Moody’s Investors Service explains the process behind rating a takaful company

Takaful, Shari’ah-compliant insurance, has shown impressive premium growth rates in recent years.

One of the key reasons for the remarkable pace of growth in takaful premiums relates to the difficulties that traditional insurers are facing in complying with Shari’ah as a result of their investment strategies.

Under Shari’ah, the charging of interest is forbidden. This disqualifies conventional bonds – which usually comprise a substantial portion of an insurer’s investment portfolio – as an acceptable asset class.

“There are substantial similarities between most common types of takaful and mutual insurance

Moody’s Investors Service.

When analysing the financial strength of a takaful company, there are substantial similarities between most common types of takaful and mutual insurance. As a result, Moody’s approach to analysing a takaful company is very similar to that for a conventional mutual insurance company.

However, the credit strengths and weaknesses of a typical takaful company will be influenced by a number of factors that do not typically apply to a Western mutual insurer. For example, depending on the takaful operational model used, the company’s capital management system and access to capital will be likely to vary by company.

Furthermore, the profit-sharing mechanism of long-term takaful products may have certain distinctive features. We therefore take into account additional considerations including corporate governance, asset allocation, and the regulatory environment when applying rating methodology to takaful insurers.