18 November 2015

The IFSB and IAIS release joint paper on issues in regulation and supervision of Microtakāful (Islamic Microinsurance) sector

The main objective of this paper is to highlight and identify regulatory issues prevailing in the Microtakāful sector and outline the role this sector can play in enhancing financial inclusion.

Microtakāful is an important mechanism that provides Sharī`ah-compliant protection to low-income and under-privileged segments of society under the principles of Tabarru’ (donation), Ta’āwun (mutual assistance) and prohibition of Ribā (interest). Due to its nascent stage, regulators and supervisors have relatively little experience or empirical data to support their role in creating an environment conducive to the promotion of affordable Takāful services to low income and under-privileged segments.

In particular, the Islamic Financial Services Board (IFSB) and International Association of Insurance Supervisors (IAIS) Issues Paper:

• Identifies current practices and models for offering Microtakāful products, and the challenges and potential issues in offering them to target customers.
• Reviews the current regulatory framework for the Microtakāful sector in various jurisdictions and suggest initiatives to strengthen it and thus enhance financial inclusion through the Takāful sector.
• Provides guidance to the regulatory and supervisory authorities in implementing an enabling environment for the development and growth of the Microtakāful sector.

The Issues Paper highlights distinguishing features of various models used for offering Microtakāful products which, despite having many common features with Takāful products, pose various unique supervisory challenges. Backed by a survey from Microtakāful operators as well as regulatory and supervisory authorities, the Issues Paper delineates the distinguishing features of Microtakāful such as types of participants, product features, participants’ contribution and distribution channels. The paper also sheds light on corporate governance aspects of the Microtakāful sector, including the role of boards of directors and Sharī`ah Boards in providing policy direction and ensuring the effectiveness of the Sharī`ah governance framework.

This Issues Paper also delves into critical issues that require the attention of regulatory and supervisory authorities of Microtakāful sector. These areas pertain to the requirement of the separation of funds, solvency and capital adequacy framework, investment policies and Sharī`ah compliance requirements. Other key aspects covered include customer education and awareness, consumer protection, licensing requirements and supervisory review processes. Finally, the Issues Paper illustrates the relevance of the IAIS’ Insurance Core Principles in the practice of Microtakāful.

Joint paper

© IAIS - International Association of Insurance Supervisors