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.
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.
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.
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.