Understanding Takaful byTarmidzi Bin Ahmad
Understanding Takaful
& the Challenges Ahead
General & Takaful Agents Convention 2007
Berjaya Times Square Hotel & Convention Centre Kuala Lumpur
11th July 2007
by Mohd Tarmidzi bin Ahmad Nordin
tarmidzi@maybantakaful.com.my
1
Contents
Part 1: Understanding takaful:
• One Scholar’s view on conventional insurance
• Modifying insurance to be Shariah compliant
• Definition of takaful
• Takaful as a concept
• Takaful in practice
• Operating Models
Part 2: The challenges ahead:
• Growing the takaful Contribution & Asset
• Financial Sector Master Plan (FSMP)
• ”Malaysia as the Islamic Financial Centre” (MIFC)
• Emergence of bancatakaful
• Meeting different customer needs
• Co-existence with conventional insurers
2
One Scholar’s view on
conventional insurance
According to Dr. Yusof Qaradawi:
• “Our observation that the modern form of
insurance companies and their current practices
are objectionable Islamically does not mean that
Islam is against insurance; not in the least - it
only opposes the means and methods”
The Lawful and The Prohibited in Islam
(English translation) pg.276
3
Modifying insurance to be
Shariah compliant (1)
According to Dr. Yusof Qaradawi:
• “In my view insurance against hazards can be
modified in a manner which would bring it closer to
the Islamic principle by means of a contract of
donation with a condition of compensation”;
• “A further requirement is that the company must
be free from usurious business”.
– The Lawful and The Prohibited in Islam pg.276 (English
translation)
4
Modifying insurance to be
Shariah compliant (2)
According to “Badan Petugas Khas”:
• “Under the Islamic insurance system, part of the
contribution from every participant must be made
with the intention of tabarru’ not for buying and
selling, the existence of tabarru’, makes the
transaction permissible and valid according to the
Shariah.”
Translated from the “Badan Petugas Khas” Report pg. 19
• Badan Petugas Khas’ was the special taskforce
commissioned by the Government in 1982 to study
the feasibility of setting up Islamic insurance in
the Malaysia.
5
Takaful Act 1984
Definition of “takaful”:
• “a scheme based on brotherhood, solidarity and
mutual assistance which provides for mutual
financial aid and assistance to the participants in
case of need whereby the participants mutually
agree to contribute for that purpose.”
Definition of “takaful business” :
• “business of takaful whose aims and operations do
not involve any element which is not approved by
the Shariah”.
6
Takaful as a Concept (1)
as envisaged by some Scholars
• Concept is based on solidarity, shared responsibility
& brotherhood among participants;
• Participants all agree to cooperate and be mutually
responsible to help one another financially should a
member suffer a loss defined in the policy;
• This is achieved through making contribution
(tabarru’) to a common fund from which financial
compensation can be paid to eligible participants;
7
Takaful as a Concept (2)
as envisaged by some Scholars
• Participants mutually bear the risks themselves in
the spirit of tabarru’;
• Participants are both the insurer as well as the
insured at the same time.
• Takaful operator does not bear the risk;
• The problem with such mutual aid concept is that
Participants can be called upon to make additional
contributions, if the common fund is not sufficient
to pay the compensation / benefits guaranteed by
the scheme.
8
Takaful in practice
(modified mutuality concept)
• Participants would not be asked to pay additional
contributions even if the takaful fund is in a deficit.
• Instead, Takaful Operator will provide interest free loan
(Qard Hassan) to make up the deficit.
• Participants are not involved in the day to day operation
or in the management of the takaful funds;
• The management of the takaful fund is delegated the
Takaful Operator (Takaful Nasional or Mayban Takaful).
9
Remuneration for the
Takaful Operator
• Fixed fee;
• Actual cost incurred;
• Percentage of:
– Contribution paid;
– Underwriting surplus;
– Investment income;
• Combination of the above;
• Mode must be pre-agreed and
transparent.
• To facilitate the remuneration,
one or more contracts can be
put in place between the
takaful operator and the
participants. 10
Transparency of contract
Contract between the Contract between
Participants themselves Participants & TO.
Participant
Takaful Operator
Participant
Participant •Wakalah or (agency)
Takaful Fund contract for managing
Participant the fund
•General
Participant
•Other contracts may
Participant •Family also be used such as
Mudharabah, Wadi’ah
Participant or Waqaf for example
Participant
•or other contracts not
forbidden by the
Tabarru’ Contract
Shariah 11
Two Operating Models Allowed
Takaful Operators in Malaysia are free to choose
different operating structures.
9 Takaful Operators
2 Operating Models
MUDHARABAH WAKALAH
Profit Sharing Contract Fee Based Contract
Additional Difference
•Payment of operating fees
•Surplus sharing structures 12
Definition of Mudharabah
• Mudharabah is a profit sharing
contract whereby one party
provides the capital (Ras ‘ul maal)
and the other party provides the
expertise (Mudharib).
• Any profit from the venture is
shared between the parties on a
pre-agreed ratio e.g. 50:50, 60:40
etc. Losses, however are borne
solely by the capital provider.
• In the context of takaful,
participants are the capital
provider while the Takaful
Operator provides the expertise
to manage the Takaful Fund.
13
Mudharabah Model (STMB)
General Takaful Operation
Investment Income Participants
Takaful Fund (TF) 40 % of Profit
Less
Payment of Underwriting cost & reserves
Contribution •Retakaful
by Participant •Claims (paid & outstanding + IBNR) Gross Profit
(based on •Reserves (UPR) (if any)
tabarru’ and
Mudharabah Provisions
contract) •doubtful debt
•diminution in investment value Qard Hassan
to cover deficit
60 % of Profit
Shareholder Fund (SF)
+ Share of profits (if any)
+ Investment income of SF
- Actual Management Expenses
14
Mudharabah Model Declaration (STMB)
• I/We hereby agree that on the basis of Al-Mudharabah and other related
principles of the Syarak the Takaful Contribution which I/we hereby
undertake to pay to STMB (Company) be credited into the Takaful Fund of
the Company for the Company to manage the various schemes of takaful
under its General Takaful Business including the investment of the said fund
in the manner deemed fit by the Company, and in the consideration thereof
I/We be entitled to share the net profit of the fund if any, in a proportion
40% to Me/Us and 60% to the Company provided always that I/We not
incurred any claims and/or received any benefits under the Takaful contract
whilst the same is in force, and in relation therefrom I/We also agree that
any part of the said Takaful Contribution including its profit be made as
tabarru’ for the Company to pay Takaful benefits to any Takaful Participant
who shall be entitled to such benefits in accordance with the Takaful
15
contract.
Definition of Wakalah
• Wakalah is a contract
whereby one party
acts on behalf of
another for a fee.
• In the context of
takaful, the takaful
operator manages the
Takaful Fund on behalf
of the participant for
a fixed fee called a
‘wakalah fee’.
16
Transparent & Clear
Contributions • The participant as a
party to the wakalah
contract agrees that the
takaful operator may
take a portion of the
contribution as
remuneration for
Wakalah Fee: services provided:
•Mgmt Exp – Wakalah Fee;
•Comm (OCC)
– Performance Fee (if
any);
Takaful Fund:
•tabarru’ to • The fee scale must be
Family or transparent and agreed
Performance General Takaful to at the time of
Fee: Fund participation.
•From surplus
share if any. 17
Wakalah Model - General
Investment Income Participants
Takaful Fund (TF) 50 % of Surplus
(100 - Y) %
Underwriting cost & reserves
Payment of •retakaful
Contribution •claims
by Participant •reserves Surplus
(based on (if any)
tabarru’ and Provisions
Wakalah •doubtful debt
contract) •diminution in investment value
Qard Hassan
Less : Surplus Equalisation
to cover deficit
Reserve
50 % of Surplus
Wakalah Fee (Y%) Shareholder Fund (SF)
+ Wakalah fee
+ Share of surplus (if any)
+ Investment income of SF
- Commission
- Actual mgmt. expenses
18
Declaration by the Participant
in Proposal Form (TNSB)
• I agree to participate in this general takaful scheme based on the principle of
takaful and to pay the contribution on the basis of tabarru’ (donation) for the
purpose of helping other participants who have suffered tragedy and with this
contribution, I am entitled to the takaful cover as expressed in the terms and
conditions of this takaful contract.
• I further agree that my contribution be credited into the General Takaful Fund
(Fund) and to elect Takaful Nasional Sdn. Bhd. (TNSB) to invest and manage the
Fund according to the principles of the Shariah. I also permit TNSB to make
payment of claims/takaful benefits, provisions and reserves based on the
guidelines and policies laid down by the authorities and TNSB to be paid a
wakalah fee based on the rate of Y% of the contribution.
• If at the end of each financial year, there is a surplus of income over liabilities
in the Fund, I agree that TNSB receive 50% of it as incentive while the balance
50% will be reserved for distribution amongst participants subject to the terms
of this contract and fixed by the authorities. 19
Sharing of Surplus
& Qard Hassan clause
in the Takaful Certificate (TNSB)
• If at the end of each financial year, there is a surplus of
income over liabilities in the Fund as set out in condition 10 of
this Certificate, We will receive 50% of the surplus as
incentive for operating and being responsible for the
management of the Fund. The balance of 50% will be reserved
for distribution amongst participants. But if the Fund is not
sufficient to meet its takaful obligations, We will provide an
interest free loan from Our standby capital as required by the
authorities. This loan will be repaid by the Fund from future
surpluses.
20
Challenge of growing the Contribution
Net Contribution › Average annual rate of
2000 contribution growth of 24.5%
1800 (2001-2006)
› Market penetration rose to
1600
RM million
1400
1200 5.6% from 5.1% (2004)
1000 › Combined contribution
800 increase by 21.4% to RM1.7
billion
600
400
200 › The increase in the market
0 penetration is a
98 99 00 01 02 03 04 05 06
Year manifestation of growing
General Family awareness of the public on
the benefit of the takaful
scheme
Market
Market 2001 2002 2003 2004 2005 2006 2000 2001 2002 2003 2004 2005
Penetration
Share (%) 4.8 5.6 5.4 5.1 5.4 6.1 2.5 3.2 3.8 4.5 5.1 5.6
(%)
21
Note: 2006 figures are based on forecast only
Challenge of growing the Assets
Assets
8000
7000
› Total Takaful assets
6000
RM million
5000 continued to increase at
4000 growth rate of 17.9% in
3000 2006.
2000
› Total Takaful Assets has
grown to RM7.04 billion to
account for 6.1% of total
1000
0 assets of insurance
sector.
96 97 98 99 00 01 02 03 04 05 06 Year
General Family
Market 2001 2002 2003 2004 2005 2006
Share (%) 5.0 5.3 5.6 5.6 5.7 6.1
22
Note: 2006 figures are based on forecast only
Market Structure
Reinsurance Composite General
9 9 27
Takaful
Operators Life
5+4 7
The industry Loss
Brokers Adjusters
35 40
International Offshore Financial Centre (I.O.F.C.)
Reinsurance
Other*
24
General / Life / 1
Captive Brokers
4 Underwriting Managers 14
9
23
* Recoveries Management (L) Ltd.
Information Source: MNRB - The Malaysian Insurance Directory 2004-2005
Challenge: Financial Sector Master Plan (FSMP)
“To create an efficient, progressive and comprehensive Islamic financial system
that contributes significantly to the effectiveness and efficiency of the Malaysian
financial sector while meeting the economic needs of the nation.”
2010
Increase takaful market share to 20%
Strong and highly capitalised operators offering broad range of
products
Comprehensive & conducive Shariah & regulatory framework
Pool of high-calibre management teams with required expertise
Malaysia as regional Islamic financial centre
PHASE I PHASE II PHASE III
Enhance domestic Instill greater
Liberalisation 24
capacity & capability competition
Slide courtesy of Tuan Syed Moheeb
Challenge of making “Malaysia as the
International Islamic Financial Centre”
• Bank Negara Malaysia launched the “Malaysia as the
International Islamic Financial Centre (MIFC) initiative in
August 2006.
• This initiative provides Islamic banks and insurers, with tax
incentives to set up an International Currency Business Unit
(ICBU) to venture into offshore Islamic banking and Takaful
business.
• ICBU allows takaful companies to operate internationally
using international currencies. This gives takaful operators
the advantage of quickly spreading and disseminating
business offerings to the international public and customers,
anywhere in the world, without having to go through the
setting up of a local representative.
25
Challenge: Emergence of bancatakaful
Year 2004 Year 2005
Others
Others
1.8%
Brokers 0.6% Brokers
14.6% 14.2%
Direct
Business
Agents 44.3%
17.3% Agents
19.3%
Direct
Bancatakaful Business
6.5% 61.0%
Bancatakaful
20.4%
Strong growth in 2005 was supported by three main distribution channel:
• Emergence of Bancatakaful;
• Strong performance by Agents & Brokers;
• Direct Business continue to be a dominant distribution channel. 26
Challenge of meeting different
customer needs
Shariah compliance
Competitive pricing Surplus sharing
Well trained personnel Good Deeds
Attractive product features
Prompt delivery
Trusted Brand
Easy Access
Extra Benefits
Different strokes for different folks
27
Value proposition (additional)
1. Shariah Compliance
• Takaful was introduced to meet the demands of Muslims to
conduct their economic activities in line with Shariah. They
would value an alternative solution that:
– is just as attractive, if not better than that offered by
conventional insurance yet at the same time;
– does not contravene the Shariah especially in respect of
investments.
• Such solution will be especially valued by those who have
some doubts about the permissibility of insurance.
28
Value proposition (additional)
2. Sharing of Surplus
• Takaful operators in Malaysia offer to share the net
surplus of income over liabilities in the takaful fund
at the end of each year according to a pre-agreed
ratio such as 50:50, 40:60 etc.
• Customers irrespective of faith can be delighted with
the prospect of receiving some experience refund at
the end of the day.
29
Value proposition (additional)
3. Doing Good Deeds
• People are generally happy (to know) that their contribution would go into a
pool to help others in need.
• Muslims believe that helping others is an act of piety to be rewarded by the
All-Mighty.
• Takaful benefits not just the living but also for the deceased.
• For example the deceased can also derive eternal benefits if the policy
proceeds used as follows:
– Settlement of outstanding debts.
– Payment of outstanding zakat (tithes);
– Performance of the Haaj;
– Purchase of useful property for purpose of waqaf;
– Do other good deeds such as helping orphans, poor etc.
• Products from “cradle to the hereafter”.
30
Differentiation Strategy
• To remain competitive takaful must strive to offer value that
conventional insurance cannot;
• Customers, staff and sales force must be made aware of the
connection between the worldly act of ‘buying / selling’ takaful and
the spiritual benefits by having the right intention (niat).
• Crucial to have well trained employees and sales force who are
motivated not by just salaries or commissions alone but by a sense
of mission.
• The staff and sales force must believe that providing a Shariah
compliant alternative to insurance is more than just a job but a
religious obligation (fard kifayah).
31
Challenge of co-existence
e.g. Maybank Insurance & Takaful Sector
Mayban
Fortis
MNI TN
MGA MLA MTB
Insurance Takaful
32
33
