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they are not privy to same. The contributions or premiums paid by the TOs to the RTO are
managed and invested based on the specific Shari'ah contracts such as wakalah (agency
contract), mudarabah (profit sharing partnership contract), or wakalah - mudarabah hybrid
arrangements. The earnings (profits and fees) are shared between the TOs and RTOs based on
pre-agreed terms.
If a TO becomes insolvent because of unanticipated claims arising from its participants, the RTO
guarantees that it will provide a qard hasan (interest-free loan) to cover the liability. The loan
must be repaid in the following periods based on specified terms or is deducted from any Re-
Takaful surplus belonging to the TO in the following year (Jamaldeen, n.d.).
Re-Takaful can be in the form of facultative and treaty. Facultative Re-Takaful is “a Re-Takaful
contract under which a ceding TO has the option to cede, and the RTO has the option to accept or
decline individual risks” (MTA, 2018). It is offered and accepted on a case by case basis, and it is
not necessary for both TO and RTO company to enter into a specific arrangement. Under the
facultative arrangement, each underwritten policy is considered a single transaction, not
lumped together by class. The RTO chooses or performs its underwriting for some or all the
policies to be subscribed under the Re-Takaful arrangement. As such, facultative Re-Takaful is
usually the simplest way for a TO to obtain Re-Takaful protection since it is easy to tailor to
specific circumstances.
On the other hand, treaty Re-Takaful occurs when the ceding company cedes all risks within a
specific class of Takaful policies to the RTO without having to perform individual underwriting
for each or all policies. In turn, the RTO agrees to indemnify the ceding company of all risks under
the arrangement. This structure is typically governed by a standing agreement or contract on an
annual basis. In this model, the RTO has the responsibility to bear all the risks within the scope
of the agreement.
There are two types of treaty arrangements: proportional and non-proportional treaties. In the
proportional treaty, both TO and RTO participate proportionately in the contributions and losses
on every risk that comes within the ambit of the agreement. Under this arrangement, there is a
quota share and a surplus. A quota share is a basic form of participating treaty whereby the Re-
Takaful accepts a stated percentage of every risk within a specified category of business on a
pro-rata basis. It is to be noted that participation in each risk is fixed and certain, and the surplus
is the excess of assets over liabilities. The statutory surplus is the Takaful or Re-Takaful capital
as determined under statutory accounting rules. Surplus determines the Takaful or Re-Takaful
capacity to underwrite businesses. In contrast, in the non-proportional treaty , the ceding TO
agrees to accept all losses up to a threshold. The RTO agrees to reimburse the ceding TO for
losses above the threshold and up to the reimbursement limit determined in the contact.