The Accounting and Auditing Organization for Islamic Financial Institutions’ (AAOIFI’s) Governance and Ethics Board (AGEB / the board) held its 38th meeting on 11 September 2024, via video conferencing.
The main agenda items included the approval, in principle, of the exposure draft of a GS on “Principles of Assessment of Necessity for Obtaining Conventional Reinsurance by Takaful Institutions”. The need for this standard originated from the evolving landscape of the Takaful industry, where Takaful institutions are increasingly seeking ways to manage their risk while ensuring to comply with Shari’ah principles and rules. As Takaful institutions navigate the complexities of the global financial market, there is a pressing need for clear guidelines as to how conventional reinsurance in case of necessity may be utilised to support their operations. The standard aims to set the controls and governance principles that apply in managing the risk.
The board discussed at length different issues and aspects such as the scope of the standard, the core principles for determination of necessity, factors for assessment of necessity, governance and control requirements and transparency and disclosure. The board directed the secretariat to issue the exposure draft after incorporating the necessary changes.
Also, the board finalised the basis of conclusions of GS 18 “Shari’ah Decision-Making Process” which was approved, in principle, during the previous meeting and directed the secretariat to issue the final standard after completion of due process.
The chairman of the AGEB, Mr. Farrukh Raza, stated that “I am pleased to announce the, in principle, approval of this much needed exposure draft and would like to thank the board members, the relevant working groups, as well as, the secretariat for their dedication and tireless efforts”. He added that “AGEB aims to enhance governance practices within the Takaful operations and contribute to the overall stability and growth of the Takaful industry”. He further added “I am optimistic that this exposure draft will provide the needed guidance and establish principles for the Takaful institutions to assess the necessity of obtaining conventional reinsurance”.
On this occasion, Mr. Omar Mustafa Ansari, Secretary General, AAOIFI stated “The Takaful industry works in a very complicated and, at times, non-conducive environment, and faces certain unique operational, governance, risk management and Shari’ah compliance related challenges. AAOIFI has currently initiated multiple projects for development of governance standards for the Takaful industry, and this is first of the series. This proposed standard addresses a unique aspect of the Takaful business whereby, due to the dire necessity, a Takaful institution has to resort to the conventional reinsurance (instead of re-Takaful), within the parameters defined by the respective AAOIFI Shari’ah Standards. This standard aims to ensure Shari’ah compliance, safeguarding the interest of the stakeholders, managing and sharing the underwriting risks, as well as, managing the reputation risk for the whole industry under a balanced approach, under such dire necessity situations.”
In terms of the way forward, the secretariat will incorporate the required changes as directed by the board and complete the due process before issuing and publishing the exposure draft on AAOIFI website. All the industry stakeholders are invited to attend the public hearings and roundtable for the standard which will be held in the upcoming months to provide their comments and feedback which then shall be collated and presented to the respective working group and AGEB for further deliberations.