Addressing structural pressures in Islamic insurance requires improvements in business models, pricing discipline, and capital frameworks, according to the “Islamic Financial Stability Report 2026” released by the Kuala Lumpur-headquartered Islamic Financial Services Board (IFSB).
In the report, the IFSB makes several recommendations for the takaful industry. The recommendations include:
Regulators should ensure that underwriting practices remain sustainable
This applies particularly in mandatory or highly competitive lines where pricing pressures are most acute. Strengthening actuarial standards, enhancing data availability (including for catastrophe risks), and improving risk-based capital frameworks would support more accurate pricing and capital allocation. Reducing persistent reliance on qard financing requires closer scrutiny of fund-level sustainability and business model viability, as well as clearer separation of policyholder and shareholder risk positions within supervisory frameworks.
Supervisory assessments of Islamic insurance should include fund-level prudential monitoring
This would provide earlier and more granular supervisory signals than current entity-level frameworks permit. Incorporating metrics related to qard and wakalah fees would enable supervisors to identify deteriorating fund sustainability before it translates into entity-level concerns.
In addition, supervisory frameworks that establish appropriate disclosures and require Boards to demonstrate that fee levels reflect fair value for services rendered would introduce greater discipline and help address the incentive distortions identified as contributing to aggressive pricing and qard dependency.
Developing Islamic reinsurance capacity remains a structural priority
Targeted measures should be considered to expand Islamic reinsurance supply, including market development initiatives and regulatory incentives that facilitate market entry and scalability.
To address limited local capacity, some regulators have allowed cross-border reinsurance arrangements. Such arrangements require careful consideration of all relevant risks, in-cluding foreign currency risks.
Where commercial Islamic reinsurance capacity remains insufficient, regional pooling arrangements may merit exploration as a mechanism to distribute risk across a broader base of participants.
In parallel, solvency treatment should be reviewed to ensure that capital requirements and risk assessments adequately capture this structural limitation, which can result in elevated risk retention on balance sheets in the absence of sufficient Islamic reinsurance cover. M