basis and the results reported to the Audit Committee. Scenario analysis will include cash flow projections based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on a takaful company’s funding needs and sources and will take into account: The potential effects of currency, and duration mismatched caused by the scenario conditions; Access to funding; Mismatching between expected asset and liability cash flows; Ability to sell assets quickly; The ability of the balance sheet to withstand sharp, unexpected drop in the inflow of funds (takaful underwriting) or unexpected outflows (claims); and The possible need to reduce large asset positions at different levels of market liquidity, and the related potential costs and timing constraints. A takaful company will make use of models to manage uncertain cash flows. It will choose between deterministic and stochastic analysis, as the level of sophistication of its risk management increases. The following guidelines will be adhered to: A takaful company will identify appropriate stress scenarios against which it will carry out testing and analysis. The scenarios will be subject to periodic review to take into consideration any changes in potential stresses a takaful company may face due to changes in the internal or external environment that impact a takaful company. Scenarios will be based on varying degrees of stress – both a takaful company specific and market-wide. RM will document the stress and scenario assessments and report the results to Senior Management with a frequency deemed suitable by the Audit Committee. Deterministic models project business results into the future based on a small number of sets of cash flows. The results obtained are valid for these specific scenarios. To estimate future cash flows under various scenarios, stochastic models based on simulations will be used. Using these techniques will assist a takaful company in arriving at statistical distributions of simulation results, and will help a takaful company to evaluate different strategies. 8. Valuation Valuations of a takaful company’s positions, which are a potential source of Balance Sheet and Market risk, are separated into valuation of assets and valuation of liabilities. Assets
basis and the results reported to the Audit Committee. Scenario analysis will include cash flow projections based on reasonable estimates of the impact (both on and off balance sheet) of that scenario on a takaful company’s funding needs and sources and will take into account: The potential effects of currency, and duration mismatched caused by the scenario conditions; Access to funding; Mismatching between expected asset and liability cash flows; Ability to sell assets quickly; The ability of the balance sheet to withstand sharp, unexpected drop in the inflow of funds (takaful underwriting) or unexpected outflows (claims); and The possible need to reduce large asset positions at different levels of market liquidity, and the related potential costs and timing constraints. A takaful company will make use of models to manage uncertain cash flows. It will choose between deterministic and stochastic analysis, as the level of sophistication of its risk management increases. The following guidelines will be adhered to: A takaful company will identify appropriate stress scenarios against which it will carry out testing and analysis. The scenarios will be subject to periodic review to take into consideration any changes in potential stresses a takaful company may face due to changes in the internal or external environment that impact a takaful company. Scenarios will be based on varying degrees of stress – both a takaful company specific and market-wide. RM will document the stress and scenario assessments and report the results to Senior Management with a frequency deemed suitable by the Audit Committee. Deterministic models project business results into the future based on a small number of sets of cash flows. The results obtained are valid for these specific scenarios. To estimate future cash flows under various scenarios, stochastic models based on simulations will be used. Using these techniques will assist a takaful company in arriving at statistical distributions of simulation results, and will help a takaful company to evaluate different strategies. 8. Valuation Valuations of a takaful company’s positions, which are a potential source of Balance Sheet and Market risk, are separated into valuation of assets and valuation of liabilities. Assets
21)%2090%20pgs%20Principles%20of%20Risk%20Management%20for%20Takaful%20Policies%20&%20Procedures.docx