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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

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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

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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.

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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”.

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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).

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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.

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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

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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

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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’.

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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

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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.

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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

(%)

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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.

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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

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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.

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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.

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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”.

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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

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Understanding Takaful byTarmidzi Bin Ahmad - Revision history

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