Risk management can be defined as a
systematic approach to managing risks that threaten the assets and income of a
business or entrepreneurship. There are five types of risks in business have been
identified that are relevant to takaful
as follows:

Underwriting risk

Operational risks

Credit risk

Liquidity risk

Market risk


Underwriting risk and
operational risk are directly related to the operations of the takaful company.
Whereas, credit risk, liquidity risk and market risk are associated with the
company’s investment activities. All types of risk in takaful require specific
risk management strategies and need to be managed individually.


The effectively
manage the risks in takaful include the following steps:



risks management culture in takaful industry


The three
current practical challenges in risk management which is confronting takaful
operators as follows:


Shari’ah Based


Practically, most of the risk management techniques
are not applicable to Islamic financial institutions due to Shariah compliance
requirements. Therefore, Shari’ah-based challenge to risk management was
created for takaful companies. These challenges arise because Shari’ah
prohibits the use of certain instruments such as derivatives involving futures,
options, swaps; and debt sales. But these mentioned instruments are beneficial
in conventional risk management.


Internal Controls

Internal controls are
important to recognize and assess the risks faced by takaful companies. Effective
internal control plays a crucial role in risk management of takaful companies which
can evade takaful companies from systemic crises and enable companies to be
aware of the possible problems and risks they may face in the future. To have
an effective internal control mechanism, the takaful company must ensure that
Shariah controls are in addition to all statutory regulations. It urges Syariah
audit requirements as part of an on-going system of internal control.



3. Corporate Governance

It is crucial for takaful
company to have an effective corporate governance to ensure the independence
and efficiency of board of director and management level who take the
responsibility to develop policies and implement strategies for risk managment.
The lack of effective corporate governance may caused BOD not functioning
independently and thereby poses a challenge to risk management. If the
ineffective corporate governance phenomenon persist, it will increase the
operating risks which may lead to operational failure. This operational failure
is due to the inability of BOD to implement independent and unbiased decisions
for the best interests of all stakeholders. As a shari’ah compliance insurance
company, takaful companies are facing with additional challenge related to the
Shari’ah Supervidory Board’s corporate governance. This additional challenge highlight
more need to incorporate corparate governance culture to resolve issues related
to the takaful industry.