UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Retakaful in Islamic Finance

Retakaful is basically reinsurance.  According to Amanie, in an insurance market, the insurance company may need to cede (transfer) some of the risk to another bigger insurance company (cedant) because it has assumed greater risk than it can handle.  The purpose is to protect the cedant company against catastrophic losses. Thus, accordingly, Retakaful aids the ceding company to underwrite a large risk by reinsuring or transferring some of that risk to another more capable party.  According to Amanie, Retakaful would allow the Takaful companies to transfer some of the risk on behalf of the Takaful participants to another company, which can assume a larger risk.  The act of pooling some of the largest risk together is done based on the tabarru/donation contract in order to ensure Sharia’h compliance of the Retakaful activity. Under Sharia’h, a Takaful company is only to ‘reinsure’ its risk to a Retakaful company.  However, the Sharia’h scholars have allowed a Takaful Company to reinsure the Takaful risk to a reinsurance company under the principle of necessity or (hajah).  According to Amanie, necessity means that if something is not done or something is done, a great difficulty will implicate the Takaful industry.  This type of transfer of risk based on hajah is allowed under the following three criteria: (1)  a Retakaful company does not have the capacity to underwrite the risk from Takaful companies; (2) the Takaful company is not entitled to any commission paid by the reinsurance company; (3) and the concession is reviewed by the Sharia’h Board of Takaful companies on an occasional basis.  Basically, without Retakaful, the Takaful industry cannot expand if it limited by its inability to underwrite larger risks. (AMANIE)

Takaful and Retakaful

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