In a highly diversified market with varying levels of compliance and regulatory oversight, can an industry standard on Shariah compliance be achieved within the nascent Takaful industry or is this an issue that currently rests with the customer and his/her perception of an organization? This notion raises the question of how a Takaful operator goes about distinguishing itself to be 100% Shariah compliant, in a market where a credible business proposition can be attained purely through adherence in principle to Shariah, targeting a Muslim audience.
Standard & Poor’s (S&P) admits through its own Takaful rating methodology that views differ as to exactly how an insurer or reinsurer should best comply with the requirements of Shariah. The ratings agency goes on to note that ethical shortfalls at an insurer, whether real or perceived, could expose it to regulatory or reputational difficulties at a later date.
AM Best meanwhile insists that a rated Takaful company must establish a Shariah board that sets the basic rules and principles governing a Takaful company’s activities, ensuring that it operates within those principles.
Like S&P, AM Best will not specifically comment on a Takaful company’s degree of compliance with Shariah. However, as part of its interactive and ongoing rating evaluation, AM Best will discuss items such as the organization’s corporate and management structure, the Takaful business model employed, corporate governance and the role of the Shariah board, and ultimately the insurer’s performance versus key strategic and financial objectives.
S&P’s report cites several examples to this back up. The authorities in Iran, for example, effectively require little more than a mutual mode of operation. By contrast, Saudi Arabia looks for at least a 90:10 profit share between shareholders and policyholders and, as already mentioned, a cooperative or outright Takaful mode of operation, with the published accounts segregated between operational and shareholder funds.
Other countries, notably Malaysia, encourage an explicit Takaful only mode of operation, with a Shariah board to supervise the ethical eligibility of policies written and assets held by reference to centrally compiled compliance guidelines.
Meanwhile in Indonesia, many insurance companies are separating their Shariah units from their parent insurance companies in order to boost the competitiveness of the local Takaful industry: a move that is hoped will assist the Takaful industry’s expansion.
S&P goes further to note that: “It is not particularly relevant, analytically, how or to whom profits are distributed. The important consideration in financial strength terms is that both the balance sheet and income statement be resilient, with total income reliably exceeding total outgoings in a normal year.” This allows risk-bearing capital to be built up over time on both the policyholder and shareholder accounts through the retention of earnings. This helps to maintain appropriate levels of solvency relative to underwritten and investment exposures, which are likely to be increasing over time.
Overall, one of the unique challenges facing Takaful companies is the need to ensure that the objectives set by their Shariah boards are consistent with key performance indicators based on conventional sound financial risk management. — SW