Moody's sets out approach to rating Takaful companies

In a new report entitled "Moody's Approach to Analysing Takaful Companies", Moody's Investors Service gives an overview of Takaful's differences from conventional insurance, the benefits that a rating offers Takaful companies and the approach taken to analysing the financial strength of such companies.

"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'a as a result of their investment strategies," says Timour Boudkeev, Moody's Vice President and author of the report.

"Under Shari'a, 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."

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

Moody's thus broadly applies its global methodology for rating insurance companies; the overall framework applies to both life companies and property and casualty companies, with some minor differences. As such, Moody's analytical approach includes not only quantitative analysis but also a significant degree of qualitative analysis -- incorporating the opinions and judgements of experienced analysts.

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 be likely to 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.

Moody's thus takes into account additional considerations relating to areas including corporate governance, asset allocation, and the regulatory environment when applying its global methodology for rating insurance companies to Takaful companies.