Regulatory Framework for Takaful International Conference on Mutual Insurance and Takaful Istanbul, Turkey 13 November 2012 Wan Mohd. Nazri Wan Osman Director Islamic Banking and Takaful Department
Agenda … Snapshot of Malaysia’s Takaful Industry Dual Financial System in Malaysia Fundamentals for Sound Takaful Development in Malaysia Regulatory and Supervisory Framework in Malaysia Regulatory Requirements For Takaful • Takaful Operational Framework • Shariah Governance • Risk-Based Capital Framework Moving Forward BANK NEGARA MALAYSIA 2 CENTRAL BANK OF MALAYSIA
Snapshot of Malaysia’s Takaful Industry MARKET STRUCTURE 12 Takaful Operators (TOs) 4 Retakaful Operators (RTOs) ASSET PENETRATION Family business - RM 15.3 bil RATE General business - RM 2.7 bil 12.82% NET CONTRIBUTIONS Family business - RM 2.18 bil MARKET General business - RM 0.67 bil SHARE AVERAGE GROWTH (2006-2011) 14.2% Net contributions – 23.8% Assets - 19.1% * as at 30 June 2012 BANK NEGARA MALAYSIA 3 CENTRAL BANK OF MALAYSIA
Takaful in Malaysia developed as component of comprehensive Islamic financial system operating in parallel with conventional financial system Islamic financial system Islamic Takaful banking Dual Four main system pillars Islamic money Islamic capital Conventional market market financial system Comprehensive Islamic Financial System Dual Financial System Ensure sustained industry viability via optimised synergies from interlinkages The mandate for developing dual financial Underpinned by : system explicitly codified in Central Bank of Strong & diversified players Malaysia Act 2009 Wide range of products & vibrant financial market BANK NEGARA MALAYSIA 4 CENTRAL BANK OF MALAYSIA
Fundamentals for sound takaful development in Malaysia … Effective & efficient consumer Facilitative Legal Framework protection Development of Islamic Financial Establishment of BNM LINK, Financial Services Act Mediation Bureau & dedicated division in High Court World class talent pool & IF learning hub World class talent pool & IF learning TO to have Appointed Actuary hub Creation of ISRA as IF research centre Establishment of IBFIM, INCEIF & ICLIF Publication of Shariah standard Fund for Shariah Scholars in Islamic Finance Strong institutional framework Strong institutional framework Increase no. & diversity of players e.g. TO (12) and RTO (4) Dedicated department in Bank Negara Malaysia for Islamic Banking & Takaful Establishment of Malaysian Takaful Institutional Capacity Enhancement Association Risk-Based Capital Framework Takaful Operational Framework Facilitative Legal Framework Institutional Capacity Enhancement Takaful Act 1984 (TA) provides platform Robust Shariah governance structure Minimum paid-up requirement increase to for separate regulatory structures CBA amendments: RM100 m SAC as a highest authority for the Robust Shariah governance structure ascertainment of Islamic law on IF Robust Shariah governance structure Foundation for Shariah governance setting Rulings of SAC shall be binding on IFIs, Establishment of Shariah Advisory in TA : courts or arbitrators Council of BNM (SAC) Business aims & operations must be Restrict SAC members to sit in SC of Shariah compliant TOs Takaful operator (TO) to establish Advanced stage Shariah Committee (SC) Strategic positioning & international integration Intermediate stage Inception stage Institutional building, activity generation Instituting foundations of Islamic & market vibrancy finance BANK NEGARA MALAYSIA 5 CENTRAL BANK OF MALAYSIA
Regulatory and Supervisory Framework in Malaysia ... Objectives Regulatory & Preserve financial stability & public confidence Supervisory Prevent risk of contagion & systematic failure Framework Ensure good market practices Promote high standard corporate & Shariah governance Pragmatic approach to regulation Governance Prudential Conduct Market Leveraging on established field of conventional system Separate rules to address takaful industry peculiarities Shariah-compliant in all aspects of the takaful operation o Balance between interests of shareholders & participants o Separation of funds between shareholders & takaful fund o Takaful Operational Framework Efficient and forward looking supervision under Risk-Based Supervisory Framework Regulatory framework for insurance broadly applicable… but Supervisory Assessment requires adaptation to be more takaful-attuned & Intervention Legal framework being strengthened by Islamic Financial Services Act to enable more comprehensive regulation and supervision of the takaful industry BANK NEGARA MALAYSIA 6 CENTRAL BANK OF MALAYSIA
Regulatory Requirements for Takaful … • Duties & responsibilities of the Shariah • Duties & responsibilities of board of directors, Advisory Council & Shariah Committee senior management, appointed actuary & Governance external auditor • Fiduciary duties of takaful operator (TO) • Minimum expectation for TO on outsourcing • Stature of participants in takaful Shariah compliance in all aspects of takaful activities, functions or processes • Invest in Shariah-compliant • Diversification rules, basis for valuation & instruments Assets, safekeeping of assets Investments • Management of takaful fund • Investment limit permissible & Liabilities • Accounting treatments • Determination & provisioning of liability Prudential • • Qard to rectify deficit in takaful fund Capital adequacy based on risk profiles • Stress test process that commensurate to Solvency nature, complexity & sophistication of the business • • Shariah endorsement on product Sound risk management practices in Product developing, managing & controlling product • Fees, charges & surplus distribution Requirements risk • Disclosure & presentation of reports & • Separation of funds Reporting, market statements • Disclosure on aqad, fees, profit sharing conduct & • Minimum standard on product transparency market protection ratio & disclosures Effective supervisory assessment on safety & soundness of TOs under Risk-Based Supervisory Framework BANK NEGARA MALAYSIA 7 CENTRAL BANK OF MALAYSIA
Takaful Operational Framework … Objectives & • Ensure uniformity with Shariah • Enhance operational efficiency • Safeguard interests of the participants • Build healthy takaful funds Principles • Promote prudent management • Promote uniformity in practices Outlines requirements in the following areas…. Fiduciary duties & relationship Establishment of Operational Model between TO - participants Funds Segregation Shareholders’ Takaful Funds Fund Claims Pricing Underwriting Income • Upfront fees Liabilities • Performance Retakaful Investment Valuation fees from takaful funds lead to Operating Qard to rectify deficit Costs Surplus / Deficit Supported by : • Effective governance & oversight • Sufficient & competent resources • Adequate disclosure & transparency • Efficient processes & procedures BANK NEGARA MALAYSIA 8 CENTRAL BANK OF MALAYSIA
Shariah Governance … Shariah as overarching principle in Islamic finance Shariah Advisory Council (SAC) of BNM Proper governance provides assurance on Shariah Shariah compliance & confidence on takaful operation: Management Board Committee (SC) SAC’s legislative stature as highest authority 1. accorded under Central Bank of Malaysia Act 2009 Shariah Compliance Functions : 2. SC of takaful operator accountable on decision, Review Risk Management views & opinions Audit Research 3. Board & senior management with sufficient expertise & capability on takaful (Islamic finance) issues 4. Function of Shariah risk management, research, review & audit to provide check & balance Shariah Governance Framework 5. SC member of another takaful operator shall not be Shariah Parameters appointed – avoid conflict of interest & maintain info confidentiality Shariah Resolutions & Rulings 6. Shariah parameters provide guidance on main features, principles & rulings Foster Shariah innovation whilst promoting 7. Institutionalise mutual respect by recognising stability in marketplace via harmonization of differences of Shariah interpretations Shariah interpretation… BANK NEGARA MALAYSIA 9 CENTRAL BANK OF MALAYSIA
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