Re-Takaful (Islamic Re-Insurance)

Concept and Nature of Re-Takaful

Re-takaful has a close relationship with takaful operations where retakaful is a form of takaful and the competitiveness of retakaful market is depend on the competitiveness of the direct takaful market. Actually Retakaful is a form of insurance whereby the Takaful operator pays an agreed upon premium from the Takaful fund to the reinsurance company or Retakaful operator, and in return, the Reinsurance company or the Retakaful operator will provides security for the risk reinsured. Reinsurance is best thought of as “insurances for insurance companies”. Or we also can say that Retakaful is a “takaful for takaful operators”. It is a way for a primary insurer to protect against unforeseen or extraordinary losses.

From the above diagram, takaful holders are individuals or companies that buy the Takaful products either General Takaful products or Family Takaful products and pay an agreed upon premium to the Takaful operator to protect them from unforeseen risk and also extraordinary losses. Then, the Takaful operator will take a portion of money from Takaful fund and pays premium to the Retakaful operator to get reinsurance protection to spread its risks. Reinsurance contracts may cover a specific risk or a broad class of business.

Retakaful or Islamic reinsurance is essentially about handling risk. It is a risk aversion method in which the Takaful ceding company resorts to either a conventional reinsurer or a Retakaful operator to reinsure original insured risks against an undesirable future situation if the risk insured were above the normal underwriting or claim. Thus, a Takaful ceding company may, based on limited financial resources, hedge against possible incapability to meet all Takaful reinsurance protection from a financially capable reinsurer, which will take over the coverage of the large proportion of the risk.

Fathi Lashin, a member of the Shariah Supervisory Board of the Dubai Islamic Bank stated that Retakaful does not, in principle, differ from Takaful operations. The Shariah principles applying to Takaful apply to Retakaful operations as well. The difference, if any, is that in the Retakaful operations, the participants are Takaful operators instead of individual participants. It is argued that the current practice of insurance business has shown that a Takaful ceding company cannot do without Retakaful facility. Therefore, there is a need for Takaful operators to split risks by way of establishing Retakaful operators. By doing so, they share their risks with Retakaful companies. The Retakaful operator, on the other hand, assumes the responsibility of managing and investing the premiums of Takaful operators on the basis of Profit Loss Sharing.

Differences between Re-Takaful and Re-Insurance

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