5 Interactive Distance Learning Programs on Islamic Banking and Finance

Wednesday, April 1, 2009

Aspects of (re)takaful insurance require special rating consideration

(Re)takaful insurance has grown from a niche product to a mainstream risk management offering and Standard & Poor’s (S&P’s) has identified aspects of the business model that may be subject to specific consideration or special treatment in its financial strength analysis.
Some of these aspects include industry and economic risk, competitive position, earnings quality and capital adequacy, according to S&P’s report, Standard & Poor’s Approach to Rating Takaful and Retakaful (Islamic Re/Insurance) Companies.
When considering industry and economic risk, S&P’s may adapt its assessment to reflect the likely potential demand for Islamic insurance in the operational domicile.
“For instance, we believe that countries with a large Islamic community are likely to have stronger economic/business drivers than where the Islamic population is smaller,” S&P’s said in its report.
In terms of competitive position, as Islamic entities, takaful companies’ income streams can be constrained by the application of strict Sharia compliance to the nature of the risks being offered, S&P’s said.
“We understand that in some circumstances, the risks accepted will be broken down into Sharia compliant and non-compliant components, with any profits from the latter being donated to charity, or eliminated in some form,” the report said.
The assessment of earnings quality can be more complex for takaful companies than for other companies because the reporting of financial statements for takaful fund members and shareholders is often separate, S&P’s continues.
“At the technical level, therefore, we consider that underwriting earnings may be expected to be more marginal in terms of profit contribution over the long term, as members may expect lower risk pricing on this shared risk basis, or a profit share distribution at some point from any surpluses.”
For capital adequacy, S&P’s generally uses its risk-based capital adequacy model to assess the capital quality of the company. For (re)takaful companies, the key adaptation is to offset any takaful fund deficit against the shareholders’ capital in S&P’s analysis, as shareholders are obliged to offer support for any such shortfalls.
Similarly, S&P’s will generally include any takaful fund surplus as part of the capital base.


No comments:

Post a Comment