Retakaful is the Islamic alternative to reinsurance. Takaful operators contribute to a common fund managed by a retakaful operator, where risk is shared among participants rather than transferred, following the principles set out by IFSB-18 in 2016.
Why a takaful operator needs protection of its own
A takaful operator pools its participants' risks in a risk fund, the PRF described in the IFSB-14 standard. When that fund carries exposures that are too heavy, the operator seeks to spread part of the risk across a second circle of participants.
The definition laid down by the 2016 Guiding Principles
Published in April 2016, the IFSB Guiding Principles for Retakāful present retakaful as the Islamic alternative to reinsurance, applicable to both life and non-life business. Takaful operators contribute to a common fund run by a specialist retakaful operator.
Sharing risk instead of ceding it for a premium
The difference from conventional reinsurance lies in the contract itself. In reinsurance, the ceding company transfers its risk in exchange for a premium. In retakaful, according to IFSB-18, the risk stays shared among the participating operators in the fund, based on tabarru' and ta'awun.
Seven guiding principles adopted by the IFSB
The 2016 text lists several principles: mutual donation (tabarru'), mutual assistance (ta'awun), the prohibition of riba, governance, sharia compliance, solvency and transparency. Each aims to keep the whole chain of protection compliant, from the end participant right up to the retakaful fund.
A consultation held with Munich Re and Hannover Re
Exposure draft ED-18 was released for consultation on 5 November 2015, then discussed in Manama on 10 January 2016. Munich Re Retakaful, Hannover Re, the Malaysian central bank BNM and the DFSA, the financial regulator of Dubai's DIFC, took part in that roundtable.
Paying the retakaful operator: wakala or mudaraba
As at the first level, the retakaful operator manages the common fund on behalf of the operators contributing to it. Its remuneration may take the form of a wakala fee or a mudaraba-style share of investment returns, the two models cited by the IFSB.
Accounting for cessions under FAS 43
AAOIFI issued FAS 43, Accounting for Takaful, which has applied since 1 January 2025. Among other things, it deals with retakaful held by the participants' fund and should be read alongside FAS 42, which governs how takaful institutions present their financial statements.
Avoiding a qard after a major loss
If the risk fund falls into deficit, IFSB-14 provides for a qard, an interest-free loan from the shareholders repayable only out of future surpluses. Sound retakaful protection reduces the likelihood of having to rely on such a qard hasan after an exceptional event.
What about conventional reinsurance when capacity is lacking?
Our verified sources do not settle whether a takaful operator may reinsure with a conventional reinsurer when Islamic capacity is unavailable. That decision belongs to each operator's sharia committee, and its written opinion should be consulted rather than assumed by participants or brokers.
Solvency II and limited European capacity
At the IFM summit in London in November 2014, Solvency II was named the biggest challenge for takaful and mutual insurers. Swiss Re said it was ready to provide retakaful, while judging that takaful had not yet taken off in Europe.
An indirect benefit for the end policyholder
An individual never signs a retakaful treaty, yet benefits from one indirectly. A well-protected fund absorbs a year of heavy claims more easily, which preserves the distributable surplus and limits contribution increases when policies come up for renewal.
Sharia governance of cession treaties
In 2009 the IFSB adopted IFSB-8 on the governance of takaful undertakings and IFSB-10 on sharia governance. The Pakistani takaful framework also requires a Shariah Board and an annual sharia audit; how far these reach into cessions should be checked with the operator.
Assessing an operator's retakaful protection
- Ask the takaful operator which retakaful operators protect its participants' risk fund.
- Check that the cession treaties were approved by the operator's sharia committee and mentioned in its annual report.
- Identify the retakaful fund model, wakala or mudaraba, and the fee charged by its manager.
- Find in the financial statements, prepared under FAS 42 and FAS 43 where AAOIFI applies, the retakaful share held by the fund.
- Check whether a qard has already been injected into the participants' fund in recent financial years.
- Compare the fund's surplus policy before and after the retakaful cessions.
Cost components of retakaful protection
| Component | Purpose | What makes it vary |
|---|---|---|
| Contribution to the retakaful fund | Mutual donation paid by the ceding takaful operator | Volume and nature of the risks ceded, claims history |
| Wakala fee | Pays the retakaful operator for managing the fund | Chosen model and level of service |
| Mudaraba share | Sharing of investment returns | Contractual ratio, performance of sukuk and compliant assets |
| Retakaful fund surplus | May be returned to the participating operators | Claims experience for the year and fund rules |
| Ceding operator's retention | Share of risk kept by the participants' fund | Solvency and risk appetite |
Documents reviewed in a retakaful treaty
- Claims statistics for the participants' fund over several years
- Fatwa or written opinion of the ceding operator's sharia committee
- Description of the wakala or mudaraba model applied to the fund
- Financial statements and solvency margins of the operator
- List of risks and sums ceded, by life or non-life line
Misconceptions about Islamic reinsurance
- Believing retakaful is simply reinsurance under a new name, when IFSB-18 requires risk sharing among participants rather than a transfer for a premium.
- Assuming that an operator advertised as halal necessarily has retakaful protection, without asking what its treaties actually contain.
- Overlooking that a qard injected by shareholders after a deficit is repaid from future surpluses, at the participants' expense.
- Confusing the retakaful operator, which manages the common fund, with the participating operators that contribute to it and share its risk.
- Thinking Solvency II bans takaful in Europe, when the sources describe a regulatory and capacity challenge, not a prohibition.
Retakaful: answers to common questions
Which international standard governs retakaful?
The reference is IFSB-18, Guiding Principles for Retakāful (Islamic Reinsurance), published in April 2016 after a consultation opened in November 2015. It covers life and non-life business and sets out principles of tabarru', ta'awun, governance, solvency and transparency.
Can an individual buy retakaful cover?
No. Retakaful is negotiated between takaful operators and retakaful operators. Individuals benefit indirectly, because a better-protected participants' fund withstands exceptional claims and is more likely to generate a surplus at the end of the year.
Which major reinsurers have shown interest in retakaful?
Munich Re Retakaful and Hannover Re took part in the Manama roundtable on exposure draft ED-18 in January 2016. Swiss Re said it was ready to provide retakaful at the IFM summit held in London in November 2014.
How does retakaful appear in an operator's accounts?
AAOIFI standard FAS 43, applicable since 1 January 2025, sets out the treatment of retakaful held by the participants' fund. Presentation and disclosure requirements fall under FAS 42, the standard specific to takaful institutions.