Takaful - Reviewing the Use of Conventional Reinsurance

There has been a significant increase in the number of multinational Retakaful operators, including Retakaful windows operated by large international reinsurance groups. This has improved the availability, capacity, technical expertise, and financial strength of Shari’ah-compliant Retakaful protection.

In the past, Takaful operators were sometimes permitted to use conventional reinsurance because suitable Retakaful alternatives were unavailable or did not have sufficient capacity to cover large or specialised risks. This permissibility was generally based on need or necessity.

However, if suitable Retakaful protection is now widely available, the original reason for relying on conventional reinsurance may no longer be as strong. A Takaful operator should therefore first consider whether an adequate Retakaful provider can meet its requirements in terms of:

• Financial capacity
• Technical expertise
• Financial-strength rating
• Risk appetite
• Type of risk
• Geographical coverage

Example

Previously:

Takaful operator needs RM500 million protection

Available Retakaful capacity = RM100 million

Remaining RM400 million may have had to be placed with conventional reinsurance because sufficient Retakaful capacity was unavailable.

Today, suppose multinational Retakaful providers can provide the full:

RM500 million

In this situation, the argument that conventional reinsurance is necessary becomes much weaker because a suitable Shari’ah-compliant alternative is available.

Therefore, the Shari’ah ruling that allowed conventional reinsurance on the basis of need may need to be reviewed as market conditions change. A permission granted because no practical alternative existed should not automatically continue if adequate Retakaful alternatives later become available.

Simple Idea

Past: Limited Retakaful → Conventional reinsurance may be permitted because of need

Now: Greater Retakaful availability → Need for conventional reinsurance may decrease

Easy Formula

More Retakaful Capacity + Stronger Ratings + Wider Global Presence = Less Justification for Conventional Reinsurance