Issues and Challenges in Retakaful by Azman Ismail

Issues and Challenges In Retakaful

Azman Ismail

HIJRAH Strategic Advisory Group

Tel : 603.4260.1995

Fax : 603.4260.1994

Email : hijrah@email.com

Why Retakaful?

„ Same reason as takaful

  „ Increase Capacity

  „ Risk management

     „ Spreading the risk

  „ Will not make the “road” better but the

    “driving” smoother

Why Retakaful…?

„ Profit Maximization?

„ Growth of Sales

„ Market Share

„ Solvency

Issues and Challenges

„ Technical Competence

„ Syariah Competence

„ Financial Strength

„ Market

„ Systems and Methods

„ Cooperation

       Hammurabbi

                                                                                              „

0001 Birth of Jesus (pbuh)

                                                                        Conventional insurance have

0600 Birth of Prophet Muhammad saw

           ‘Aqilah &

           Dhaman

                                                                        developed over 500 years but

            Ahl al-diwan

      Italian traders

1400

                                                                                                            Technical Competence

      Khilafah Othmaniah

                                                                        takaful is less than 50 years old

                                         Takaful & Insurance Compared

      Islamic research Congress

      International islamic Economic Conference

2000

Technical Competence …

„ Underwriting skills

„ Quantitative Analysis

„ Financial Analysis

„ Product Development

Shariah Competence

„ Apart from technical competence,

 Takaful practitioners lack sufficient

 shariah knowledge and shariah advisors

 lack sufficient operational knowledge to

 be able to develop the takaful industry

 at par with conventional insurance

Shariah knowledge …

„ Usul Fiqh

„ Qawaid Fiqhiyah

„ Fiqh Mu’amalat

Financial Strength

„ Conventional „ Retakaful

  „ Premium = USD 2          „ Contribution < USD

    trillion                   1 billion

  „ Equity > USD trillion    „ Equity < USD 100

                               million (strictly

                               speaking < USD 5

                               million)

Market

      Insurance           Takaful

        Market            Market

Systems and Methods

„ Processes and Procedures

„ IT Systems

„ Turnaround

Cooperation

„ Common standards

„ Research

„ Product Development

„ Contract

„ Financial Models

On sharing risks

„ Pools

  „ Takaful operators agree to cede risks to

    share aggregate risks

„ Retakaful

  „ With reinsurers

  „ With retakaful operators

Concept of Lesser Evil (Danger)?

„ For general business, a large proportion

  is still with conventional reinsurers

„ For family business, retakaful is with

  one major reinsurer

„ Applying the concept through fixing the

  “right” retention amount.

One Way of Facing This

Challenge Is Through

Understanding The Retakaful

Impact On Business.

Optimizing Retention

„ Through Scientific Approach

„ Quantitative Factor Apart From

 Qualitative factors

„ Learn from conventional insurers and

 reinsurers

Current Retention Ratio

 Fixing Retentions…

   Rates &                    Investment

  Loadings       Retained     Policy

               Contribution

                               Contribution

       Loss                    Income

Experience

  Financial     Retention      Staff

  Strength        Limits       Experience

                                Retakaful

Management Costs

 Philosophy

 Management Philosophy

 „  Management Attitude Towards Risk

 „  Knowledge of Management

 „  Acceptable nature & range

 „  Priorities

Contribution Income

„ Gross Contribution

„ Risk Profile

„ Retention = k C

„ Per risk – 1% to 10%

„ Per event - depends

Staff Experience

„ Underwriting skills

„ Quantitative skills

„ Background

„ Training

Loss Experience

            „ Either on gross or net

            „ Degree of fluctuation over

              time

            „ Effectiveness of retakaful

              arrangements

Deviation …

                  Retakaful Costs

                  „   Utility

                  „   Probability of Ruin

                  „   Expected Profits

Expected Profits

                                      Probability of Ruin

                  Investment Policy

                  „   Cashflow - liquidity

                  „   Currently does not impact much on

                      takaful retention but should consider

                      long-tail business

          Rates & Loadings

          „      Lower rated risks carry higher retentions

          „      Loadings – expenses (including commission), profit -

                 depending on financial model, contingency and tax

                 (depending on the model & tax structure of the

                 country)

Retention Limit

                      Degree of Risk (Reflected by Contribution Rate)

          Financial Strength

            „    Shareholders Fund

            „    Takaful Fund

            „    Potential Variation In Claims Experience

                  „   Example, (study on 300,000 fire risks – largest 5

                      million and 1,000)

Rule of Thumb

„ R = y X (Capital + Free Reserves)

  „  where - 1% < y < 5%

„ R = 100/n X A

  „  Where n is the # of times of large claims

     per year requiring immediate payment

  „  And A equals the liquid assets (should be 5

     X max retention per loss in company’s

     most important branch)

A more exhaustive method

R = X (S) (EC)

    (GC) (L + E)

Where

X = 1% - 5%

S = surplus

EC = earned contribution

GC = gross contribution

L = loss ratio

E = expense ratio

So,

„ Have we set the correct retention

 limits?

„ Can we optimize our retention?

„ Can we improve the bottom line of

 takaful and retakaful operators?

Conclusion

„ Retakaful challenges can be met with :

  „ Greater knowledge

  „ Enhanced skills

  „ Higher financial strength

  „ Political will

  „ Greater cooperation

Wassalam