by ~ Robert A. Whitney (Email) (Web Site)
Retakaful is reinsurance governed by Islamic, or Sharia, law. While a relatively new form of reinsurance, the number of Retakaful companies and contracts will continue to grow throughout the world over the next few years, including within the United States. As such, there is a growing need for attorneys and arbitrators who are familiar with these contracts and experienced in Sharia insurance and reinsurance law.
Insurance as a risk transfer mechanism dates back thousands of years before Edward Lloyd opened his coffee house in the City of London. Historically, early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BCE, respectively. Chinese merchants redistributed their wares across multiple ships in order to limit the loss due to any single vessel's sinking. Babylonian merchants also developed a system practiced by early traders sailing the Mediterranean in which a merchant who received a loan to fund his shipment of goods would also pay the lender an additional sum in exchange for the lender's promise to cancel the loan should the shipment be stolen.
In the early days of the Islamic era, caravans trading throughout Arabia and adjoining lands were also exposed to potentially catastrophic losses, such as sandstorms and raiders. Also, as Muslim traders expanded to markets in the Indian subcontinent, the Malay Archipelago and Asia, they often experienced large losses when ships were lost at sea or raided by pirates along the way.
Based on the Islamic principle of mutual help and cooperation in good and virtuous acts, traders often agreed before they started their long journey to contribute to a fund that would be used to compensate any member who suffered losses on the caravan trip or ocean voyage. Muslim scholars generally acknowledge that the basis of shared responsibility as practiced between these early Muslim traders laid the foundation for a form of mutual insurance under Islamic law known as Takaful and Retakaful.
I. What Is Takaful?
Takaful is a form of conventional insurance that is compliant with Sharia law. It is a form of risk management or cooperative insurance. Although practiced for centuries, the worlds first modern Takaful company, the Sudanese Islamic Insurance Company, was not established until 1979. As of January 2009, that number had grown to approximately 124 Takaful companies and 38 Takaful windows (i.e. Takaful business undertaken by conventional insurers).
There are many differences between Takaful and conventional insurance, with the main distinction being the fundamental principles that govern each practice. Based upon the Koran and related teachings, Takaful provides that policyholders will cooperate among themselves for their common good; that every policyholder pays his subscription to help those who need assistance; that losses are divided and liabilities spread according to a community pooling system; that uncertainty is eliminated in respect of subscription and compensation; and that one does not derive advantage at the cost of others.
Sharia, the religious law of Islam, forbids certain elements of conventional insurance contracts, including Riba (interest), Maisir (gambling), and Gharar (excessive uncertainty). Takaful operations are structured to avoid these prohibited elements. Indeed, Takaful operations are overseen by Sharia supervisory bodies that ensure compliance with Sharia principles and Islamic objectives.
For example, in conventional insurance, Riba (interest) arises in transactions whereby an unequal exchange occurs between premium paid in and indemnities paid out, as well as in the income derived from interest-bearing investments. Takaful structures avoid Riba by using share contracts and by investing pooled funds only in Sharia-compliant schemes. The practice of conventional insurance also implicates Gharar (uncertainty) due to uncertainties on how much will be paid in losses and when and whether losses will occur. When no claim is made under a conventional policy, an insurance company may be perceived to receive all of the benefit, or profit, from the arrangement. Takaful contracts, on the other hand, must follow specific rules to avoid Gharar (uncertainty). Takaful participants contribute to a common pool from which claims are paid, and any surplus from the pool is later returned to members in some form of sharing device. (In this respect Takaful companies are very similar to mutual or cooperative insurance companies.) Maisir (gambling) is also prohibited. Premiums are characterized as donations a voluntary contribution to the pool for those in need of assistance. Takaful is also not characterized as a risk transfer mechanism or a as a sale or exchange, but rather as a mutual sharing of risks; it is a contract for membership in a common pool which gives every member certain benefits but also exposure to some risks of loss.
II. Retakaful Islamic Reinsurance
Retakaful is to reinsurance what Takaful is to conventional insurance. Like conventional reinsurance, Retakaful redistributes risk and is used mainly for covering large risks and accumulation of risks subject to common loss. Retakaful also ensures that Takaful funds are managed to meet the indemnity obligations of the reinsured, thereby assuring the continuity of Takaful operations. In short, just as in conventional reinsuring relationships, Retakaful gives underwriting capacity to a Takaful ceding company.
The Sharia principles applying to Takaful apply equally to Retakaful operations. Thus, conventional reinsurance like conventional insurance - is prohibited under Islamic law because of the view that conventional reinsurance relies on or involves prohibited elements of Riba (interest), Gharar (uncertainty) and Maisir (gambling). A Retakaful operation avoids these prohibited elements by structuring its operation much in the same way as a Takaful company and by prohibiting payment to its cedents (Takaful companies) based on either profit or interest.
Unlike Takaful, Retakaful operations are relatively new. At present, most Takaful operators still reinsure with conventional reinsurers because of the insufficient number of Retakaful companies that are capitalized to the levels required by insurers and more particularly the lack of A rated Retakaful companies. Indeed, the first Islamic reinsurance company, or Retakaful, the Islamic Reinsurance Company in Bahrain, was only formed in 1985. While Sharia scholars have approved the use of conventional reinsurers, this authorization is temporary and conditional and only permitted when there is no practicable Sharia-compliant alternative.
B. Looking Ahead: Future Issues Concerning Retakaful Contracts
The market for Islamic insurance products Takaful and Retakaful has grown dramatically, with double digit growth rates over the past few years. Currently there are more than 80 Takaful operators active in the primary insurance business set up mainly in the Muslim world. Some have predicted future growth of between 15 and 20 percent annually, with gross premiums predicted to reach $14 billion by the year 2015 almost a three-fold increase over todays level.
Some of this growth is likely to come from existing global reinsurers. For example, in late 2006, Hannover Re, the fifth largest reinsurance company in the world, set up an Islamic subsidiary, Hannover ReTakaful B.S.C., in Bahrain, with an initial capitalization of $185 million. In 2010, the worlds largest reinsurance company, Swiss Re, announced the formation of its Sharia-compliant reinsurance business in Dubai for life/family Retakaful.
As the number of Retakaful companies and contracts continues to grow throughout the world, it is inevitable that disputes over Retakaful contracts will arise. And as Retakaful contracts become more common place, and involve risks that include American-based assets, interesting issues will arise. Will disputes involving such contracts be arbitrated in the United States? If so, will the disputes be decided by arbitration panels or judges? Will Islamic law apply? What issues may arise in the enforcement of such awards? These and other issues are certain to garner the attention of reinsurance practitioners in the coming years.
SOURCES AND ADDITIONAL READING LIST
History of Insurance, http://en.wikipedia.org/wiki/History_of_insurance
Takaful And Retakaful, https://www.reorient.co.uk/pdfs/takaful_retakaful.pdf
A Guide to Risk Transfer, Principles of Insurance and Reinsurance, REACTIONS, http://www.reactionsnet.com/AboutUs/Stub/WhatIsReactions.html.
M. Ashraf, Takaful Insurance Business, ACCOUNTANCY, http://www.accountancy.com.pk/articles.asp?id=157 (June 10, 2005).
A. MULHIM & A. SABBAGH, ISLAMIC INSURANCE THEORY AND PRACTICE 108
B. Kettell, A Guide To Islamic Co-Operative Insurance, http://www.cpifinancial.net/v2/print.aspx?pg=magazine&aid=391
P. Hodgins and C. Jaffer. The Future of Takaful: Potholes in the Streets of Gold?, ISLAMICA, August 2009,
Getting in the Game: Retakaful in a Changing Environment, ISLAMICA, 1 www.ae.zawya.com/story.cfm, (March 13, 2007)
A.Imoisili, Get The Facts On Dispute Resolution Before Entering Into A Takaful Venture, NATIONAL UNDERWRITER PROPERTY & CASUALTY, http://www.milbank.com/NR/rdonlyres/68D54F33-8FC3-4409-83F7-9D0EE9743400/0/102609_NUCO_Aluya_Imoisili.pdf (October 26, 2009)
Rob Whitney may be reached at email@example.com.
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