Islamic Reinsurance - Scope of Standard

Transcription

1. Shari ’ah Standard No. (41): Islamic Reinsurance Statement of the Standard 1. Scope of the Standard This Standard covers Islamic reinsurance and participation with traditional insurance or reinsurance companies. The Standard does not cover Islamic insurance which has already been covered in a separate standard. 2. Definition of Reinsurance 2/1 Islamic Reinsurance refers to the agreement among insurance companies, on behalf of the insurance funds under their management, to devise a mechanism for the avoidance of part of the risks which the insurance funds may encounter. On the basis of such agreement a reinsurance fund which has a distinct legal personality and independent financial liability is formed up through making contributions out of the insurance funds paid by the insurance clients on the basis of donation. The reinsurance fund, thus formed, assumes the task of covering part of the risks encountered by the insurance funds. 2/2 Reinsurance, as described above, constitutes the Islamic alternative for the reinsurance provided by traditional reinsurance companies, which is based on exchange of the reinsurance premiums and compensation, rather than on donation commitments. 3. Shari’ah Status of Reinsurance 3/1 Shari’ah status of Islamic reinsurance: 3/1/1 It is permissible to reinsure with Islamic reinsurance companies. 3/2 Shari’ah status of reinsurance with traditional reinsurance companies: It is impermissible for Islamic insurance companies to reinsure with traditional reinsurance companies, except when such reinsurance is sought as a transitional arrangement stemming from public need which amounts to necessity. 1018
2. Shari ’ah Standard No. (41): Islamic Reinsurance 4. Key Methods of Reinsurance With regard to the scope of commitment of the reinsurer, reinsurance can take place through one of the following two forms: 4/1 Selective reinsurance: In this case the insurance company presents the individual risk which constitutes the subject matter of reinsurance to the reinsurer along with a summary of all the information related to it, so that the reinsurer can study the information and decide whether to accept the risk or not. The reinsurance company (insurer) becomes committed to what it accepts. 4/2 Comprehensive reinsurance (reinsurance agreement): In this case the reinsurance company assumes the commitment to accept all the risks which fall within the scope of the agreement signed with the insurance company. 5. Key Forms of Reinsurance Requests 5/1 Risk sharing reinsurance: The insurance company in this case seeks reinsurance for a percentage of the insurance policies it issues (50% or 25%), whether such coverage is within or in excess of its own insurance capacity. 5/2 Excess risk reinsurance (beyond risk tolerance): The insurance company keeps all the insurance policies which it can easily tolerate their risks and seeks reinsurance for those which involve risks that it cannot tolerate. 5/3 Loss reinsurance: According to this type of reinsurance the reinsurance company assumes the responsibility of bearing the losses beyond the specific limit agreed upon. This form of reinsurance is widely used in the insurances which involve big amounts. The insurance company bears, for instance, the first 20 thousand dollars of compensation for the accident, while the reinsurance company bears the rest. 6. Controls on Reinsurance with Traditional Reinsurance Companies In reinsuring with traditional reinsurance companies, Islamic insurance companies should observe the following controls: 1019
3. Shari ’ah Standard No. (41): Islamic Reinsurance 6/1 Islamic insurance companies should reinsure first with Islamic reinsurance companies, to the largest possible extent. 6/2 Islamic insurance companies should not keep any cash reserves for ongoing risks, that belong to traditional reinsurance companies and on which interest has to be paid. Nevertheless, an agreement can be reached between the Islamic insurance company and the traditional reinsurance company in order to specify a certain portion of the premiums payable to the traditional reinsurance company to be retained by the Islamic insurance company. The Islamic insurance company can invest retained funds through Mudarabah or investment agency, where the Islamic insurance company assumes the role of the Mudarib and the traditional reinsurance company assumes the role of Rab al-Mal. When profit is distributed as per the ratios agreed upon, the share of the traditional reinsurance company is to be added to its account with the Islamic insurance company, whereas the share of the profit earned by the Islamic insurance company for performing the investment as an independent personality is to be added to the account of the participants. 6/3 The periods of the reinsurance agreements sought by Islamic insurance companies from traditional reinsurance companies should be commensurate to the actual need. 6/4 Before signing agreements with traditional reinsurance companies, Islamic insurance companies should seek the approval of their Shari’ah Supervisory Boards. 6/5 Islamic insurance companies should stick to the minimum size of reinsurance with traditional reinsurance companies, and Shari’ah Boards should undertake follow-up in this connection. 7. Shari’ah Status of Compensations and Commissions Presented to Islamic Insurance Companies by Traditional Reinsurance Companies 7/1 It is permissible for Islamic insurance companies to receive the amounts of the insurance coverage from traditional reinsurance companies. 1020
4. Shari ’ah Standard No. (41): Islamic Reinsurance 7/2 It is impermissible for an Islamic insurance company to receive reinsurance commission from a traditional reinsurance company. Nevertheless, the Islamic insurance company has the right to seek premium discounts from the traditional reinsurance company. 7/3 Islamic insurance companies should not accept any redistributions of insurance surplus forwarded by traditional reinsurance companies. Nonetheless, Islamic insurance companies can request premium discounts from traditional reinsurance companies. 8. Shari’ah Controls on Practicing Islamic Reinsurance by Islamic Reinsurance Companies 8/1 Islamic reinsurance companies should observe the Shari’ah controls on the activities of Islamic insurance companies indicted in Shari’ah Standard No. (26) on Islamic Insurance, with due consideration to the fact that the participants in this case are the insurance companies. 8/2 Formation of a Shari’ah Supervisory Board to supervise the process of establishing the Islamic reinsurance company, verify its contracts and documents, overview its applications and submit Shari’ah reports on its activities. 8/3 It is permissible for the Islamic reinsurance company to provide reinsurance services to traditional insurance companies, subject to the following conditions: 1. The contract to be used should be the Islamic reinsurance contract. 2. There should be no linkage. 3. Reinsurance should not involve a Shari’ah prohibited object. 9. Financial Gains Received from Islamic Reinsurance Companies All financial gains which Islamic insurance companies receive from Islamic reinsurance companies are considered as lawful gains and should be credited to the account of policyholders (the participant companies of the reinsurance scheme), as part of revenues. 1021
5. Shari ’ah Standard No. (41): Islamic Reinsurance 10. Date of Issuance of the Standard This Standard was issued on 2 Dhul-Qa’dah 1430 A.H., corresponding to 21 October 2009 A.D. 1022