IFSB’s Experiences and Practices in Takaful Sector Ahmad Al-Razni Al-Shammari, Ph.D Member of the Secretariat, Technical and Research Islamic Financial Services Board (IFSB) 13th MEETING OF THE COMCEC FINANCIAL COOPERATION WORKING GROUP 17 th October 2019 Ankara, Turkey www.ifsb.org www.ifsb.org
AGENDA 1 IFSB Mandate 2 IFSB Takaful Standards www.ifsb.org www.ifsb.org 2
IFSB Mandate Global Regulatory Standards for the Institutions offering Islamic Financial Services (IIFS) Specific Disclosures for IIFS Regulations that deal with specific risks & regulatory considerations for Islamic Banks (e.g. PSIAs, DCR, CAR, Regulations to Stress testing, financial reflect the Regulations to address safety nets etc.) specificities in the specificities of Takaful ICM (Ṣukūk, ICIS, (segregation of funds, Islamic equities & Qard, surplus, market supervision, governance intermediaries) etc.) Sharīʻah -governance SPECIFICITIES OF ISLAMIC FINANCE Core Principles for Islamic Finance Regulation Preconditions for Islamic Finance Regulation www.ifsb.org 3
IFSB Mandate Cross On-Going Standards Takaful Sector Sector for Takaful Sector IFSB – 8 Governance [December 2009] PUBLISHED IFSB – 11 PRUDENTIAL Solvency IFSB – 9 STANDARDS [December 2010] IFSB – X Conduct of Disclosures Business IFSB – 14 [December 2020] [December 2009] Risk Management [December 2013] 30 IFSB – 10 IFSB – 18 IFSB – X Shariah Retakāful Core Principles Governance [April 2016] [December 2021] [December 2009] IFSB – 20 Supervisory Review Process [December 2018] www.ifsb.org www.ifsb.org 4
Preparation of IFSB Standards www.ifsb.org www.ifsb.org 5
IFSB-8: Guiding Principles on Governance for 1 Takāful Undertakings Shareholders Participants Sharī`ah Board Auditors Regulators Code of Ethics Governance Framework Takaful Operator Acts as 1.2 Mudarib or/and Wakil 1.1 Governance Procedures for Participants Shareholders Shareholders Structure for Proper Disclosure Participants 01 2.2 Participants 2.1 Hybrid Structure (mutual & commercial) Clear Segregation of 02 Funds between PRF and Mgmt Mgmt Investment Investment Risk Risk SHF Fund Fund Fund Fund Fund Fund 3.2 03 3.1 Sound Investment Mechanism to 04 Takaful Operator Acts in Strategy Sustain Solvency Fiduciary Capacity Takāful Operator Conventional Insurer (Principle 1.1) Guiding Principles www.ifsb.org 6
IFSB-8 (Principle 2.2) CORPORATE GOVERNANCE 2. Client Disclosures INVESTMENT AFTER RISK EXPOSURES 03 INCEPTION OF THE CONTRACT The names of their Shari’ah PRIOR TO board members 1. Prudential Disclosures 02 INCEPTION OF Qualifications and THE CONTRACT Remuneration of Shari’ah areas of expertise of board members each Sharīʻah board member PRODUCT 01 DEVELOPMENT SHARĪʻAH Zakat disclosures The role of the GOVERNANCE Shari’ah board in supervising the TU/RTU's activities Earnings or expenditures Shari’ah board fatwas prohibited by Sharīʻah The adopted Sharīʻah www.ifsb.org 7 screening methodology
IFSB-8 3. Environmental, Social and Governance (ESG) Disclosures (Principle 2.2) www.ifsb.org 8
IFSB-11: Solvency Requirements for Takāful 2 Undertakings 1 2 To increase likelihood to meet obligations 7 Key Features for Minimum To act as early 3 warning system Solvency 4 Requirements To provide buffer To foster confidence www.ifsb.org 9
IFSB-11 (Key Feature 2) What is Qard 01 Facility? 02 The Purpose Takāful Undertaking Earmarked vs. Draw- 03 Participants Shareholders down Qard facility SHF – with Qard PRF – with Qard 04 Can SHF withdraw The Rationale Excess Excess the Qard at Assets “Earmarked” to “Notional Asset” anytime? Back Qard Facility Right to 05 Does the Standard PCR PCR Call Qard Mgmt specify an amount for Risk Investment PTC Qard Facility MCR MCR Fund Fund Who has the priority Fund such a facility? 06 Assets drawn-down Qard or Risk Margin PTC Assets MTC participants’ claims? Central Best MTC Estimate of Takaful Underwriting Liabilities Qard Facility Liabilities www.ifsb.org 10
IFSB-14 Risk Management for Takāful 3 Undertakings 01 Sharī`ah non-compliance risk 02 Risk from segregation of funds SHF PIF PRF 03 Risk arising from Retakāful activities Main Categories of Risks Significant Risks Relevance to Takāful www.ifsb.org 11
I. GOVERNANCE OF RETAKĀFUL UNDERTAKINGS Principle 1.1 Comprehensive Governance Framework Principle 1.2 Code of Ethics and Conduct Principle 1.3 Truthfulness, Honesty and Fairness IFSB-18: Guiding Principle 1.4 Due Care and Diligence Principle 1.5 Systems and Procedures Principles for 4 Retakāful II. COMPLIANCE WITH SHARI’AH PRINCIPLES Principle 2.1 Business is Shari’ah Compliant III. PRUDENTIAL FRAMEWORK Principle 3.1 Adequacy Risk Management Framework Principle 3.2 Solvency of Retakaful Undertakings Principle 3.3 Investment Strategy IV. TRANSPARENCY AND DISCLOSURE Principle 4.1 Appropriate Disclosures V. SUPERVISORY REVIEW OF RETAKĀFUL /REINSURANCE ARRANGEMENTS The Guiding Principles Principle 5.1 Supervision of Retakaful / reinsurance Programmes www.ifsb.org 12
IFSB-18: Guiding Principles for Retakāful A sound investment strategy, Assets of a Retakāful window determined with due regard to should be segregated from the risk and return assets of the host expectations of its undertaking, and ring-fenced stakeholders, and policies and for application only to procedures to implement that liabilities arising from the strategy. RRF of the window. Principle 3.3 Investment Strategy A risk management framework to manage all Segregation of funds should be material risks relating to observed as between contracts investment activity, including issued under different operating those specific to the nature RTOs shall adopt and implement a sound models of their business. investment strategy and prudently manage the assets and liabilities of Retakāful undertakings. www.ifsb.org 13
IFSB 20 Key Elements in the Supervisory Review 5 Process of Takaful/Retakaful Undertakings Supervisory Tools Supervisory Reporting Thematic Review Event-based Off-site Supervision Monitoring On-site Inspection Enforcement Supervisory Follow-up www.ifsb.org 14
IFSB 20: Takāful and Retakāful Windows Takāful and Retakāful Windows 1. The RSA should 2. The RSA should 3. The RSA should consider whether confirm that such consider whether appropriate operations have in the separation of Sharīʻah place controls Islamic assets and governance is designed to secure funds from non- observed. end-to-end Sharīʻah - Sharīʻah compliant assets compliance . and funds is transparent. www.ifsb.org 15
IFSB 20: Sharīʻah Governance The RSA should verify that the Sharīʻah board is adequately knowledgeable with respect to the business and is independent, giving consideration to the suitability, background and qualification of its members. The RSA should check that internal Sharīʻah compliance review/audit has been appropriately carried out and that its findings have been presented to and duly The RSA should verify that the TO/RTO has put in considered by the Sharīʻah board place internal policies, processes, systems and controls in the areas of Sharīʻah compliance and audit. The RSA should verify that the Sharīʻah governance framework contains procedures for issuance of relevant Sharīʻah pronouncements or resolutions . www.ifsb.org 16
2020 for Takaful Sector Standard Research Disclosures to Promote Prudential and Transparency and Market Regulatory Issues arising Discipline for from Takaful Window Takaful/Retakaful Operations Undertakings GOAL www.ifsb.org 17
THANK YOU Ahmad Al-Razni Al-Shammari, Ph.D Member of the Secretariat, Technical and Research Islamic Financial Services Board (IFSB) ahmad@ifsb.org www.ifsb.org www.ifsb.org
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