Insurance solvency supervision, European regulation and takaful products

This paper investigates the application of global solvency supervisory principles and the European Solvency II regulatory framework to Takaful schemes, given their growth potential in both Western and Islamic countries. Due to their particular nature, concerns have been raised as to the suitability of international standards for sound and proper supervision. On the one hand, growing numbers of potential customers are already present in many Western countries, but only in a few of these countries are these products available, and even then in limited numbers, due at least in part to regulatory and supervisory constraints. In many emerging countries, on the other hand, these schemes represent a significant portion of insurance business, despite low levels of insurance penetration and a limited diffusion of specific regulation and supervision, driving attention to risks for customers arising from extreme events. This contribution focuses on major supervisory complexities surrounding the introduction of Takaful in European countries, with regard to the forthcoming Solvency II framework. Its three-pillared approach encompasses financial, governance and risk management requirements, as well as transparency and enhanced disclosure: in all these areas, several issues arise when considering Takaful schemes (e.g. size of market risks, definition of eligible capital, potential conflicts of interest, segregation of funds and accountability). Some concerns are shared by mutual and cooperative insurers, whereas others are more specific: the application of the proportionality principle is still under development, and its reconciliation might prove a difficult task. The objective of this study is to highlight these main areas of concern, with particular regard to the issues of solvency and prudential supervision: this might be useful to emerging economies and their improving solvency regulation as well, should risk-based supervision be increasingly adopted as a world-wide standard.