Takaful securitization viability based on alternative risk transfer mechanism / Wan Zamri Wan Ismail

There is a growing demand in the conventional financial market, for ‘Alternative Risk Transfer’(ART) products or structured insurance solutions. It involves securitization of insurance and reinsurance - by transforming certain underwriting and actuarial risks, into tradeable financial securities such as bonds, securities and derivatives. Through ART mechanism, the insurance industry is able to tap and gain access into the huge asset base of the capital market for their reinsurance risks and capital management needs; more efficiently and at lower transaction cost. ART is also a new asset class for investors due to the low correlation with other investment risks. There are currently no ART products in Malaysia and other Muslim countries. Therefore, in the same context, retakāful management and capital management of the takāful industry may be achieved by replicating the economic benefits of similar products. However, ART is a conventional product which is not compliant with Sharīʿah. For this purpose, this research is undertaken to explore the viability of introducing takāful securitization based on principles and practices of takāful and other relevant Sharīʿah approved contracts for securitization, such as ṣukūk. This will also enhance financial intermediation through convergence of the takāful industry with the Islamic capital market. The researcher suggests that the products be termed as ‘Securitized Takāful and Retakāful’ (STAR). This is a qualitative and applied study which is undertaken in the context of Malaysia, a premier centre for Islamic finance; thus, a potential choice for the development of STAR. The primary data gathered from interview conducted with selected industry experts consisting of Sharīʿah scholars, regulator, takāful and Islamic capital market practitioners, reveals a general lack of understanding on the subject. Nevertheless, the interviewees welcome the beneficial innovation of STAR in order to usher the industry to greater heights, in the context of enhancing retakāful and capital management for the industry. Secondary data is derived from published reports from various authorities on the subject. However, as a new innovation, there is an apparent dearth of literature and research on the subject. Hence, the investigation on the viability of STAR, is benchmarked with the conventional ART mechanism, that has a wide body of knowledge, experience and expertise on the subject. Data comprising of interview, published reports and literature is analyzed using the Atlas.ti 8. Upon condensation of data, a proposed framework is formulated, that encompasses the major elements as a proposed blueprint for the implementation of STAR. This research achieves its objectives of highlighting the viability and the way forward to enhance retakāful and capital management by replicating the economics benefits of ART products through takāful securitization in the form of STAR solutions.