1.1 Calculation of the PCR

The PCR for an AIFC-Incorporated Takaful Operator is the higher of:

• (a) 150% of the AIFC-Incorporated Takaful Operator’s MCR; and
• (b) the AIFC-Incorporated Takaful Operator’s Risk-Based Capital Requirement.

2.1. Risk-Based Capital Requirement

(1) For an AIFC-Incorporated Takaful Operator that has been approved to use its own internal model to calculate its Risk-Based Capital Requirement under TRR 5.3.1, the amount calculated using that model is the Risk-Based Capital Requirement.

(2) The Risk-Based Capital Requirement for an AIFC-Incorporated Takaful Operator that, under TRR 5.3.1 (Approval by AFSA), has been approved to use its own internal model to replace 1 or more components of its Investment, Takaful and Operational Risk Requirements is the amount calculated using those components as replaced and the other components of the AIFC-Incorporated Takaful Operator’s Investment, Takaful and Operational Risk Requirements.

(3) The Risk-Based Capital Requirement (RBC) for any other AIFC-Incorporated Takaful Operator is the aggregate of the Risk-Based Capital Requirements for each of the Takaful Funds operated by it and the Risk-Based Capital Requirements for its own operational and financial risk exposures. RBC for the Takaful Operator = ∑i ( RBC for Takaful Fundi ) + RBC for the Takaful Operator’s own risk exposures

(4) RBC for the Takaful Fund or for the Takaful Operator as the case may be, is calculated as the sum of the following component requirements:

• (a) Investment Risk Requirement;
• (b) Takaful Risk Requirement; and
• (c) Operational Risk Requirement.

Guidance

Among the three components of RBC detailed in 2.1 (4) above, only the Investment Risk Requirement is applicable for the Takaful Operator. Therefore, the Takaful Risk and Operational Risk Requirements need not be calculated for the Takaful Operator. For each of the Takaful Funds operated by the Takaful Operator, all the three requirements must be calculated using the methodologies detailed below.

2.2. Investment Risk Requirement

The Investment Risk Requirement referred in 2.1 (a) above is defined as the sum of:

• (a) Asset Risk Component;
• (b) Off-Balance Sheet Asset Risk Component; and
• (c) Off-Balance Sheet Liability Risk Component.

2.3. Takaful Risk Requirement

The Takaful Risk Requirement referred in 2.1 (b) above is defined as the sum of:

• (a) Premium Risk Component;
• (b) Outstanding Claims Risk Component;
• (c) Family Takaful Risk Component; and
• (d) Takaful Concentration Risk Component.

2.4. Operational Risk Requirement

(1) The Operational Risk Requirement referred in 2.1 (c) above is defined as 2% of whichever is the higher of:

(a) the gross contributions of the Takaful Fund in the 12 months ending on the Solvency Reference Date; and

(b) the technical provisions for the Takaful Fund (without deduction for Retakaful / reinsurance) as at the Solvency Reference Date.

(2) However, if the amount calculated under sub-rule (1) is more than a ceiling, calculated as:

then the Operational Risk Requirement is the amount of the ceiling.

3.1. Meaning of Counterparty Grade

(1) In this Schedule:

(a) Counterparty Grade (or Grade) has the meaning given by sub-rule (2); and

(b) Invested Asset means an asset, right or interest held by a Takaful Operator or by a Takaful Fund for the primary purpose of generating revenue or for directly providing funds to meet potential cash outflows.

(2) For this Schedule, the Grade of an asset is its Grade according to the rating of its counterparty, in accordance with table A.

Table A Grade of assets according to counterparty ratings

Unrated assets, exposures and counterparties must be classified as Grade 4.

3.2. Using different credit rating agencies

(1) An AIFC-Incorporated Takaful Operator must rely on the ratings issued by the same credit rating agency for determining Counterparty Grades unless the AIFC-Incorporated Takaful Operator has good reason to use a different credit rating agency or agencies.

(2) If a counterparty or debt obligation has been rated by more than 1 rating agency and there are 2 or more ratings that lead to different capital charges, the AIFC-Incorporated Takaful Operator must use the credit rating that results in the highest capital charge.

(3) An AIFC-Incorporated Takaful Operator must not use the rating of an agency that is not in table A unless the AIFC-Incorporated Takaful Operator has the written permission of the AFSA.

4.1. Asset Risk Component

(1) The Asset Risk Component for a Takaful Operator or for any Takaful Fund is the sum of the amounts obtained by multiplying the value of each asset held by the relevant entity categorised according to the Counterparty Grade of the asset, by the percentage applicable to that asset, as detailed below:

1. (a) for assets that are not Retakaful / reinsurance assets—table B1;
2. (b) for assets that are Retakaful / reinsurance assets where the Retakaful Operator / reinsurer is subject to prudential supervision by a sub-rule (2)regulator—table B2; or
3. (c) for assets that are reinsurance assets where the Retakaful Operator / reinsurer is not subject to prudential supervision by a sub rule (2) regulator— table B3.

(2) A regulator is a sub-rule (2) regulator if it is located:

1. (a) in the AIFC or the Republic of Kazakhstan;
2. (b) in 1 of the member states of the European Union;
3. (c) in Australia, Canada, Hong Kong, Iceland, Japan, Norway, Singapore, Switzerland, the United States of America; or
4. (d) in any other jurisdiction that is a signatory to the Multilateral Memorandum of Understanding on Cooperation and Information Exchange initiated by the International Association of Insurance Supervisors.

Note 1 For the list of the member states of the European Union, see http://europa.eu/about-eu/countries/index_en.htm.

Note 2 For the list of signatories to the Multilateral Memorandum of Understanding on Cooperation and Information Exchange, see http://www.iaisweb.org/MMoU-signatories605

Table B1 Percentage applicable to assets that are not Retakaful / reinsurance assets

Table B2 Percentage applicable to reinsurance assets— reinsurer / Retakaful Operator supervised by sub-rule (2) regulator

Table B3 Percentage applicable to reinsurance assets—reinsurer / Retakaful Operator not by supervised by sub-rule (2) regulato

4.2. Effect of guarantee or collateral

(1) Assets that have been explicitly, unconditionally and irrevocably guaranteed for their remaining term to maturity by a guarantor with a counterparty rating in Grades 1, 2 or 3 who is not a related party to the AIFC-Incorporated Takaful Operator may be assigned the asset risk charge that would apply to a debt instrument issued from the guarantor.

(2) Where an AIFC-Incorporated Takaful Operator holds collateral against an asset, and this collateral takes the form of a charge, mortgage or other security interest in, or over, cash, or any debt security whose issuer has a counterparty rating of Grades 1, 2 or 3, the AIFCIncorporated Takaful Operator may apply the asset risk charge relevant to the collateral (instead of applying the asset risk charge that would otherwise apply to the asset).

(3) The provisions in sub-Rules (1) and (2) above apply only to so much of the asset that is covered by the guarantee or the collateral.

4.3. Assets subject to mortgage or charge

(1) Subject to (2), assets of the AIFC-Incorporated Takaful Operator that are under a fixed or floating charge, mortgage or other security are subject to an asset risk charge of 100% to the extent of the indebtedness secured on those assets. This would replace the asset risk charge that would otherwise apply to the secured assets.

(2) Where the security supports an AIFC-Incorporated Takaful Operator’s Takaful Liabilities, the asset risk charge of 100% is applicable only to the amount by which the market value of the charged assets exceeds the AIFC-Incorporated Takaful Operator’s supported liabilities.

4.4. Excluded assets

An AIFC-Incorporated Takaful Operator need not include an amount in the asset risk charge for any asset excluded from Eligible Capital in accordance with the table B1 in rule 4.1.

5.1. When Off-Balance Sheet Asset Risk Component must be calculated

The Off-Balance Sheet Asset Risk Component must be calculated, if the AIFC-Incorporated Takaful Operator or any of its Takaful Funds are, as of the Solvency Reference Date, a party to a Shari’ahcompliant Derivative contract, including a forward, future, swap, option or other similar contract, but not:

• (a) a put option serving as a guarantee;
• (b) a foreign exchange contract which has an original maturity of 14 calendar days or less; or
• (c) an instrument traded on a futures or options exchange which is subject to daily mark-tomarket and margin payments.

5.2. How to calculate Off-Balance Sheet Asset Risk Component

The Off-Balance Sheet Asset Risk Component must be calculated as the sum of the amounts obtained by applying the calculations set out in paragraph 5.3 in respect of each Shari’ah-compliant Derivative contract entered into by the AIFC-Incorporated Takaful Operator or any of the Takaful Funds managed by it that meets the description in paragraph 5.1.

5.3. Amount of Off-Balance Sheet Asset Risk Component

To calculate the amount of the Off-Balance Sheet Asset Risk Component, the asset equivalent value of each Shari’ah-compliant Derivative (as determined in paragraph 5.4) is multiplied by the Asset Risk Component as though the asset equivalent value were a debt obligation due from the Derivative counterparty.

5.4. Asset equivalent value

(1) The asset equivalent value is the current mark-to-market exposure of the Shari’ahcompliant Derivative (where positive) and a potential exposure add-on.

(2) The potential exposure add-on is determined by multiplying the notional principal amount of the Shari’ah-compliant Derivative in accordance with the following table, according to the nature and residual maturity of the Shari’ah-compliant Derivative.

_

6.1 How to calculate Off-Balance Sheet Liability Risk Component

(1) The Off-Balance Sheet Liability Risk Component must be calculated by applying, to the face value of any credit substitute it has issued (including letters of credit, guarantees and put options serving as guarantees) the asset risk component that would be applied to the obligation or asset over which the credit substitute has been written.

(2) Where the credit substitute is supported by collateral or a guarantee, the provisions of paragraph 4.5 (Effect of guarantee or collateral) may be applied by the AIFC-Incorporated Takaful Operator or any of the Takaful Funds managed by it.

7.1. Application

(1) Paragraphs 7.2 to 7.4 apply to General Takaful Business.

(2) The calculation of Premium Risk Component of the Takaful risk requirement is applicable only to every Takaful Funds and it does not apply to the Takaful Operator’s own balance sheet.

7.2. Premium Risk Component

(1) The Premium Risk Component for each of the Takaful Funds, is calculated as the sum of the amounts obtained by multiplying the Takaful Fund’s net contribution liability that falls within each Category of General Takaful Business by the percentage applicable to that liability under table C. Table C Percentage factor— Premium Risk Component

(2) In this rule, net contribution liability means contribution liability less any expected retakaful and non-retakaful recoveries in respect of that contribution liability as at the Solvency Reference Date

_

7.3 AIFC-Incorporated Takaful Operator may apply for different percentages

(1) The AFSA may, on application of an AIFC-Incorporated Takaful Operator conducting General Takaful Business in Category 1, give written consent to the use of percentages other than those in table C if the AFSA is satisfied that:

• (a) adequate mortality and morbidity information exists in respect of that business; and
• (b) the information provides a reasonable basis for reliance on actuarial principles.

(2) The percentages that may be used must be those stated in the notice but may not be lower than:

• (a) 12% in the case of direct Takaful and proportional Retakaful; and
• (b) 16% in the case of non-proportional Retakaful

7.4. Certain contracts not included

(1) If an AIFC-Incorporated Takaful Operator underwrites Takaful Contracts in General Takaful Categories 1 and 2 that are Family Takaful Contracts, the AIFC-Incorporated Takaful Operator need not calculate a Premium Risk component in respect of those contracts.

(2) For Takaful Contracts in General Takaful Categories 1 and 2 that are Family Takaful contracts, the AIFC-Incorporated Takaful Operator must calculate a Family Takaful Risk Component.

8.1. Application

(1) Paragraphs 8.2 to 8.4 apply to General Takaful Business.

(2) The calculation of Outstanding Claims Risk Component of the Takaful risk requirement is applicable only to every Takaful Funds and it does not apply to the Takaful Operator’s own balance sheet.

8.2. Outstanding Claims Risk Component

(1) The Outstanding Claims Risk Component is calculated for each of the Takaful Funds, as the sum of the amounts obtained by multiplying the Takaful Fund’s net liability for outstanding claims that falls within each Category of Takaful Business by the percentage applicable to that liability under table D. Table D Percentage factor— Outstanding Claims Risk Component

(2) In this rule: net liability for outstanding claims means the liability in respect of future claims referred in TRR 8.3.2 (Treatment of value of future claims payments), less any expected retakaful and non-retakaful recoveries in respect of that liability as at the Solvency Reference Date.

_

8.3. AIFC-Incorporated Takaful Operator may apply for different percentages

(1) The AFSA may, by written notice, allow the AIFC-Incorporated Takaful Operator to use percentages other than those in table D if the AFSA is satisfied that:

• (a) adequate mortality and morbidity information exists in respect of that business; and
• (b) the information provides a reasonable basis for reliance on actuarial principles.

(2) The percentages that may be used must be those stated in the notice but may not be lower than 8%.

8.4. Certain contracts not included

(1) Family Takaful Contracts written to cover risks in General Takaful Categories 1 and 2 need not be included in the calculation of Outstanding Claims Risk Component for the Takaful Funds to which they are attributed.

(2) Family Takaful Contracts written to cover risks in General Takaful Cateogries 1 and 2, must be included in the calculation of the Family Takaful Risk Component.

9.1. Application

(1) Paragraphs 9.2 and 9.3 apply to Family Takaful Business.

(2) The calculation of Family Takaful Risk Component of the Takaful risk requirement is applicable only to Family Takaful Funds and it does not apply to the Takaful Operator’s own balance sheet.

9.2. Family Takaful Risk Component

The Family Takaful Risk Component is calculated as the sum of the following amounts, so far as they relate to the Family Takaful business of the AIFC-Incorporated Takaful Operator:

(a) 1.25% of the amount of provisions in respect of Family Takaful Business that is [investmentlinked Takaful, where the contracts are subject to a capital guarantee;]

(b) 0.5% of the amount of provisions in respect of Family Takaful Business that is investmentlinked Takaful, where the contracts are not subject to a capital guarantee;

(c) 3% of the amount of provisions in respect of Family Takaful Business other than business described in paragraphs (a) and (b); (d) the amount obtained by multiplying the amount of capital at risk under paragraph 9.3 by 0.1%;

(e) if the relevant Takaful Fund includes policies that are contingent on mortality—the amount of anticipated claims cost arising from a 0.5 per thousand increase in the rate of lives insured dying over the following year.

9.3. Capital at risk

(1) Capital at risk of a Family Takaful Fund means the total amount of sums assured on Family Takaful Contracts issued by that Family Takaful Fund, less:

• (a) the total amount of mathematical reserves for those contracts; and
• (b) any expected Retakaful and non-Retakaful recoveries as at the Solvency Reference Date.

(2) For an annuity, the sum assured must be taken to be the present value of the annuity payments.

(3) The contribution of each contract to capital at risk must be determined separately. If the capital at risk calculated for a contract is less than zero, the capital at risk for that contract is taken to be zero

10.1. Application

(1) Paragraphs 10.2 and 10.3 apply to General Takaful Business.

(2) The calculation of Takaful Concentration Risk Component of the Takaful risk requirement is applicable only to Takaful Funds and it does not apply to the Takaful Operator’s own balance sheet.

10.2. Takaful Concentration Risk Component

(1) The Takaful Concentration Risk Component for an AIFC-Incorporated Takaful Operator is: MER + CoR (if any) – RP (if any)

where:

MER has the meaning given in paragraph 10.3 (Maximum event retention). CoR or cost of reinstatement, in relation to an extreme event, means:

• (a) the rate that a Takaful Fund has contractually agreed to pay the Retakaful Operator concerned to reinstate the retakaful coverrelating to the extreme event; or
• (b) if the Takaful Fund has not agreed on the rate for the Retakaful / reinsurance cover— the Takaful Fund’s estimate of the cost of reinstating that cover based on current Retakaful / reinsurance market conditions (but no less than the original rate of reinsurance cover).

RP or reinstatement premiums, for a Takaful Fund that also writes retakaful, means the amount of inward reinstatement premiums from cedants in respect of catastrophe retakaful if that Takaful Fund or the AIFC-Incorporated Takaful Operator managing it has a binding netting arrangement with the cedant.

(2) An AIFC-Incorporated Takaful Operator must seek advice from its Approved Actuary about estimating the MER for every Takaful Fund it operates, if the AIFC-Incorporated Takaful Operator:

• (a) issues policies that do not have a maximum amount insured;
• (b) insures risks in multiple lines of business; or
• (c) has a complex portfolio of Takaful risks.

10.3. Maximum event retention

(1) MER or maximum event retention, in relation to an extreme event, is the maximum amount of loss to which the Takaful Fund will be exposed due to an accumulation of exposures, after netting out any potential reinsurance / Retakaful recoveries.

(2) In calculating its MER, a Takaful Fund must:

• (a) set the amount based on the accumulation of exposures of the Takaful Fund to a single extreme event;
• (b) assume a return period of 1 in 250 years (or greater), where the return period is the expected average period within which the extreme event will re-occur; and
• (c) take into account:
• (i) its risk profile and risk tolerance;
• (ii) its claims history (using available internal and external data);
• (iii) the capital resources available to it;
• (iv) its current and future solvency needs;
• (v) its Retakaful / reinsurance programme;
• (vi) the classes of Takaful business underwritten by it; and
• (vii) the areas where it conducts business.

(3) If the Takaful Fund is exposed to more than 1 extreme event, its MER is the largest of the MERs calculated for those events.

(4) Despite anything in this rule, the AFSA may require the Takaful Fund or the AIFCincorporated Takaful Operator, to make adjustments in calculating its MER.