6.1.1 Security, liquidity, location and diversification

(1) A Takaful Operator must invest only in assets or investment opportunities which are approved as Shari’ah-compliant, by its Shari’ah Supervisory Board.

(2) A Takaful Operator when, investing in assets, must consider whether, for the portfolio as a whole:

(a) its assets are sufficiently secure having regard to their capacity to protect their value and preserve their economic substance;

(b) its assets are sufficiently liquid to ensure that the Takaful Operator is able to make payments to policyholders and creditors as they fall due

(c) its assets are held in the appropriate location for their availability; and

(d) its assets are sufficiently diversified subject to the nature, scale and complexity of the business.

6.1.2. Assets appropriate to liabilities

(1) A Takaful Operator must invest in a manner that is appropriate to the nature of its liabilities.

(2) In particular, a Takaful Operator must:

(a) consider the extent to which the cash flows from its investments match the liability cash flows in both timing and amount and how these changes in varying conditions;

(b) consider the investment guarantees and embedded options that are contained in its policies;

(c) consider the currency or currencies of its liabilities and the extent to which they are matched by the currencies of the assets;

(d) manage conflicts of interest (e.g. between the Takaful Operator’s corporate objectives and disclosed Takaful policy objectives) to ensure assets are invested appropriately;

(e) for with-profits liabilities, hold an appropriate mix of assets to meet policyholders’ reasonable expectations; and

(f) if it is part of an insurance group, hold investments tailored to the characteristics of its liabilities and its needs and not be subject to undue influence from the wider objectives of the group.

6.1.3. Ability to assess risks

(1) A Takaful Operator must only invest in assets whose risks it can properly assess and manage.

(2) In particular, a Takaful Operator must:

(a) ensure its investments, including those in collective investment funds, are sufficiently transparent and limit its investments to those where the associated risks of the asset can be properly managed by it

(b) ensure that it understands all of the risks involved in an investment before any investments are undertaken;

(c) if it is able to look through the structure of an investment to the underlying assets,consider the risk characteristics of the underlying assets and how this affects the risk characteristics of the investments itself

(d) if it is not able to look through the structure of an investment to the underlying assets,develop appropriate techniques to assess the risks associated with the investment.

6.2.1. Assets not admitted to trading on a regulated financial market

A Takaful Operator must ensure that assets and securities that are not admitted to trading on a regulated financial market are kept to prudent levels.

6.2.2. Derivatives

(1) A Takaful Operator must not use a Derivative instrument for speculation or proprietary trading.

(2) A Takaful Operator may only use a Shari’ah-compliant Derivative instrument:

• (a) to apply an index tracking strategy to part or all of a portfolio;
• (b) to apply capital protected strategies to part or all of a portfolio;
• (c) to apply efficient portfolio management techniques to a portfolio; or
• (d) to reduce investment risk currently employed on a portfolio.

6.2.3. Forward foreign exchange transactions

A Takaful Operator must not invest in forward foreign exchange transactions save to the extent that they hedge currency exposures to currencies other than the reporting currency in its prudential returns.

6.3.1. Investment policy

A Takaful Operator must establish and maintain an investment policy which specifies

• (a) the nature, role and extent of its investment activities; and
• (b) how it complies with TRR 6.1 (Admissible assets).

6.3.2. Procedures for complex and non-transparent investments

A Takaful Operator must establish procedures for managing the risk associated with more complex and less transparent classes of asset and investment in markets or instruments that are subject to less governance or regulation.