Directive to License a Takaful Operator or Authorize a Takaful Window Operator No. STB/1/2020

የኢትዮጵያ ብሔራዊ ባንክ
NATIONAL BANK OF ETHIOPIA
ADDIS ABABA

Licensing and Supervision of Insurance Business

A Directive to License a Takaful Operator or
Authorize a Takaful Window Operator
No. STB/1/2020

Whereas, proper licensing of a takaful operator or authorization of a takaful window operator is important to ensure the safety and soundness of the insurance sector;

Whereas, it becomes necessary to establish a mechanism of regulating takaful business and set requirements and minimum standards for operation of takaful business and to protect the interest of participants;

Now, therefore, in accordance with article 60(1 & 2) and 64(2) of the Insurance Business Proclamation No.746/2012 as amended by the Insurance Business (Amendment) Proclamation No.1163/2019, the National Bank of Ethiopia has issued this directive.

1. Short Title

This directive may be cited as “A Directive to License a Takaful Operator or Authorize a Takaful Window Operator No. STB/1/2020”.

2. Definitions

In this directive, unless the context provides otherwise;

2.1 “National Bank” means the National Bank of Ethiopia;
2.2 “board” means the board of directors of a takaful operator or a takaful window operator;
2.3 “contribution” means the amount payable by a participant to a takaful operator or a takaful window operator under a takaful contract;
2.4 “family takaful” means insurance for the protection of the lives of individuals, groups of individuals and their families;
2.5 “general takaful” means takaful other than family takaful;
2.6 “operating model” means a model that defines the relationship and fiduciary duties between the takaful operator or a takaful window operator and the participants;

2.7 “participant” means the party contributing to the takaful contract who is covered through the mutual protection and solidarity of the takaful contract;
2.8 “participants investment fund” means a fund to credit a portion of contributions from the participant for the purpose of investment or savings and applies only to family takaful;
2.9 “participants risk fund” means a fund where a portion of the participants’ contributions are credited to pay participants who might suffer unexpected financial losses;
2.10 “qard hasan” means an interest free loan granted by the takaful operator or a takaful window operator to the participants’ risk fund in the event of a deficit;
2.11 “shareholders’ fund” means the account that holds the paid-up capital provided by the company’s shareholders;
2.12 “shari’ah advisory council” means a committee of scholars who are well-versed and competent in Shari’ah and its approaches to finance and are appointed by the takaful operator or takaful window operator’s board;
2.13 “takaful” means a cooperation between members of a community whereby each member undertakes to contribute a certain sum of money to a fund which will be used mutually to assist the members against a defined loss or damage;
2.14 “takaful certificates” means a document evidencing the existence of a takaful contract;
2.15 “takaful operator” means a company licensed to transact a full-fledged takaful;
2.16 “takaful window operator” means an insurance company authorized to transact takaful business through a takaful window or branch alongside conventional insurance business; and
2.17 any expression in the masculine gender includes the feminine and or legal persons.

3. Scope

This directive applies to all persons who desire to be licensed as takaful operator or authorized as takaful window operator.

4. Special Requirements

4.1 No person shall carry on takaful business unless such person is authorized to carry on takaful business as takaful operator or takaful window operator;

4.2 In addition to the board, a takaful operator or takaful window operator shall have a Shari’ah Advisory Council.

4.3 The Shari’ah Advisory Council shall act as the advisory body on Shari’ah principles relating to takaful operations.

4.4 The Shari’ah Advisory Council shall consist three members. One of the members must be knowledgeable in insurance, the other is required to be a scholar in Shari’ah principles and the other must be a person with adequate expertise in financial services.

4.5 The board of a takaful operator or takaful window operator shall develop and submit to the National Bank detailed policies and procedures on Shari’ah oversight.

4.6 An insurance company that intends to operate a takaful window shall:
4.6.1 apply for authorization; and
4.6.2 submit a feasibility study.

4.7 An authorized takaful window operator shall:
4.7.1 establish a separate unit to transact takaful business;
4.7.2 appoint a head for the takaful operations who has the relevant experience and knowledge;
4.7.3 keep set of accounts for takaful business segregated;
4.7.4 ensure separation of the takaful and conventional business; and
4.7.5 ensure that the words ‘takaful window’ are prominently displayed in all documents pertaining to takaful operations.

4.8 A takaful operator or takaful window operator is required to adopt an operating model which is endorsed by the Shari’ah Advisory Council and approved by the Board.

4.9 A takaful operator or takaful window operator shall maintain relevant documentation relating to the operating model in use including:
4.9.1 contract governing relationship between participants and takaful operator or takaful window operator;
4.9.2 contract governing relationship between participants;
4.9.3 fund segregation policy, with details of sub-fund if applicable;
4.9.4 investment policy and the method for the calculation of investment profit for participants’ investment fund;
4.9.5 policy on recognition of surplus or deficit and its distribution;
4.9.6 policy on deficit rectification mechanism including the repayment of qard hassan;
4.9.7 remunerations to takaful operator or takaful window operator, policy and relevant Shari’ah principle or contract underlying the remuneration; and
4.9.8 any other relevant information required for understanding of the operating model.

4.10 A takaful operator or takaful window operator shall submit to the National Bank the operating model at the point of authorization or prior to adopting a new operating model.

4.11 A takaful operator or takaful window operator shall disclose the operating model adopted for use in the proposal forms, participants’ certificates and the annual financial statements.

4.12 A takaful operator or takaful window operator shall segregate the assets of the participants from the assets of the shareholders.

4.13 A takaful operator or takaful window operator shall allocate, establish and maintain separate takaful funds and bank accounts in respect of family takaful business and general takaful business.

5. Distribution of Surplus

5.1 A takaful operator or takaful window operator shall ensure that the funds are managed in an effective manner and sufficient funds are available at all times to prudently cover all unforeseeable events.

5.2 A takaful operator or takaful window operator shall develop a policy on the management of the surplus in the participants risk fund with the advice of the Shari’ah Advisory Council.

5.3 While distributing the surplus, a takaful operator or takaful window operator shall observe that:
5.3.1 the surplus to be distributed shall be recommended by an actuary/an external auditor, endorsed by the Shari’ah Advisory Council and approved by the board and the National Bank;
5.3.2 the surplus distribution shall be in line with the underlying contract;
5.3.3 the surplus shall be determined based on full valuation of liabilities;
5.3.4 the participants risk fund shall not be in a deficit after surplus is distributed;
5.3.5 the surplus distribution shall not cause adverse financial implications on the participants risk fund;
5.3.6 the surplus distribution shall be based on generally accepted actuarial principles; and
5.3.7 the surplus shall be distributed to participants in a manner which ensures their fair treatment.

5.4 The external auditor or the actuary shall not recommend surplus distribution if in his professional judgment; the surplus should remain in the participants risk fund as a buffer to meet future liabilities or to meet participants’ reasonable expectations not specifically provided for in the actuarial valuation.

5.5 Profits earned on the participants’ investment fund shall be distributed to the participants and the takaful operator or takaful window operator according to the underlying contract.

6. Surrender of Certificates

6.1. A takaful operator or takaful window operator shall ensure that the takaful contract specifies the circumstances where a surrender payment would be made to the participant and the basis of calculation for the surrender payment.

6.2. A takaful operator or takaful window operator shall take into consideration the following when determining the surrender value, including the cost of any applicable surrender charge:
6.2.1. where relevant, in accordance with generally accepted actuarial principles;
6.2.2. in a manner ensuring fair treatment of participants; and
6.2.3. in compliance with standards on market conduct or fair treatment of participants.

6.3. A takaful operator or takaful window operator shall ensure that the amounts payable to the participants on surrender are made from the appropriate fund.

6.4. A takaful operator or takaful window operator shall only apply a surrender charge where it is clearly specified in the takaful contract and the takaful contract shall specify the basis of calculating the surrender charges.

7. Management of Operating Costs

7.1. A takaful operator or takaful window operator shall;
7.1.1. establish effective policies and procedures to manage operating costs;
7.1.2. ensure that commissions and operating expenses are paid from the shareholders’ funds or from the participants risk fund as the case may be in line with the underlying takaful model;
7.1.3. ensure that claims and re-takaful contributions are paid from the participants funds;
7.1.4. pay direct claims related expenses and direct investment related expenses from the participants’ risk fund and the expenses must have been approved by the Shari’ah Advisory Council;
7.1.5. set and document their remuneration arrangements in the takaful contracts prior to signing a takaful agreement with the participants;
7.1.6. receive a fee or remuneration depending on the underlying takaful model and contracts;
7.1.7. ensure that the contributions agreed at inception of the takaful contract are adequate to service the certificate until the end of the contract and the recognition of income and profits are aligned to related expenses and liabilities;
7.1.8. report any scenario where a deficit has occurred or is expected to occur in the participants risk fund to the National Bank within seven days; and
7.1.9. rectify the deficit via qard hasan from the shareholders’ fund where the assets of the participants risk fund are insufficient to meet the liabilities.

7.2 For the purpose of determining a deficit in the participants risk fund, the takaful operator or takaful window operator shall use assets and liabilities of the participants risk fund.

7.3 The qard hasan from shareholders’ fund shall be repaid from the surplus arising in the participants risk fund in subsequent years.

7.4 The features in the policies on deficit rectification for the Participants Risk Fund shall include:
7.4.1 events which would require the prompting of the qard hasan;
7.4.2 the process and assessment methodology to determine repayments;
7.4.3 surplus distribution methodology to participants while the qard hasan is outstanding;
7.4.4 remuneration to takaful operator or takaful window operator while the qard hasan is outstanding;
7.4.5 time period over which the qard hasan is to be repaid;
7.4.6 circumstances where the qard hasan may no longer be required to be repaid;
7.4.7 the impact of qard hasan on potential participants; and
7.4.8 treatment of deficit or surplus in the various sub-funds operated in the participants risk fund.

7.5 A takaful operator or takaful window operator shall not use qard hasan from its shareholders funds to meet any loss occurring in the participants’ investment fund, unless the loss is either as a result of negligence or mismanagement by the takaful operator or takaful window operator.

8. Disclosure and Transparency

8.1 A takaful operator or takaful window operator shall publish details of its operational model together with its underlying Shari’ah principles.

8.2 The information published shall be accurate, adequate and up-to date and shall be in a clear and understandable language with minimum technical jargon.

8.3 Where participants bear the investment risks, information disclosed shall be sufficient to enable understanding of market movements and its implications on the takaful funds.

8.4 A takaful operator or takaful window operator shall ensure consistency in information being disclosed and the information given to participants shall be consistent with the information submitted to the National Bank.

8.5 A takaful operator or takaful window operator shall within seven days inform participants of any modifications or changes to its operational model or to the terms and conditions of the products and the impact of the changes.

8.6 Where the impact of the changes is material as defined by the board and financially significant, such disclosure shall be sufficiently detailed to be reasonably understood by the participants.

8.7 A takaful window operator shall submit quarterly reports to the National Bank in the formats prescribed under Directive No.SIB/38/2014.

9. Compliance with Other Regulatory and Supervisory Requirements

In carrying out takaful business, a takaful operator or takaful window operator shall comply mutatis mutandis with the provisions of all relevant directives and the Insurance Business Proclamation No.746/2012 and Insurance Business (Amendment) Proclamation No.1163/2019.

10. Effective Date

This Directive shall come in to force as of the 15th day of June 2020.

Yinager Dessie (PhD)
Governor