Regulatory Frame Work of Takaful in Pakistan by Shoaib Soofi

Regulatory Frame Work of

  Takaful in Pakistan

  Shoaib Soofi, Director (SECP)

         April 27, 2007

            Karachi

 Controlling Documents of

 Takaful

 Insurance Ordinance, 2000

 Covers all types of insurance business in Pakistan including

  takaful,

 Insurance Rules, 2002

 Deals with specific details like admissibility of assets,

  reinsurance, licensing documents etc, applicable to all insurers,

 Takaful Rules,2005

 Notified in 2005 under the Insurance Ordinance,2000 deals with

  specific additional requirements for takaful operators.

 Circulars

 Issued by SECP from time to time on various specific issues

Compliance by Takaful

Operators

 A Takaful Operator has to comply with the Takaful

 Rules 2005 in addition to requirements of the

 Insurance Ordinance 2000 and the Insurance Rules

 2002,

 In case Takaful Rules and Insurance Rules conflict -

 Takaful Rules prevail.

 In case Takaful Rules and the Insurance Ordinance

 conflict – Insurance Ordinance prevail.

  Major Regulatory

Requirements for Takaful

 Business in Pakistan

Registration

 Registration under section 6 of the Insurance

 Ordinance is required to carry on Takaful

 Business,

 A person can be registered either as a Family

 Takaful Operator or General Takaful Operator.

 No person can be registered as a Composite

 Takaful Operator.

 Window Takaful Operations by existing

 Conventional Insurers are NOT ALLOWED,

Shariah Board

 Takaful Operator shall appoint a Shariah Board,

 At least 3 members,

 Members must be high calibre scholars with

 knowledge of modern financial dealings,

 Responsible for approval of products, investment

 and operational practices,

 There is a provision of Central Shariah Board at

 SECP level which is in process

Minimum Paid up Capital

 For Family Takaful Operator:

 Rs. 500 million

 For General Takaful Operator:

 Rs. 300 million

Minimum Solvency Margin

 Admissible Assets less Liabilities,

 As per the Insurance Ordinance plus the

 condition that the securities must be

 approved by the Shariah Board,

 Solvency requirements being reviewed.

Minimum Statutory Deposit

 Takaful Operators have to deposit and keep

 deposited with State Bank a minimum amount in

 cash or approved securities.

 Currently the minimum required statutory deposit

 is higher of Rs. 10 million or 10% of Paid-up-

 Capital,

 The securities for this purpose must be approved

 under the Insurance Ordinance and should be

 instruments of “approved Islamic Financial

 Institutions”.

Operational Models

 The principal model for insurance risk

 management component shall be based on

 Wakala

 The principal model for investment components

 shall be based on “Modarba”,

 The Takaful product shall be based on the

 principal of Wakala or Modarba or both.

ReTakaful/Reinsurance

 Should be as per the guidelines of

 Shariah Board of Takaful Operator,

 Should be adequate to ensure continuing

 compliance by Takaful Operator with the

 provisions of the Insurance Ordinance,

ReTakaful/Reinsurance (con’d)

 In case Shariah Compliant Re-Takaful

 Operator does not provide sufficient re-

 takaful, takaful operator may be allowed

 to enter into contract with conventional

 reinsurance under advice of Shariah

 Board,

 Risk sharing among Takaful Operators

 within or outside Pakistan may be

 permitted by SECP,

Maintenance of Funds

 Each Takaful Operator shall maintain two

 funds:

 Shareholder Fund (SHF),

 Participants Takaful Fund (PTF)

Maintenance of Funds (cont’d)

 Shareholder Fund (SHF):

 As per Insurance Ordinance and Rules,

 Under Guidelines of Shariah Board,

 Consists of Paid-up Capital and

 Undistributed Profit to Shareholders,

Maintenance of Funds (cont’d)

 Participants Takaful Fund (PTF):

 To be established and maintained for

 each class of Takaful Business,

 A risk pool to which the participants’ risk

 related contributions are paid and from

 which risk related benefits are paid out.

Investment

 Investments of the Funds must be Shariah

 Compliant under the advice of the Shariah

 Board,

Market Conduct

 Participants should not be mislead or deceived,

 Ambiguities in favor of participants,

 Agents’ Training

 SECP may visit Takaful Operators to check

 compliance with Market Conduct Requirements

Additional Requirements for

Family Takaful Operators

 Appointed Actuary

 Certification of products as sound and

 workable,

 Financial Condition Report as part of

 Annual Returns,

 Any other duty prescribed by SECP.

Additional Requirements for

Family Takaful Operators (cont’d)

 Participants Investment Fund (PIF)

 Maintained to build up surrender value in saving

 type takaful products,

 A portion of each year’s contribution is invested

 in this fund,

 Maintained in the form of units,

 Unit prices to be determined at least once every

 month.

Key Issues

 Human Resource,

 Shariah Issues,

 Limited Investment Avenues,

 Limited Re-takaful options,

Recent Developments

 A comprehensive paper on issues in Takaful Regulation

 prepared by a joint working group of IFSB-IAIS (available on

 their websites) addressing the key issues like corporate

 governance, prudential regulations, suitability of persons

 from a regulator’s viewpoint,

 Demand from conventional insurers to allow them to do

 takaful business through window operations,

 5 takaful applications in process,

 Realization to review Takaful Rules mainly to remove

 anomalies and address the needs of the market.

Thank You