As mentioned earlier, reinsurance is simply defined as insurance of insurance. From a legal perspective, a contract of reinsurance is basically a contract of insurance. All doctrines that apply to insurance also apply to reinsurance.
Adopting the same logic facilitates the description of what retakaful actually is. Retakaful can simply be defined as ‘takaful of takaful’. The retakaful contract is essentially a contract of takaful, so that all the basic principles of takaful must also be followed.
While the definition of retakaful as the ‘takaful of takaful’ is simple, it does bring with it an in-depth meaning and consequences. The takaful pool of risks being managed by a takaful operator is a translation of the principle of tabarru’/takaful among individual participants. Similarly, a retakaful pool of risks, which is managed by a retakaful operator, is a real implementation of tabarru’/solidarity among takaful pools of risk.
Taking the view from a different angle, retakaful is actually a means of widening the spectrum of the principle of solidarity or mutual help.. Without retakaful, implementation of the principle of tabarrru’ is limited within the boundary of a single takaful pool being managed by a takaful operator. However, through retakaful, a participant in one takaful pool essentially helps or is being helped by other participants in the other takaful pools. This concept is a unique dimension of retakaful that is` not to be found in conventional reinsurance.
The technical functions of conventional reinsurance as discussed previously also apply to retakaful. As with conventional reinsurance, retakaful plays the role of spreading risks from one pool to others and at the same time of providing underwriting capacity to the takaful pool. Using the appropriate techniques, retakaful will also be able to protect a pool from the effects of a catastrophic event.
The capacity provided by the retakaful industry will allow takaful operators to underwrite large industrial and mega risks and hence to be in a position to compete with established conventional insurers, while reducing the need to raise huge amounts of capital. Retakaful is an effective and convenient way of spreading the risk portfolio over different takaful pools as well as territories. It also reduces the probability of the risk of ruin for the industry when large catastrophic losses, either natural or man-made, occur.
From the takaful operator’s perspective, retakaful is a cost-effective substitute for capital. Whilst not assuming the risk, takaful operators remain obliged to set aside capital to support the pool under their management through the mechanism of Qard (benevolent loan) in the case of a deficit in the pool.
Considering the high rate of growth of the global takaful industry, it is therefore equally important for the industry to reflect long-term sustainability. The existence of an adequate and financially strong retakaful industry is an essential factor for sustainability. No insurance market, globally, is able to flourish and sustain itself on a long-term basis in the absence of the support of reinsurance, and takaful is no exception.
The retakaful industry is in the development stage. Up to the end of 2007, there were six fully-fledged retakaful operators and seven retakaful windows in the market. Estimates indicate that retakaful contributions amounted to US$ 570 million in 2006, and this figure is projected to double by around 2010. Not all of this volume is absorbed by retakaful operators as, for historical and capacity reasons, many takaful operators reinsure their portfolio with conventional reinsurers.
In principle, takaful operators are not allowed to reinsure with a conventional reinsurer, as reinsuring with a conventional reinsurer impairs full compliance with shariah principles which is of crucial important in takaful. However, in the absence of capacity and of financially strong retakaful undertakings in the market, shariah scholars do grant temporary permission to reinsure with conventional reinsurers as a matter of dharuraa(necessity). As the takaful industry continues its rapid growth, the need for adequate and financially-strong retakaful capacity becomes more evident.
Adopted from Akoob, M. (2008). Reinsurance and Retakaful. In S. Archer, R. Karim, & V. Neinhaus, Takaful and Islamic Insurance: Concept and Regulatory Issues. Singapore: John Wiley & Sons (Pte) Ltd