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.