This is not the first time we are discussing this topic, but it is as pressing today as it has ever been. In this article, I would like to share with you a few opinions on commitment to the takaful way and how this is still a challenge to both takaful and retakaful operators alike.
Legal structures
Putting the detailed workings of the model aside, there are certain practices that might not be in line with the generally accepted philosophy of takaful. For instance, let us first explore the legal form of (re)takaful operators. We typically see them as fully capitalised entities, branches or window operations. The clearer difference we could see is between fully capitalised entities as opposed to the other two forms. Both modes have their advantages and disadvantages, but the fact that the two broad categories exist raises two questions. Would the legal form of the (re)takaful operator indicate the shareholders’ commitment to the business? Would this make any difference in the choices made by the (re)takaful participant?
Looking into the first question, the assumption would be if you are willing to engage independent capital to a certain operation, you must be committed to the success of this operation and the long term prosperity of the field it operates in. A branch or a window does not send that same strong message an independent, fully capitalised operation might. However, in the real world, practice showed us that this makes no significant difference. For instance, cedant participants in a retakaful fund seem indifferent to the legal form of the fund’s operator. To many of them, the only thing that matters is the word “retakaful” in the signing stamp, irrespective of the operator and in some cases the contract itself.
Darurah – only to avoid great difficulty or danger
This takes the discussion to the next point. How far can the principle of necessity (darurah) go? Theory suggests that this principle can only be invoked to avoid great difficulty or danger. The emphasis is on “great”. This means that darurah can only go so far. Real world practice shows that it does go much further than what this simple theoretical definition suggests. Darurah seems to have become the answer to way too many questions.
Not so long ago, as a retakaful underwriter, I encountered a situation where a ceding retakaful participant decided to go for conventional reinsurance for the sole reason of price. The selected conventional reinsurance underwriter quoted a price about 10% lower than the lowest retakaful underwriter had quoted. Upon enquiring how the participants decided to use this quote, the answer was straightforward. Price difference amounts to a darurah situation. I am not quite sure how this reflects the commitment of the participant in question.
Extending the same argument to the primary market, darurah does not seem to be an issue for corporate clients. This is basically the same case in retakaful. As explored in many writings before, takaful as a way of risk management plays a limited role in the corporate world compared to personal lines. It does not offer any perceived niche or provide any risk management value add to the corporate client more than a conventional insurer might. The limited exception to this would be corporate business with Islamic financing, where the financiers require takaful covers. In such a case, practice has also showed that darurah is always the answer in case takaful is not clearly cheaper than conventional insurance. Personal lines are a different matter as the decision leans more towards an individual’s own beliefs.
The two examples above basically mean that takaful and retakaful are competing directly with insurance and reinsurance, respectively. The question is, however, was that the intention? If so, we need to consider another question. With the generally under-priced business in the current soft cycle, should we consider the possibility of a (re)takaful operator not surviving it?
Wakala fees need to be calculated carefully
Another question worth considering has to do with the wakala fee. While conventional underwriters produce their financials according to different accounting standards, Shariah-compliant underwriters, in most cases, use the wakala model. Subtracting a substantial fee from the (re)takaful fund where contributions are already under extreme stress might not be a wise decision. The wakala fee needs to be calculated with extreme care to make sure it will not be, at any point, the reason for a possible fund deficit, like what we have seen in the past with excessive wakala fees, mainly on the primary side, leading to almost perpetual fund deficits and causing eventual solvency challenges.
Is takaful for Muslims only?
Most takaful literature and research include many statistics about Muslim countries, Muslim populations in non-Muslim countries, Muslim demographics, the Muslim belief system, and so on. In other words, takaful is being looked at as a “faith-based” product. It started as such, but is there anything against offering this as a solution to non-Muslims?
As a matter of fact, if takaful offers utility at least to the same level of conventional insurance, faith should not be the sole criteria on which someone participates in a takaful pool. If takaful is already in competition with conventional insurance, why does takaful literature limit the possibilities to Muslims? This suggests exclusion of followers of other beliefs, which I certainly doubt is the intention.
Are Shariah scholars actively engaged?
The next point that might warrant some thought is the role of Shariah boards. Be it “advisory” or “supervisory”, scholars are far from reaching a consensus on how takaful should be in the world. It makes sense, but is there no possibility for dialogue and harmonisation?
There are two major regions where takaful is an active market: the Middle East and Southeast Asia. Both regions share many similarities in their interpretations of Shariah tenets, yet, it is not clear if Shariah scholars are engaging in the active exchange that would help shape the future of this industry. It would be great news for the industry if interpretations are somehow harmonised. This could also include regulators. With their exceptionally commendable efforts in their respective markets, it all remains generally local. A focused exchange with the vision of harmonising global, or at least regional, (re)takaful is still not clear.
Need for concrete resolutions
Finally, there are plenty of takaful conferences, forums, publications and other media that, like this publication, offer a great podium for sharing thoughts and discussing issues. However, action remains lacking. Every year, there are several takaful-focused gatherings taking place from London to Kuala Lumpur. The topics discussed are generally the same or very similar, which is fine, but there is no resolution or concrete outcome from any of the conferences. Of course, they provide a great opportunity to meet other industry players, but should we not need to convert these discussions to realities?
Room for improvement
To summarise, (re)takaful is still far from its potential. We are still far from the complete commitment to the model. We should probably devote capital to this industry rather than use somehow protective legal forms. Darurah should be something to enjoy with extreme caution. It is not the answer to all questions. It should not be seen as a loop hole in the system.
Also, if takaful is the great service we believe it to be, we should not be limiting it to an exclusive faith-based offering. Other than that, it would be great to have a global exchange between Shariah scholars and between regulators. Standardisation of (re)takaful principles and regulatory harmonisation is probably in the best long-term interest of this industry. It would also be great if we come up with clear conclusions to our gatherings, and convert those conclusions to actions to improve the realities of our business.
So, the answer to the title question is certainly yes. We can and should improve. Please consider these thoughts as an open invitation for discussion and cooperation from someone who takes this business personally, with the hope that our efforts would be well-received in this life and the hereafter.
Mr Mahomed Akoob is CEO of Hannover ReTakaful.