Malaysian body creates new Islamic reinsurance model

KUALA LUMPUR (Reuters) - Islamic finance researchers backed by the Malaysian central bank have developed a new wadiah retakaful model which could boost protection for sharia insurers.

The structure aims to address some of the sharia objections to the popular wakala, mudaraba and hybrid models currently used by Islamic reinsurers who play a key role in the $14 billion takaful industry.

Based on the contracts of wakala and wadiah yad dhamanah, the concept devised by the International Sharia Research Academy for Islamic Finance (ISRA) states that takaful players own the surplus from contributions paid into a fund.

"The wadiah fund is owned by the takaful companies so there is no issue of ownership and with that you can resolve quite a number of other issues," ISRA Executive Director Mohamad Akram Laldin told Reuters by telephone.

Under the pure wakala and mudaraba models now used, there are differences in opinions as to who is entitled to the surplus in the funds, with some companies sharing it with participants while others returning it to the participants only.

Under the new model, takaful companies would contribute to a fund managed by an Islamic reinsurer. The reinsurer is paid an agent's fee and invests the fund or uses it for other purposes.

The retakaful firm gets the profits earned from investments. Reserves and claims are deducted from the fund and the surplus is returned to the takaful companies.

The system is similar to operating a current account with an Islamic bank which guarantees the principal, ISRA said.

"It's sensible to say that these assets are owned by the participants in the fund rather than the retakaful operator," said Peter Hodgins, a Dubai-based takaful lawyer with Clyde & Co.

"If you didn't have the ownership point, what happens in insolvency then starts to just look like a conventional reinsurance model ie. all of those assets in the fund are owned by the retakaful operator."

The Kuala Lumpur-based ISRA said the new model would help takaful companies reach a wider market.

"The return of the full surplus to participants complies with (industry body) AAOIFI guidelines," ISRA said in a report to brief industry players.

"It will consequently result in a greater number of (takaful companies) that can do business with the retakaful operator."

Akram said the wadiah model was not expected to affect the profitability of retakaful companies and would "motivate them to really find a good avenue (of investments)."

He said the concept would be refined taking into account industry feedback.

Despite the entry of new players, the retakaful industry remains small and the limited capacity has been cited as a key factor holding back the global takaful industry.

The world's largest retakaful company is ACR ReTakaful Holdings Ltd, owned by ACR Capital Holdings, the Dubai Group and Malaysian sovereign wealth fund Khazanah Nasional Bhd, with a paid-up capital of $300 million, according to its website.

Other companies that have retakaful business include Swiss Re, Munich Re and Best Re.