Gulf Times, 31 May 2007
DOHA: Islamic insurance Takaful, which has grown annually at about 20% since 2000, is expected to attract $7.4bn in premiums by 2015, according to global credit rating agency Moody’s.However, its development hinged on Islamic banking and capital markets as well as in building ample Takaful reinsurance capacity, the agency said.It also noted that Takaful represented a relatively small proportion of Qatar’s market, notwithstanding the substantial growth opportunities in the energy-rich country. One of the key reasons for the “remarkable” growth in Takaful related to the difficulties traditional insurers faced in complying with Shariah as a result of their investment strategies, said Moody’s vice president Timour Boudkeev.
A typical conventional insurer would commit a substantial portion of its investments, usually in excess of 80%, to fixed-income securities to reduce risk on the asset side of its balance sheet and maximise the capital to support its liabilities, he added.“Under Shariah, riba (interest) is forbidden, disqualifying conventional bonds – which usually comprise a substantial portion of an insurer’s investment portfolio – as an acceptable asset class,” he said.The restrictions imposed limitations on insurers for certain sources of funding like senior or subordinated debt or hybrid capital, he added.Moreover, Moody’s said, equity investments could only be made in Shariah-compliant companies, ruling out investments in businesses involved with alcohol, gambling or conventional financial services.
Stressing the need for Islamic banking and capital markets, Moody’s said access to Islamic financial products was very important for a Takaful company as it offered the best way to build non-riba asset without exposing the company to excessive risks.Highlighting that co-operation or solidarity as the main concept that differentiated Takaful from conventional insurance, Moody’s said the former was similar to a conventional mutual insurer since the purpose was not to generate profits but to share risks among members. “When analysing the financial strength of a Takaful company, there are substantial similarities between most common types of Takaful and mutual insurance,” Boudkeev said.
There are three main operational models of Takaful with ‘Al-Wakala’, being common in the Middle East, which distinguished between the operating company and the Takaful fund.The operating company does not share in the underwriting result but is rather compensated by a fee deducted from the contributions made by participants and/or investment profits generated by the Takaful fund and the surplus of the Takaful fund belongs only to the members.The other model ‘Al-Mudharaba’, common in Malaysia, stipulates profit sharing between the operating company and the Takaful fund.
This may give the operating company an additional incentive to improve its underwriting performance. But the surplus of the fund belongs to the members, as it is in the case of Al-Wakala.‘Waqaf’, in contrast to ‘Al-Wakala’ and ‘Al-Mudharaba’, operates as a public foundation and the Takaful fund belongs to nobody.“Depending on the Takaful operational model used, the company’s capital management system and access to capital will be likely to vary by company,” the credit rating agency said.
Moody’s said the rapid development of Takaful institutions fuelled the demand for re-Takaful as an alternative source of enhancing the financial strength of the Takaful fund.Though the re-Takaful industry “is still in its early days”, the availability of ample re-Takaful insurance capacity would “seem to be very important for the further successful development of the primary Takaful industry as a whole,” it said.Reinsurance is the most appropriate tool for managing catastrophe exposure and accumulation of risk, particularly factoring that most Takaful companies tend to operate in a single geographical region and their diversification may be “less than adequate,” Moody’s said.