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Dubai: The market for Takaful, or Islamic insurance, has recorded impressive premium growth rates of about 20 per cent in recent years, with total premiums of over $2 billion in 2005, which are projected to exceed $7 billion by 2015, Moody's Investors Service says in a report.
The rating agency's approach to analysing the financial strength of a Takaful company is essentially the same as with a conventional mutual insurance company, although there are some key differences.
"Conventional insurance has been deemed to be in conflict with Sharia (Islamic law) for two key reasons," says Timour Boudkeev, a Moody's vice-president and senior credit officer and author of the report.
"Firstly, traditional insurance is thought to have a large element of 'gharar', a term that denotes uncertainty, ambiguity.
As the payoff from an insurance policy is dependent on occurrence of uncertain events in the future, the amount of compensation has no predictable relationship with the insurance premium which disqualifies conventional insurance as an acceptable financial product under Islamic law.
The second reason relates to traditional insurers' investment strategies. "As 'riba' (interest) is forbidden under Sharia, conventional bonds and other sources of funding are not viewed as Islamically acceptable," the analyst explains.
The main concept that differentiates Takaful from conventional insurance is that of co-operation, or solidarity. Somewhat similar to a mutual insurer, the purpose of the company is not to generate profits but to share risk between members, thus making it more manageable for each of them. "Importantly, however, consideration for the insurance service is classified as a "donation", rather than a "premium", which may have implications for the structure of certain long-term life insurance products," says Boudkeev.
Moody's approach to analysing a takaful company is very similar to that for a conventional mutual insurance company, given that the distinction between a 'premium' and a 'donation' is in Moody's view more cultural than economic.
The rating agency's report discusses a number of additional considerations relating to corporate governance, asset allocation, structural features, capitalisation strategies and the regulatory environment that need to be taken into account when rating a Takaful company.
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