Takaful and Re-Takaful Explained

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Takaful, Re-Takaful

Transcript of Takaful and Re-Takaful Explained

Page 1: Takaful and Re-Takaful Explained

Takaful as a Risk Mitigation Technique

By: Camille Paldi

Page 2: Takaful and Re-Takaful Explained

Takaful as Risk Mitigation Tool

• Takaful is a co-operative system of reimbursement in case of loss, paid to people and companies concerned about hazards, compensated out of a fund to which they agree to donate small regular contributions managed on behalf by a Takaful Operator.

• This is a tool used to mitigate the risk of loss.

Page 3: Takaful and Re-Takaful Explained

Takaful as a Risk Mitigation Tool

• Insurance exists as one of the important instruments in financial markets in managing risks and uncertainties.

• Pure risk exists in a situation where there are only two possible outcomes; loss or no loss at all.

• Speculative risk involves three possibilities: the possibility of loss, profit or no change in value.

Page 4: Takaful and Re-Takaful Explained

Managing Risks

• For managing loss, man has developed five main concepts:

1. Prevention of Risks

2. Assumption of Risks

3. Spread of Risk Mutually: One can spread the risk with a group of people sharing the same concern.

Page 5: Takaful and Re-Takaful Explained

Managing Risks

4. Transference of Risk by Insurance: To transfer the risk to someone else i.e. to create financial security in the face of a risk is by spreading the risk among a number of persons all exposed to the same risk and all prepared to make a relatively negligible contribution towards neutralizing the detrimental effects of the risk, which may materialize for anyone or more of their members.

5. Buying an Insurance Policy: Where a policyholder enters into an insurance contract with a third party, who takes the responsibility of indemnifying him in case the risk insured materializes, provided he pays a premium to the commercial company.

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What is Takaful?

• Takaful, or Islamic insurance, is a cooperative scheme, where in which the participants pay a premium in the form of donation or tabarru in a common pool in return for the ability to draw upon that pool upon a valid claim.

• The word takaful originates from the Arabic world kafalah, which means "guaranteeing each other" or "joint-guarantee."

Page 7: Takaful and Re-Takaful Explained


• The basis of shared responsibility is taken from the system of aaqilah, which was an arrangement of mutual help or indemnification customary in many tribes of the Arab world.

• Under this system, if a member of a tribe was accidentally or unjustly killed, the murderer was obliged to pay blood money (dia) to the deceased's next of kin as a form of life insurance for the deceased's relatives.

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Conventional v Islamic Insurance

• The purpose of this Holy Book insurance system is not profits, but to uphold the Qu’ranic, Christian, and Jewish principle of "bear ye one another's burden."

• Therefore, in contrast to conventional insurance, takaful is not a contract of buying and selling where a party offers and sells protection and the other party accepts and buys the service at a certain cost or price. 

• Rather, it is an arrangement whereby a group of individuals each pay a fixed amount of money and compensation for losses of members of the group is paid out of the total sum.

Page 9: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• Furthermore, it is possible to make a return on funds invested by the takaful managers in addition to the fact that the funds remaining in the takaful fund on maturity of the policy are distributed back to the participants and operator or participants only depending on the type of takaful management model utilized by the fund.

Page 10: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• Therefore, according to Uqail (2012), in takaful, the paid contribution is returned to the participant with the share of profits made over the paid contributions after deduction of the charges due to the operator.

• The paid contributions are a trust (al-Amanah) to the operator, and they, therefore, should be due only to the participant.

• This is because, under Islamic law, there is no justification for the trustee to refuse to render the entrusted articles to their proprietor once the depositor rightfully demands from the trustee.

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Conventional v Islamic Insurance

• In conventional insurance, one enters a bilateral sale contract or contract of exchange with the insurance provider and transfers risk of loss to the provider.

• The provider will bear the risk of loss in the event of an accident or harm to the insured item or person.

• In addition, the insurance provider speculates on risk in the underwriting process.

Page 12: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• A conventional insurance company speculates on the risk by making an assessment of the risk and then pre-determining profit based on the estimated payout versus the premium. 

• It is in a sense gambling (Paldi: 2014).

• In regards to transfer of loss or speculation on risk, there is neither in Takaful. 

Page 13: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• In Islamic Insurance, the loss and risk are essentially distributed amongst the policyholders. 

• Overall, Takaful is a scheme of mutual protection that exists amongst the participants making them both the insurer and the insured, which is a concept promoted by all of the people of the Holy Books (Paldi: 2014).

Page 14: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• In conventional insurance, riba (interest) occurs as the amount of money received by the insured, either on the occurrence of the insured event or upon maturity of the policy may be more or less than what is actually paid by the insured. 

• Furthermore, since the payments are deferred, the compensation paid, which is greater than the instalments paid by the insured may constitute surplus riba (riba al fadl) and credit riba (riba al-nasiah). 

• Secondly, the profits of conventional insurance companies result from riba related transactions (ISRA: 2012).

Page 15: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• In addition, conventional insurance contracts contain gharar (uncertainty) in that the subject-matter of the contract is not certain until the insured event has taken place. 

• The amount being paid by the two parties is not known at the time of execution of the contract. 

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Conventional v Islamic Insurance

• For example, an accident may occur immediately after the insured makes the first payment requiring a payout or he or she may make all the payments without any accidents happening, never receiving any compensation back from the insurance company during the duration of the policy (ISRA: 2012).

• The Shari'ah requires that all the particulars relating to the contract must be known to the parties at the time of contract, otherwise, the contract may become invalid. 

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Conventional v Islamic Insurance

• In a conventional insurance contract, the policyholder agrees to pay a certain premium sum in consideration for the guarantee of the insurance company that they will pay a certain sum of compensation in the event of a valid claim.

• However, the policyholder is not informed of how much compensation the company will pay him or her or how the amount shall be derived (ISRA: 2012).

Page 18: Takaful and Re-Takaful Explained

Conventional v Islamic Insurance

• Maisir or gambling means to court such risk as it involves both the hope of gain as well as the fear of loss, which is not a necessary part of any normal activity in life. 

• In conventional insurance, policyholders are gambling by betting premiums on the condition that the insurer will make payment contingent upon the circumstance of a specified event. 

• On the other hand, the insured does not get anything from his premiums if the insured event does not happen at all (ISRA: 2012).

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Takaful Minimizes Riba and Gharar

Takaful minimizes riba (interest), gharar (uncertainty), and maisir (gambling) through its cooperative donation scheme (tabarru) and investment in halal activities.

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General Takaful

• The general takaful contract is a short-term policy where takaful participants pay contributions and operators undertake to manage the risk.

• According to ISRA (2012:512), the contributions paid by the participants are credited into the general takaful fund, which is then invested and the profits generated are paid back to the fund.

• Profit-sharing will be according to the term of contract, to be provided after deducting operational costs and according to a ratio determined by both parties according to al-Mudharabah i.e. 50:50, 60:40 (Al Huda CIBE).

Page 21: Takaful and Re-Takaful Explained

General Takaful

• The tabarru element is more apparent in general takaful as participants will normally undertake to regard their contributions as donations to fellow participants (ISRA, 2012:513).

• Tabarru is an agreement by a participant to relinquish, as a donation, a sum of contribution that he or she agrees to pay with the purpose of providing mutual indemnity to takaful participants, where the donation acts as a mutual help and joint guarantee should any fellow participants suffer from a defined loss (ISRA, 2012: 514).

Page 22: Takaful and Re-Takaful Explained

General Takaful

• Tabarra is derived from the word tabarra'a, which means contribution, gift, donation, or charity.

• The purpose of this contract is to give a favor to the recipient without any specific consideration in return (Al Huda CIBE).

• Essentially, tabarru is a contribution or donation, which entails no return, but rather a reward from Allah alone.

Page 23: Takaful and Re-Takaful Explained

General Takaful

• There are two important pillars of tabarru, namely the absence of counter-value and the intention to perform tabarru.

• For example, if a donor contributes with an expectation of a counter-value from the donation given, then the whole transaction will be perceived as an exchange (muawadah) rather than a tabarru contract (Al Huda CIBE).

Page 24: Takaful and Re-Takaful Explained

General Takaful

• Takaful, unlike its conventional counterpart, is based on the principles of mutual cooperation (ta'awun) and donation (tabarru).

• Under the Islamic law of transactions, the existence of gharar (uncertainty) and maisir (gambling), which normally nullifies an exchange contract (muawadah) are tolerated in a contract of donation (tabarru).

Page 25: Takaful and Re-Takaful Explained

General Takaful

• This corresponds to the Islamic legal maxim, "uncertainties are tolerable in a gratuitous contract." (Al Hude CIBE)

• This is mainly due to the fact that parties who enter into a tabarru contract do not aim to make profit out of the contributed sum, and hence the potential dispute, which normally arises in a profit-making transaction is deemed to be negligible in a gratuitous-based transaction.

Page 26: Takaful and Re-Takaful Explained

General Takaful

• Furthermore, the issue of uncertainty is nullified as the contributor voluntarily gives away his property or right to the recipient without any consideration (Al Huda CIBE).

• In contrast, conventional insurance is based on exchange (muawadah), aims at making profit from the insurance operations, and is not Shari'ah compliant due to excessive gharar (uncertainty), maysir (gambling), and riba (interest).

Page 27: Takaful and Re-Takaful Explained

General Takaful

• Nevertheless, it is observed that a takaful contract cannot be considered a pure tabarru contract, but rather a qualified or conditional tabarru contract due to the following reasons.

• (1) The contribution is made by a participant in takaful is with consideration to a right to claim for compensation in the event of loss or damage of subject-matter.

• Thus, the tabarru is not merely for charity, but conditional upon certain consideration, namely the right to claim takaful benefits in the event of loss. This is a violation of the fundamental objective of tabarru.

Page 28: Takaful and Re-Takaful Explained

General Takaful

• (2) Takaful participants are normally obliged to pay different amounts of contributions depending on the different degree of risk exposure. This implies that their participation in the fund is conditional upon a certain amount of contribution, which deserves compensation.

• In the event that the participant disagrees with the amount, he will not be allowed to participate or benefit from the takaful protection scheme.

Page 29: Takaful and Re-Takaful Explained

General Takaful

• This is in contradiction to the principle of tabarru as the real intention of the contracting parties is not for donation, but rather to make them eligible for certain benefits under takaful.

• (3) Takaful includes a few controversial practices such as surrendering of benefit, survival of benefit, or sharing of underwriting surplus among participants of takaful although they have surrendered all of their rights over the monies of the fund.

Page 30: Takaful and Re-Takaful Explained

General Takaful

• When a participant pays a premium to the takaful operator, he has effectively donated his contribution as tabarru, hence, relinquishing his ownership over the object donated as prescribed by the rules of tabarru.

• Therefore, it should not return to the participants upon maturity of the policy or liquidation of the fund (Al Huda CIBE).

Page 31: Takaful and Re-Takaful Explained

General Takaful

• According to Asyraf Dusuki, many takaful products and operations are starting to converge closely with conventional insurance.

• The fundamental structure of takaful, which is premised on the basic concept of tabarru is questionable as many benefits are offered to the participants in the beginning of the takaful contract in return for the contributions paid to the tabarru pool managed by the takaful operators (Revisit the Principle of Tabarru in Takaful Structures: 1).

Page 32: Takaful and Re-Takaful Explained

General Takaful

• All contributions go to a common pool of funds, which will be used to compensate takaful participants in the event of a loss.

• The participants carry the risk and the takaful operator is merely a custodian of the fund.

• There are no savings and investment elements, but the takaful operator will distribute any underwriting surplus to the participants on an annual basis. Takaful is generally renewable on a periodic basis.

Page 33: Takaful and Re-Takaful Explained

General Takaful

• General takaful is categorized into two types: motor and non-motor takaful.

• Motor takaful provides protection for private car, motorcycle, and commercial vehicles.

• Non-motor takaful range from fire, personal accident, marine, health takaful, etc. (ISRA, 2012:513).

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 Participant's Benefits

The competency of a person to enter into a takaful contract is determined by his legal capacity to contract and his

interest in the subject-matter covered .

•It is the participant's pecuniary interest, which forms the subject-matter of the contract and not the cover afforded .

Page 35: Takaful and Re-Takaful Explained

Utmost Good Faith

The takaful contract imposes a duty on the contributor to disclose all material facts bearing on the contract.

The duty of utmost good faith applies to both the participant and the takaful operator

The contributor is expected not to withhold information vis-à-vis the takaful operator because this leads him into a less favorable contract, which ultimately affects all participants.

Page 36: Takaful and Re-Takaful Explained

Utmost Good Faith

• When deciding which risk to be covered, the takaful operator must ensure that the specific exception to the risk to be covered should be revealed to the participants and the participants in return should disclose any aspect related to the risk associated with them, which needs to be underwritten, i.e. his full health conditions should be disclosed in the case of a medical cover.

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Insurable Interest

• A person has an insurable interest in something when a loss or damage would cause that person to specifically suffer a financial loss or certain other kinds of loss.

Page 38: Takaful and Re-Takaful Explained

Proximate Cause

• In takaful claims, the question, which is often asked is not whether an event (consequence as defined in the contract) has occurred, but whether it was the result of a cause as defined.

• This means that a claim will be met if the fact for which a claim is brought is the result of the proximate cause included in the perils insured against, or that its liability will be excluded if the proximate cause was an excluded peril.

• Usually, for a claim to succeed, the participant must show that the loss was proximately caused by the peril covered for.

Page 39: Takaful and Re-Takaful Explained


• The takaful contract is a contract to pay the actual loss sustained by the participant or a contract of indemnity.

• It is a mechanism by which the takaful operator provides financial compensation in an attempt to place the participant in the same pecuniary position he enjoyed right before the loss.

Page 40: Takaful and Re-Takaful Explained

Claims and Distribution

• When claims are paid out, especially in family takaful, the proceeds disbursed should be distributed to the legal heirs according to Islamic law and not to the stipulated nominee as in the case of conventional insurance.

Page 41: Takaful and Re-Takaful Explained

Contribution and Subrogation

• Contribution from participants is the starting point for creating the takaful fund, from which claims are paid.

• Once the takaful operator pays the claims from the takaful fund, the takaful operator will have to claim this disbursement from the person who caused the damage.

Page 42: Takaful and Re-Takaful Explained

Contribution and Subrogation

• Subrogation refers to a set of rules that facilitates the reimbursement of a takaful operator when the operator has indemnified its participants under a contract of indemnity from a third party.

• This occurs when a third party has caused damages to a participant and the takaful operator indemnifies him.

• The money disbursed is claimable from the third party that has caused the damages.

Page 43: Takaful and Re-Takaful Explained

Contribution and Subrogation

• The purpose of subrogation is to provide the takaful operator with a right of recourse.

• Both the contribution and subrogation principles are corollaries to the principles of indemnity and equity.

Page 44: Takaful and Re-Takaful Explained


•This is a process of selection through which the takaful underwriter determines which of the risks offered should be accepted, and if so, on what terms, conditions, and rates (ISRA, 2012: 512).

Page 45: Takaful and Re-Takaful Explained

Banca Takaful

• Banca takaful is defined as the delivery and distribution of a suitable range of tailored 'bankable' protection and long-term savings, education, and retirement plans designed to meet the lifecycle needs of the consumer base of a bank or other financial institution.

• In Banca takaful, Takaful products are distributed by a bank.

Page 46: Takaful and Re-Takaful Explained

Takaful Management Models

• The contract between the participants and the licensed Takaful operator could be based on Wakalah or Mudarabah or a hybrid of the two. 

• This contract refers to a management contract between the participants and the Takaful operator.

Page 47: Takaful and Re-Takaful Explained

Mudarabah Model

• By this principle, the entrepreneur or al-Mudharib (takaful operator) will accept payment of the takaful installments or takaful contributions (premium) termed as Ra’s-ul-Mal from investors or providers of capital or fund (takaful participants) acting as Sahib-ul-Mal.

• The contract specifies how the profit (surplus) from the operations of managed by the takaful operator is to be shared, in accordance with the principle of al-Mudharabah, between the participants as the providers of capital and the takaful operator as the entrepreneur.

Page 48: Takaful and Re-Takaful Explained

Mudharabah Model

• The sharing of such profit may be in a ratio of 50:50, 60:40, 70:30, etc. as mutually agreed between the contracting parties.

• Generally, the risk-sharing arrangements allow the takaful operator to share in the favorable investment performance of both the participants account (savings account) and the participant's special account (tabarru).

Page 49: Takaful and Re-Takaful Explained

Mudharabah Model

• However, if there are losses in the participant's special account, the takaful operator provides an interest-free loan (qard hassan) that has to be repaid when the participant's special account returns to profitability and before any future surplus is distributed.

• The contract is cancellable and upon cancellation, all cumulative capital plus profit must be returned to the capital provider (participants) after deducting administrative expenses (ISRA, 2012: 516).

Page 50: Takaful and Re-Takaful Explained

Mudharabah Model

• In order to eliminate the element of uncertainty in the takaful contract, the concept of tabarru (to donate, to contribute, to give away) is incorporated.

• In relation to this concept, a participant shall agree to relinquish as tabarru, certain proportion of his takaful installments or takaful contributions that he agrees or undertakes to pay should any of his fellow participants suffer a defined loss.

• This agreement enables him to fulfill his obligation of mutual help and joint guarantee (Al Huda CIBE).

Page 51: Takaful and Re-Takaful Explained

Mudharabah Model

• In essence, tabarru would enable the participants to perform their deeds in sincerely assisting fellow participants who might suffer a loss or damage due to a catastrophe or disaster.

• The sharing of profit or surplus that may emerge from the operations of takaful is made only after the obligation of assisting the fellow participants has been fulfilled.

Page 52: Takaful and Re-Takaful Explained

Mudharabah Model

• It is imperative, therefore, for a takaful operator to maintain adequate assets of the defined funds under its care whilst simultaneously striving prudently to ensure the funds are sufficiently protected against undue over-exposure.

• Therefore, the provision of insurance cover as a form of business in conformity with Shari'ah is based on the Islamic principles of al-Takaful and al-Mudharabah (Al Huda CIBE).

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Mudharabah Model

• Al-Hari Raya is the pact among a group of people, called participants, reciprocally guaranteeing each other; while Al-Mudharabah is the commercial profit-sharing contract between the provider or providers of funds for a business venture and the entrepreneur who actually conducts the business.

• The operation of takaful may thus be envisaged as the profit-sharing business venture between the takaful operator and the individual members of a group of participants who desire to reciprocally guarantee each other against a certain loss or damage that may be inflicted upon any one of them.

Page 54: Takaful and Re-Takaful Explained

Wakalah Model

• Wakalah is a contract of agency, whereby participants remain the actual owners of the takaful fund.

• In this arrangement, the principal is the participant while the agent (wakil) is the takaful operator.

• The principal appoints or authorizes the agent to manage the takaful fund for two main duties, namely, takaful activities and investments.

• As an agent, the operator is entitled to an agency fee and performance fee.

Page 55: Takaful and Re-Takaful Explained

Wakalah Model

• In Wakalah model, the surplus of policyholders’ funds investments – net of the management fee or expenses – goes to the policyholders. 

• The shareholders charge a Wakalah fee from contributions that covers most of the expenses of business. 

• The fee rate is fixed annually in advance in consultation with the Shari'ah committee of the company.

• In order to give incentive for good governance, the management fee is related to the level of performance.

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Wakalah Model

• The main issue in a pure wakalah model is that the management and shareholders of a takaful operator cannot share in the profits because they merely act as an agent to the participants.

• However, they may be entitled to a fee based on their performance in the investment.

• Therefore, many operators attempt to adopt a combination of wakalah and mudarabah or modified wakalah model (ISRA, 2012: 519).

Page 57: Takaful and Re-Takaful Explained

Hybrid Wakalah and Mudarabah Model

• In the hybrid wakalah and mudarabah model, the wakalah principle is applied in underwriting activities while a mudarabah contract is used in the investment of the takaful funds.

• Thus, the takaful operator is entitled to agency fee for managing the fund as a wakil and a share of profit for managing the investment of the fund as a mudarib (ISRA, 2012, 521).

Page 58: Takaful and Re-Takaful Explained

Hybrid Wakalah and Waqf Model • The latest takaful model that has emerged from Pakistan was introduced by

Mufti Taqi Usmani.

• This plan enables any individual to save regularly with the aim of accumulating a fund that can be left as a donation under the waqf system.

• In this model, the shareholders of the takaful operator will initially make a donation to establish the waqf fund.

• The fund needs to be invested in a Shari'ah compliant investment and the returns will be used for the benefit of the participants.

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Hybrid Wakalah and Waqf Model

• The tabarru fund from participants' special account also becomes part of the waqf fund.

• Therefore, a waqf fund consists of donations from shareholders and participants seeking takaful protection.

• The combined amount will be invested and any profits earned will be returned to the same fund.

• Based on waqf principles, the donors (shareholders and participants) would lose ownership rights on their monetary contributions in the waqf fund.

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Hybrid Wakalah and Waqf Model

•The monies eventually become the property of the waqf fund, which can be used for the benefit of all participants.

•The shareholders, who acts as the owners of the waqf fund, delegate authority to the operator to become the administrator of the fund, whose function, among others, include paying claims from

the fund .

•The operator also undertakes the role of investment agent (wakalah bi istithmar) when it invests the waqf funds and is entitled to a

certain percentage of the investment as a performance fee .

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Hybrid and Wakalah Waqf Model

• Generally, there are two types of waqf model in respect of surplus sharing: (1) Pakistani model, in which the underwriting surplus is returned to the waqf fund, thus not distributed to either the participants or the operator.

• (2) Commercial waqf model, in which the terms on surplus-sharing are spelt out in the waqf deed in accordance to the intention of the contracting parties involved in the waqf arrangement.

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Hybrid Wakalah and Waqf Model

The sources of income for this model include the agency fee for undertaking service as a wakil against a defined remuneration payable from the waqf fund and the performance fee for acting as an agent for investment (ISRA, 2012: 522 – 524).

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• Re-takaful is a form of mutual assistance among participating takaful operators in which the operators pay a certain amount of contribution into the re-takaful fund in order to share a certain defined risk in a specified category if these exceed prudent underwriting limits (ISRA, 2012: 529).

• According to ISRA, there are only a few re-takaful operators and they only operate at national and regional markets (2012:529).

Page 64: Takaful and Re-Takaful Explained


• The process of sharing the insured risk between the takaful operator and other conventional insurance companies is either due to lack of sufficient insurance capacity for such risk or because of regulatory requirements of risk-sharing with regard to the magnitude of the risk in question.

• This poses an issue that the re-insurance process as executed by conventional re-insurance companies may not observe the Shari'ah principles of takaful (ISRA, 2012: 529).

Page 65: Takaful and Re-Takaful Explained


• Re-Takaful currently adopts two main methods, facultative and treaty: In the facultative method, the operator presents the individual risk, which constitutes the subject-matter of re-takaful to the re-takaful operator along with a summary of all the information related to it, so that the re-takaful operator can study the information and decide whether to accept the risk or not.

• The Re-Takaful operator becomes committed to what it accepts (ISRA, 2012: 530).

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• The facultative method is for individual policy or risk. This arrangement can be on a proportional basis, which is the original form, or non-proportional basis.

• Facultative means 'optional', i.e. the power to act according to a free choice.

• So, the facultative underwriter of a re-takaful operator is free to accept or decline any offer from a takaful operator that wants to cede its risk to such re-takaful operator (ISRA, 2012: 530).

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• In the treaty method, the re-takaful operator assumes the commitment to accept all the risks, which fall within the scope of the agreement signed with the takaful operator.

• There are four ways to apply the treaty method.

• (1) Quota Share – When the takaful operator and re-takaful operator share each and every risk proportionately on the original terms and conditions;

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• (2) Surplus – When the takaful operator by arrangement with the re-takaful operator cedes only that portion of each and every risk, which it does not like to retain in its own account.

• (3) Excess of loss – When a takaful operator bears all claims arising to a specified amount and only when this ultimate net loss (after taking into account all recoveries) exceeds this amount, can they recover from the re-insurer up to a specified maximum.

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• In this case, there is no proportional sharing of risk between the takaful operator and the re-takaful operator;

• (4) Stop loss: The re-takaful operator will not be responsible for any loss until the loss ratio for the year reaches an agreed percentage of the premium (ISRA, 2012: 531).

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•Item 3/2 of Shari'ah Standard No. 41, AAOIFI 2010 states that takaful operators are not allowed to re-insure with conventional re-insurance companies, except when such re-insurance is sought as a transitional arrangement

stemming from public need, which amounts to necessity .

Therefore, the practice of takaful operators to re-insure with conventional re-insurers is permissible with certain

conditions (ISRA, 2012: 531) .

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Item 6 of Shari'ah Standard No. 41, AAOIFI 2010 states :

• Takaful operators should re-insure first with re-takaful operators, to the largest extent possible; Takaful operators should not keep any cash reserves for ongoing risks that belong to conventional re-insurance companies and on which interest has to be paid.

• An agreement can be reached between the takaful operator and the conventional re-insurance company in order to specify a certain portion of the premiums payable to the conventional re-insurance company to be retained by the Islamic insurance company;

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• The takaful operator can invest retained funds through mudarabah or investment proxy, where the takaful operator assumes the role of the mudarib and the conventional re-insurance company assumes the role of rabbul mal.

• When profit is distributed as per the ratio agreed upon, the share of the conventional re-insurance company is to be added to its account with the takaful operator, where the share of the profit earned by the takaful operator for performing the investment as an independent personality is to be added to the account of the participants;

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• The periods of the re-insurance agreements sought by takaful operators from conventional re-insurance companies should be commensurate with the actual need;

• Before signing agreements with conventional re-insurance companies, takaful operators should seek the approval of their Shari'ah boards;

• Takaful operators should stick to the minimum size of re-insurance with conventional re-insurance companies, and Shari'ah boards should undertake the follow-up in this matter (ISRA, 2012-533).

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• The IFSB in Item 91 of Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings (2009) states that: "Takaful operators shall ensure that any re-takaful arrangement duly serves the purpose of the takaful undertakings and is undertaken with the interests of takaful participants as the foremost consideration.

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• The pricing and protection offered by the re-takaful operator shall be consistently reviewed from time to time to ensure that it is commensurate with the needs and requirements of the takaful undertakings.

• As far as possible, takaful operators should strive to use re-takaful operators, rather than conventional re-insurers, in support of a fully Shari'ah compliant financial system for the takaful undertakings." (ISRA, 2012: 533)

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•According to Sheikh Wahba Zuhayli, when using conventional insurance companies for re-takaful :

• (1) Payment to re-insurance companies should be kept to the minimum possible amount to satisfy the need, following the rule, "Necessities are measured by their degree." The evaluation of the amount needed to satisfy the need is left to the bank's experts to determine;

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• (2) The takaful operator does not collect a profit commission or any other commission from the re-insurance companies;

• (3) The takaful operator does not keep any reserves with the re-insurance company for natural disasters, since keeping such reserves would lead to interest payments to re-insurance companies;

• (4) The takaful operator should not be involved in determining the investments of the reinsurance companies. It should not demand any share in the profits gained from such investments, nor ask about any losses they incur;

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• (5) The contract with the re-insurance company should be for the shortest possible period;

• (6) The takaful operator works towards the establishment of a re-takaful operator that would allow it to avoid dealing with conventional re-insurance companies (ISRA, 2012: 532).

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