Takaful - Retakaful Contributions and Retakaful Shareholders

1. What Is a Retakaful Premium / Contribution?

• In conventional reinsurance, the insurer pays a reinsurance premium to the reinsurer.
• In Retakaful, it is more accurate to refer to this as a Retakaful contribution.
• The Takaful operator pays this contribution to the Retakaful operator so that part of the Takaful operator’s large risks can be shared.

Example

• A Takaful operator covers a factory with a potential loss of RM500 million.
• The Takaful operator does not want to keep the entire risk.
• It retains RM100 million and shares RM400 million with a Retakaful operator.
• To obtain this Retakaful protection, the Takaful operator pays a Retakaful contribution.

Simple Process

Participant → Takaful Operator → Retakaful Contribution → Retakaful Operator

Why Is the Contribution Paid?

• To obtain protection against large losses
• To increase the Takaful operator’s risk capacity
• To reduce the burden on the Participants’ Risk Fund
• To make very large risks more manageable

Simple Idea

Retakaful contribution = Amount paid by the Takaful operator to share part of its risk with the Retakaful operator

2. Where Does the Retakaful Contribution Come From?

• The Retakaful contribution is generally funded from the relevant Takaful risk fund, because Retakaful is used to protect that fund against large claims.
• It is treated as part of the cost of managing the participants’ risks.

Example

• Participants’ Risk Fund receives RM50 million in contributions.
• The Takaful operator decides that RM5 million should be used for Retakaful protection.
• That RM5 million is paid to the Retakaful operator.

Simple Idea

Participants’ Risk Fund → Retakaful contribution → Retakaful protection

3. What Are Retakaful Shareholders?

• A Retakaful operator may be established as a shareholder-owned company.
• The shareholders are the owners and investors of the Retakaful company.
• They provide the company with shareholder capital.

Example

Suppose investors establish ABC Retakaful.

• Shareholders invest RM200 million.
• That money becomes shareholder capital.
• The capital helps the Retakaful operator:
• Obtain a licence
• Meet regulatory capital requirements
• Establish operations
• Hire staff
• Build systems
• Provide financial strength
• Support the Retakaful fund when necessary

Simple Idea

Retakaful shareholders = Owners who invest capital in the Retakaful company

4. Role of Shareholder Capital in Retakaful

• Shareholder capital provides additional financial strength.
• This is important because Retakaful deals with potentially very large and volatile claims.

Shareholder Capital Can Help With

• Initial establishment costs
• Operating expenses
• Regulatory capital requirements
• Technology and infrastructure
• Absorbing operational losses
• Providing financial support to the Retakaful risk fund when required

Example

• Retakaful shareholders invest RM200 million.
• The Retakaful operator uses part of this money for:
• Systems
• Staff
• Liquidity
• Shari’ah-compliant investments
• The capital also provides a financial cushion.

5. Is Shareholder Capital Used Directly to Pay Claims?

• Normally, claims are primarily paid from the Retakaful risk fund.
• That fund is built from Retakaful contributions received from Takaful operators.
• However, if the Retakaful fund suffers a deficit, shareholder support may become important.

Example

Retakaful risk fund has:

RM300 million

But claims amount to:

RM350 million

There is a deficit of:

RM50 million

• Depending on the Retakaful structure, the shareholders’ fund may provide Qard, an interest-free loan, to support the risk fund.

Simple Process

Retakaful contributions → Retakaful Risk Fund → Claims

If insufficient:

Shareholders’ Fund → Qard → Retakaful Risk Fund

6. Difference Between Retakaful Contribution and Shareholder Capital

Retakaful Contribution

• Comes from Takaful operators
• Paid to obtain Retakaful protection
• Goes into the Retakaful risk-sharing arrangement
• Used to support claims and related obligations
• Similar in purpose to a reinsurance premium, but structured according to Shari’ah

Shareholder Capital

• Comes from the owners/investors of the Retakaful company
• Represents ownership capital
• Supports the company’s operations and financial strength
• Is separate from the Retakaful risk fund
• May support the risk fund through Qard if there is a deficit

Simple Example Bringing Both Together

Suppose ABC Retakaful is established.

Shareholders

• Invest RM200 million
• This forms the shareholders’ fund.

Takaful Operators

• Various Takaful operators purchase Retakaful protection.
• Together they pay RM100 million in Retakaful contributions.
• These contributions go into the Retakaful risk fund.

Now:

Shareholder capital = RM200 million

Retakaful contributions = RM100 million

They are not the same thing.

If Claims Are RM70 Million

• Claims are mainly paid from the Retakaful risk fund.
• RM100m contributions − RM70m claims = amount remaining before other expenses and reserves.

If Claims Are RM130 Million

• The risk fund may face a shortfall.
• The shareholders’ fund may provide Qard, depending on the structure.

Easy Way to Remember

Retakaful Contribution

= Money paid by Takaful operators

= Used for Retakaful protection

Retakaful Shareholders

= Owners of the Retakaful company

= Provide capital and financial support

Simple Formula

Takaful Operators → Retakaful Contributions → Retakaful Risk Fund → Claims

Shareholders → Shareholder Capital → Support Retakaful Company + Possible Qard Support