Islamic Reinsurance — practice questions

Correct answer: C. Clause 2: Islamic reinsurance is an agreement among insurance companies, on behalf of the insurance funds they manage, to share part of the risks faced by those funds through a reinsurance fund with distinct legal personality and independent financial liability, formed from contributions made on the basis of donation. It is the Islamic alternative to conventional reinsurance, which is based on the exchange of reinsurance premiums and compensation rather than on donation commitments.

Correct answer: A. Clauses 3/1, 3/2 and 6: Reinsuring with Islamic reinsurance companies is permissible, but reinsuring with conventional reinsurers is impermissible except as a transitional arrangement stemming from public need that amounts to necessity. In that case, the Islamic insurer must reinsure first with Islamic reinsurers to the largest possible extent, keep the periods commensurate with actual need, obtain its Shari’ah Supervisory Board’s prior approval, and keep conventional reinsurance to the minimum, with follow-up by the board.

Correct answer: D. Clause 6/2: Islamic insurers should not keep cash reserves for ongoing risks belonging to conventional reinsurers on which interest must be paid. They may, however, agree to retain a portion of the premiums payable to the conventional reinsurer and invest it through Mudarabah or investment agency, with the Islamic insurer as Mudarib and the reinsurer as Rab al-Mal. The reinsurer’s profit share is added to its account, and the Islamic insurer’s share as investment manager is added to the participants’ account. A fixed return would be interest in substance.