Takaful Islamic Insurance Concepts and Regulatory Issues www.ebook3000.com Takaful Islamic Insurance Concepts and Regulatory Issues Edited by Simon Archer Rifaat Ahmed Abdel Karim Volker Nienhaus John Wiley & Sons (Asia) Pte Ltd Copyright © 2009 John Wiley & Sons (Asia) Pte Ltd Published in 2009 by John Wiley & Sons (Asia) Pte Ltd Clementi Loop, #02–01, Singapore 129809 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as expressly permitted by law, without either the prior written permission of the Publisher, or authorization through payment of the appropriate photocopy fee to the Copyright Clearance Center Requests for permission should be addressed to the Publisher, John Wiley & Sons (Asia) Pte Ltd., Clementi Loop, #02–01, Singapore 129809, tel: 65-6463-2400, fax: 65-6463-4605, e-mail: enquiry@wiley.com This publication is designed to provide accurate and authoritative information in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in rendering professional services If professional advice or other expert assistance is required, the services of a competent professional person should be sought Neither the authors nor the publisher are liable for any actions prompted or caused by the information presented in this book Any views expressed herein are those of the authors and not represent the views of the organizations they work for Other Wiley Editorial Offices John Wiley & Sons, 111 River Street, Hoboken, NJ 07030, USA John Wiley & Sons, The Atrium, Southern Gate, Chichester, West Sussex, P019 8SQ, United Kingdom John Wiley & Sons (Canada) Ltd., 5353 Dundas Street West, Suite 400, Toronto, Ontario, M9B 6HB, Canada John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia Wiley-VCH, Boschstrasse 12, D-69469 Weinheim, Germany Library of Congress Cataloging-in-Publication Data ISBN 978-0-470-82352-1 Typeset in 10.5/13pt Sabon by Laserwords Private Limited, Chennai, India Printed in Singapore by Markono Print Media Pte Ltd 10 www.ebook3000.com Contents Dedication ix About the Editors xi About the Contributors xiii Foreword xvii Acknowledgment xix Conceptual, Legal, and Institutional Issues Confronting Takaful Simon Archer, Rifaat Ahmed Abdel Karim, and Volker Nienhaus 1.1 1.2 1.3 Introduction Developments in International Prudential Guidelines for Insurance and Takaful Contents of this Book Part Business Models in Takaful and Regulatory Implications Simon Archer, Rifaat Ahmed Abdel Karim, and Volker Nienhaus 2.1 2.2 2.3 2.4 Introduction Business Models Business Structures and Regulatory Implications Regulatory Perspectives Shari’ah Principles Governing Takaful Models Dr Mohd Daud Bakar 3.1 Introduction 3.2 Takaful: Nomenclature and Conceptual Meaning 3.3 Shari’ah Principles Governing Takaful Contracts 3.4 Takaful Management Models Corporate Governance and Stakeholder Rights in Islamic Insurance Simon Archer, Rifaat Ahmed Abdel Karim, and Volker Nienhaus 4.1 4.2 4.3 4.4 4.5 Introduction The Neo-classical and Neo-corporatist Models of Corporate Governance Corporate Governance Issues in the Insurance Industry Corporate Governance Issues in Takaful Concluding Remarks v 11 20 27 31 31 32 34 42 47 47 49 53 57 65 vi Contents Legal Issues in Takaful 67 Madzlan Mohamad Hussain 5.1 Introduction 5.2 Takaful Models and their Impacts 5.3 The Legal Issues 5.4 The Call for an Effective Framework 5.5 Concluding Remarks Business Conduct in Islamic Insurance with Special Reference to Emerging Markets Arup Chatterjee 6.1 6.2 6.3 6.4 6.5 Background Business Environment in Emerging Markets Framework of Business Conduct and Best Practices Critical Drivers for Developing Market Infrastructure Conclusion Supervisory Issues in Takaful: An Overview Peter Casey 7.1 7.2 7.3 7.4 7.5 7.6 67 68 72 81 82 85 85 86 90 101 107 113 Introduction Governance Issues Financial Issues Market Conduct Issues Market Issues Supervisory Priorities 113 115 121 130 135 137 Reinsurance and Retakaful Mahomed Akoob 8.1 Introduction 8.2 What is Reinsurance? 8.3 Functions of Reinsurance 8.4 Types of Reinsurance 8.5 Proportional Reinsurance 8.6 Non-proportional Reinsurance 8.7 Reinsurance Market 8.8 Concept of Takaful 8.9 Need for Retakaful 8.10 Retakaful Models 8.11 Main Issues Raised by Retakaful 8.12 Conclusion 143 Risk Management in Takaful Abdullah Haron and Dawood Taylor 169 Part 9.1 9.2 Introduction Comparison between Conventional Insurance and Takaful www.ebook3000.com 143 143 145 145 147 149 151 151 154 156 162 167 169 172 vii Contents 9.3 9.4 9.5 9.6 Fundamental Principles of Takaful from a Risk Management Perspective Risk Issues in Takaful Undertakings Management of Risks in a Takaful Undertaking Concluding Remarks 10 Solvency and Capital Adequacy in Takaful 175 176 184 191 193 James Smith 10.1 10.2 10.3 10.4 10.5 10.6 Introduction The Need for Solvency The Principle of Solvency Traditional Approaches to Insurance Solvency Risk-based Capital Summary 11 Investment Portfolios of Takaful Undertakings 193 194 195 197 200 214 217 Dr Abdulrahman Tolefat 11.1 Total Investment Portfolio of Takaful Undertakings for All Funds 11.2 Shareholders’ Funds 11.3 Analysis of Shareholders’ Funds between the GCC Countries and Malaysia 11.4 General Fund 11.5 Analysis of General Fund between GCC and Malaysia 11.6 Family Fund 11.7 Influence of Related Parties on the Investment Portfolios of Participants’ Funds 11.8 Summary and Conclusions 12 Issues in Rating Takaful Companies Andrew Murray 12.1 12.2 12.3 12.4 12.5 12.6 Introduction What is a Credit Rating? Types of Credit Rating Credit Rating Basics Key Issues for Rating Takaful Firms Conclusion 13 Transparency and Financial Reporting in Islamic Insurance Elham Hassan and Andre Rohayem 13.1 Introduction 13.2 Stakeholders Need Transparency in Financial Reporting by Islamic Insurance Companies 13.3 Existing Islamic Insurance Financial Reporting Framework Should be Improved to Achieve Greater Transparency 13.4 Conclusion 218 219 224 226 229 232 234 236 239 239 240 240 241 243 263 265 265 266 274 283 viii Contents Part 14 Concluding Remarks 287 Simon Archer, Rifaat Ahmed Abdel Karim, and Volker Nienhaus 14.1 Introduction 14.2 The Structure of Takaful Undertakings and Resultant Unresolved Issues 14.3 Corporate Governance and Related Matters 14.4 The Need for, and Scope of, a Comprehensive Regulatory Framework for Takaful 14.5 The Work of the IFSB in Developing International Prudential Guidelines for Takaful Undertakings 14.6 Some Thoughts for the Future 287 Bibliography 297 Index 301 www.ebook3000.com 288 289 292 293 294 Dedication We would like to dedicate this book to our wives Iglal, Evelyne, and Hannelor About the Editors Professor Simon Archer is Visiting Professor at the ICMA Centre, Henley Business School, University of Reading (U.K.), where he teaches on an MSc program, Investment Banking and Islamic Finance Previously, he was Professor of Financial Management at the University of Surrey (U.K.) having been Midland Bank Professor of Financial Sector Accounting at the University of Wales, Bangor After studies in Philosophy, Politics, and Economics at Oxford University, he qualified as a Chartered Accountant with Arthur Andersen in London and then moved to Price Waterhouse in Paris, where he became a Partner in Management Consultancy Services In addition to being co-editor of, and chapter contributor to, Islamic Finance: Innovation and Growth, and Islamic Finance: The Regulatory Challenge (published by John Wiley), Professor Archer is co-author of the CCH International Accounting/Financial Reporting Standards Guide and the author of a considerable number of academic papers on international accounting and on accounting, finance, and related issues in Islamic financial institutions He also supervises research students in these areas He has carried out a number of consultancy assignments for the Accounting and Auditing Organization for Islamic Financial Institutions, the Islamic Financial Services Board, and the World Bank on issues connected with Islamic finance Professor Rifaat Ahmed Abdel Karim has been the Secretary-General of the Islamic Financial Services Board since 2002 Prior to his current position, Professor Rifaat was the Secretary-General of the Accounting and Auditing Organization for Islamic Financial Institutions, a post he held for more than eight years He was a member of the Standards Advisory Council of the International Accounting Standards Board for two terms, and is currently a member of the Consultative Advisory Group of the International Auditing and Assurance Standards Board Professor Rifaat was a Visiting Professor at Surrey University (U.K.) and Honorary Professor at Monash University (Australia) He is currently a Visiting Professor at Reading University (U.K.) Professor Rifaat is the co-author of Business and Accounting Ethics in Islam, the Euromoney bestseller book Islamic Finance: Innovation and Growth, and Islamic Finance: The Regulatory Challenge recently published by John Wiley He is also the author of many academic and professional xi www.ebook3000.com xii About the Editors papers on accounting, governance, and finance issues in Islamic banking and finance Dr Volker Nienhaus was Professor of Economics at the German universities of Trier (1989–90) and Bochum (1990–2004) before he became President of the University of Marburg (election period 2004–10) He has published numerous books and articles on Islamic economics and Islamic banking and finance since the 1980s He was a member of several academic advisory boards of public and private institutions in Germany, including the German Orient-Foundation (1993–2006) and the Federal Ministry of Economic Cooperation and Development (1998–2008) In 2006, he was appointed a member of the Governing Council of the International Centre for Education in Islamic Finance (INCEIF) in Kuala Lumpur He is also consultant to the Islamic Financial Services Board on governance issues of takaful operations ... perspective, Takaful Islamic Insurance: Concepts and Regulatory Issues is a timely and welcomed addition to the growing body of literature on takaful The book is edited by three eminent scholars and practitioners... auditing and providing advisory services to insurance and reinsurance companies He has also advised and assisted several investors and multinational companies in the establishment of insurance and takaful. .. encouragement and support every step of the way xix www.ebook3000.com Takaful Islamic Insurance: Concepts and Regulatory Issues Edited by Simon Archer, Rifaat Ahmed Abdel Karim and Volker Nienhaus