View source for Takaful by Abdul Rahim

                               Abdul Rahim Abdul Wahab, FSA

                                            Director & Actuary

                                     Actuarial Services Division

                                abdul.rahim@sidathyder.com.pk

                       Sidat Hyder Morshed Associates (Pvt) Ltd

Islamic Finance & Investment Symposium 6 - 7 Dec 2006, Karachi


 What is covered

  • Gap in Islamic Finance

  • Conventional Insurance

  • Takaful Concept

  • Takaful Rules

  • Retakaful

  • Market Potential

  • Islamic Banks and BancaTakaful

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd


 Gap in Islamic Finance

  • Islamic Banks contracts require assets to be insured

    with a Takaful company as per Shariah requirement.

     • Many potential consumers of Islamic Finance stay away due to Insurance

       being on conventional basis.

     • Doctrine of Necessity applied till Takaful was not available.

     • Takaful Rules promulgated in September 2005.

     • One General takaful operator since last one year. More to follow in coming

       months giving consumers a choice within takaful.

     • Takaful exists for almost 30 years – typically with 2 to 3 years lag with

       Islamic banking development. Started with Sudan, later ME and Malaysia.

  • Also number of synergies could be created with Islamic

    banks distributing takaful products (BancaTakaful) or

    setting up takaful companies with equity participation.

     • Standing requirement of Islamic Banks for Islamic House Mortgage

       schemes, Car Ijarah schemes as integrated benefits.

     • Distribution of Takaful Savings and Protection plans in different forms.

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 CONVENTIONAL INSURANCE

  Indemnification against unforeseen financial losses

   (not to profit from loss)

  Commercial Risk Transfer

  Law of Large numbers - Insurance company pools

   risks/reinsures above capacity.

  Recovers expenses for managing the pool

  Investment return under life insurance shared with

   PHs based on Actuarial Valuation or otherwise.

  Profit for the shareholders based on Underwriting

   results and Investment income

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 OBJECTIONS TO CONVENTIONAL INS

      Objections to Conventional Ins

  Elements of:

      Uncertainty – Gharrar (non-existence of

          goods, un-known quantity, timing) in a

          commercial risk transfer contract.

      Interest – Riba

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 BASIC CONCEPT OF TAKAFUL

  Takaful means “Joint Guarantee” for mutual

    assistance within a group. Each member of the group

    pools to support the needy within the group.

  Mutual protection contains elements of cooperation,

    shared responsibility joint help – all encompassing in

    takaful concept

  Principle objective is the same as Insurance - to

    indemnify against unforeseen financial losses.

  Mechanism followed is however different.

  An economic institution whereby the losses of the

    unfortunate few are shared by the contribution of the

    fortunate many who are exposed to the same risk on

    “Co-operative Risk Sharing” basis.

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 HOW IS IT DIFFERENT FROM INSURANCE

   Concept of “Risk Manager” NOT “Risk Taker”

   Underwriting Surplus belong to Participants

   Underwriting Deficit may be shared by participants

   Risk Management

      Underwriting as usual

      Ensure Risk premium adequate – not commercial

         driven

      Retakaful Pool instead of Reinsurance

      Interest free loan by SH (Qard Hasnah)

  Investments compatible with Shariah based on Profit

    Sharing principles

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 CONVENTIONAL vs TAKAFUL

         Issue                 Conventional                       Takaful

 Organization           Profit for shareholders/  Mutual for participants

 Principle              Risk transfer             Risk remains with participants

                                                  No underwriting profits for SHs

 Form of                Commercial                Cooperative, Shariah contracts of

 Relationship           Exchange/Contract of      Wakala or Mudarabah with

                        compensation              contribution for mutual assistance

 Capital                Shareholders              Operator provides set-up capital.

 Laws                   Regulations               Regulations plus Sharia approval

 Ownership              Shareholders              Participants of Takaful Fund

 Investments            Equity/debt-no            Sharia compliant investments only /

                        restrictions              No interest

 Surplus                Shareholders account      Participants account

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    Takaful Rules 2005

 Capital requirement – 80 m for General and 150 m for

   Family. Likely to be increased to Rs.300m for General

   and Rs.500 m for Family. Board of Investment

   requirement is $4 million (Rs. 240 million) at present.

 Composite companies not allowed

 Wakalah Model for Risk Protection

 100% Surplus distribution for participants (after

   reserves etc)

 Underwriting deficit – Qard Hasnah by SH or recover

 Mudaraba or Wakala Model for Investment Sharing.

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    Takaful Rules 2005

    Takaful company can also share risks on

      coinsurance basis from outside Pakistan

    Can use conventional reinsurance, only if

      retakaful is not available and if Shariah Board

      permits. Wakala based would be preferred.

    Windows not allowed for atleast 5 years

    Transformation of existing conventional general

      companies is allowed in one year

    Three member Shariah Board and Annual

      Shariah Audit

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 RE TAKAFUL

  Retakaful solutions evolving although not

    enough capacity available.

  Best Re (Tunisia), Asean Re (Labuan) and

    Tokyo Marine are providing retakaful based on

    Mudaraba model. Shariah scholars and SECP

    have objections to Mudaraba model. Need to

    look for Wakala based Retakaful solutions as a

    preferred route.

  Lloyds syndicate is setting up a Retakaful

    solution for General Takaful.

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 RE TAKAFUL

 Takaful Re launched in Dubai by ARIG with $125 m capital.

   Recently rated BBB by S&P becoming the 1st Retakaful operator

   with a rating and Wakala based model.

 Swiss Re recently launched Wakala based Family Retakaful Fund.

 Hannover Re is working on Retakaful solutions.

 Munich Re has also incorporated its Retakaful subsidiary in

   Malaysia.

 “Doctrine of Necessity” may no longer be justified hopefully

   leading to Takaful being backed by RETAKAFUL rather than

   Reinsurance.

 Government/ SECP needs to encourage setting up of Retakaful

   pools.

     Possibly within NICL / PRCL for General Retakaful

     State Life for Family Retakaful

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Market Potential

  Pakistan’s insurance

  density and insurance

  penetration rates low.

  Reasons – Lack of

  awareness and religious

  concerns.

  Takaful can help push

  the penetration rates up.

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 Growth of Life Insurance Premium

     Billions

      20.00

      18.00

                                                         4.65

      16.00

      14.00

                                               3.57

      12.00                        3.11

                                                                     Private

      10.00                 1.93                                     State Ow ned

        8.00     1.35

                                                        13.90

        6.00                                  11.11

                                   9.92

                            8.39

        4.00     6.98

        2.00

        0.00

               2001       2002   2003        2004      2005

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  Growth of General Insurance Premium

25.00

20.00

                                                               2.77

                                                     1.74                 Misc

15.00                                                          6.96

                                           1.26      5.89                 Motor

10.00                          1.23        4.28

                      1.36                                     3.62

           1.20

                                                     3.05

                                                                          Marine

                               3.00

                      2.94

           3.13                            2.40

                               1.71

 5.00

           1.28

                      1.63

                                                               6.92

                                                                          Fire

                                                     5.96

                               4.14        4.66

           3.22       3.59

  -

        2000        2001    2002        2003      2004      2005

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 ROE OF INSURANCE INDUSTRY

  GENERAL INSURANCE             RETURN ON EQUITY (%)

             Average Equity

    Year        Weighted (%)      EFU        AIC       NJI    Shaheen     Askari

    2005           58               56        63        57      39          28

    2004           33               60        27        30      11          23

    2003           32               33        29        41      21          16

    2002           21               17        21        25      18          13

          LIFE INSURANCE             RETURN ON EQUITY (%)

                     Average Equity

           Year        Weighted (%)      EFU       NJI     ALICO      METRO

           2005            26             43        15       15         1

           2004            27             47        21        6         8

           2003            26             40        33       13         2

           2002            14             17        -4       21         4

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 Islamic Banking

                                         Dec 02    Dec 03 Dec 04 Dec 05  Mar 06  June 06

     Number of full fledge Islamic Banks   1         1      2       2      3        4

     Number of Islamic Bank Branches       6         10     23     37      39      48

     No. of conventional banks operating   -         3      7       9      10      11

     Islamic Banking Operation

     Number of stand alone Islamic         -         7      21     33      34      39

     Branches of conventional banks

  Number of Branches expected to grow exponentially

  Two new banks Emirates Global Islamic Bank Limited and First Dawood Islamic

  Bank Limited

  State Bank growth estimates for Islamic Banks

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 Islamic Banking Growth

   Table-5.2: Sources and Uses of Funds                                   Rs. In billion

                                           2003      2004    2005  Mar-06        Jun-06

   SOURCES

   Deposits                              8397.1   30184.8 49931.8    53667      59657.5

   Borrowings                              1899    6559.1  9005.8   8948.2          8539

   Capital & Other funds                 1993.7    5123.1    7811  10268.9      12284.5

   Other                                  624.8    2276.1  4744.8   6416.9       7121.7

                                        12914.6   44143.1 71493.4    79301      87602.7

   USES:

   Financing                             8652.2   27535.5 45786.2  48717.6      51602.8

   Investments                           1242.3      2007  1854.2   6034.8       6333.1

   Cash, bank balance, placements        1978.5   11899.7 19314.3  19718.7      22877.4

   Other assets                          1041.7    2700.8  4538.7   4829.9       6789.3

                                        12914.7     44143 71493.4    79301      87602.6

  Source: SBP Publication June 2006

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 Opportunities – General Takaful

   Islamic Banks have a mandated requirement / moral obligation to insure

    assets from a takaful company if available.

     • Islamic Banks had disbursed Rs.58 billion (approx) – June 2006 in

       various assets

   General Insurance market size 2005– GWP Rs. 20 Billion (approx.), 38

    companies

     • Even if 10% switch to this basis it is more than Rs. 2.0 billion.

   Untapped Market - Individuals do not take insurance - Motor, PA, Health,

    Home

     • Even if 10% of existing market do not insure for religious reasons, its

       over 2 billion.

  A large number of industrial groups have shown interest in takaful.

  Only one Takaful operator licensed in Pakistan, so far!! – More to follow

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 Opportunities – Family Takaful

     Islamic Banks require life cover for House financing etc.

     Life Insurance market size 2005– GWP Rs. 18 Billion (approx.), 4

    private sector companies. Talks of SLIC being privatised in some

    form.

      Even if 10% switch to this basis it is more than Rs. 1.8 billion.

     Untapped Market - Individuals do not take insurance – Just 2.5

    million individual life policies

      Even if 10% of existing market do not insure for religious

        reasons, its almost 2 billion.

     A large number of industrial groups are interested in group life and

    health benefits based on takaful.

     No Life takaful operator so far!! – Some under formation

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 TAKAFUL IN THE WORLD

    • World Takaful Conference Dubai April 2006

    • Around 70-80 companies are now operating in 28 countries.

    • Takaful is one of the fastest growing sectors of the insurance

       industry with around 20 per cent annual growth compared to

       less than 10% for conventional.

    • Global Takaful premiums are estimated at $3 billion, of which

       60 per cent is general takaful and the remaining is family

       takaful.

    • Middle East accounts for 36 per cent of premiums and about

       56 per cent is generated in South East Asia.

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 SYNERGIES AMONGST ISLAMIC

 FINANCE PARTICIPANTS

                               Takaful Operators,

                               banks and Capital

                                 market players

                            continuously focus on

                              product building to

                             offer more attractive

                            products that fulfill the

                            differentiated needs of

                                 the customers.

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 Synergies in Islamic Financial System

  • Islamic Banks, Capital Markets and Takaful Operators work together to develop

    products using each others strengths leading to competitive products.

  • Takaful Operators fill the gap by providing Shariah compliant protection for Islamic

    Financing Products.

  • Islamic Banks and takaful operators work together to distribute takaful savings

    and protection products under bancatakaful arrangements in a more cost effective

    manner leading to better consumer values.

  • Takaful Operators need longer term investments which fulfill the long term

    financing needs of Islamic financial institutions

  • Long term investments enable takaful operators to offer better returns to its

    customers and shareholders.

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 BANCATAKAFUL

  • A mechanism for distribution of takaful products through banks.

    Advantages for banks:

     • Additional fee income from existing customers received upfront.

     • Additional product offering

     • Increase customer retention by offering long term plans

  • Simple examples are:

     • Motor Takaful policy with Car Ijarah of Islamic Bank

     • Family Takaful cover with Housing or other financing facility.

     • Depositors protection

     • Credit card protection

  • More complex products include:

     • Savings products

     • Education products

     • Retirement products

     • Protection products

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 BANCATAKAFUL TRENDS IN ASIA

  • Based on research conducted by Swiss Re Sigma report (2002)

    “…by 2006, bancassurance could potentially account for 13% of total

    premiums collected in Asia’s life insurance sector and 6% in the non-life

    sector”.

  • A large interest from insurers at this time as they seek to diversify

    from traditional and less productive agency channels.

  • Distribution agreements appear to be increasingly common as a

    business model in Asia Pacific but increasing focus by major banks

    in JVs and ownership models.

  • Most of the larger banks in each country have an interest in a

    bancassurance operation, or plans to enter the ‘manufacturing’ area

    – moving from ‘fee income’ to ‘value creation’, by setting up its own

    insurance company.

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 Recap

• Protection against unforeseen financial losses is a

  concern for many. Religious prohibition stops.

• Takaful Offers a huge potential market by filling the

  gap which remains untapped at present.

• Competitive Pricing of Takaful products would remain

  a key factor along with quality service.

• Bancatakaful could fast track efficient distribution and

  better customer value.

• Adherence to Shariah principles in operational

  practices would be the long term driver for success.

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd


                       THANK YOU

                     Abdul Rahim Abdul Wahab, FSA

                             Director & Actuary

                         Actuarial Services Division

                     abdul.rahim@sidathyder.com.pk

               Sidat Hyder Morshed Associates (Pvt) Ltd

    Islamic Finance & Investment Symposium 6 - 7 Dec 2006,

                                    Karachi

Actuarial Services Division         Sidat Hyder Morshed Associates (Pvt) Ltd