2013-01-28 18:11:43 -
While the Takaful industry has been developing rapidly in the countries of the Gulf Cooperation Council (GCC), the development of Takaful regulation varies significantly country by country. As a result, the levels of policyholder protection differ from one state to another, which has created opportunities for Takaful operators to pursue regulatory arbitrage, according to a new report from A.M. Best Co.
This special report maps the provisions for Takaful regulation in the GCC and identifies the implications for policyholder protection and its impact on A.M. Best ratings.
There is significant debate as to the right level of regulation. Market participants in some of the more demanding regimes consider the regulations to be stifling their companies. A.M. Best believes the solution is
not less regulation but more consistent application of regulation throughout the region, which has the potential to provide sufficient policyholder protection, and thus safeguard the long-term viability of the Takaful industry.
According to the report, there are three key issues that need to be examined to establish an adequate level of policyholder protection provided by the regulatory system.
- Takaful-specific regulation: Regulation tailored to the demands of the Takaful model is important, especially in recognizing the existence in Takaful of separate funds for policyholders and shareholders. This is a major difference between Takaful and traditional insurers.
Regulation needs to provide the rules under which these funds interact, both during insolvency and when the company is viewed as a going concern.
- Obligation to provide Qard Hassan at all times: Based on key principles of the Takaful model, operators are obliged to provide a Qard Hassan (an interest-free loan) to cover arising deficits.
However, the principle leaves unclear the permanence of Qard Hassan because, as a loan, it may need to be repaid to the shareholders when it becomes evident that the Takaful fund is not viable over the long term. Regulators therefore are called to establish the rules of permanence for Qard.
- Policyholder priority: This is important particularly in cases of insolvency, and in most cases, it is provided by the general law rather than the provisions established by insurance regulators.
To access a complimentary copy of this report, please visit www3.ambest.com/bestweek/purchase.asp?record_code=208839
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