SYDNEY (Reuters) - London-based firm Cobalt has developed a sharia-compliant insurance platform that uses a syndication model to help spread risk across a panel of underwriters, a novel format that could boost capacity in the sector.
Under the platform, Cobalt allows multiple insurers to pool their capacity and each can subscribe to the desired level of risk though individual Islamic windows, said chief executive Richard Bishop.
“We are syndicating the risk across a panel of insurers. What we are about is developing an Islamic alternative in London for Islamic insurance,” Bishop said.
Cobalt aims to address capacity constraints in the takaful (Islamic insurance) industry, which is based on the concept of mutuality; where a company oversees a segregated pool of funds contributed by all policy holders.
In their investments, takaful firms must follow religious guidelines such as a ban on interest and pure speculation.
Global takaful contributions were expected to reach $12.4 billion in 2012, according to a report by consultants Ernst & Young last April.
The platform allows each insurer to have a takaful window, where policyholder funds are segregated from conventional funds, without affecting their rating levels and helping price the risk competitively, said Bishop.
“It is essential to our offering that all security is of at least an A rating in order to satisfy the requirements of both buyers and their financiers,” he said.
The risk is priced by a lead insurer and other firms must then subscribe under similar terms, a similar approach to the subscription model used in London’s insurance market.
Cobalt, formed in 2012 with capital from Capita insurance services and the Bank of London and The Middle East, hopes its platform can address gaps in both the Islamic insurance and reinsurance sectors.
The firm has secured underwriting capacity from XL Group to insure property risks with capacity of up to $300 million.
Cobalt would seek to underwrite large transactions of no less than $30 million in value while it is also seeking to expand capacity into the construction sector, Bishop said.
In the long term, further capacity could be added for other risks including trade finance, Islamic finance institutions, energy and aviation, he added.
Operators in the takaful sector, which has its core markets in the Gulf and southeast Asia, have been limited in their ability to take on large commercial risks partly due to a lack of scale.
“Once you get beyond small commercial risk, takaful doesn’t work. We have created a multiple-insurer platform to provide the sort of capacity the industry needs,” Bishop said.
Reinsurance options are also scarce, with some takaful firms forced to reinsure through conventional lines, a practice allowed under the concept of darura, or extreme necessity.
Industry scholars, however, are increasingly challenging whether the darura concept is still applicable in today’s market and are encouraging alternatives.
Several pricing models can be used under the platform such as mudaraba and wakala, the latter can incorporate an incentive fee which is the preferred format, Bishop said.
Under the mudaraba model, a firm acts as a managing partner for a policyholder’s money, working under a profit-sharing contract with any losses borne by participants.
In wakala, the firm operates under an agency agreement, managing funds on behalf of policyholders in exchange for a management fee, which can also include a performance fee.
Editing by Dinesh Nair and Patrick Graham