Surplus Distribution and Corporate
Governance
Mahomed Akoob
CEO of Hannover ReTakaful B.S.C ©, Bahrain
ICMIF Takaful Network Seminar
Bahrain, 5-6 May, 2009
GLOBAL PRESENCE OF TAKAFUL
179 Takaful Operators including windows / 143 Takaful Companies excluding windows (E&Y WTR 09)
17 ReTakaful Operators
2
Takaful and Mutual / Co-operative Insurance
Insurance
Takaful
Co-operative / Mutual
3
Shariah
Underwriting Surplus
 Insurance or underwriting surplus is the excess of the total premium
contributions paid by policyholders during the financial period over the total
indemnities paid in respect of claims incurred during the period, net of
reinsurance and after deducting expenses and changes in technical
provisions
 In takaful, surplus is simply defined as assets minus liabilities of the takaful
fund
Surplus = Assets – Accounting Liabilities – Actuarial Liabilities
 Accounting liabilities including claim and expenses
 Actuarial liabilities are amount set aside for contingencies which are likely to
happen in the future
4
The Insurance Surplus
AAOIFI Shari'ah Standard No. 26
 The insurance surplus is part of the assets of the insurance account and
should be disposed of according to what has been stated in item 5/5 of this
standard
 Distribution of the surplus or part thereof among the policyholders should be
in one of the following forms, provided that the selected form is explicitly
mentioned in the regulations:
 Distribution of the surplus among the policyholders in proportion to their respective
contributions, and regardless of whether the policyholder has received indemnity
during the financial period or not
 Distribution of the surplus among the policyholders who have not received
indemnity during the financial period
 Distribution of the surplus among the policyholders after deducting the amounts of
indemnity they receive during the same financial period
 Distribution through any other method approved by Shariah Supervisory Board
5
Surplus Distribution:
Consideration Factors

Surplus distribution should not be viewed as the ultimate success of
takaful firms. The main objective of a takaful firm is to provide insurance
protection and invest funds in Shariah compliance

The existence of surplus depends upon several factors
- Class of business and volatility
- Number of participants
- Contribution adequacy
- Reserving methodology
- Solvency requirements

Personal lines vs. Commercial lines
- Volatility of portfolio

Method of distribution
- The takaful firm is free to decide on method of distribution

6
Approval of Shariah Board
Corporate Governance
Definitions
“Corporate governance is concerned with holding the balance between economic and
social goals and between individual and communal goals…the aim is to align as nearly
as possible the interests of individuals, corporations and society.” (Sir Adrian Cadbury,
Corporate Governance Overview, 1999 World Bank Report)
“a set of relationships between a company's management, its board, its shareholders
and other stakeholders. Corporate Governance also provides the structure through
which the objectives of the company are set, and the means of attaining those
objectives and monitoring performance are determined.”(Organisation for Economic
Cooperation and Development (OECD), 2004)
“an internal system encompassing policies, processes and people, which serves the
needs of shareholders and other stakeholders, by directing and controlling
management activities with good business savvy, objectivity, accountability and
integrity. Sound corporate governance is reliant on external marketplace commitment
and legislation, plus a healthy board culture which safeguards policies and processes”.
(Gabrielle O'Donovan in A Board Culture of Corporate Governance)
7
Corporate Governance
 Not a foreign concept to Islamic financial institutions: basic
tenants of Islam promote ethics integrity
 Islamic financial institutions are not immune from weak
Corporate Governance
 Negative repercussions for sustainability of institution
 Islamic financial institutions should not be exempted from
Corporate Governance pre requisite
8
Shareholder vs. Stakeholder
The Shareholders based Corporate Governance
 The old-style Corporate Governance focusing on principal-agent relationship
between managers and shareholders
 The shareholders (principals) delegate the task of management to managers
(agents) who, in theory, act in the interests of the shareholders
 The shareholders based Corporate Governance arrangements include issues
of corporate structure, the power of shareholders to exercise accountability of
managers, the transparency of corporate structures, the authority and power of
directors, internal audit arrangements and lines of accountability of managers
 The shareholders based Corporate Governance faces so-called 'agency
problem' i.e. when managers have information advantages over shareholders
and also have their own interests which may not correspond with those of the
owners
9
Shareholder vs. Stakeholder
The Stakeholders based Corporate Governance
 Modern style of Corporate Governance that emerges broadening the
classical definition of business responsibilities and go beyond shareholder
management relationship
 Stakeholders defined:
“any group or individual who can affect or is affected by the achievement of
the organisation's objectives”
(Freeman R.E. in Strategic Management: A Stakeholder Approach, 1994)
 Stakeholders include shareholders, employees, customers, suppliers,
lenders, society and environment
10
Key elements of good corporate governance
 Honesty
 Trust and integrity
 Openness
 Performance orientation
 Responsibility and accountability
 Mutual respect
 Commitment to the organisation
 Looking after society and long-term interests of all stakeholders
11
Commonly Accepted Principles of Corporate Governance
 Rights and equitable treatment of shareholders:
respect the
rights of shareholders and help shareholders to exercise those rights
 Interests of other stakeholders:
recognize that they have legal and
other obligations to all legitimate stakeholders
 Role and responsibilities of the board:
The board needs a range
of skills and understanding to be able to deal with various business issues
and have the ability to review and challenge management performance
 Integrity and ethical behaviour:
develop a code of conduct for their
directors and executives that promotes ethical and responsible decision
making
 Disclosure and transparency:
clarify and make publicly known the
roles and responsibilities of board and management to provide shareholders
with a level of accountability
12
Unique Characteristics for the Effective Corporate Governance of
Islamic Financial Institutions
(AAOIFI Governance Standard No. 6)
 Enhancing confidence
– Sound governance practice serve to enhance public confidence
 Shariah compliance
– Islamic financial institutions must have mechanisms to comply with
Shariah in all their financial and other dealings
 Business model
– Characterized by contracts that are designed to be compliant with Shariah
 Stakeholder's interests
– Understand and respond to transparency needs of its stakeholders
 Social responsibility
– The principles of Shariah strike a balance between the interest of the
individual and those of the society to which he or she belongs
 Business ethics and culture
– Values derived from Shariah
13
Principles of Governance of Islamic Financial Institutions
(AAOIFI Governance Standard No. 6)
 Effective Shariah compliance structures
 Fair treatment of equity-holders
 Equitable treatment of fund providers and other significant stakeholders
 Fit and proper conditions for board and management
 Effective oversight
 Audit and governance committee
 Risk management
 Avoidance of conflicts of interest
 Appropriate compensation policy oversight
 Public disclosure and transparency
 Code of conduct and ethics
 Appropriate enforcement of governance principles and standards
14
Guiding Principles on Governance for Islamic Insurance
IFSB Exposure Draft
The Guiding
Principles
Part I
Reinforcement of other
relevant internationally
recognised standards
Part II
A Balanced approach
and fair treatment
to all stakeholders
Part III
An impetus for
a more comprehensive
prudential framework
Exposure was released in December 2008 and IFSB is waiting for comments until 15 May 2009
15
Guiding Principles on Governance for Islamic Insurance
IFSB Exposure Draft
PART I: Reinforcement of other relevant internationally recognised standards
Principle 1.1: Takaful Operator shall have a comprehensive governance
framework in which the independence and integrity of each
organ of governance shall be well defined and preserved and
the mechanisms for proper control and conflict management
shall be clearly set out.
Principle 1.2: Takaful Operators shall adopt an appropriate code of ethics and
conduct to be complied with by their officials at all levels.
16
Guiding Principles on Governance for Islamic Insurance
IFSB Exposure Draft
PART II: A balanced approach and fair treatment to all stakeholders
Principle 2.1: Takaful Operators shall have in place an appropriate
governance structure that represents the rights and
interests of Takaful participants.
Principle 2.2:
17
Takaful Operators shall adopt and implement procedures
for appropriate disclosures that provide Takaful participants
with fair access to a material and relevant information.
Guiding Principles on Governance for Islamic Insurance
IFSB Exposure Draft
PART III: An impetus for a more comprehensive prudential framework
Principle 3.1: Takaful Operators shall ensure that they have in place
appropriate mechanisms properly to sustain the solvency
of Takaful undertakings.
Principle 3.2: Takaful Operators shall adopt and implement a sound
investment strategy and prudently manage the assets
and liabilities of Takaful undertakings.
18
Concluding Remarks
19
Thank you for your attention!