Retakaful is Islamic reinsurance: the participants' fund of a Takaful operator cedes part of its risks to a retakaful fund, financed by contributions donated under the Tabarru principle and managed by an operator paid separately.
Why a Takaful fund needs reinsurance
A fund with a few thousand participants cannot absorb on its own a factory fire, an earthquake or a cluster of deaths in a group scheme. Ceding part of these risks stabilises its results and limits reliance on the operator's interest-free loan.
The ceding fund, not the shareholder, is the insured
In Retakaful it is the participants' fund that cedes the risk and pays the reinsurance contribution. The operator acts on behalf of that fund; it does not reinsure its own balance sheet, since it does not carry the underwriting risk.
Contributions donated to a second common pool
The ceding funds of several operators pay their contributions as donations into a common retakaful fund. This fund compensates cedants hit by large losses, reproducing at operator level the solidarity that exists between individual participants.
A Sharia standard devoted to Islamic reinsurance
AAOIFI has adopted a specific standard on Islamic reinsurance, separate from the one on insurance. It requires, among other things, segregation of the retakaful fund from the operator's accounts, compliant investment of reserves and allocation of surpluses to cedants.
How a Retakaful operator is paid
As at the first level, the reinsurance operator earns Wakala fees deducted from ceded contributions, a Mudaraba share of investment returns, or both. It does not pocket the difference between contributions and claims.
Proportional and non-proportional treaties
Under quota share, the fund cedes, say, 40% of every risk and recovers 40% of every claim. Under excess of loss, the reinsurer pays only above a threshold, for example 2 million euros. Both techniques are used in Retakaful.
The question of reinsurance commission
In conventional reinsurance, the reinsurer pays the cedant a commission covering acquisition costs. In Retakaful, several Sharia boards accept it as a reimbursement of actual expenses; others prefer to build it into the calculation of the donated contribution.
Who receives the retakaful fund's surplus?
If the retakaful fund ends the year in surplus, it goes back to the ceding funds and, depending on their rules, may reach the end participants. A conventional reinsurer would keep this result for its shareholders: that is the essential difference.
Using a conventional reinsurer out of necessity
Global Retakaful capacity remains limited, especially for large industrial or catastrophe risks. Many Sharia boards therefore allow cession to conventional reinsurers on grounds of necessity (darura), while reducing the share ceded and the duration.
Conditions attached to a conventional cession
Boards usually require that available Islamic capacity be used first, that no interest be received on retained premium deposits and that the arrangement be reviewed every year. Some also ask for highly rated reinsurers to limit default risk.
Retakaful windows of major reinsurers
Several international reinsurers have opened Retakaful windows with separate funds and their own Sharia board. These structures bring capacity and actuarial expertise, but their compliance depends on genuine segregation of accounts and investments.
Where Retakaful business is concentrated
Activity is concentrated in Malaysia, including the Labuan centre, Bahrain, the United Arab Emirates and Saudi Arabia. Regulators there set capital and solvency requirements, and the IFSB publishes guiding principles for the business at international level.
Specialist external source
The Islamic Development Bank's website presents the group and its entities, including its investment and export credit insurance subsidiary, which is active in Sharia-compliant cover.