Retakāful in participation insurance system

Takāful /participation insurance is a risk management approach introduced as an alternative to conventional insurance. Just like reinsurance, which is an essential component of the insurance system, retakāful emerged as a Sharīʿah-compliant form of reinsurance. The strength and stability of the takāful system depends on the financial capacity of the retakāful companies as well as the Sharīʿah compliance of retakāful operations. Sharīʿah governance, which is an important issue that differentiates participation finance from the conventional system, should be determinant in the retakāful programme and actively applied at every stage of the process, from the drafting of retakāful agreements to the implementation of the programs. The fact that the number and capacity of takāful operators were insufficient for the sustainability of the sector during the first years of takāful insurance led to co-operation with conventional reinsurance based on necessity. This study comprehensively analyses the retakāful system and examines the negative impacts of the practices that evolved into a commercial flexibility over time on the independence and development of the system. The qualitative method and exploratory research design are used to analyze the mechanism and development of retakāful in comparison with traditional reinsurance. Practices are evaluated through data provided from industry reports, annual company reports, legislations, standards and official websites. In this study, unlike previous studies, retakāful is discussed from a holistic perspective, and a comparative analysis of the system planned for retakāful and application is provided, and some solutions are offered to the problems in practice. In this sense, it stands out that even the existence of necessity is discussed. However, efforts to reform necessity-based practices are insufficient. It is envisaged that developing some parameters and setting standards in the process of implementing the fatwa of necessity will strengthen Sharīʿah compliance and, accordingly, the retakāful system. Besides, the underdevelopment of retakāful is attributed to the fact that retakāful is based on tabarruʿ contracts and the operating models designed on this line are complicated and the technical costs are relatively high. In this framework, revisions to the AAOIFI and IFSB retakāful standards, which are important reference sources but do not fully reflect the reality, are envisaged to yield positive results. Key Words: Islamic Finance, Participation Insurance, Takāful, Sharīʿah Compliance, Participation Reinsurance