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Moody’s explains rating of takaful firms – Islamic insurance May 31, 2007

Posted by islamicfinanceaffairs in Uncategorized.
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Khaleej Times Online – Moody’s explains rating of takaful firms

Takaful, or Shariah-compliant insurance,
has shown impressive premium growth rates in recent years, says Timour
Boudkeev, Moody’s vice-president and author of the report, “Moody’s
Approach to Analysing Takaful Companies”.

He
says high premium growth reflects the difficulties that traditional
insurers are facing in complying with Shariah as a result of their
investment strategies.

“Under
Shariah, riba (interest) is forbidden. This disqualifies conventional
bonds — which usually comprise a substantial portion of an
insurer’s investment portfolio — as an acceptable asset class,”
says Boudkeev.

The
report gives an overview of how takaful differs from conventional
insurance, the benefits that a rating offers takaful companies and the
approach taken to analysing the financial strength of such companies.

Seven
key factors underlying an insurer’s business and financial profile are
reviewed in Moody’s rating process. The seven include the insurer’s
market position, brand and distribution, reserve adequacy/liquidity and
asset liability management, and asset risk.

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 likely vary by company. Furthermore, the
profit-sharing mechanism of long-term takaful products may have certain
distinctive features such as the determination, crediting and payment
of profit participation on life policies, as well as the structure of
any implicit or explicit guarantees, Moody’s notes.

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