Underwriting business reporting The total new business written for different products will be reported by the Underwriting Department to the Management. Underwriting Department Takaful Committee Quarterly Claims settlement reporting Total claims settled for different products and business lines will be reported by the Claims team to the Takaful Committee Claims Department Takaful Committee Quarterly Re-takaful reporting Returns to Re-Takaful operators detailing business transacted and claims incurred Re-Takaful Department Re-Takaful operators Quarterly Stress testing and scenario analysis Stress testing and scenario analysis will be conducted on an annual basis and the results reported to the Audit Committee. Risk Management function Audit Committee Annually
Ensuring adherence to Operational Risk management policies and procedures; Monitoring the implementation and execution of Operational Risk strategies from an independent viewpoint, and advising the Board Audit Committee and Audit Committee accordingly; Independently and pragmatically advising management on the necessary regular review processes within the Operational Risk environment, and of how and where implementation and ongoing Operational Risk management can be improved; and Independently validating the integrity and administration of Operational Risk models for use within regulatory or internal capital ratio or capital allocation policies. Operational Risk Overview Operational risk is the risk of financial loss resulting from inadequate or failed internal processes, people and systems or from external events. Operational Risk consists of the following risk event categories: Process Risk The process in undertaking any transactions entails a chain that includes, transaction risk, documentation/contract risk, and control risk. People Risk The differing background, education, skills, personal expectations/ ambitions, ethical standards are unique to each individual. Lack of understanding, skill gaps and above all inadequate training may lead to people risk. Systems Risk Takaful companies use various systems to support their operations. Failure or inadequate functioning of systems can result in risks related to ineffective operations, inadequate decision making, control weaknesses...etc. Event Risk Certain uncontrollable events may lead to Operational Risk such as natural disasters or terrorist attacks. Examples of Operational Risks in each category are detailed below: Risk source Example of risk Processes External data – clients External data – industry Internal management information and decisions Methodology, modeling and
Combined Liquidity Reporting The above liquidity information will be combined. The Head of Investment will be responsible for presenting the information to Risk Committee, and will provide commentary on the adequacy of the liquidity profile. Any breaches that have occurred during the period will also be reported. Investment function Audit Committee Quarterly Stress testing and scenario analysis Stress testing and scenario analysis will be conducted on an annual basis and the results reported to the Audit Committee. RM Audit Committee Annually 6. Market Risk Market risk appetite A takaful company’s Market Risk appetite is defined by the Audit Committee and approved by the Governing Body. The Market Risk appetite is demonstrated through the establishment of limit structures that take into account Market Risk concentrations, and the capital requirements that would be required as a result of
basis and the results reported to the Audit Committee. Scenario analysis will include cash flow projections based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on a takaful company’s funding needs and sources and will take into account: The potential effects of currency, and duration mismatched caused by the scenario conditions; Access to funding; Mismatching between expected asset and liability cash flows; Ability to sell assets quickly; The ability of the balance sheet to withstand sharp, unexpected drop in the inflow of funds (takaful underwriting) or unexpected outflows (claims); and The possible need to reduce large asset positions at different levels of market liquidity, and the related potential costs and timing constraints. A takaful company will make use of models to manage uncertain cash flows. It will choose between deterministic and stochastic analysis, as the level of sophistication of its risk management increases. The following guidelines will be adhered to: A takaful company will identify appropriate stress scenarios against which it will carry out testing and analysis. The scenarios will be subject to periodic review to take into consideration any changes in potential stresses a takaful company may face due to changes in the internal or external environment that impact a takaful company. Scenarios will be based on varying degrees of stress – both a takaful company specific and market-wide. RM will document the stress and scenario assessments and report the results to Senior Management with a frequency deemed suitable by the Audit Committee. Deterministic models project business results into the future based on a small number of sets of cash flows. The results obtained are valid for these specific scenarios. To estimate future cash flows under various scenarios, stochastic models based on simulations will be used. Using these techniques will assist a takaful company in arriving at statistical distributions of simulation results, and will help a takaful company to evaluate different strategies. 8. Valuation Valuations of a takaful company’s positions, which are a potential source of Balance Sheet and Market risk, are separated into valuation of assets and valuation of liabilities. Assets