Executive Summary

Legal Basis

TA-A.2.1

This Sector Guide was first issued in April 2005 by the BMA together with the rest of Volume 3 (Insurance). Any material changes that have subsequently been made to this Module are annotated with the calendar date in which the change was made. Chapter UG-3 provides further details on Rulebook maintenance and version control.

TA-A.2.2

When the CBB replaced the BMA in September 2006, the provisions of this Module remained in force. Volume 3 was updated in January 2007 to reflect the switch to the CBB; however, new calendar quarter dates were only issued where the update necessitated changes to actual requirements.

TA-A.2.3

A list of recent changes made to this Module is provided below:

TA-A.2.3 [Deleted]

TA-A.2.4

Guidance on the implementation and transition to Volume 3 (Insurance) is given in Module ES (Executive Summary).

TA-1.1.1

It is generally accepted by Muslim Jurists that the operation of conventional insurance does not conform to the rules and requirements of Shari'a. Takaful firms (that is, those insurance firms that choose to apply Shari'a to govern their operations and products) provide products and services corresponding to those offered by a conventional insurer to an insured (policyholder) but in a legitimate co-operative manner consistent with Islamic principles. Accordingly, takaful contracts are designed so as to be free of any gharar (uncertainty that would render them non-compliant with Shari'a), riba (interest) and other prohibitions.

TA-1.1.2

The concept of takaful involves the payment of contributions that are wholly or partially donated to form an insurance portfolio. The pooled resources are then used to pay indemnity when the insured risk occurs. The pooling of donations and assisting those in need through indemnity payments does not contradict Shari'a but is in line with the principles of compensation and shared responsibilities among the community.

TA-1.1.3

Takaful has been undertaken using a number of different operational models or combinations thereof. The two most common bases of operating a takaful fund are as follows:

TA-1.1.4

The al mudaraba model, as the name suggests, is a profit sharing model whereby investors provide capital and contributions (investment funds/premiums) are received from the takaful participants. The contract specifies how the profit (surplus) from the operations is to be shared according to the principle of al mudaraba. Generally the sharing arrangements allow the operator to share in both the underwriting results from the operations as well as any favourable investment performance on the invested contributions.

TA-1.1.5

The al wakala model operates somewhat differently. The takaful participants pay contributions to the takaful fund. However these contributions include the payment of fees and charges due to the operator together with a donation to the community (takaful) fund. All risks are borne by the fund and the annual operating surplus belongs exclusively to the participants. The takaful operator does not share directly in either the risk borne by the fund or any surplus/deficit of the fund. Instead, the operator receives a set fee for managing the operations on the participants' behalf. It should however be noted that the operator's remuneration may (depending on the terms of the contract) include a performance fee, charged against any surplus, as an incentive to effectively manage the takaful fund. Under the al wakala model the operator can only make a profit by ensuring expenses of managing the operations are less than the fees. Those costs and charges that can be charged to the takaful fund must be provided at the lowest possible cost level that the operator can negotiate.

TA-1.1.6

In Bahrain, the current practice is to adopt the al wakala model for underwriting activities and the al mudaraba for the investment activities of takaful. This approach appears to be that favoured by the 'Accounting and Auditing Organisation For Islamic Financial Institutions' ('AAOIFI'). The CBB Rules have been designed to be in line with AAOIFI standards and have been adapted to correspond to current industry practice.

TA-1.1.7

Each licensed takaful firm is required to have a Shari'a Supervisory Board, whose duty is to direct, review and supervise the activities of the company in order to ensure that they are in compliance with Islamic Shari'a rules and principles.

TA-1.1.8

The CBB does not propose to establish Rules as to what constitutes a takaful product; this is a matter for each firm's Shari'a Supervisory Board. However, the CBB has an obligation to ensure that consumers of takaful products are afforded the same level of protection as that afforded to the purchasers of conventional insurance products. In addition, the CBB has an obligation to ensure that the operations of takaful firms do not represent a threat to the stability of Bahrain's financial services industry or wider economy.

TA-1.2.1

The table below lists the Modules of the CBB Insurance Rulebook and indicates those that apply to takaful and retakaful firms. The remaining chapters of this guide describe, in more detail, the principal requirements of each Module of the Regulations and Directives that apply to takaful and retakaful firms.

HIGH LEVEL STANDARDS

BUSINESS STANDARDS

REPORTING REQUIREMENTS

ENFORCEMENT AND REDRESS

TA-2.1.1

An entity in Bahrain must be authorised if it wishes to conduct regulated insurance services, including effecting insurance contracts, the broking of insurance contracts, the offering of advice to third parties and the provision of insurance management services. Insurance firms must restrict their business to insurance under their memorandum and articles of association.

TA-2.1.2

An insurance firm's license will state the classes of insurance that the firm is authorised to conduct. An insurance firm, except for captive insurers, cannot undertake both general insurance and long-term insurance business. Insurance firms must operate on either conventional insurance principles or on takaful principles; they cannot combine the two.

TA-2.1.3

All persons wishing to undertake a controlled function in an insurance licensee must be approved by the CBB prior to their appointment. Membership of a Shari'a Supervisory Board is a controlled function and requires CBB approval.

TA-2.1.4

A captive insurer may also be licensed either as a takaful firm in which case it will appoint a Shari'a Supervisory Board and will operate in accordance with the principles of the Shari'a.

TA-2.2.1

There are 10 Principles of Business that apply to all insurance licensees including takaful and retakaful firms.

TA-2.2.2

Non compliance with the Principles of Business can lead to enforcement action, which can include the calling into question of whether the firm or its management continue to meet the fitness and propriety criteria for approval.

TA-2.2.3

The Principles of Business are:

TA-2.3.1

In accordance with Principle of Business 10, insurance licensees must put in place effective management, systems and controls for their business. The High-Level Controls Module sets out the Directives that put this principle into practice and apply to all takaful and retakaful firms.

TA-2.3.2

Some of these Rules govern the establishment, composition, functions and responsibilities of Boards of Directors. All incorporated insurance licensees must have a Board, composed of a minimum of five Directors, which is ultimately accountable and responsible for the management and performance of the firm.

TA-2.3.3

In addition to a Board of Directors, takaful and retakaful firms must also have in place a Shari'a Supervisory Board.

TA-2.3.4

The CBB expects, for Bahraini insurance licensees, for Bahrain to be the principal place of business and for Bahrain to be the centre of its governance and management. This must include:

TA-2.3.5

The CBB requires Bahraini insurance licensees to establish an internal audit function to monitor the adequacy of their systems and controls.

TA-2.3.6

All insurance licensees must designate an employee, of appropriate standing and resident in Bahrain, as Compliance Officer. The duties of the Compliance Officer include:

TA-2.3.7

The Board must establish a remuneration committee of at least three directors which must:

TA-2.3.8

An insurance licensee's Board must establish and disseminate to all employees and appointed representatives of the licensee a corporate code of conduct.

TA-2.3.9

The Board must oversee the process of disclosure to all stakeholders. The Board must ensure that the licensee's communications are fair, transparent, comprehensive and timely.

TA-2.3.10

The Board must assess, document and provide a written certification to the CBB each year detailing whether the internal corporate governance processes that it has implemented have successfully achieved their objectives, and consequently whether the Board has fulfilled its responsibilities for directing and monitoring the overall conduct of the licensee's affairs.

TA-2.4.1

All insurance firms must have an annual external audit. Firms must obtain prior written approval from the CBB before appointing or re-appointing their auditor.

TA-2.4.2

There are specific Rules and Guidance governing the duties and restrictions of external auditors.

TA-2.4.3

All insurance firms that conduct long-term insurance business (family takaful)must appoint an actuary that must provide an annual financial condition report (FCR).

TA-2.4.4

Insurance firms that undertake general takaful business must commission an actuarial opinion from an actuary, every two years.

TA-2.4.4A

Insurance firms can appoint a Registered Actuary or Signing Actuary to meet the CBB requirements.

TA-2.4.5

The CBB maintains on its website a list of Registered Actuaries that can practise in the Kingdom of Bahrain. A Registered Actuary must be independent of the insurance firm for which he is providing an actuarial evaluation and report.

TA-2.4.6

A Signing Actuary is a Director or employee of the licensee concerned; he occupies a controlled function, and is subject to CBB approval as per Section AU-1.2.

TA-2.5.1

All insurance licensees are expected to maintain books and records sufficient to produce financial statements and show a record of the business undertaken.

TA-2.5.2

All insurance licensees must keep customer and transaction records in accordance with the requirement outlined in Section GR-1.2. Insurance licensees must also keep other records as required per Section GR-1.3.

TA-2.5.3

Insurance licensees, other than captive insurers, must seek prior approval from the CBB for their corporate name and any trade names, and those of their subsidiaries located in Bahrain.

TA-2.5.4

All Bahraini insurance licensees require CBB pre-approval for the distribution of dividends to shareholders.

TA-2.5.5

An insurance firm must seek prior written approval from the CBB before executing a business transfer.

TA-2.5.6

Insurance licensees must obtain prior approval from the CBB for any of the following changes to its controllers (as defined in Section GR-5.2):

TA-2.5.7

All requirements dealing with close links apply in full to all insurance firms.

TA-2.5.8

Insurance firms are required to maintain statutory deposits as per Article 181 of the CBB Law.

TA-2.5.9

In accordance with the Bahrain Commercial Companies Law, insurance licensees are required to set aside a proportion of their annual profits, being no less than 10 per cent as a compulsory reserve until the total of such compulsory reserve, equals 50 per cent of the paid-up capital.

TA-2.5.10

An insurance firm wishing to suspend its operations and liquidate its business must notify the CBB in writing, setting out whether it proposes to affect a transfer of its portfolio or go into run-off.

TA-3.1.1

Principle 9 requires insurance licensees to hold adequate financial resources for the needs of the business. Module CA (Capital Adequacy) sets out in detail the minimum financial resources requirements for insurance licensees. In addition, it is the responsibility of Boards of insurance licensees to make their own assessment of the financial resources needed to meet their liabilities.

TA-3.1.2

The base requirement is for firms to maintain at all times capital available in excess of the higher of its required solvency margin and minimum fund.

TA-3.1.3

The takaful firm is subject to capital available and solvency requirements. Should the Takaful firm not meet the solvency requirements, it must inject capital.

TA-3.1.4

The minimum fund that must be maintained by the each takaful fund at all times, is:

These minimum requirements are equivalent to those amounts for conventional insurance firms.

TA-3.1.5

For each general participants' fund, the required solvency margin is calculated on the basis of the premiums written and claims incurred by the fund. A risk factor is applied, to reflect the differing risk profiles of different classes of insurance. Refer to Chapter CA-2 for the detailed rules governing the calculation of the required solvency margin.

TA-3.1.6

For each family participants' fund, the required solvency margin is calculated on the basis of the aggregate of the mathematical reserves calculation and the capital sum at risk calculation.

TA-3.1.7

The Valuation and Admissibility of Asset Regulations are contained in Chapter CA-4. Assets of an insurance firm may only be given value for regulatory purposes in accordance with the Valuation of Assets Regulations. Surplus (inadmissible) assets are valued at zero for the purposes of calculating the firm's capital available. Assets considered inadmissible include those that exceed permitted categories and counterparty limits and intangible assets (e.g. brand value).

TA-3.1.8

The Valuation of Liability Regulations are contained in Chapter CA-5. Liabilities must be valued in accordance with International Accounting Standards (to the extent available) or, until such standards come into effect, with Section CA-5.1.

TA-3.1.9

There are also Rules concerning the matching of assets and liabilities, to minimise the risk of maturity and/or currency mismatch in the portfolio.

TA-3.1.10

The CBB may require a takaful firm to provide:

TA-3.1.11

All takaful firms licensed in Bahrain must organise and operate their business according to the al wakala model. Specifically, in exchange for the provision of management services to takaful fund(s), the shareholders of the takaful firm will receive a specific consideration (wakala fee). For the insurance assets invested on behalf of takaful funds, the takaful operator will use the al mudaraba model, and will receive a set percentage of the profits generated from the investment portfolio.

TA-3.1.12

The wakala fee charged in respect of a takaful contract must be directly proportional to the costs associated with establishing and maintaining that contract.

TA-3.1.13

Takaful firms must maintain separate books of account in respect of each kind of business and for each fund.

TA-3.1.13A

Where a participants' fund(s) has a cash deficit which results in its inability to meet its day to day expenses and obligations, a Qard Hassan must be extended immediately to the shareholder fund.

TA-3.1.14

Takaful firms by definition are co-operative in nature and as such participants (policyholders) are entitled to a return of any surplus of the takaful funds operated by a takaful insurer. Takaful firms must establish a policy for the distribution of surplus but may only distribute a surplus if the firm meets its required solvency margin requirements both prior to and after the distribution.

TA-3.2.1

The Business Conduct Module comprises general rules (BC-1) and a Code of Practice (BC-2). These rules apply in full to all insurance licensees with special provisions applicable to takaful firms.

TA-3.2.2

The use of the terms 'takaful', 'retakaful', 'general takaful' and 'family takaful' may only be used to describe the products of insurance firms that are Islamic financial institutions within the meaning of the CBB Rulebook.

TA-3.2.3

An insurance firm may only offer takaful products if it is licensed to do so. An insurance intermediary may offer both conventional insurance and takaful products but must provide clear information to enable consumers to make informed choices.

TA-3.2.4

Takaful firms must provide participants and shareholders with clear information about the performance of their business. This information must, as a minimum, comply with relevant AAOIFI standards, in particular Standard 13 (Disclosure of Bases for Determining and Allocating Surplus or Deficit in Islamic Insurance Companies) and Standard 12 (General Presentation and Disclosure in the Financial Statements of Islamic Insurance Companies).

TA-3.3.1

Principle 10 (TA-2.2.3) requires firms to have systems and controls that are appropriate for their business. Consequently, the Risk Management Module of the CBB Rulebook contains Rules and Guidance on how, specifically, firms should monitor and manage risk. This Module applies to all licensees, and it is for firms to consider the scale and complexity of the procedures that are required, given the nature of their operations. All those sections dealing with Bahraini insurance firms and overseas insurance firms are applicable to takaful firms.

TA-3.3.2

The Module contains both:

TA-3.4.1

The general law of Bahrain imposes obligations on individuals and firms in relation to the prevention and prohibition of the laundering of money. Module FC applies to all insurance licensees.

TA-3.4.2

In addition, Module FC contains specific Rules and Guidance for insurance licensees that require them to have effective money laundering controls and to report suspicious transactions to the relevant authorities.

TA-3.4.3

Chapter FC-1 outlines the requirements for customer due diligence.

TA-3.4.4

The reporting of suspicious transactions is the responsibility of the firm's Money Laundering Reporting Officer ('MLRO'). All takaful firms must appoint an MLRO.

TA-3.4.5

The MLRO will prepare an annual report on compliance with the anti-money laundering and combating terrorism financing controls and procedures. The Boards of takaful firms will need to include the consideration of this report as a standing item for Board meetings each year.

TA-3.4.6

Appendix FC-(iv), contained in Part B of the CBB Rulebook provides guidance material and examples of transactions that would be considered suspicious for the purposes of this Directive.

TA-4.1.1

Takaful firms are required to file annual, quarterly and group insurance returns to the CBB providing details of the financial condition of the firm and the business undertaken.

TA-4.1.2

Details of the content of the Insurance Firm Return can be found in Section BR-1.1. The content of the Insurance Firm Return is identical to that required for conventional insurance firms, except for the calculation of the solvency margin as outlined in Chapter CA-8. The Return must be:

TA-4.1.3

Takaful firms must disclose to the CBB material information about changes in their situation including (but not limited to):

TA-4.1.4

An insurance licensee must permit representatives of the CBB, or persons appointed for the purpose by the CBB to have access, with or without notice, during reasonable business hours to any of its business premises in relation to the discharge of the CBB's functions under the relevant law.

TA-4.2.1

Takaful and Retakaful firms are subject to the same Public Disclosure requirements imposed in Module PD to insurance firms and overseas insurance firms.

TA-4.2.2

Takaful and Retakaful firms must disclose to participants the calculation and amount of wakala fee and mudaraba share of profits paid by the takaful fund to the takaful operator.

TA-5.1.1

The Enforcement Module of the CBB Rulebook applies in full to all insurance licensees.