Insurance compliant with Islamic beliefs is growing at such a rate that a new rating methodology has been designed specifically for it.

The new methodology, called Takaful Insurance and which outlines the application of rating agency AM Best Co.'s core financial strength ratings, will be issued to Shari'a compliant insurance companies.

Takaful insurance is on the rise, particularly in the Middle East and Malaysia, and while takaful insurers share many similarities with conventional mutual operating structures, Best believes that there are distinctive characteristics of those insurers that must be considered in the rating evaluation.

The insurance is essentially a co-operative risk-sharing programme established for the well-being of the community, with the purpose of this system not to generate profit, but to uphold the Islamic principle of Al-Takaful - "bear ye one another's burden". As a result, takaful insurance is based on the concept of mutual cooperation, solidarity and brotherhood.

Takaful participants contribute to help protect one another against the impact of unpredicted risk and catastrophe, whereas in the conventional insurance model, policyholders pay premiums to protect themselves, or their interests, from some form of risk.

The establishment of two separate funds: A takaful (or policyholders') fund and an operator's (or shareholders') fund. The takaful fund operates under pure co-operative principles, in a very similar way to conventional mutual insurance entities. Underwriting deficits and surpluses are accrued over time within this fund, to which the operator has no direct recourse.

As a result, the takaful fund effectively is ring-fenced and protected from default of the operator's fund. Management expenses and seed capital are borne by the operator's fund, where the main income takes the form of either a predefined management fee (to cover costs) or a share of investment returns and underwriting results (or a combination of both).