cover large risks such as:
• Aircraft
• Ships
• Oil and gas projects
• Large factories
• Infrastructure
• However, they may need significant Retakaful protection.
• If Retakaful capacity is limited, Takaful operators may struggle to transfer/share enough of these large risks.

Example

• A Takaful operator covers an aircraft with potential exposure of:

USD300 million

• It wants to retain only USD50 million.
• It therefore needs Retakaful protection of:

USD250 million

• If Retakaful operators cannot provide sufficient capacity, the Takaful operator may have difficulty accepting the risk.

Simple Process

Large risk → Takaful operator → Needs Retakaful → Limited Retakaful capacity creates difficulty

9. Why Reinsurance Has Greater Capacity

• Conventional reinsurance has:
• A much larger insurance market supporting it
• More premiums
• More shareholder capital
• More established international reinsurers
• Greater geographical diversification
• Therefore, risks can be spread across a much larger financial base.

Simple Idea

Large insurance industry → Large reinsurance industry → Greater risk-bearing capacity

10. Why Retakaful Has Lower Capacity

• The global Takaful industry itself is much smaller.
• Therefore, Retakaful receives fewer contributions.
• There are also fewer major Retakaful providers.
• This results in a smaller pool available to absorb losses.

Simple Relationship

Smaller Takaful market → Smaller Retakaful market → Lower loss-absorbing capacity

Easy Numerical Comparison

Conventional Market

• Global insurance premiums = USD6,300bn
• Global reinsurance premiums = USD320bn
• Reinsurance share ≈ 5%
• Reinsurance capacity = More than USD500bn

Takaful Market

• Global Takaful contributions = USD30bn
• Estimated Retakaful contribution at 5% = USD1.5bn

Main Lesson

• The difference between USD320 billion of reinsurance premiums and approximately USD1.5 billion of Retakaful contributions shows how much smaller the Retakaful market is.
• Consequently, Retakaful has a more limited capacity to absorb very large losses.
• This is one reason why the Takaful industry needs:
• More Retakaful operators
• Greater capital
• Larger contribution pools
• Stronger financial resources

Easy Way to Remember

Insurance market is huge → Reinsurance pool is huge → Can absorb huge risks

Takaful market is smaller → Retakaful pool is smaller → Capacity for huge risks is more limited

Simple Formula

Larger Risk Pool + More Capital = Greater Capacity to Absorb Losses