Featured, Takaful Corner

Corporate Governance

Fourthly, a survey of takaful companies around the globe will demonstrate that so far the board of directors represents solely the shareholders’ interests. Many boards do not yet have even independent board members (ISAS recommends 1 to 3), nor any representatives from policyholders (excluding standing board members who may also own a takaful policy issued by the company).

Fifth and finally, despite the importance of policyholder capital (in the forms of annual contributions as well as accumulated reserves) in addition to shareholder capital (albeit not at direct risk to claims payments), takaful companies typically are not involving policyholders in either investment decision-making neither in major decisions such as mergers, acquisitions or divestment of large assets.

Again, these decisions significantly influence the financial strength of the takaful yet occur at the board level with no consultation or inputs from the takaful’s constituency –the policyholders. By contrast, as shown in the descriptive table below, mutual insurers dare not resolve such decisions at the board level alone, and usually consult policyholders via a referendum, survey or even proxy voting.

Comparative roles of policyholders
Intuitively, people feel safer in a group. Most people will opt for the security, relative safety and economic benefits to themselves at mutual risk-sharing. Indeed, mutual risk sharing in the modern day bears a striking resemblance to the ancient Arab tribal practices. However, upon closer examination there are important differences, as are shown in the table on page 19.

Guidance from IAIS and IFBS on corporate governance
IAIS guidelines and IFBS recommendations on good corporate governance for Islamic insurance companies may be summarised:
1. Clear roles and responsibilities for
. The board
. Board committees – remuneration, investment, risk management, audit and perhaps corp governance
implementation
. Senior management/job descriptions; Lines of authority; authority matrix
. Shari’a Supervisory Board – how appointed; how removed
. Auditors – both internal and external audit; who conducts a Shari’a audit
. Policyholders – what are PH rights; obligations; how to terminate a policy; how to lodge a complaint; or appeal a complaints resolution
2. Clear pathway to resolve conflicts and disputes – explain the treatment of complaints
3. Verification of compliance – adhere to U/W guidelines; financial reporting; regulatory; shari’a; investments compliance
4. Adopt Code of Ethics for business and conduct of personnel –both operations and sales staff; how does the code extend to third parties; how to enforce compliance

Essential elements in takaful corporate governance
We may conclude, therefore, that essential elements of good corporate governance for a takaful operations would incorporate the following items:
. Be consistent with takaful risk-sharing model (congruent with takaful business principles)
. Existence of ethics code for business operations and binding on personnel
. A fair balance of shareholder (SH) interests and policyholder (PH) interests
. Encourage policyholder representation and, where possible, participation in management decision-making in matters of direct impact to policyholders
. Market discipline imposed through disclosures and financial reporting
. A goal to manage the business to be self-sustaining, fulfilling solvency requirements (in compliance with insurance regulations of that jurisdiction) rather than maximising profits for only the shareholders
. Pursue investment strategies (matching assets/liabilities, sound liquidity, safety and diversification) in accordance with shari’a-compliant rules

Given the above discussion, the author humbly suggests that an additional core principle be included into the definition of what makes a takaful:
. Tabar’ru – contributions from members or policyholders are donation
. Ta’awun – mutual assistance extended from the group risk pool
. Prohibition of riba and other impermissible commercial elements – in both shareholder capital and Policyholder common funds
. Surplus excess funds at year end legally belongs solely to policyholders
. (added) “Voice” and participation by policyholders in takaful operations

Moving forward – the major challenges
As takaful companies enter only their fourth decade of existence, as contrasted with conventional insurers whose longevity exceeds 400 years, one may assert that formidable challenges lie ahead in execution of good corporate governance; namely:
1. Balancing the conflicting responsibilities and interests of shareholders/policyholders within the hybrid takaful model as to:
. Capital adequacy
. Risk management
. Transparency
. Market discipline/disclosures
. Financial returns (dividends vs surplus refunds)
This is because financial objectives are generally not aligned, consequently surplus -enhancing activities quite often reduce the final profits to shareholders and potential for dividend payouts.

2. When takafuls conduct cross-border transactions or open branches or joint ventures to expand horizons, there looms large the challenge of balancing various shari’a issues of differing takaful models, variations in product implementation, styles of risk management, lack of range of investment vehicles and even identifying and appointing local, qualified shari’a scholars to advise the company. In addition, often poor/no audits occur on actual compliance within the takaful to shari’a principles espoused during business operations.

3. What “voice” – if any – to provide policyholders in operations. To date, the author is unaware of any takaful operator that gives an active role to policyholders. Among the potential roles – representation on the board of directors (non-voting), representation on the executive operations committee (observer status), representation on committees of the board or executive management, are some examples.

Growth prospects
Data compiled by global takaful reports make clear that the nascent industry is growing rapidly – more than 25 per cent per annum in some countries – and outstripping the growth of conventional insurance. Although global takaful contributions amount to less than one per cent of insurance industry annual premiums of US$4trn (2009), both the impressive rates of adoption of takaful coverages and the proliferation of new takaful entities assure that this segment of the industry will swell in breadth and importance.

Eventually by capturing just one per cent of global risk coverages, the takaful volumes of contributions can reach US$40bn annually worldwide, which would position takaful alongside cooperative and mutual insurance as a truly global player and risk protection mechanism of choice for millions of policyholders. Thus, implementation by takafuls of good corporate governance equally fair to shareholders and policyholders most assuredly will propel enduring growth for this sector.

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