Regulatory Framework of Takaful Business in Pakistan by Sibg
August 26,2008 MIAN & SIBGHAT
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August 26,2008 MIAN & SIBGHAT
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Presented by:
SIBGHATULLAH AHSAN
LL.B (Hons.) Shariah & Law
MSc. Islamic Banking & Finance
PARTNER
MIAN & SIBGHAT Advocates Legal Consultants
ISLAMABAD.
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Regulatory Framework
of Takaful Business in Pakistan
Sources
Insurance Ordinance, 2000
Takaful Rules, 2005
Insurance Rules, 2002 (made by
federal govt.)
Insurance Rules, 2002 (made by
SECP)
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Regulation of Takaful Business
The Takaful Business in Pakistan shall be
governed by:
Insurance Ordinance, 2000
Takaful Rules, 2005
Insurance Rules, 2002 (Insurance Rules)
Securities and Exchange Commission of Pakistan
(Insurance) Rules, 2002 (SECP Rules)
If there is a conflict between Takaful Rules and
Insurance Rules or SECP Rules, the provisions
of Takaful Rules shall prevail
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INTRODUCTION TO TAKAFUL RULES,
2005
In conformity with the Insurance
Ordinance, Takaful Rules also prohibit
composite business i.e. No company can
conduct Life and Non-life business at a
time
A Company can either do Life business
or Non-life business
[Section 7(3) of the Ord., Rule 4 of Takaful Rules]
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Takaful Business Defined
Takaful business means business of
Takaful whose aims and operations do not
involve any element which is not in
consonance with the injunctions of Islam
as laid down in Shariah
The Takaful Rules do not define the
word “Takaful”
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INTRODUCTION TO TAKAFUL
RULES, 2005
Rules are made by the Federal Govt. under
section 167 (1) of the Insurance Ordinance,
2000
Rules are applicable to Takaful companies, in
addition to Insurance Rules, 2002 and the
Securities and Exchange Commission
(Insurance) Rules, 2002
The Rules came into force at once on 7th
September, 2005
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WHO CAN DO TAKAFUL
BUSINESS
Takaful business can only be carried on by
a public company; or
a body corporate incorporated under the laws of Pakistan
Other conditions
No existing company, doing conventional business, can do
Takaful business
However, an existing Non-life company may convert its
conventional business to Takaful business within one year
from the start date. (conventional licence will be cancelled
automatically)
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Classes of Business
LIFE –NON LIFE NON-LIFE
(a) ordinary life business;
(b) capital redemption business;
(c) pension fund business; and
(d) accident and health business.
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CLASSES OF BUSINESS
for direct and facultative reinsurance business;
(i) Class 1 being fire and property damage business;
(ii) Class 2 being marine, aviation and transport
business;
(iii) Class 3 being motor third party compulsory
business;
(iv) Class 4 being liability business;
(v) Class 5 being workers’ compensation business;
(vi) Class 6 being credit and suretyship business;
(vii) Class 7 being accident and health business; and
(viii) Class 8 being agriculture insurance including crop
insurance;
(ix) Class 9 being miscellaneous business;
(b) for treaty reinsurance business:
(i) Class 9 being proportional treaty business; and
(ii) Class 10 being non-proportional treaty business.
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REGISTRATION OF TAKFUL
OPERATORS
No company to operate without
registration
Registration through application in writing
(Urdu or English)
Application shall contain information and
be accompanied by documents, reports,
certificates as prescribed by Section 6 (8)
and R. 5 & 6 SEC Rules, 2002
(See AnnexF:\Takaful Alhu\ANNEX..doc.)
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Shariah Supervision
Every Takaful Operator will have a
Shariah Board of not less than three
members
There will be Central Shariah Board
appointed by SECP
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Operational Model
T
Investment A
K
Portion A
F
U
L
Risk F
Wakala U
Portion N
Wakalah Agreement
D
Participant Operator
Investment
Fund
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Participants’ Takaful Fund (PTF)
A separate risk pool to which the participants’ risk related
contributions are paid and from which risk related benefits are
paid out
A separate Participants Takaful Fund (PTF) shall be created
within the Takaful business Statutory Fund to which the risk
related component of contributions and Takaful operator’ s
fees shall be credited and from which benefits shall be paid
out.
A PTF shall be a separate fund the purpose of which shall be
the pooling of risks amongst the participants. The role of the
Takaful operator shall be the management of the PTF and
related risks.
The objectives of the PTF shall be to provide relief to
participants against defined losses as per the PTF rules and
the PMD
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Income of the PTF
Contributions received from participants (other than the
portion transferred to the PIF under Family Takaful
policies) including Takaful operator’s fees which should
be a part of the contributions;
claims received from re-Takaful operators and re-
insurers;
investment profits generated by the investment of funds
and other reserves attributable to participants in the PTF;
salvages and recoveries;
qard-e-hasna by the shareholders fund to the PTF in
case of a deficit;
commission received from re-Takaful operators and
reinsurers; and
any donation made by the shareholders.
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Outgo from the PTF
Losses settled related to participants risks and expenses
directly related to settlement of claims such as surveyors’
fees, etc, but not including any office expenses. All expenses
to be charged to the PTF (other than benefit payments) shall
need to be defined in the PTF rules and the PMD;
re-Takaful and reinsurance costs;
Takaful operator’s fees, which shall not be determined with
reference to the surplus in the PTF;
a share of investment profits of the PTF as mudarib’ s share,
or a percentage of the funds as wakala fees for investment
management or any other combination thereof approved by
the Appointed Actuary (in the case of Family Takaful operator)
and Shariah Board of the Takaful operator;
surplus distributed to participants; and
return of qard-e-hasna to the Shareholders Fund
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Reserves
Subject to the provisions of the Ordinance, technical
reserves required to be set up in the PTF shall consist of
all of the following reserves or any one of them, or any
combination of two or more of them or such other
reserves as the Appointed Actuary of the Takaful
operator may require to be provided, namely :-
(a) Unearned contributions reserves ;
(b) incurred but not reported reserve ;
(c) deficiency reserve ;
(d) contingency reserve ;
(e) reserve for qarde-e-hasna to be returned in future ;
and
(f) surplus equalization reserve
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RELATIONSHIP
For the risk sharing portion the relationship of the participants
and of the Takaful operator shall be directly with the PTF. The
Takaful operator shall act as the wakeel of the PTF and the
participants shall pay contributions to the PTF.
Being members of the PTF, the participants shall be entitled to
the benefits as per the PTF rules and the PMD.
The shareholders shall provide an undertaking to the PTF to
provide the members benefits in the event that there is a deficit
in the PTF at any point by giving a Qard-e-hasna to the PTF.
The shareholders shall, however, have the right to recover the
Qard-e-hasna payments to the PTF from future surpluses in the
PTF.
The other relationship with the Takaful operator shall be that of
either mudarib or wakeel or both , where in the case of the PTF,
the Takaful operator shall also act either as mudarib or wakeel
or both to the PTF. Further in the case of the Family Takaful
plans with a savings element, the Takaful operator shall also
act either as mudarib or wakeel or combination of mudarib or
wakeel relating to the PIF
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Sharing Surplus
At the end of each financial year the Takaful operator shall
evaluate the assets and liabilities of the PTF and determine
whether the operation for that particular period had produced
a surplus or a deficit for sharing amongst the participants. (At
least once in year)
Surplus at each valuation date shall be made up of technical
results and investment returns related to the PTF
Surplus =
Total contributions to PTF
- (total value of claims paid - claims received from
re- takaful and reinsurance and recoveries)
- takaful operators fees
- commission paid to intermediaries and change in
the technical reserves
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Surplus (continued)
Takaful operator may hold a portion of the surplus as a
contingency reserve (over and above the technical
provisions). The rest of the surplus shall be distributed to
participants in proportion to the contributions to the PTF
net of any risk related claims, which they may have
received during the intervaluation period
In the case of General Takaful business the distribution
of surplus shall be after each valuation. Contracts
completing their risk period in the accounting year for
which the valuation is done shall be taken into account
for surplus distribution based on the results of the
previous valuation.
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Surplus (continued)
In the case of Family Takaful business the urplus
distribution may be done after each actuarial valuation or
it may be distributed only to those participants who
actually leave the risk pool by way of termination of
membership which may be due to the payment of
benefits as per the PMD or otherwise. The determination
of surplus shall consider the method of surplus
distribution
A Takaful operator may compute the distributable
surpluses on the basis of the combined results of all the
classes of business or calculate the surpluses separately
for each class.
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Surplus (continued)
The Takaful operator may distribute surplus
either in cash or adjust against future
contributions or in the case of Family Takaful
contracts, credit the surplus to the PIA. However
in the case that a member does not wish to
continue as a participant in the PTF it shall be
necessary to pay surplus to such member based
on his entitlement.
If a participant wishes to donate its surplus for
social or charitable purposes, this shall be done
by the Takaful operator.
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Investments
The Takaful operator may invest its funds in joint stock
companies. However, investments in non-Shariah compliant
preferred stocks, debentures and interest based redeemable
capital securities are not allowed
The Takaful operators may invest a portion of their funds in
liquid or short notice deposits schemes of Islamic banks and
their branches or other Islamic financial institutions,
placements in PLS saving accounts of Islamic banks and
placement in current accounts of traditional banks without any
return thereon
The Takaful operators may make arrangements with the
Islamic banks operating in Pakistan to directly finance
under musharika, murabaha, ijara (lease), salam, istisna
contracts approved by the Commission
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Investments in Redeemable Capital
The Takaful operator may also make its portfolio investments
through various mutual funds operating under the Shariah
principles and approved by the Commission. Before making
any investment therein, the Takaful operator shall have the
procedures and practices being followed by such funds
scrutinised by its Shariah Board.
The Takaful operators may invest their funds in Shariah
compliant instruments like Musharika Certificates, Term
Finance Certificates (TFCs), Participation Term Certificates
(PTCs), etc. However, in case of investment in redeemable
capital it shall be necessary that the certificates are issued in
compliance with the Islamic injunctions and the scheme of their
issue be examined by the Shariah Board of the Takaful
operator. The basic conditions as laid down earlier for
investments in the common stock of joint stock companies
should also be followed.
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Management and marketing
expenses
(1) All the administrative and management expenses of the Takaful
operator, except those enumerated under sub-rule (4) of rule 9 , shall
be borne by the shareholders in consideration of receiving a
stipulated proportion of the gross contributions to the PTF by way of
Takaful operator fee.
(2) The shareholders shall be responsible for all expenses of
management and
marketing, etc. Shareholders’ income shall include the Takaful
operator fee and
investment management fee or share, for the PTF and the PIF and
investment income on the SHF. Takaful operator fees to be charged
and the investment management fee or share shall be explicitly
defined in each PMD and Takaful contract.
(3) All expenses of Takaful business shall form part of the expenses of
Takaful Business Statutory Fund for Family Takaful operators; and
Shareholders Fund for General Takaful operators.
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Contact:
Sibghatullah Ahsan
Advocate High Court
MIAN & SIBGHAT Advocates & Legal Consultants
Off. 102-A, 1st Floor, Azeem Mansion,
Block 87-E, Fazal-e-Haq Road, Blue Area
Islamabad.
Ph. 92-51-4309208, 4319884
Fax. 92-51-2802542
Email. [email protected]
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