View source for 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. mslaw.pk@gmail.com

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