The Use of Retrocession by Retakaful operators: An Analysis from Shariah Perspective

Abstract

In Malaysia, the insurance and takaful sector is under the purview of the Central Bank of Malaysia, and the same goes for reinsurance and retakaful operations. However, due to the country's dual financial system i.e. the conventional and Islamic financial system, conventional reinsurance and retakaful, fall under different laws. The conventional reinsurance is regulated under the Financial Services Act (2013) while the takaful and retakaful by the Islamic Financial Services Act (2013). Undoubtedly, the takaful industry is expanding in the Malaysian market today by leaps and bounds. Retakaful acts in the same way as takaful, providing (re)takaful arrangement for their policyholders. The survival of the takaful operator is heavily influenced by the retakaful operators. The takaful operator will distribute some portion of their risks that they cannot bear to a retakaful operators. However, the retakaful operators are currently unable to cover the entire risk that were ceded by the takaful operators due to lack of retakaful operators in the market, as well as very limited capital, inadequate accumulated funds, and regulatory solvency issues. At the same time, retakaful operators also face challenges in meeting their commercial goals. They, in turn, use tools such as retrocession to overcome their impending challenges. This paper aims to analyse the importance of retrocession to the retakaful company from a Shariah perspective. The research is timely as not much research has been carried out on Retakaful operations in Malaysia. There is also limited discussion related to the business models of retakaful, as well as no specific guidelines focusing on retakaful itself. Therefore, a qualitative approach is suitable for the purpose of exploring such new areas. Besides, Retakaful industry is considered relatively new compared to reinsurance.