The retakaful sector has been strengthening its core competencies, and today boasts highly rated capacity along with strong technical and Shariah advisory support. Some perennial issues such as “leakage” to conventional reinsurance remain relevant, though companies have seen some improvement through regulatory support and a better regard for the value of retakaful.
By Ridwan Abbas
The retakaful sector has been growing from strength to strength with capacity and well-rated securities more readily available. The sustained double-digit growth in the takaful market, along with the strong take-up of Islamic financing in both the retail and commercial space, presents opportunities for retakaful.
However, the industry has not had a smooth ride as it struggles to step out of the shadow of their reinsurance counterparts, given the latter’s more entrenched position in the market. Nonetheless, one can safely say that retakaful capacity is today big enough to support takaful growth across nearly all lines of business; the last five years have seen the presence of more ‘A’-rated securities in the sector.
Unfortunately, perennial challenges remain, not least in the fact that not all takaful companies view retakaful as a default option, with management preferring to place their risk with conventional reinsurers they have long-standing relationships with.
Leakage to conventional market shows improvement
“In my view, there is not much improvement as takaful operators are caught up with maintaining existing relationships in their panel and rating continues to be a concern in some countries,” said Mr Sahimy Man, CEO of MNRB Retakaful.
While some of these conflicting issues remain, the majority of retakaful operators Middle East Insurance Review spoke to have seen some improvement on the “leakage” issue and in Malaysia, the existence of regulation to address this has made it into a “retakaful-friendly” market. Bank Negara Malaysia (BNM), which regulates the takaful sector in Malaysia, last year released guidelines which place an onus on takaful operators to exhaust its retakaful options before ceding any risk to the conventional market.
“BNM’s ‘Circular on General Retakaful Arrangements’ reiterates the requirement for takaful operators to justify the utilisation of conventional reinsurance capacity. This requires written endorsement by the Sharia Committee and approval by the Board of Management,” explained Mr Tobias Frenz, Head of Munich Re Retakaful based in Kuala Lumpur.
He added that the Malaysia Takaful Association (MTA) has also completed a survey of four general takaful companies to understand the cause of leakage in Malaysia.
“The survey indicates that leakage is due to two main factors. On the one hand, it is linked to a lack of ‘competitive’ retakaful capacity. That is, more competitive terms are available in the conventional reinsurance market. On the other hand, some risks are simply not within the risk appetite of the retakaful operators,” said Mr Frenz..
On the issue of mega risks which are too large to be reinsured by a single retakaful operator, such as aviation and energy, one suggestion was to create a combined retakaful pool to support the risk.
“There should be better co-operation amongst the takaful/ retakaful operators to handle the exceptionally high valued and complex risks. The operators should consider co-insurance and reinsurance pools to create increased capacities to absorb larger risks,” said Mr Nassib Barbir, Assistant Director of Takaful Re.
Adding value to retakaful
Aside from being capacity providers, retakaful companies constantly look to provide value-added service as is the case on the conventional side.
In appreciating the differences in the takaful business, retakaful companies are then able to provide assistance over and above the traditional scope of underwriting, data analytics and risk management.
“The lack of capacity is a problem of the past and there can be no better time for retakaful operators to look at product innovation and service quality to enable market growth,” said Mr Barbir.
He cites the ability to provide Shariah compliance advisory, assistance in structuring takaful policy wordings and guidance on Islamic accounting and investments as some of the ways that retakaful operators further set themselves apart in the market.
The ability to pay out surplus is also seen as a distinguishing factor for a retakaful operation. “Last year, we declared surplus distribution and this year, we’re declaring it again; it provides a discernible difference between retakaful and reinsurance,” said Mr Mahomed Akoob, Managing Director of Hannover ReTakaful.
Variance in retakaful models
Being in a relatively infant stage, harmonisation of all takaful practices has understandably yet to be achieved. Similarly, the retakaful model has not fully converged and market practices do vary in some regards globally.
In the absence of regulatory guidance, there have been attempts at some form of self-governance, such as the attempt to create standardised retakaful wording for Malaysia under MTA’s lead.
“Some well-known Shariah scholars came up with 10 resolutions in 2011 aimed at driving harmonisation. However, there is no enforcement and retakaful operators tend to be caught between Shariah compliance and commercial pressure,” said Mr Marcel Omar Papp, Head of Swiss Re Retakaful.
ACR Retakaful’s CEO Luc Metivier noted that in the short-to-medium term, there would unlikely be a harmonisation in retakaful models.
“This will likely remain the trend over the next decade in correspondence with the early stages of the takaful industry development. Perhaps over time, the industry can expect a gradual confluence of the types of retakaful business models, influenced in part by the standardisation of similarly high levels of regulatory requirements across different territories and regions,” he said.
Mr Frenz pointed out that while methods may vary, the important thing is for Shariah compliance to prevail.
“We have discussed these issues within the MTA General Retakaful Treaty Wordings Sub-committee. The members concurred that we would not want to mandate what operational model retakaful operators can apply, as long as it is compliant,” he said.
Hence for instance, there is a broad agreement on the topic of pooling that it would be done across cedants instead of one-company pools. But whether the pool is segregated by line of business, country, region or even globally is left to the individual retakaful operator depending on its risk and capital management considerations, he added.
Increasing penetration
The main vision for takaful since inception remains to create an inclusive insurance environment taking into account religious sensitivities, which would ultimately lead to increased penetration globally. In that regard, there has been a visible increase in insurance penetration owing to influence to takaful in places like Malaysia and pockets of the GCC.
However, pro-active support on the part of regulators and government has proven to go a long way for takaful to make a strong impact, said Mr Frenz. “A pro-active and long-term support by the government and regulator of Islamic finance is crucial as has been proven in Malaysia. No other country has been able to replicate the Malaysian success story so far as the support has been patchy elsewhere.”
In the long run, the industry would also ideally need to come up with products that reflect a strong takaful identity to open up new market segments.
“There is an even greater onus on the takaful industry to advance from merely reinterpreting conventional insurance to Shariah-compliant practices, towards proactively building a vibrant and stable takaful platform that provides sound risk management solutions tailored for the Muslim community,” said Mr Metivier.
Opportunities lay in niche areas for a start, such as microtakaful, said Mr Frenz. “As commercial takaful operations have shied away from microtakaful so far, private-public partnerships (PPP) could be a viable solution.”
The takaful sector could also take the lead in providing solutions in light of universal trends such as longevity risk, escalating health costs and increased wealth, which are just as pertinent to its core Muslim market segment.
And in this regard, the retakaful sector is ideally positioned to provide leadership to allow the takaful industry to be at the forefront of innovation for the benefit of individuals and businesses alike.