The UAE Insurance Authority Board recently promulgated Resolution No. 4 of 2010 concerning Takaful Insurance (the Takaful Regulations) which, for the first time in the UAE, provides regulations for Islamic Insurers (Takaful operators) distinct from the regulations governing conventional insurers.
The Takaful Regulations are broad ranging; providing details both as to structure and powers of the UAE Insurance Authority, and the day-to-day operations of Takaful operators. The Takaful Regulations provide guidance as to the structure of the Takaful policies to be issued and expressly prohibit conventional insurers from offering Takaful products via an Islamic window. There are also significant corporate governance requirements imposed upon Takaful operators in relation to ensuring the Shari'a compliance of their operations.
It is important to be aware that Takaful operators are still required to comply with the provisions of Federal No. 6 of 2007 on the Establishment of the Insurance Authority (the Insurance Law) and the implementing regulations issued pursuant to it. As such, the Takaful Regulations must be read in conjunction with the Insurance Law.
The key features of the Takaful Regulations include:
The National Shari'a Supervisory Board
Arguably, the most fundamental changes introduced by the Takaful Regulations is the creation of the Supreme Committee for Fatwa and Shari'a Supervision (the Supreme Committee). The Supreme Committee is effectively a national Shari'a board for the Takaful Industry. It will operate in accordance with a bylaw to be issued by the UAE Insurance Authority at a future date.
Membership of the Supreme Committee is to be exclusive, and it is not permitted for a scholar who is a member of the Supreme Committee to also be a member of any Shari'a Committee of any UAE Takaful operator. There are to be between three and five members of the Supreme Committee.
The function of the Supreme Committee is to issue fatwas (legal opinions) on insurance and investment issues for the Takaful industry that will be binding upon the industry, to coordinate the legal opinions issued by the Shari'a Committees of the Takaful operators and to collate, classify and explain fatwas and opinions relating to Takaful issued by the Shari'a supervisory boards of the Takaful operators. The UAE Insurance Authority is also granted powers to investigate the Shari'a compliance of Takaful operators and to require Takaful operators to adjust their operations in the event that issues are identified.
It is to be hoped that the Supreme Committee will ensure consistency and clarity as to the Shari'a requirements of Takaful, which is to the benefit of the industry as a whole.
Takaful Windows and Composite Operators
Article 3 of the Takaful Regulations provides that only Takaful operators may offer Takaful products in the UAE. It is therefore clear that conventional insurers may not offer Takaful products via "Islamic windows."
Article 7 of the Takaful Regulations prohibits Takaful operators from undertaking both "Individual" Takaful business and "Property and Liability Business". For these purposes "Individual" Takaful is defined as including:
(a) Family Solidarity Insurance;
(b) Health Takaful Insurance; and
(c) Personal Accident Takaful Insurance related to
Family Solidarity Takaful.
These provisions are consistent with the requirements of Article 25(2) of the Insurance Law, which applies to conventional insurers. Takaful operators are required to satisfy the requirements of Article 7 by September 2012 as provided in Article 25(2) of the Insurance Law (or such later date as the UAE Insurance Authority may specify). In the interim, Article 22 of the Takaful Regulations requires that the technical, financial and administrative aspects of the two types of Takaful business must be segregated, so as to provide for two or more subscriber accounts.
The Takaful Model
The Takaful Regulations recognise the most common forms of Takaful structure, namely, the mudaraba and wakala model. Article 8 of the Takaful Regulations acknowledges that either model may be used, and that a combined model is also acceptable. There is no reference to any other models of Takaful, such as the Waqf model, used elsewhere in the world.
The Takaful Regulations do not provide any details as to how these models should operate beyond the definition of Takaful as being "a collective contractual arrangement that aims at achieving cooperation between the subscribers against certain risks, where each subscriber pays a certain contribution into an account called the "subscriber account" from which compensation is paid to whoever faces a risk". The description of the Takaful operator's role is as being to "manage [the subscriber] account and invest its funds."
Takaful Policies
Article 9 of the Takaful Regulations requires that Takaful operators provide subscribers with separate "Takaful Subscription Policies" and "Takaful Policies". For these purposes a Subscription Policy essentially details the Takaful model used by the Takaful operator, whilst the Takaful Policy is essentially the policy wording outlining the terms and conditions on which a risk will be insured. This represents a significant change to the documentation to be produced by a Takaful operator. Historically, many Takaful operators have issued documentation involving a "Takaful wrapper" effectively having a series of introductory provisions that describe the wakala and/or mudaraba model to be used followed by the terms and conditions of the insurance offered.
Article 9 does not include any details as to what may be included in a Takaful Policy. However, details are provided in the Takaful Regulations as to the required contents of the Subscription Policy.
Article 9(3) also requires the Subscription Policy to be submitted to the UAE Insurance Authority. The UAE Insurance Authority has the opportunity to require amendments to the Subscription Policy if it is determined to be contrary to Shari'a or "if there is an injustice against subscribers". It is not clear what will amount to such an injustice, but it would appear, for example, that the UAE Insurance Authority could require the remuneration provisions in favour of the Takaful operator to be amended if they unfairly prejudice subscribers.
Shari'a Supervision
The Takaful Regulations also introduce requirements in relation to the Shari'a supervision of the Takaful operator through the establishment of Shari'a supervisory boards (the Shari'a Committee), and the appointment of a Shari'a supervisor. These provisions substantially reflect the Shari'a Standards recommended by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI), and reflect an additional layer of corporate governance that Takaful operators will need to satisfy.
The Takaful Regulations provide that no scholar may be a member of more than two Shari'a Committees and that a member of the Supreme Committee may not serve on a Takaful operator's Shari'a Committee. It is implicit from the Regulations that this restriction is limited to membership of such bodies for Takaful operators in the UAE (and therefore membership of other committees in other sectors of Islamic finance or elsewhere in the world is permitted). However, presumably one of the considerations that the UAE Insurance Authority will take into account when approving the appointment of a scholar will be the number of other commitments that he has and it is implicit that the UAE Insurance Authority expects Shari'a scholars to commit their time to the Takaful operators who they advise. These restrictions are likely to further highlight the shortage of Shari'a scholars with adequate knowledge of the insurance industry.
Takaful Operations
The Takaful Regulations also impose obligations on Takaful operators to establish bylaws governing various aspects of its operations, including in relation to:
- The operation of its subscriber accounts – Takaful operators operating on a composite basis must segregate its subscriber accounts for "Individual Takaful" business from "Property and General Liability" business, and for Family Solidarity Insurance it is necessary to establish separate risk and investment accounts.
- The Zakat account - the Takaful operator is required to establish a Zakat fund into which the Zakat amounts must be deposited. Such a fund is to be segregated from the Shareholder fund and the Subscriber funds.
- Surplus - a Takaful operator must have a set of rules governing the distribution of surplus, including details as to whether the surplus will be distributed based across all subscriber accounts managed by the Takaful operator or on an individual subscriber account basis.
- Qard Hasan – it mandatory for the Takaful operator to provide a Qard Hasan (interest free loan) to a subscriber account in the event of a deficit. In the event that the Takaful operator fails to provide such a loan, the Director General of the UAE Insurance Authority may direct the Takaful operator to provide the loan within 15 days, and a failure to comply with such a direction may result in the Takaful operator's activities being suspended
- Retakaful - Takaful operators must use Retakaful (as opposed to
conventional reinsurance). However, Article 29(2) of the Takaful
Regulations provides that where there is insufficient capacity in
the Retakaful market (either from a single Retakaful operator or
from a convenient number of Retakaful companies) the Takaful
operator may use a conventional reinsurance. Retakaful protection
may be placed outside of the UAE (Article 29(3)).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.