2.1 Overall Governance

A Takaful Operator must ensure the adoption and effective implementation of sound risk management practices, robust Shari’ah governance and high standards of business conduct. The board of directors and senior management of a Takaful Operator are responsible for ensuring such effective governance framework as it is critical for achieving the objectives of the TRR rules.

2.2 Takaful Funds and their Governance

2.2.1 Takaful Funds – establishment & attribution of business

(1) A Takaful Operator must establish and maintain one or more Takaful Funds for its Takaful Business.

(2) A Takaful Operator must attribute all Takaful Business that it conducts to one or more of the Takaful Funds it operates.

2.2.2 Takaful Funds – Allocation of assets

(1) A Takaful Operator must ensure the assets allocated to a particular Takaful Fund are only allocated, apart from the exceptions provided for in the rest of this rule below, for the purposes of the Takaful Fund to which it is attributed and must not be allocated or made available for any other purpose of the Takaful Operator.

(2) Rule 2.1.2 (1) above does not preclude the reimbursement of expenditures borne by the shareholders of the Takaful Operator (in the same or the preceding financial year) in discharging liabilities wholly or partly attributable to a Takaful Fund.

(3) Rule 2.1.2 (1) above does not apply to the payment of management fees by a Takaful Fund to the Takaful Operator or an investment manager to whom management of the Takaful Fund has been delegated, even where the manager is the shareholder of the Takaful Operator, provided that the Shari’a supervisory board of the Takaful Operator has approved those fees.

(4) Rule 2.1.2 (1) above does not prevent a Takaful Operator from exchanging, at fair market value, Takaful business assets of any Takaful Fund for other assets of the Takaful Operator including assets held by another Takaful Fund or assets held by the shareholder of the Takaful Operator.

2.2.3 Takaful Funds – Fair transactions

A Takaful Operator must have adequate arrangements for ensuring that transactions involving assets of the Takaful Operator (other than transactions outside its control) do not operate unfairly between a Takaful Fund established and maintained under rule 2.1.1 and the shareholder assets of the Takaful

Operator or, in the case where the Takaful Operator has more than one Takaful Fund, between those Takaful Funds.

2.2.4 Takaful Funds – Prohibition on making or attributing loans

A Takaful Operator must not make or attribute any loans from a Takaful Fund it operates to another Takaful Fund or to any other party, including but not limited to:

(a) the Takaful Operator;

(b) a person in a controlled function;

(c) a participant (policyholder) in the Takaful Fund; and

(d) a controller or person with close links to the Takaful Operator.

Guidance: systems and controls requirements in GEN

As an Authorised Person, A Takaful Operatoris required to comply with the Systems and Controls requirements in GEN 5. The requirements of this Chapter are in addition to the requirements of GEN 5.

Guidance: Relevance of the IAIS Insurance Core Principles

In assessing A Takaful Operator’s compliance with the systems and controls requirements in GEN 5 and in this Chapter,the AFSA will have regard to the detailed guidance in ICP 8 (Risk Management and Internal Controls). In particular:

·In assessing A Takaful Operator’s compliance with GEN 5.1 (Systems and Controls: general requirements), GEN 5.3 (Corporate Governance) and GEN 5.6 (Conflicts of Interest), the AFSA will have regard to the guidance in ICP 8.1 and 8.2 (Systems for risk management and internal controls) and ICP

1. In assessing A Takaful Operator’s compliance with GEN 5.2 (Outsourcing), the AFSA will have regard to ICP 8.8 (Outsourcing of material activities or functions).
2. In assessing A Takaful Operator’s compliance with GEN 5.4 (Compliance), the AFSA will have regard to the guidance in ICP 8.5 (Compliance function).
3. In assessing A Takaful Operator’s compliance with GEN 5.5 (Internal audit), the AFSA will have regard to the guidance in ICP 8.7 (Internal audit function).
4. In assessing A Takaful Operator’s compliance with TRR 2.1.1, the AFSA will have regard to the guidance in ICP 8.4 (Risk management function).
5. In assessing A Takaful Operator’s compliance with TRR 2.1.1, the AFSA will have regard to the guidance in ICP 8.6 (Actuarial function).

2.3 Systems for risk management and internal controls

2.3.1 Risk management function

A Takaful Operator must establish and maintain an effective risk management function capable of assisting the Takaful Operator to identify, assess, monitor, mitigate and report on its key risks in a timely way; and to promote and sustain a sound risk culture.

Guidance: additional requirements in GEN

A Takaful Operator is also subject to obligations in respect of operational risk, legal risk and fraud risk pursuant to GEN 5.8 (Management of risks).

2.3.2 Actuarial function

A Takaful Operator must establish and maintain an effective actuarial function capable of evaluating and providing advice regarding, at a minimum, technical provisions, premium and pricing activities, capital adequacy, reinsurance and compliance with related statutory and regulatory requirements.

2.4 Controlled Functions

1.1.1 Designation of roles as Controlled Functions

The following functions are prescribed as Controlled Functions within the meaning of section 20 of the FSFR:

(a) Risk Officer;

(b) Internal Auditor; and

(c) Approved Actuary.

Guidance: relationship with GEN

Rules in this section supplement, and should be read in conjunction with, the Rules in GEN 2.2 (Controlled and Designated Functions). In particular a Takaful Operatorshould note the following requirements of general application to Controlled Functions and the Approved Individuals performing them:

1. ·GEN 2.2.6. Application for Approved Individual status
2. ·GEN 2.2.7. AFSA discretion to waive requirements
3. ·GEN   2.2.8.   Modification   or   withdrawal   of an       Approved Individual’s registration
4. ·GEN 2.2.9. Dismissal or resignation of an ApprovedIndividual

2.4.2 Obligation to appoint Approved Individuals to certain roles

(1) A Takaful Operator must make the following appointments and ensure that they are held by one or more Approved Individuals at all times:

(a) Risk Officer; and

(b) Internal Auditor.

(2) A Takaful Operator must also appoint an Approved Actuary and ensure that such role is held at all times by an Approved Individual if:

(a) it conducts Family Takaful Business; or

(b) it conducts General Takaful Business and;

(i) more than 15% of its gross outstanding liabilities are attributable to Takaful Contracts for General Takaful Business in General Insurance 1 (Accident) or 2 (Sickness); or

(ii) more than 20% of its gross outstanding liabilities are attributable to Takaful Contracts for General Takaful Business in General Insurance Categories 10 (Motor vehicle liability), 11 (Aircraft liability), 12 (Liability of ships), 13 (General liability), 14 (Credit) or 15 (Suretyship).

2.4.3 Risk Officer

The Risk Officer is an individual who has responsibility for the Takaful Operator’s risk management function.

2.4.4 Internal Auditor

The Internal Auditor is an individual who has responsibility:

(a) for the Takaful Operator’s internal audit policies, procedures and controls; and

(b) for taking appropriate steps to ensure the implementation of and compliance with those policies, procedures and controls.

2.4.5 Approved Actuary

(1) The Approved Actuary is an individual who has responsibility:

(a) for the Takaful Operator’s actuarial policies, procedures and controls; and

(b) for taking appropriate steps to ensure the implementation of and compliance with those policies, procedures and controls.

(2) The Approved Actuary must not be an individual who:

(a) exercises the Senior Executive Function for the Takaful Operator or a related body corporate (except a related body corporate that is a subsidiary of the Takaful Operator); or

(b) is an Employee or Director of an auditor for the Takaful Operator.