IA issues the Takaful Insurance Regulations, granting the companies one year to regularize their status

: 6/28/2010

Monday, June 28, 2010

H.E. Eng. Sultan bin Saeed Al Mansouri, Minister of Economy and Chairman of the Insurance Authority, issued the Resolution No. 4 of 2010 concerning the Takaful Insurance Regulations with the objective of setting the legal frameworks to establish cooperative Islamic system in this type of insurance, making the UAE the first Arab country to set regulatory legislation for the Takaful insurance industry.

The Resolution states that an insurance company may not practice the Takaful insurance activity through what is known as 'Islamic Window' and the founders of the insurance company must decide from the beginning whether they want to incorporate a traditional or Takaful insurance company.صورة الالتفاف

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The IA emphasized that the Takaful insurance companies must fully observe the rules of Islamic Shariah in all of their transactions and insurance and investment operations. The organizational Resolution issued by the IA introduced the position of Shariah Controller in each Takaful insurance company in addition to the Shariah Control Committee which is formed within each Takaful insurance company. The IA granted the insurance companies a period of one year to regularize their status.

The Takaful insurance market in the UAE recorded the highest compound annual rate during the past five years amounting to 135% as per the third annual international report issued by Ernest & Young.

The IA prohibited combining the practice of family Takaful insurance (life insurance) and Takaful insurance of property and liability (general insurance) in one company and it granted the Takaful insurance companies that practice both types the same period granted to the other insurance companies to regularize their status in accordance with the provisions of law number 6 of 2007.

The IA’s Resolution stated that the companies that practice both types of the aforesaid insurance must fully separate them whether in terms of the participants' accounts, technical provisions, or investment aspects, and even at the level of personnel until the grace period granted for prohibition of combination expires.

The IA’s Resolution determined the authorities of the Shariah Control Committee in the Takaful insurance companies clearly and accurately as well as its relationship with the Board of the company, the General Assembly, and the IA. The Resolution covered the organization of the books and accounting records as well as the closing accounts of such companies in consistency with the structure of the company and the nature of its business.

The Resolution of the IA’s Chairman organized the process of sharing the surplus made by the accounts of participants (the insured) and it includes some of the legislations that establish the concept of Islamic Takaful insurance.

The IA’s Resolution stated separation between the Participation Membership Document in Takaful insurance and the Takaful Insurance Policy whereas the former indicates the key aspects of the cooperative relationship implied in the Takaful insurance process while the latter (insurance policy) states the conditions related to the bilateral relationship between the company and the participant (the insured) which represents an advantage for the UAE regulations.

The Resolution allowed the incorporation of a Takaful insurance company upon the approval of the Ministry of Economy and the Securities & Commodities Authority by setting a bylaw that includes inviting the participants (the insured) to attend the ordinary or extraordinary General Assembly meetings of the Takaful insurance company so that they have the right of discussion and expression of opinions without the right of voting.

In case the assets of participants’ account are not enough to pay up the liabilities of such account to the participants, the Qardh Hasan which the shareholders’ account is obliged to present to the participants’ accounts shall be the total of shareholders’ rights. Further, the regulations addressed the issue of introducing Zakat Fund in the company.

The regulations indicated that the Takaful insurance company may deal with the Takaful reinsurance companies and reinsurance companies. The regulations also granted the existing Takaful insurance companies a period of one year effective from the date of effectiveness thereof to regularize their status with the provisions of the new regulations.

The number of insurance companies operating in the State amounts to 57, including nine Takaful insurance companies; namely Islamic Arab Insurance Co. (Salama), Dubai Islamic Insurance and Reinsurance Co. (Aman), Takaful Co., Takaful Emarat, Noor Takaful, Al Hilal Takaful Insurance Co., Abu Dhabi National Takaful Co., and Methaq Takaful Insurance Co., as well as Union Insurance Company which embarked upon finalizing the necessary procedures to be transformed into Takaful insurance.

On her part, H.E. Fatima Mohammed Ishaq Al Awadi, Deputy Director General of the IA, said that during the past years, many Takaful insurance companies were incorporated in the State as per the insurance companies and agents law number 9 of 1984 and Federal Law number 6 of 2007 concerning the establishment of the Insurance Authority and organization of operations thereof.

Al Awadi said that the Takaful insurance companies are different in terms of structure and working approach from the commercial insurance companies, therefore, it was inevitable to organize their business in line with the nature thereof. She added that the draft regulations were presented to the Takaful insurance companies to receive their suggestions thereon.

She added that the UAE records a legislative precedence by issuing such regulations at the regional and Arab levels like it had the precedence of organizing the business of such companies at the Gulf and Arab levels.

She noted that in preparation of such regulations, the conditions of the UAE insurance market and the legal environment of the State were observed. Gradual development of the regulations was also observed to open the opportunity to (amend the legislation) from day one of its adoption in light of the results of the practical experiment.

 

Explaining the Regulations

She said the IA plans to hold a series of seminars with the officials of the Takaful insurance companies as well as the heads and members of Shariah Control Committees in the Takaful insurance companies to explain the regulations and mechanism of adoption thereof.

On his part, Said Khalil, General Manager of Union Insurance Company said that the new regulations will lead to a new wave of incorporation of Takaful insurance companies following the delivery of Islamic services through dedicated outlets in the commercial insurance companies.

He said that the new regulations enhance the concept of Takaful insurance and give the clients more options and insurance products which accommodate their preferences and tendencies.

He said that a large number of the existing insurance companies cannot do without the proceeds of Takaful insurance products and therefore they will seek during the next twelve months and before expiry of the set period to incorporate new Takaful insurance companies to maintain their client base.

Khalil considered that the new regulations are a legislative precedence whereas no other Arab country has adopted similar regulations that draw borderlines between the Islamic insurance and commercial insurance.

Said emphasized the importance of providing new products by the insurance companies amid the direction of clients to move from the varied insurance products into the traditional insurance products and rendering a comprehensive review of the investment policies amid the dropping of proceeds of various investment forms, especially the stocks.

 

Minimizing the risk rate

Ernest & Young reported earlier that the UAE is the second biggest Takaful market in the Gulf recording $542 million with a prevalence rate of 0.21%, followed by Qatar recording $116 million with a prevalence rate of 0.12%, versus Kuwait which recorded $101 million with a prevalence rate of 0.07%, and Bahrain which recorded $72 million with insurance service prevalence rate of 0.33%.

The report indicated that despite the dropping proceeds of the capital of the Gulf Takaful companies during the crisis, they managed to minimize the risk rate to 37% during the past year against 36.6% during 2008 while the ratio of risks to proceeds amounted to nearly 42.2% in 2005.

Contribution of operational profits arising from the insurance premiums written in the Gulf Takaful companies rose in 2008 recording 84% of the total profits in 2008, against 16% which is the contribution of investments in the total profits. In 2006 the contribution of investments in the total profits recorded nearly 97% against a share not exceeding 3% for the written premiums.

The report indicated that the investment profits made by the Takaful companies during the past year were arising from investing in the securities markets with share of 37.1% against 32% for deposits, 22.3% for Sukuks, and 8.2% for real estate investment.

At the same time, profits arising from investing in securities in 2008 dominated 66.3% of the total investment proceeds, followed by investing in Sukuks with a rate of 18.8%, 9.5% for proceeds, and 5.4% for real estate investment.

At the level of expenses, the indemnities dominated 58% of the total expenses of the Gulf Takaful companies during the past year, while the administrative and operational expenses formed 41% against a rate not exceeding 2% for marketing. In 2008 the claims for indemnities dominated a rate of 69% while the administrative expensed recorded 27% and marketing recorded 4%.​

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