Regulatory Approaches to Takaful

Susan DingwallPartner

1 November 2007

What is Takaful?

• Shari’ah compliant insurance product• A form of mutual insurance

– Participants co-operate with each other for the common good

– Every participant pays his donation to help those that need assistance

– No-one participant derives advantage at the cost of others

• Shariah compliance– No risk transfer– Distribution of surplus– Ethical investment policy

Key differences between Takaful and conventional insurance

Takaful structures – main models

• Wakala– Operating company acts as agent– Agent does not share in any surplus in the fund

• Mudarabah– Operating company acts in partnership with the

participants and receives a fixed percentage of any profits from investing the fund

– No guaranteed level of income

Takaful structures – main models

• Mixed Model– Two funds – one for the shareholders and one

for the participants– Wakala model used for underwriting activities– Mudarabah model used for investment activities

Regulatory approaches to Takaful

• Regulation still in infancy in many jurisdictions• Different models in use• Different regulatory approaches

– UK– Bahrain– Malaysia– Dubai

Case study - Regulation in the UK

• Regulation of insurance governed by FSMA• Authorisation required by the FSA• Wide geographical scope of FSMA• Must be authorised to carry on a regulated activity• Consequences of not being authorised:

– Criminal offence– Any agreement entered into in contravention of the

requirement to be authorised is unenforceable

Case study - Regulation in the UK

• The FSA’s policy on Islamic products: “level playing field”

• Intention to treat the regulation of Takaful operators on the same basis as the regulation of conventional insurers

Case study - Regulation in the UK

• In authorising a Takaful operator, the FSA will consider:– Risk assessment– Conduct of business– Capital adequacy– Management, Systems and Controls– Disclosure

Case study - Regulation in the UK

• Passporting – using the UK as a platform to Europe

– Setting up a branch operation within the EEA

– Cross-border business

• Choice of home state regulator?

– Regulatory hurdles

– Administrative burden

– Reserving requirements

Case study - Regulation in Bahrain

• Regulation by the CBB• Takaful and conventional insurance operate in a

competitive environment• Specific module for Takaful – prescribed use of mixed

model• CBB takes no view on aspects of Shariah law – all such

issues referred to the operator’s Shariah Supervisory Board

Case study - Regulation in Bahrain

• The CBB’s regulatory framework is similar to the FSA in that it includes rules on:– Conduct of business– Capital adequacy– Management, systems and controls– Disclosure

Case study - Regulation in Malaysia

• Takaful operators regulated and supervised by Bank Negra Malaysia• Relevant provisions contained in the Takaful Act 1984 (the “Act”) and

rules, guidelines and circulars issued under the Act• No prescription of a particular model• The Act divides Takaful business into two classes

– Family solidarity business– General Takaful business

Case study - Regulation in Malaysia• Applicants for a licence to carry on business must satisfy the following key

requirements:– Incorporation under the Malaysian Companies Act or Malaysian Cooperatives

Societies Act– Minimum paid-up capital– Financially sound institution– Must demonstrate ability to contribute to development of Takaful industry in

Malaysia– Management, systems and controls– Disclosure

Case study - Regulation in Dubai

• Ministry of Economy regulates insurance in the UAE• Financial Services conducted in the DIFC regulated by the DFSA• PIN Module applies to conventional insurers and Takaful

operators• No prescribed model

Case study - Regulation in Dubai• Regulation focuses on

– Management and control of risk– Systems and controls– Capital adequacy

• Measurement of assets and liabilities• Financial and other reporting

– Consolidated supervision• Current moves to change regulation

Harmonisation?

• Regulation at different stages of development in different jurisdictions

• No measure of international uniformity• Harmonisation is key to facilitating growth on a global scale• Assistance from the IFSB and ITA?

Our international practice

Asia Bangkok BeijingHong KongJakartaShanghaiSingapore

Middle EastBahrainDubai

RussiaMoscow

Europe AmsterdamAthensBrusselsFrankfurtLondonMilanMunichParisPiraeusPragueRomeWarsaw

Disclaimers

1 No individual who is a member, partner, shareholder, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this publication.

2 Any reference to a partner means a member of Norton Rose LLP or a consultant or employee of Norton Rose LLP or one of its affiliates with equivalent standing and qualifications.

3 This presentation contains information confidential to Norton Rose Group. Copyright in the materials is owned by Norton Rose Group and the materials should not be copied or disclosed to any other person without the express authorisation of Norton Rose.

4 This presentation is not intended to give legal advice and, accordingly, they should not be relied upon. They should not be regarded as a comprehensive statement of the law and practice in this area. Readers must take specific legal advice on any particular matter which concerns them. If you require any advice or information, please speak to your usual contact at Norton Rose Group.