Re-Takaful is the ultimate solution for Takaful operator’s limited financial capacities. It emerged as an instrument to transfer risk in accordance with Shariah principles. However, Re Takaful faces many inexorable challenges in many aspects of its business. Since Re-Takaful is a new instrument introduced in Takaful, the number of Re-Takaful operators is quite small compared to the conventional Reinsurance industry.
Limited Capacity
The limited capacity is one of the challenges faced by Re-Takaful. With a limited number of Re-Takaful operators, the capacity available is not big enough to satisfy the Takaful operators’ demand. Only three Re-Takaful companies were operating in Malaysia as of January 2021 reported by Bank Negara Malaysia which are a) Swiss Reinsurance Company Ltd. (Swiss Re Retakaful) b) Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) c) Malaysian Reinsurance Berhad, indicating the industry’s still-slim presence. In line with that, it forced the takaful operators to reach out and use conventional reinsurance services.
To addressthisissue the Re-Takaful companiesshould encourage new entrants by collaborating with authorities and professional organisationsto entice new competitors. They should promote the advantages of Re-takaful, providing incentives for new entrants, and accelerating or streamlining the licensing process for new companies. In addition, fostering partnerships and collaborations is also one of the effective ways to introduce the market of Re-Takaful. Re
takaful companies can collaborate with other companies in the industry to increase their capacity and competitiveness. This can include forming partnerships with top takaful companies, establishing joint ventures with other re-takaful operators, or collaborating with technology firms to develop innovative solutions.
Insufficient of Re-Takaful company
Insufficient of Re-Takaful company funds to cover the risk of takaful company is also a factor that leads to reinsurance. To safeguard the company’s financial stability from poor underwriting outcomes, the Re-Takaful company must make sure they are appropriately capitalized. Thus, to ensure the Re-Takaful is capable to support the takaful companies, they can increase their capitalisation. They might boost their capitalisation to raise their ability to pay for takaful risks. This may entail obtaining more equity funding, issuing sukuk or subordinated debt, or looking for investment from trusted partners or sovereign wealth funds. To control their exposure to takaful risk, they might develop Alternative Risk Transfer Solutions such as risk transfer mechanisms, like catastrophe bonds or weather derivatives and collaboration with other financial institutions to provide fresh forms of funding.
Limited underwriting capacity
This limited underwriting capacity can be seen in the Covid-19 era. The pandemic drove a rapid increase in claims across multiple insurance lines, including health, travel, and business interruption. Claims from ceding Takaful companies rose, putting pressure on Re-takaful operators’ underwriting and claims management processes. Investing in technology enables boosting productivity, saving expenses, and expanding capacity. This can involve using blockchain to speed up transactions, leveraging artificial intelligence (AI) and machine learning to improve underwriting and claims processing, or implementing cloud-based solutions to increase scalability.
Lack of standardisation
Lack of standardisation in the Re-Takaful system also can paralyse the growth of the Re Takaful system. Re-Takaful lacks universal standardisation, contrary to conventional reinsurance, which has solidified standard practices and documentation. This lack of standardisation in contracts, terms, and practices can create complexities and inconsistencies in the Re-Takaful market. The need to enhance transparency is vital to fill up the holes through enhance their operational transparency to build stakeholder trust and boost market effectiveness. This can involve enhancing disclosure procedures, giving customers and regulators clear and concise information, setting up standardised reporting systems also establishing best practices for risk management and governance.
To sum it up, Takaful and Re-Takaful are much needed nowadays. The need for strong and credible Re-Takaful operators is vital to complement the growth and expansion of the takaful industry. Therefore, recognising that Re-Takaful companies play a significant part in the takaful industry, some proactive steps must be taken to maintain the benefits and sustainability of takaful products while rebuffing products carrying elements prohibited by Islam, such as riba, gharar, and maysir.
By Ezza Nasyitah Suhariman, Bachelor Degree Student, Faculty of Shariah and Laws, Universiti Sains Islam Malaysia (USIM)
