Understanding Retakaful
Understanding Retakaful
Understanding Retakaful
Retakaful
Outline
• What is Retakaful?
• How Retakaful Works
• Models for Retakaful Operations
• Types of Retakaful Contracts
• Benefits of Retakaful
What is Retakaful?
INTRODUCTION:
Retakaful is where one party (the takaful operator) cedes a proportion of its risks
on either Treaty Retakaful basis or Facultative Retakaful basis to another party
(Retakaful Operator) for a proportion of contribution in the form of Tabarru into
a common fund in-exchange for cover against a specified loss or damage.
How Retakaful Works
Retakaful is the Takaful equivalent of conventional reinsurance. The party that cedes
the risks i.e. the cedant is the Takaful Operator and the party that underwrites and
offers capacity for the ceded risks is called the Retakaful Operator. The relationship
between the two parties is governed by a Retakaful Contract.
Rather than transfer risks from one party to another as is the case in conventional
reinsurance, a Retakaful operation provides for risk sharing between the participants.
The takaful operator contributes a sum of money from the participant risk fund as
Tabarru into a common fund managed by the Retakaful Operator. The Common fund
created by the Retakaful Operator is known as the Retakaful Risk Fund.
How Retakaful Works…..
The diagram below is a simple illustration of the flow of risk between various parties
from the Takaful Participants to the Retrotakaful.
Models for Retakaful Operations
Wakalah Model: Under this model, the Retakaful Operator (RTO) and the
Takaful Operator work under a Principle-Agent Relationship with the RTO
operating as the Agent (Wakil) of the TO (Principle). The RTO manages the risks
ceded by the TO to the RTF including the investments made from the
contributions.
The Takaful Operator makes contributions to the pool in the form of
donations/tabarru. An agreed percentage of the contributions is deducted by the
Retakaful operator as agency/wakala fees. From the contributions in the RTF, the
Retakaful Operator working as a Wakil is able to make investments on behalf of
the Fund, and any profits are credited back to the RTF. In addition, if the fund
makes an underwriting surplus, the Surplus is distributed back to the Cedant.
Models for Retakaful Operations…..
Mudharabah Model: In the Mudharabah model, the relationship between the takaful
operator and the retakaful operator is based on a profit-sharing agreement. Here, the
retakaful operator acts as the entrepreneur (mudharib) while the participants provide the
capital.
There is usually a contractual agreement between the takaful operator and the retakaful
operator, where the retakaful operator acts as the entrepreneur (mudharib) and the
takaful operator (representing the participants) acts as the provider of capital (rabb-ul-
mal). Key features:
Profit Sharing: Profits from the investment of funds are shared according to a pre-
agreed ratio between the retakaful operator and the participants.
Loss Bearing: Any losses are borne by the participants unless caused by negligence
or misconduct by the retakaful operator.
Models for Retakaful Operations…..
Wakalah-Mudarabah Model: With this model, the Retakaful Operator works as
both a wakil (Agent) and a Mudharib (Entrepreneur). As a wakil, the Retakaful
Operator manages the risks ceded to the RRF and is renumerated with a wakalah fee.
As a Mudharib, the Retakaful Operator Manages the investment activities of the
Retakaful Risk Fund and is rewarded with a pre-determined percentage of the
investment profit.
The Key Factor in this model is that the Retakaful Operator acts as both a wakil and a
Mudharib and therefore earns from a pre-determined percentage of both the
contributions and investment earnings.
Models for Retakaful Operations…..
Wakalah- Waqf Model: Under this Model, A Waqf RTF is established through initial
contributions from both the Retakaful Operator and the Takaful Operator. The RTO
will thus have two roles; (1) as waqf (Trustee) of the RTF and (2) as Wakil (Agent).
Like in the above models, the RTO is remunerated with a wakalah fee whose
percentage is pre-determined and expressly stated in the Retakaful contract.
The Waqf fund is initially set up with seed money from both the Takaful Operator and
Shareholders of the retakaful fund. Additional contributions are made to the RTF (b)
from which the RTO can obtain a Wakalah fee (c). Portion of the fund is invested and
the profit realized is credited back to the RRF.
Types of Retakaful Contracts
Like conventional reinsurance, Retakaful can be offered in two ways i.e. Treaty
Retakaful or Facultative Retakaful.
Treaty Retakaful: This form of retakaful contract offers automatic coverage for all
risks written by the ceding Takaful Operator that fall within the terms of the retakaful
contract and are subject to limits and exclusions.
Facultative Retakaful: FAC contracts on the other hand cover the ceding Takaful
operator for individual risks that either exceed the capacity of the treaty arrangement or
are not covered under the terms of the treaty arrangement. The Retakaful Operator has
the liberty to accept or decline or accept the individual offers
Methods of Retakaful Contracts
Both types of Retakaful contracts can be transacted through, Proportional and Non-
Proportional Retakaful.
Proportional Retakaful: Under the proportional method, the common arrangements
are the Quota Share Retakaful and the Surplus Retakaful. Contributions and claims are
shared between the TO and the RTO in an agreed proportion.
Quota Share Retakaful: The Cedant (TO) shares a fixed percentage of all
contributions received by it to the Retakaful Operator and the same fixed percentage
of all claims incurred by it are recovered from the Retakaful Operator.
Surplus Retakaful: Under the Surplus arrangement, the Takaful Operator cedes
those risks that exceed its chosen retention but up to an agreed limit.
Methods of Retakaful Contracts….
Non-Proportional Retakaful: The Non-Proportional forms of Retakaful are loss-oriented
arrangements.
Excess of Loss Retakaful: The arrangement covers the Cedant (TO) for claims
incurred that are above a deductible specified in the Retakaful contract but up to a
maximum coverage limit. For Example, ABC Takaful can arrange GMD 1,000 Xs
GMD 500, excess of loss contract. All Claims that are in excess of 500 will be honored
by the Retakaful Operator but up to a maximum limit of GMD 1,000.
The forms of Excess of Loss include, Working Excess of Loss, Catastrophe Excess of
Loss and The Stop Loss Excess of Loss and aggregate excess of Loss.
Benefits of Retakaful
The benefits of Retakaful to the Takaful operator are quite similar to those in
conventional reinsurance some of which include;
1. Enables the takaful operator to balance out its portfolio of risks. By selectively
ceding out its peak risks, the Takaful operator is able to withstand losses or
damages from the occurrence of particular events.
2. The Retakaful operators also have a wealth of technical expertise that takaful
operators can utilize in underwriting complex risks.
3. Retakaful also ensures the diversification of the exposure of the takaful
operator.
4. The retakaful contract provides extra underwriting capacity to the cedant (TO).
The Retakaful Window
Highly capitalized conventional reinsurers can also provide Retakaful Services in
addition to their core reinsurance business. This is done through what is known as a
Retakaful Window.
In offering Retakaful Services, the Conventional Reinsurers should take utmost care
to ensure that there is no mix/association of the operational activities of the
conventional side to the retakaful side.
The Retakaful window should be strictly confirm to the requirements of shariah
Law. One of the Reinsurers offering Retakaful Services in Africa through the
window ZEP Re (PTA Reinsurance Company) through its Retakaful Window in
Sudan.
Thank you