Takaful Islamic Insurance: Concepts and Regulatory Issues

324 Pages·2009·3.24 MB·English

Takaful Islamic Insurance
Concepts and Regulatory Issues
Takaful Islamic Insurance
Concepts and Regulatory Issues
Edited by
Simon Archer
Rifaat Ahmed Abdel Karim
Volker Nienhaus
JohnWiley&Sons(Asia)Pte.Ltd.
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Contents
Dedication ix
AbouttheEditors xi
AbouttheContributors xiii
Foreword xvii
Acknowledgment xix
1 Conceptual,Legal,andInstitutionalIssuesConfrontingTakaful 1
SimonArcher,RifaatAhmedAbdelKarim,andVolkerNienhaus
1.1 Introduction 1
1.2 DevelopmentsinInternationalPrudentialGuidelinesfor
InsuranceandTakaful 2
1.3 ContentsofthisBook 3
Part 1
2 BusinessModelsinTakafulandRegulatoryImplications 9
SimonArcher,RifaatAhmedAbdelKarim,andVolkerNienhaus
2.1 Introduction 9
2.2 BusinessModels 11
2.3 BusinessStructuresandRegulatoryImplications 20
2.4 RegulatoryPerspectives 27
3 Shari’ahPrinciplesGoverningTakafulModels 31
Dr.MohdDaudBakar
3.1 Introduction 31
3.2 Takaful:NomenclatureandConceptualMeaning 32
3.3 Shari’ahPrinciplesGoverningTakafulContracts 34
3.4 TakafulManagementModels 42
4 CorporateGovernanceandStakeholderRights
inIslamicInsurance 47
SimonArcher,RifaatAhmedAbdelKarim,andVolkerNienhaus
4.1 Introduction 47
4.2 The Neo-classical and Neo-corporatist Models of Corporate
Governance 49
4.3 CorporateGovernanceIssuesintheInsuranceIndustry 53
4.4 CorporateGovernanceIssuesinTakaful 57
4.5 ConcludingRemarks 65
v
vi Contents
5 LegalIssuesinTakaful 67
MadzlanMohamadHussain
5.1 Introduction 67
5.2 TakafulModelsandtheirImpacts 68
5.3 TheLegalIssues 72
5.4 TheCallforanEffectiveFramework 81
5.5 ConcludingRemarks 82
6 BusinessConductinIslamicInsurancewithSpecialReference
toEmergingMarkets 85
ArupChatterjee
6.1 Background 85
6.2 BusinessEnvironmentinEmergingMarkets 86
6.3 FrameworkofBusinessConductandBestPractices 90
6.4 CriticalDriversforDevelopingMarketInfrastructure 101
6.5 Conclusion 107
7 SupervisoryIssuesinTakaful:AnOverview 113
PeterCasey
7.1 Introduction 113
7.2 GovernanceIssues 115
7.3 FinancialIssues 121
7.4 MarketConductIssues 130
7.5 MarketIssues 135
7.6 SupervisoryPriorities 137
Part 2
8 ReinsuranceandRetakaful 143
MahomedAkoob
8.1 Introduction 143
8.2 WhatisReinsurance? 143
8.3 FunctionsofReinsurance 145
8.4 TypesofReinsurance 145
8.5 ProportionalReinsurance 147
8.6 Non-proportionalReinsurance 149
8.7 ReinsuranceMarket 151
8.8 ConceptofTakaful 151
8.9 NeedforRetakaful 154
8.10 RetakafulModels 156
8.11 MainIssuesRaisedbyRetakaful 162
8.12 Conclusion 167
9 RiskManagementinTakaful 169
AbdullahHaronandDawoodTaylor
9.1 Introduction 169
9.2 ComparisonbetweenConventionalInsuranceandTakaful 172
Contents vii
9.3 Fundamental Principles of Takaful from a Risk Management
Perspective 175
9.4 RiskIssuesinTakafulUndertakings 176
9.5 ManagementofRisksinaTakafulUndertaking 184
9.6 ConcludingRemarks 191
10 SolvencyandCapitalAdequacyinTakaful 193
JamesSmith
10.1 Introduction 193
10.2 TheNeedforSolvency 194
10.3 ThePrincipleofSolvency 195
10.4 TraditionalApproachestoInsuranceSolvency 197
10.5 Risk-basedCapital 200
10.6 Summary 214
11 InvestmentPortfoliosofTakafulUndertakings 217
Dr.AbdulrahmanTolefat
11.1 TotalInvestmentPortfolioofTakafulUndertakings
forAllFunds 218
11.2 Shareholders’Funds 219
11.3 Analysis of Shareholders’ Funds between the GCC Countries
andMalaysia 224
11.4 GeneralFund 226
11.5 AnalysisofGeneralFundbetweenGCCandMalaysia 229
11.6 FamilyFund 232
11.7 Influence of Related Parties on the Investment Portfolios of
Participants’Funds 234
11.8 SummaryandConclusions 236
12 IssuesinRatingTakafulCompanies 239
AndrewMurray
12.1 Introduction 239
12.2 WhatisaCreditRating? 240
12.3 TypesofCreditRating 240
12.4 CreditRatingBasics 241
12.5 KeyIssuesforRatingTakafulFirms 243
12.6 Conclusion 263
13 TransparencyandFinancialReportinginIslamicInsurance 265
ElhamHassanandAndreRohayem
13.1 Introduction 265
13.2 Stakeholders Need Transparency in Financial Reporting by
IslamicInsuranceCompanies 266
13.3 ExistingIslamicInsuranceFinancialReporting
FrameworkShouldbeImprovedtoAchieveGreater
Transparency 274
13.4 Conclusion 283
viii Contents
Part 3
14 ConcludingRemarks 287
SimonArcher,RifaatAhmedAbdelKarim,andVolkerNienhaus
14.1 Introduction 287
14.2 TheStructureofTakafulUndertakingsandResultant
UnresolvedIssues 288
14.3 CorporateGovernanceandRelatedMatters 289
14.4 The Need for, and Scope of, a Comprehensive Regulatory
FrameworkforTakaful 292
14.5 The Work of the IFSB in Developing International Prudential
GuidelinesforTakafulUndertakings 293
14.6 SomeThoughtsfortheFuture 294
Bibliography 297
Index 301
Dedication
Wewouldliketodedicate thisbooktoourwives
Iglal,Evelyne,and Hannelor.
About the Editors
Professor Simon Archer is Visiting Professor at the ICMA Cen-
tre, 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 Uni-
versity,hequalifiedasaCharteredAccountantwithArthurAndersen
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 Chal-
lenge(publishedbyJohnWiley),ProfessorArcherisco-authorofthe
CCHInternationalAccounting/FinancialReportingStandardsGuide
andtheauthorofaconsiderablenumberofacademicpapersoninter-
nationalaccounting andonaccounting, finance, andrelated issuesin
Islamic financial institutions. He also supervises research students in
these areas. He has carried outa number ofconsultancy assignments
for the Accounting and Auditing Organization for Islamic Financial
Institutions,theIslamicFinancialServicesBoard,andtheWorldBank
onissuesconnected withIslamicfinance.
ProfessorRifaatAhmedAbdelKarimhasbeentheSecretary-General
oftheIslamicFinancialServicesBoardsince2002.Priortohiscurrent
position,ProfessorRifaatwastheSecretary-GeneraloftheAccounting
and Auditing Organization for Islamic Financial Institutions, a post
heheldformorethaneightyears.HewasamemberoftheStandards
Advisory Council of the International Accounting Standards Board
fortwoterms,andiscurrentlyamemberoftheConsultativeAdvisory
GroupoftheInternationalAuditingandAssuranceStandardsBoard.
Professor Rifaat was a Visiting Professor at Surrey University (U.K.)
and Honorary Professor at Monash University (Australia). He is
currentlyaVisiting ProfessoratReading University(U.K.). Professor
Rifaatistheco-authorofBusinessandAccountingEthicsinIslam,the
EuromoneybestsellerbookIslamicFinance:InnovationandGrowth,
andIslamicFinance:TheRegulatoryChallengerecentlypublishedby
JohnWiley.Heisalsotheauthorofmanyacademicandprofessional
xi
xii AbouttheEditors
papers on accounting, governance, and finance issues in Islamic
bankingandfinance.
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).HehaspublishednumerousbooksandarticlesonIslamic
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)andtheFederalMinistryofEconomicCooperationand
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.