Takaful - Small Size of the Retakaful Industry and Dependence on Conventional Reinsurance

The Retakaful industry is still relatively small compared with conventional reinsurance. There are only a limited number of dedicated Retakaful operators, and many are smaller, have limited capital, and operate mainly within national or regional markets. In contrast, large conventional reinsurers generally have greater capital, stronger technical expertise, wider international networks, and greater capacity to absorb very large risks.

Because Retakaful capacity is limited, Takaful operators may not always be able to place all their large risks with Retakaful providers. This is particularly relevant for aviation, marine, oil and gas, large industrial projects, infrastructure, and catastrophe risks. For example, if a Takaful operator needs RM900 million of external protection but Retakaful providers can only accept RM400 million, the remaining RM500 million may need to be placed with conventional reinsurers.

The problem may also involve a lack of technical capacity, not only financial capacity. Some specialised risks require experienced underwriters, actuaries, catastrophe-modelling experts, and specialists in areas such as aviation, marine, or engineering. Large conventional reinsurers may already possess this expertise, while smaller Retakaful operators may not.

Regulatory requirements can also require Takaful operators to share large risks. A regulator may limit how much exposure an operator can retain to prevent a single major loss from threatening the Participants’ Risk Fund. If sufficient Retakaful capacity is unavailable, conventional reinsurance may sometimes be used to meet this requirement.

However, using conventional reinsurance creates a Shari’ah concern because conventional reinsurance may involve risk transfer, interest-based investments, and other structures that do not follow Retakaful principles. Therefore, its use may only be accepted under applicable Shari’ah rules where there is genuine need or necessity.

In the long term, the industry needs more well-capitalised Retakaful operators, stronger financial ratings, better technical expertise, wider geographical diversification, and greater underwriting capacity. A larger and stronger Retakaful market would reduce the Takaful industry’s dependence on conventional reinsurance.