Worldwide: The Takaful Regulatory Landscape Across The Gulf Cooperation Council (GCC)

Whilst insurance regulation in the GCC first appeared as early as the 1960s, specialist takaful regulation is by comparison a fairly recent phenomenon. Even then takaful regulation across the GCC remains fragmented between specialist takaful regimes, general insurance regimes that are also applicable to takaful insurers and regimes which have little or no specific recognition of takaful. This article briefly examines the current state of takaful regulation across the GCC whilst identifying two recent regulatory developments that will impact the takaful market.

Overview of GCC jurisdictions

Both the onshore UAE and DIFC jurisdictions provide specific takaful regimes (with the latter being confined to retakaful).  Likewise the rulebooks of the Central Bank of Bahrain (CBB) and Qatar Financial Centre Regulatory Authority (QFCRA) include takaful-specific modules.  Oman is in the process of finalising its own takaful-specific regulatory code that will set out requirements for takaful operators in the Sultanate.  Taking a different approach, the Kingdom of Saudi Arabia requires that all insurers be established in a 'cooperative' manner though strictly speaking this model is conceptually distinct from takaful.  Finally, onshore Qatar and Kuwait do not, at the time of writing, have either express takaful regulation nor do their respective insurance laws specifically mention takaful operations.  As we understand, the Qatar Central Bank is in the process of formulating implementing regulations for the onshore insurance regime that may then include requirements applicable to takaful operators.

Takaful Models

The principle takaful structures used by operators in the GCC are the wakala model and the combined wakala / mudarabah model.  Some regulators have introduced regulations requiring the use of one or both of these specific models. For example, the UAE's Takaful Regulations expressly provide that takaful operators in the UAE shall use either a pure wakala model or the combined mudarabah / wakala structure.  In Bahrain the CBB Rulebook provides that takaful operators may only use a combined wakala / mudarabah model.  By comparison, neither the DFSA nor the QFCRA specify the (re)takaful model to be used by operators.  In the UAE the takaful model is to be recorded in a separate takaful subscription agreement to the takaful policy document and signed by both the operator and the participant.

Takaful Funds

In accordance with the principles of Shari'a, takaful operators must establish one or more takaful funds that are segregated from the shareholders' assets.  There should be no commingling between the takaful fund(s) and the shareholders' fund. It is fundamental to the takaful concept that there be an element of commonality of the risks faced by the participants that are members of a particular fund. However, the requirement of commonality is not consistently reflected in the regulations in the region.

Profits and Deficits

A core feature of takaful is the return of surplus to participants. In the UAE and Bahrain, takaful operators are to establish a policy governing the return of surplus. Similar requirements exist in relation to the QFC, where an operator is required to have a written policy for determining the surplus or deficit arising from its operations and the basis of distributing or transferring such surplus to shareholders or participants. Interestingly, the DFSA Rulebook does not make any express mention of the return of surplus other than in the context of retail takaful business whereby the operator is required to disclose the basis on which surplus will be shared.

Shari'a Governance Requirements

In addition to conventional insurance governance requirements, takaful operators have an additional layer of governance in order to ensure that they operate in accordance with the requirements of Shari'a.  As a matter of market practice takaful operators tend to apply the guidance provided by Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI).  This guidance is to some degree incorporated or supplemented with additional requirements by the takaful laws and regulations in some of the GCC states.

There are varying levels of regulatory requirements in relation to the policies and procedures of an operator. In the UAE, for example, the only policy expressly referred to is the by-law governing the Shari'a Supervisory Board (SSB). In contrast, a retakaful operator in the DIFC is required to "establish and maintain systems and controls which enable it to comply with the applicable Shari'a requirements."  In Bahrain the obligation is more generally contained in the CBB's 10 Principles of Business which include the overarching obligation to take "reasonable care to ensure that affairs are manage effectively and responsibly, with appropriate management, and systems and controls in relation to the size and complexity of operations."

Takaful operators are required to have a SSB.  It is common practice for operators to establish appropriate policies and procedures governing the role of the SSB. In the DIFC and the QFC an operator is expressly required to establish and maintain an Islamic Financial Business policy and procedures manual.

Development of UAE Shari'a Oversight Committee

In general the insurance regulators in the GCC do not purport to review the Shari'a compliance of takaful operators. However, in accordance with its takaful regulations, the UAE has recently stated that it will be establishing a unified committee for Fatwa and Shari'a supervision. At the time of writing the committee has yet to be constituted, though it is likely to have wide ranging powers to oversee the Shari'a compliance of UAE takaful operators, including the power to issue fatwas on the subject of takaful and investment that are binding upon operators.  Whilst there is no precedent for a supervisory committee in the GCC, in Malaysia, the Shariah Advisory Council (SAC) has been in place since 1997 providing oversight of Malaysia's takaful industry (including its wider Islamic banking industry).  The SAC is responsible for validating all takaful products to ensure their compliance with Shari'a principles.  Furthermore, numerous other takaful markets have quasi-supervisory committees in place providing some form of limited oversight.  In addition, last year the State Bank of Pakistan issued a strategy paper which contemplated the introduction of a supervisory committee of a similar nature to the SAC.  Whilst the other GCC States have not indicated any intention to establish oversight committees, if other international takaful markets do following Malaysia's example, the UAE may not be the only GCC regime to propose a supervisory committee.

New Financial Regulations

The recent enactment of the Insurance Authority's Board of Directors' Decision Number (25) of 2014 (Financial Regulations) marks a significant change in the financial regulation of UAE insurers, including takaful insurers.  The implementation of the Financial Regulations will mean that UAE takaful operators will be subject to the same solvency standards that will come into force in Europe through the EU's Solvency II regime at the start of next year.  In particular, the Financial Regulations require both traditional and takaful insurers to:

  • ensure that they have adequate diversification of assets.
  • establish investment and risk management policies that properly assess the risks associated with investments.
  • adhere to specific asset distribution and allocation limits in respect of different classes of assets.
  • maintain minimum capital, a minimum guarantee fund and a solvency margin.
  • establish a range of technical provisions to deal with their reserving
  • invest in accordance with the "prudent person" principle and with a view to ensuring the security, quality, liquidity and profitability of the portfolio.
  • maintain complete records of all transactions for at least 10 years.
  • establish an Audit committee, Internal Audit department and appoint a compliance officer.
  • prepare financial statements in accordance with IFRS and the Insurance Authority to be submitted to the Insurance Authority on a quarterly and annual basis.

Conclusion

Whilst takaful regulation across the GCC remains fragmented the process for harmonisation would be considerable.  Despite this, the GCC takaful market remains one of the most important and fast growing in the world.  The relatively recent introduction of specialist takaful regimes means we are still very much in the developmental stage of regulatory oversight.  The recent introduction of the new Financial Regulations in the UAE and the potential establishment of a Shari'a Oversight Committee represents steps firmly in the direction of closer and more robust regulatory scrutiny of takaful in the UAE.  We are yet to see if other GCC States will follow the lead of the UAE.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.