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Takaful Products in Europe

Cross-Border Distribution of Takaful Products within the Regulatory Framework of the EU

Ms Susan Dingwall, Partner, and Ms Fon Grifths, Associate, both of Norton Rose, tackle this increasingly interesting question of the spread of takaful products to Europe where there is a large Muslim population, too, spelling out the rules to be followed for cross-border distribution of these products.

Ms Susan Dingwall

Ms Fon Grifths

ver the last decade, the insurance markets in the Middle East and Asia have witnessed a signicant growth in takaful products. In line with this trend, market commentators expect the increasing interest in takaful to translate into the European market. While predictions range on the estimated future rate of growth, research from Moodys rating agency indicates that global takaful premiums are likely to reach a total of over US$7 billion by 2015 and, with over 15 million Muslims in Europe, it is possible that that the European share of that market will be a substantial contributor to such projected growth.
Factors Aiding the Growth of Takaful in Europe

The largest markets for takaful in Europe are perceived to be the UK, France and Germany. There are a number of reasons why these particular jurisdictions as well as the wider European market are seen to be well-placed to develop a strong takaful sector. Unlike the Middle East, where there has traditionally been a low penetration of insurance products, the insurance market in Europe is very mature with a strong consumer understanding of the benets of insurance cover. This means that, in addition to the large Muslim popula-

tions who are likely to wish to obtain Shariah-compliant insurance products, non-Muslims may also be receptive to the unique selling points of takaful particularly the ethical investment policy and potential distribution of surplus among participants at the end of each policy period. In terms of resources, Europe also has a wealth of skill and experience in the insurance industry which will be essential to the development, marketing and selling of takaful products. Furthermore, the fact that the European market is strongly regulated can be a critical factor in aiding growth. Rating agencies, in particular, view strong regulation as key in determining the rating of an insurance company or takaful operator. In turn, a strong rating is an essential component for attracting investment and aiding growth on an international level.
The Regulation of Takaful in Europe

In Europe, takaful operators and the products which they offer will effectively be subject to double regulation. On the one hand, they will be subject to the EU regulatory regime for insurers, and on the other, they must operate according to the principles and within the parameters of Shariah law.

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In terms of EU regulation, the rights of insurers and intermediaries to carry on business throughout the EEA derive from the EC Treaty; formerly known as the Treaty of Rome. Article 43 of the EC Treaty sets out the freedom of establishment while Article 49 sets out the freedom to provide cross-border services. The framework of the EC Treaty is implemented through various Directives which have introduced a single set of rules governing the authorisation and prudential supervision of insurance companies and takaful operators by the Member State in which they have their head ofce.
Cross-border Distribution of Takaful

The rules set out by the various Directives effectively enable a takaful operator which has been authorised in one Member State (known as the home Member State) to carry on its business anywhere in the EEA, without the need for further authorisation by the host Member State. This process is commonly known as passporting. However, the passporting process differs depending on whether the takaful operator seeks to establish a branch in the host Member State or merely wishes to provide cross-border services.
The Setting Up Rules

or provide cross-border services, it is important to note that the key regulator will be the home state regulator, since it will be the home state regulators responsibility to ensure that the takaful operator complies with prudential requirements such as capital adequacy, solvency requirements and the calculation of reserves. The home state regulator will then liaise with the host state regulator on the takaful operators behalf, certifying that it has met the required standard. The key role of the home state regulator means that a takaful operator wishing to take advantage of its passporting rights within the EEA will need to give careful consideration to which EU regulator is to be the preferred home state regulator. A number of factors will need to be taken into account, including the applicable regulatory hurdles, the administrative burden in seeking authorisation, the ongoing management and supervision obligations, the costs of authorisation as well as the knowledge and general attitude of the regulator to takaful.
The Marketing Rules

A takaful operator seeking to establish a branch must satisfy a number of establishment conditions. The regulator of the host Member State must receive a consent notice from the takaful operators home state regulator, conrming that it has given its consent for the establishment of the branch in the designated jurisdiction. The consent notice follows the form required by the Directive, and must identify the business activities to which the consent relates. Within two months of receipt of the consent notice, the host state regulator must notify the home state regulator of any of the host states rules which will apply to the branch business (known as the applicable provisions). If no applicable provisions are notied after two months, the takaful operator may establish its branch, subject to the laws of the host state.
The Basic Service Conditions to Be Met

However, it is also important to note that a takaful operator will be required to comply with the host states conduct of business and marketing rules. The conduct of business and marketing rules of EEA states may conict, since each state can implement its own rules based on the concept of the general good. In principle, this allows a host state to apply its normal consumer protection rules. However, the rules will only apply if they do not affect the creation of a common market by restricting the activities of incoming takaful operators. For a measure to be justied as being for the general good, it must: Be non-discriminatory; Be justied by imperative requirements in the general interest; Be objectively necessary; Be proportionate to the objective pursued; Not have been harmonised at Community level; Not duplicate the rules of the home Member State. The requirement that any additional rules imposed by a host state must satisfy the general good seeks to ensure that the passporting rights of insurance companies and takaful operators alike are not unduly hampered by overregulation.
Conclusion

In the event that a takaful operator wishes to provide cross-border services, it must satisfy a number of service conditions. Firstly, the takaful operator must give the home state regulator notice of its intention to provide cross-border services. In turn, the home state regulator will provide the host state regulator with a regulators notice, containing such information as is prescribed by the relevant laws of the host state regulator. The host state regulator will then inform the takaful operator and the home state regulator of any applicable provisions which must be complied with for the passported activities. As with the rules governing the establishment of a branch, if no applicable provisions are notied after two months of the receipt of the regulators notice, the takaful operators proposed cross-border activities will be deemed to be approved.
The Home State Regulators Hold

The maturity of the insurance market in Europe arguably provides fruitful ground for the growth and development of takaful. Although a takaful operator must overcome some regulatory hurdles in its home state and potentially those of the relevant host state in order to undertake crossborder business, the passporting system has the potential to signicantly aid the growth and distribution of takaful across the EEA.
The authors can be contacted at susan.dingwall@nortonrose.com and fon.grifths@nortonrose.com

Whether the takaful operator is seeking to set up a branch

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