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Retakaful, Retention Capacity
To limit liabilities and exposure to…
Retakaful
Core Principal
1. Donation
- amount contributed by TO to fulfill the obligations of mutual help and pay claims submitted by eligible claimants
- Usage of DONATION mitigates Uncertainty and Gambling
2. Mutual Assistant
- cedant TO agree to cover each other mutually for the loss arising from specific risk
3. Prohibition of Usury
- RRF and RTOr funds should be RIBA free
Definition + Type
Definition
Takaful Operator donating portion of the contribution into retakaful Risk Fund (RRF) to cover against specified loss or damage
reduce risk exposure in the event of claim
Type of retakaful
a. Inward - accept risk from TO or RTO
a. Outward - ceding risk to another TO or RTO
Type
Treaty
- falls within the terms
- automatic arrangement, risk fit within treaty terms must be ceded by TO and cannot be rejected by RTO
- an annual agrt between TO and RTO
- amount ceded = cession
- restriction type of risk
- contract arrange in advance, nego only necessary upon renewal
- arrange on portfolio basis, mix of risk ceded out, over and above retention limit of cedant
Facultative
- contact negotiated for a specific cert or cover
- on case to case for cover unusual or large
- TO offer part of risk, RTO decide if to accept
- enables TO dispose risk beyond scope of its treaty arrangement
Proportional / pro rated
RO reimburse predetermine proportion incurred by cedant within the scope of treaty
Quota Share
- fix share & same for all claim as agreed by all parties
- arrange in %, TO cant retain 100%
- suitable for new TO or TO with adverse remarks
- allows RTO share good & bad risk
Surplus
- entitle to share any surplus risk
- 10 line treaty = 11 times capacity of TO own retention
- TO will cede to RTO, surplus all risk & above TO retention limit
- TO may retain own ac, risk of small values
- Retakaful contribution are proportionate to original Takaful contribution
- sharing net surplus for Retakaful fund
Non Proportional
kick in when exceeds certain limitMinimum Deposit Contribution (MDC) applies, premium charged based on
- loss experience
- annual est total contribution income last 3 yrs
Stop Loss
- known as excess of loss ratio
- cushion wide fluctuation
- fire class claim ration 60%, if TO wish to prevent ration > 90% it will purchase stop loss above 905 up to 120%
Excess Loss
- TO pays amt of each claim for each risk up to predetermined limit
- RTO pays amt above limit up to specific sum
- can be arrange into layers with various limit on whole ac or separately by class
Regulatory framework by BNM covers
- Financial strength and flexibility
- related experience
- contribute to industry
- viable of operations
Function of Retakaful
- Flexibility - can accept risk over and above their capacity
- Expansion - RTO provides technical assistance to TO in areas where latter has limited experience
- Accumulation - limit TO aggregate losses to an acceptance level
Basic Principle
- RTO agrees to indemnify TO against all or a portion of, the risk undertaken
- Retakaful does not discharge liability of TO to its participants
- original participant of TO has no rights against RTO
- RTO become insolvent TO still contractually remain liable
- TO become insolvent, RTO still remain liable
- RTO has NO contractual rights against any wrongdoing of participants
Important element
- Takaful contract distinct and separate from original takaful
- may cover part of risk
- must cover same risk as original cover
- Takaful and Retakaful cert must exist at same time
Critical Risk Management
- spread risk and protects TO from adverse liability
- additional capacity to accept bigger risk
- stabilize income and loss for period of yrs
- RTO has vast technical knowledge to help TO to manage risk
- TO duty to protect and safeguard from any adverse claim, at sometime pay claim and share surplus
- help TO achieve objective
Using Insurance Co on early days
- limited no of TO / RTO
- financial inadequacy
- retakaful non exist
- lack of RTO well capitalized as A rated
Retention Capacity
- To limit liabilities and exposure to protect capital, retain profit, pay dividend and surplus sharing to participants
- limit of liability TO retain for its ac after retakaful
- max TO pay for loss and risk
Process fixing retention capacity
- Objective : control fluctuations in loss ratio, business results & cash flow
- optimal level : claim ratio / contribution income per yr
- fixed on each class, within each class subject to further sub division, plus overall retention