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Moody's explains rating of takaful firms

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.