A.M. Best develops Takaful rating methodology

A.M. Best has issued a rating methodology for Takaful insurers that incorporates a two-stage risk-based capital approach.
One of the key characteristics of a Takaful insurance operation is the existence of two separate funds: the Takaful (or policyholders’) fund, and the operator’s (shareholders’) fund. With this in mind, the starting point for assessing the financial strength of a particular insurance company is to apply Best’s capital adequacy ratio (BCAR) model to the Takaful fund in a way very similar to a mutual company, the methodology says.
The first-tier analysis compares the Takaful fund’s surplus to the capital required to support the fund’s obligations to participants, per the BCAR model.
“The BCAR ratio for the Takaful fund, as well as an analysis of the trends in the ratio and other key metrics, is the primary driver of A.M. Best’s assessment of the Takaful company’s balance sheet strength.”
A second-tier capital assessment is then performed on the operator’s fund, A.M. Best explains.
This analysis compares the surplus position of the operator’s fund to the capital required to support the fund’s obligations, per the BCAR model.
“An operator’s fund with much higher financial strength than its corresponding Takaful fund normally will enhance the capitalisation assessment in respect of the whole insurance operation, reflecting the increased financial strength provided to the Takaful fund’s participants.”