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Ernst & young's the world takaful report 2012

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  • 1. In collaboration with
  • 2. 7th Annual 16 & 17 April 2012, Dusit Thani Dubai, UAE Dear Insurance Industry Leader, It is with great pleasure that we present to you the 5th annual edition of the World Takaful Report, a ground-breaking original research project developed in collaboration with leading global professional services and advisory firm, Ernst & Young. With a principal focus on ‘Industry Growth and Preparing for Regulatory Change’, the World Takaful Report 2012 explores the key industry trends and the critical success factors guiding the global Islamic insurance industry to the next level of performance and growth. We would like to take this opportunity to express our sincere gratitude to Ernst & Young and their world renowned Islamic Financial Services Team for investing their considerable talent and resources in developing the World Takaful Report 2012. The Report is exclusively launched on-site at a special plenary session of the 7th Annual World Takaful Conference (WTC 2012) where more than 350 industry leaders from over 150 leading organizations gather to chart the future of the Takaful industry. Established as a critical reference resource for key industry players, thought leaders and policy makers in the international Shari’ah-compliant insurance industry, we hope that the analysis in this year’s Report will provide practical, constructive and valuable insights which will be useful in your own strategic planning activities and will assist your organization in its quest for success as the global Takaful industry enters the next phase of growth. To find out more on how your organization can play a part in this important research initiative in the future, please e-mail sophie@megaevents.net Yours sincerely, David McLean Chief Executive The World Takaful Conference A MEGA Brand MEGA Brands: Shaping the Future of the Global Islamic Finance Industry Since 1993 P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003 MEGA Brands. MEGA Clients. Market Leaders. www.megaevents.net THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change
  • 3. The World Takaful Report 2012 Industry growth and preparing for regulatory change April 2012
  • 4. Disclaimer The contents of the World Takaful Report 2012 are based on a combination of quantitative data and qualitative comments and hence provide a subjective assessment of the current Takaful market. All quantitative comments are based on published information wherever possible. Where published reliable data was not available, qualitative comments were made which may or may not reflect the true state of affairs. Information has been assimilated from secondary sources, including published country, industry and institutional information, and primary sources, in the form of interviews with industry executives. We are not expressing any assurance on the accuracy or completeness of the information obtained. Although this report has been documented based on our understanding of Islamic finance and insurance activities to include only such activities that are deemed Shari‟a compliant, no Shari‟a opinion whatsoever has been taken on this report. Hence, the contents of this report, in terms of the activities to be carried out, might not necessarily be consistent with Shari‟a in all cases, and the opinion of a Shari‟a scholar(s) should be taken before any further steps are made to implement suggestions made in the report. Whilst every care has been taken in the preparation of this report, no responsibility is taken by Ernst & Young as to the accuracy or completeness of the data used or consequent conclusions based on that data, due to the respective uncertainties associated with any assumptions that have been made. This report is documented for the World Takaful Conference. No part of this document may be republished, distributed, retransmitted, cited or quoted to anyone without prior written permission from Ernst & Young. 2 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 2 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 5. Contents Introduction ► ► Executive brief Introduction to Takaful Industry Growth Financial Performance Business Challenges Regulations for Growth Appendices Page 3 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 3
  • 6. Executive brief Dear Takaful Executive On behalf of Ernst & Young, we take pleasure in introducing to you the 5th annual edition of Ernst & Young’s World Takaful Report (WTR 2012). It is of great pride to us that the annual report has claimed its place as the leading reference tool for Takaful decision makers and industry experts, e perts as well as the broader Islamic finance ind str We are gratef l for the response and patronage recei ed from you and other ind str ell industry. grateful received o industry leaders who have provided their time and thoughts for finalization of this year’s much anticipated report. The Takaful industry continued to show double digit growth in 2011 albeit at a relatively slower rate of 19% as compared to previous years. Amongst key markets, Malaysia and UAE again achieved growth rates of over 24%, whilst Saudi Arabia saw its gross contributions increase by US$0.5b. The challenge was once again, maintaining growth with profitability in the current economic climate. There were positive developments in the GCC with more operators showing profitability than previous years. The Saudi Cooperatives continued their growth performance yet still struggled in generating shareholder returns. Overall, return on equity for the Takaful industry was lower than conventional counterparts, both in the GCC as well as in Malaysia. However, a significant contributing factor to this was the lower investment returns for the industry relative to returns yielded by conventional insurers. The industry has now obtained significant market share versus conventional insurance in most GCC countries as well as South East Asian markets. There are a number of drivers behind this growth but one that is becoming increasingly important is regulatory support through appropriate amendments in legislature to provide a level playing field with conventional insurance companies. With operational efficiency still a key focus, we take a look at some of the regulatory changes that will impact and how some Takaful Operators may be forced to change their operating model and how forward planning is critical to save on considerable project and change management costs. The report also highlights the strong need for introducing greater standardization in regulatory frameworks across jurisdictions. Standardization will enhance clarity around Takaful, its business models and its unique selling proposition, hence allowing the industry to strive towards its true growth potential. We hope that you will find this report informative and useful and it provides insight to align your strategic agenda. Ashar M. Nazim Senior Director & Global Head of Islamic Finance Ernst and Young 4 THE Page WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change 4 Justin Balcome Senior Director & MENA Insurance Leader Ernst and Young The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 7. Introduction to Takaful Takaful is the Shari‟a compliant alternative to conventional insurance The company accepts premiums from the insured at a level which it anticipates will cover claims and result in a profit. This process of anticipation is akin to Maysir (speculation). Conventional Insurance (non-mutual) The insured pays premiums to the company in exchange for indemnity against risks that may not occur. This process of ambiguity is akin to Gharar (uncertainty). The company engages in investments that may derive their income from interest and/or prohibited industries. This process is akin to Riba (usury) and/or relates to Haram (prohibited) activities. Takaful Takaful is based on the concept of social solidarity, cooperation and mutual indemnification. It is a pact amongst a group that agrees to donate contributions to a fund that is used to jointly indemnify covered losses incurred by the members. While the concept of Takaful revolves around mutuality and is founded on non-commercial basis, the operations and the fund are commonly managed by a Takaful operator on commercial basis. Mutual Guarantee - The basic objective of Takaful is to pay a defined loss from a defined fund. The loss is covered by a fund created by the donations of policyholders. Liability is spread amongst the policyholders and all losses divided between them. In effect, the policyholders are both the insurer and the insured. Ownership of the Fund - Donating their contributions to the Takaful fund, policyholders are owners of the fund and entitled to its profits (this varies slightly between the adopted models which are described later). Five Key Elements Elimination of Uncertainty - Donations, causing transfer of ownership to the fund, are voluntary to mutually help in the case of a policyholder‟s loss without any pre-determined monetary benefit. Management of the Takaful Fund - Management is by the operator who, depending on the adopted model, utilises either (or a combination) of two Shari'a compliant contracts, namely Mudaraba or Wakala. Investment Conditions - All investments must be Shari‟a compliant, which prohibits investment in Haram industries and requires the use of instruments that are free of Riba. Source: Ernst and Young research and analysis Page 5 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 5
  • 8. Introduction to Takaful Takaful uses a system of voluntary donations and mutual assistance to share risk, collectively, amongst a group of members Takaful ► Contracts utilised ► ► Company’s responsibility Participants’ responsibility Capital utilised for underwriting business Investment considerations ► ► Donation and mutual undertaking based on nonremunerative / noncommutative contract Not an exchange / commutative contract Manage the participants‟ fund Pay claims from underwriting fund Provide interest free loan to underwriting fund in case of deficit ► Pay contributions ► Participants‟ funds and in case of shortfall, temporary access to shareholders‟ equity on a qard al hassan basis ► Shari‟a compliance and prudential Cooperative insurance ► Mutual contract ► Pay claims with underwriting fund Pay for deficits if any ► ► Pay contributions (and pay for deficits in some models) ► Participating capital and accumulated surplus ► No restrictions except prudential Mutual insurance ► Mutual contract – considered to be an exchange contract on principles of mutuality ► ► Remunerative / commutative exchange contract Pay claims with underwriting fund ► Pay claims ► Pay premiums (and pay for deficits in some models) ► Pay premiums ► Participating capital, accumulated surplus and guarantee capital (if applicable) ► Shareholders‟ equity ► No restrictions except prudential ► No restrictions except prudential Source: Ernst and Young research and analysis 6 Proprietary / commercial insurance THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 6 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 9. Contents Introduction ► Industry Growth ► Financial Performance Business Challenges ► Global Takaful contributions grew by 19% in 2010, to US$8.3b Global Takaful contributions are expected to reach US$12b by 2012 Saudi Arabia remained the largest market in GCC Regulations for Growth Appendices Page 7 The World Takaful Report 2012 7
  • 10. Summary of key Takaful events Significant events in the Takaful industry during March 2011 – March 2012 GCC & MENA Bahrain AAOIFI ruling on underwriting surplus SA & SEA Malaysia SECP issued draft Takaful rules 2012 AAOIFI amended their ruling on sharing of Takaful surplus made five 5 ago. The ruling continued to refrain Shareholders from sharing in the underwriting surplus. However, the AAOIFI Shari‟a Appellate Bench (SAB) has proposed to allow surplus participation with the management team of the Takaful operator. A performance fee of up to 30% may be taken out of participant surplus for the management. Securities and Exchange Commission Pakistan issued draft Takaful rules proposing significant changes in the Takaful regulatory framework. The changes shall allow conventional insurance companies to open Takaful windows. SA & SEA Malaysia Tokio Marine sold its stake in Hong Leong Bhd SA & SEA Pakistan Bank Negara Malaysia issued draft risk-based capital framework for Takaful operators Tokio Marine sold all shares in its Malaysia Takaful joint venture, Hong Leong Tokio Marine Takaful Bhd., to its local partner Hong Leong Group. The draft risk-based capital framework aims to address solvency requirements described in the IFSB “Standard for Solvency Requirements in Takaful Undertakings”. GCC & MENA Oman SA & SEA Malaysia GCC & MENA Bahrain GCC & MENA UAE Oman set to allow Takaful operators Takaful Operational Framework Allianz sold 75% of its Takaful business to Medgulf Bancassurance regulations update Oman‟s Capital Market Authority (CMA) allowed Takaful products. The CMA is in the process of finalizing the regulations and standards required for Takaful operations. Malaysia‟s „Takaful Operational Framework‟ came into effect in January 2012. Its objective is to enhance Takaful business efficiency, ensure healthy and sustainable Takaful funds and safeguard participant‟s interest. Allianz Takaful sold 75% shares to Medgulf for Bahrain and Qatar markets. The Insurance Authority issued a circular in September 2011 to all insurance and Takaful companies in the UAE setting out guiding rules which UAE insurance and Takaful companies should adhere to in distributing products through banks. Business events Regulatory events 8 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 8 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 11. Global events affecting Takaful A number of political and economic events being witnessed around the world are likely to impact the Takaful industry Europe MENA The European crisis has dampened the prospects of Takaful making gains in that market. Increased solvency requirements add to the difficulty of launching Takaful, given the risk structure of Takaful and the favorable treatment of debt instruments in the capital adequacy calculation. It may also limit the appetite of European insurers for investing overseas, as the new rules apply at a group level as well as at insurer level. The Arab Spring has hurt the attractiveness of populous Muslim markets such as Sudan and Tunisia for foreign investment. Specifically Libya and Egypt were considered as high potential growth markets. A number of projects have been postponed or at least affected due to the prevailing situation in these countries. Saudi Arabia The Saudi Arabian Monetary Authority (SAMA) had directed all operators to align with the cooperative insurance model by year end 2011. Takaful operators had to adjust their internal accounting structures, remove the use of Wakala and Qard and amend product terms and conditions. Saudi is a huge Takaful market and this shift away from the pure Takaful model may have various affects on the industry which is already in need of regulatory harmonization. Sudan South East Asia Sudan is the largest Takaful market outside the GCC and Malaysia. The recent partition has resulted in the creation of two countries. Oil rich but under developed South Sudan does not support Islamic Finance and Takaful. North Sudan only allows Islamic Finance and Takaful. However, the partition has resulted in a steep drop in North Sudan‟s GDP growth due to loss of oil revenues. Overall slowdown of economy and reduced FDI will directly impact the growth of the financial sector, including that of Takaful. Indonesia is emerging as a significant Takaful market, overtaking several of the GCC countries in Gross Written Contributions (GWC). Along with Malaysia and Brunei, the other two important Takaful markets in South East Asia, the region accounts for USD 2b in total GWC. With Saudi regulators disallowing the pure Takaful model, the primary hub for Takaful may well shift from the GCC, to South East Asia. . Source: Ernst and Young research and analysis Page 9 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 9
  • 12. Global Takaful contributions growth Global gross Takaful contributions reached US$8.3b in 2010 and continue to depict healthy growth. US$4.3b of these contributions came from Saudi cooperatives Global Gross Takaful Contributions – including Saudi cooperatives (US$m) 8,329 CAGR (2005 - 2009) = 29% Growth (2010) = 19% 6,975 193 39 377 1,480 990 76 22 276 901 557 3,068 11 18 256 695 238 1,065 2005 8 17 181 544 173 1,850 2006 2,289 2007 2,912 2008 2010 growth 3,896 2009 2010 (e) 122% Levant 4,370 Indian Subcontinent 23% 102% 20% 10% South East Asia 28% 32% GCC(excluding Saudi) 123 33 295 1,110 842 4,122 CAGR 2005-2009 Africa 5,315 1,988 202 79 413 1,951 1,313 54% 33% Saudi cooperative 38% 12% 35% 29% 5% Global Takaful - excluding cooperative contributions (US$m) 924 1,219 1,833 2,402 3,079 3,959 Pure Takaful Saudi Arabia requires all insurance companies to operate under a cooperative business model. Similarities exist between the cooperative model and Takaful, so that most re-Takaful operators are permitted to conduct business with them. In fact, various regional Takaful operators have subsidiaries in Saudi working under the cooperative model. However, as the model is different from Takaful practiced in other regions, we are treating it in separation to the pure Takaful industry. Source: World Islamic Insurance Directory 2012 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis Page Islamic Insurance Directory 2012 (Reproduced with permission from Takaful Re Limited), Ernst Report 2012 The World Takaful & Young analysis Source: World10 10 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Industry Growth & Preparing For Regulatory Change
  • 13. GCC Takaful contributions growth Overall, the GCC experienced relatively slower growth this year post implementation of compulsory medical in Saudi and Abu Dhabi during the last two years Gross Takaful Contributions in the GCC – including Saudi cooperatives (US$m) 5,683 CAGR (2005 - 2009) = 41% Growth (2010) = 16% 87 136 640 128 2,846 2,088 34 1,065 2005 15 34 42 83 50 65 90 1,850 2006 2,289 2007 2010 growth 41 53 369 95 3,896 4,370 55% 17% 41% 91% UAE 98% 28% Kuwait 71 128 542 101 Bahrain Qatar 3,753 1,238 102 260 818 133 4,886 CAGR 2005-2009 11% 4% Saudi Cooperative 38% 12% 2,911 2008 2009 2010 (e) GCC Takaful - excluding cooperative contributions (US$m) 173 238 557 842 990 1,313 Pure Takaful 55% 33% Saudi Arabia requires all insurance companies to operate under a cooperative business model. Similarities exist between the cooperative model and Takaful, so that most re-Takaful operators are permitted to conduct business with them. In fact, various regional Takaful operators have subsidiaries in Saudi working under the cooperative model. However, as the model is different from Takaful practiced in other regions, we are treating it in separation to the pure Takaful industry. Source: World Islamic Insurance Directory 2012 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis Page Islamic Insurance Directory 2012 (Reproduced with permission from Takaful Re Limited), Ernst Report 2012 The World Takaful & Young analysis Source: World11 Industry Growth & Preparing For Regulatory Change 11
  • 14. South East Asian Takaful contributions growth Indonesia and Brunei are becoming increasingly important Takaful markets. Together with Malaysia, they account for US$2b in gross Takaful contributions Gross Takaful Contributions in South East Asia (US$m) CAGR (2005 - 2009) = 28% Growth (2010) = 32% 1,951 1,110 544 75 412 2005 695 27 30 80 553 2006 30 32 133 32 35 150 32 38 32 38 314 3% 393% 5% 0% Indonesia 35% 25% Malaysia 1,441 Brunei Thailand 251 29% 24% 1,158 701 2007 889 2008 2009 2010 (e) Source: World Islamic Insurance Directory 2012 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis THE WORLD TAKAFUL Page 12 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 12 2010 growth 158 38 1,480 901 CAGR 2005-2009
  • 15. Other markets Takaful contributions growth Sudan is the most significant market outside GCC and SEA. Jordan and Egypt have just under US$50m in gross Takaful contributions but are showing strong growth Gross Takaful Contributions in Other Markets (US$m) CAGR 2005-2009 694 CAGR (2005 - 2009) = 31% Growth (2010) = 14% 610 2010 growth 165 104 453 375 48 285 37 4 207 65 166 172 2005 59% Bangladesh 154% 0% 19% 7% 166 105 31 4 35% Sudan 67 Others 244 262 281 2006 2007 2008 340 363 2009 2010 (e) Source: World Islamic Insurance Directory 2012 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis Page 13 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 13
  • 16. Global Takaful forecast Continued steady growth in core markets and the emergence of new fringe markets such as Indonesia, Brunei and Bangladesh suggest a US$12b industry by 2012 WTR12 Forecasts for Global Gross Takaful Contributions – including cooperatives (US$m) ► ► ► ► The World Takaful Report 2011 forecasted total contributions to reach US$9.1b by 2011. The results have been lower (US$8.3b) due to industry slow down in core markets relative to the high growth rates seen in previous years. The anticipated compulsory medical insurance regulation in Dubai and other UAE emirates was not rolled out either. Current growth trends would suggest US$12b in gross contributions by 2012. Excluding Saudi cooperative contributions, total Takaful contributions are expected to be reach US$7b by 2012. Takaful – excluding Saudi cooperatives 12,407 10,039 211 160 452 8,329 6,975 193 39 377 1,480 990 3,896 1,951 202 79 413 469 197 544 3,390 1,741 4,902 5,498 2009 2010 (e) 2011 (f) 2012 (f) 3,079 3,958 5,137 6,910 Sources: World Islamic Insurance Directory 2012, Ernst & Young analysis 5% THE WORLD TAKAFUL Page 14 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 102% Africa 10% South East Asia 2,310 1,313 4,370 Indian Subcontinent Levant 2,572 Note: Forecast is based on respective growth rates in 2010, adjusted for emerging trends. 14 Growth 2010 32% GCC(excluding Saudi) 33% Saudi cooperative 12%
  • 17. Takaful contribution concentration centres The GCC has a high number of Takaful operators and relatively low average contributions per operator. 77 operators grew their contributions by an average of US$10m in 2010 Takaful Contributions per operator Levant Avg. contributions per operator: US$9m Takaful growth 2010: 102% GCC Saudi Arabia Avg. contributions per operator: US$74m Takaful growth 2010: 16% Avg. contributions per operator: US$141m Takaful growth 2010: 12% Source: World Islamic Insurance Directory 2012, Global Insights, Alpen Capital – GCC Insurance Industry Report 2011,Ernst & Young analysis Page 15 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 15
  • 18. Takaful contribution concentration centres Malaysia has a relatively high ratio of average gross written contributions per operator. The 14 operators in Malaysia grew their contributions by an average of US$20m in 2010 Takaful Contributions per operator Indian Sub-Continent Africa Malaysia Avg. contributions per operator: US$17m Takaful growth 2010: 5% Avg. contributions per operator: US$13m Takaful growth 2010: 10% Avg. contributions per operator: US$141m Takaful growth 2010: 24% Source: World Islamic Insurance Directory 2012, Global Insights, Alpen Capital – GCC Insurance Industry Report 2011,Ernst & Young analysis 16 Page 16 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 THE WORLD TAKAFUL Industry Growth & Preparing For Regulatory Change
  • 19. Key business lines Medical Takaful has become a major business line in GCC. Family Takaful is the dominant business line in Malaysia. Marine and Aviation Takaful business activity remains minimal Key Takaful business lines in major markets (2010) 100% 90% 27 80% 3 70% 60% 48 59 69 18 76 4 50% 40% 30% 16 5 2 16 53 13 20% 10% 4 32 13 20 16 GCC and Levant South East Asia 7 0% Iran Family and medical Marine and aviation Indian sub continent Property and accident Total Motor Source: World Islamic Insurance Directory 2012, Ernst & Young analysis Page 17 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 17
  • 20. Potential Takaful markets There are large Muslim population centers throughout the emerging markets of MENA and Asia. Many of these markets hold great potential for Islamic Finance and Takaful Global Estimated Muslim Populations in 2010 Turkey Population: ~75 m Per Capita income: $12,390 Insurance penetration: 1.3% Population: ~ 16 m Per Capita income: $15,756 Insurance penetration: 2.3% Population: ~ 61 m Per Capita income: $ 10,715 Insurance penetration: N/A China Morocco Population: ~32 m Per Capita income: $7,360 Insurance penetration: 2.8% Estimated Muslim Populations in 2010 Russia CIS Region Population: ~ 23 m Per Capita income: $7,503 Insurance penetration: 3.8% 10 – 50m 5 – 10m Population: ~35 m Per Capita income: $7,100 Insurance penetration: 0.8% Indonesia Nigeria Population: ~75 m Per Capita income: $2,241 Insurance penetration: 0.5% Pakistan 1 – 5m Under 1m Egypt Population: ~178 m Per Capita income: $1,250 Insurance penetration: 0.7% Population: ~80 m Per Capita income: $5,598 Insurance penetration: 0.7% Source: Global Insights (Per Capita Income is based on PPP of individual markets), Pew Forum 18 Population: ~148 m Per Capita income: $3,125 Insurance penetration: 0.9% Algeria 100m + 50 - 100m Bangladesh THE WORLD TAKAFUL Page 18 REPORT 2012: Industry growth and preparing for regulatory2012 – “Takaful Regulations for Growth, Equity and Stability” The World Takaful Report change Population: ~213 m Per Capita income: $4,094 Insurance penetration: 1.5% India Population: ~177 m Per Capita income: $3,194 Insurance penetration: 5.1%
  • 21. Takaful’s untapped potential The Takaful industry is currently concentrated in limited markets, segments and business lines. However, there is immense unrealized potential that can be achieved 1 Potential market space in Takaful hubs 2 ► ► ► Untapped customer segments ► ► 3 GCC’s untapped business lines Page 19 ► ► Share of Islamic Finance in GCC and Malaysia is 25% and 22% whereas Takaful market share is 15% and 10% respectively. Takaful has at least 10% of the known Shari‟a inclined market that they have not yet tapped. ► As the industry matures and establishes stronger distribution capabilities, this additional market space will be captured. Takaful, with its Shari‟a appeal, is predominantly retail driven in most markets. Corporate business is attracted through a value proposition based on the operators reputation, history, product suite, service standards, relationships and pricing. For Takaful, the corporate customer segment has significant room for growth. ► Focus on underwriting capabilities, service standards and product offering, together with stronger market relationships will allow Takaful to tap the corporate segment. ► Focus on customer research to understand needs and expectations, in addition to focus on customer education and distribution capacity building shall allow tapping into this market. The GCC Takaful market predominantly comprises of general Takaful business with family Takaful accounting for as little as 5% in certain markets. With high disposable income average and low market penetration, the GCC presents potential for family Takaful. The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 19
  • 22. Takaful’s untapped potential The Takaful industry is currently concentrated in limited markets, segments and business lines. However, there is immense unrealized potential that can be achieved 4 ► 5 Frontier market potential 6 Potential of dormant markets 20 Page 20 ► Large Muslim markets such as Libya, Egypt, Bangladesh, Indonesia and Brunei are opening up to Takaful. Recent regime changes in MENA countries including Egypt, Libya and Tunisia have brought forward Islamist governments that are encouraging Islamic finance. Bangladesh, Brunei and Indonesia are emerging as important frontier markets for Takaful, showing healthy growth. ► Establishment of separate regulatory frameworks for Takaful will accelerate growth in these markets. Technical and financial assistance from IDB and other facilitating organizations are important ► Local insurers need to encourage their regulator / government to facilitate Takaful. Lobbying by IDB / OIC to create awareness and acceptance for Takaful in these markets is important. Conventional insurance has penetrated a small percentage of the 1.6b Muslims market globally. Whether this is due to religious inclinations, inadequate insurance distribution or lack of education around insurance products, the untapped segment provides huge potential for Takaful. ► Global market potential Focus on customer research to understand needs and expectations, in addition to focus on customer education and distribution capacity building shall allow tapping into this market. ► ► ► ► India, China, Russia, Turkey and CIS countries have immense potential for Takaful based on the size of their Muslim populations and the growth in their economies. Takaful has not been permitted and / or facilitated in these markets until now. However, these markets hold considerable potential for Takaful should there be encouragement from their governments. The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change ►
  • 23. Takaful’s untapped potential The Takaful industry is currently concentrated in limited markets, segments and business lines. However, there is immense unrealized potential that can be achieved 7 ► MicroTakaful ► 8 ► Distribution and reach ► 9 ► Potential of value driven segment ► Page 21 A sizable portion of Muslim populated countries are characterized by having low income / lower-middle income households (Indonesia, Pakistan, Bangladesh, Sudan). They are also characterized by having low insurance penetration rates. This may be due, in part, to religious views towards conventional insurers but is also due to the unavailability of products suitable to the low income target market. There is limited awareness of insurance products, savings and retirement plans in most Muslim majority countries. The market is there for risk mitigation tools but traditional mechanisms are relied upon. Conventional distribution channels are being used to target the Takaful market. Direct sales force, agencies, bancatakaful partners have limited training on Takaful and its unique selling proposition. Shari‟a compliance offers an advantage over conventional insurers in targeting the Shari‟a inclined Muslim segment. However, no significant disadvantage hinders Takaful from targeting non-Muslims. In theory, Takaful has a larger potential market than conventional insurance as Takaful is able to tap the additional Shari‟a inclined market segment. The value driven, Shari‟a neutral market holds significant potential, specially in under penetrated markets. The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change ► Micro Takaful products can allow tapping into the large low income and lowermiddle income segments characterizing most Muslim populated countries. ► Greater Takaful awareness amongst religious scholars and mosque Imams will promote acceptability and awareness in the market. Focus on Takaful training for sales channels will enhance sales productivity. ► ► With maturity and scale, Takaful operators should be able to establish efficiencies, service quality, product variety, distribution strength to compete for the value driven, Shari‟a neutral segment. 21
  • 24. Contents Introduction ► Industry Growth Financial Performance Business Challenges Regulations for Growth ► Insurance companies continued to yield higher returns than Takaful. Saudi cooperatives struggled to show positive returns Investment yields for Takaful were again lower than their conventional counterparts, in both Malaysia as well as the GCC Appendices 22 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 22 The World Takaful Report 2012
  • 25. Breakdown of financial performance Insurance companies and Takaful operators generate shareholder returns through a number of key drivers Company RoE (Page 24) Combined Operating Ratio Investment Results (Page 29) (Page 25) Reinsurance Ratio (Page 30-1) Claims Ratio Commission Ratio Expense Ratio Investment Composition Returns (Page 26) (Page 27) (Page 28) (Page 30) (Page 31) Investments Insurance Notes: 1. Data used for the analysis is based on the annual reports of a sample of Takaful operators, cooperatives and conventional companies covering the GCC, Saudi Arabia and Malaysia. 2. Annual reports of some of the companies for the year 2011 were not available at the time of publishing. In such cases, data has been annualized. 3. Numbers may differ from those reported in previous reports as the sample size has been enhanced and Saudi Arabian cooperative insurance entities have been excluded from pure Takaful companies. Saudi Arabian cooperatives includes certain companies that are branded as Takaful operators. 4. Refer to Appendix for complete list of operators and companies included in our sample. Page 23 The World Takaful Report 2012 23
  • 26. Return on equity Insurance companies continue yielding higher returns than Takaful. Saudi cooperatives have struggled for profitability since after the financial crisis Shareholder returns on insurance operations are higher than Takaful shareholder returns, both in the GCC and Malaysia. Insurers, having more long term / short term investment options, have made higher investment income than Takaful operators. Their scale, longer operating history and market relationships have allowed them to build a more profitable business mix while Takaful has relied predominantly on retail business and relatively fewer product classes. ► Saudi cooperatives have struggled for profitability. Most Saudi operators are new in the market and are absorbing their pre-incorporation costs. The market is dominated by three players with the remaining operators incurring high expense ratios and loss ratios in their effort to quickly build market share. ► Average return on equity for a sample of Takaful operators, insurance companies and cooperatives 20% GCC Sample 20% 18% 10% 9% 8% 4% 5% 0% -5% 2007 2008 -2% 2009 2010 15% 10% 9% 9% Malaysian Sample 20% 15% 15% 10% Saudi Arabian Sample 18% 17% 14% 14% 10% 4% 5% 5% 0% 2011 0% 2007 2008 2009 -5% -2% -10% -15% Insurance Companies 2011 -1% -7% -10% -15% 2010 -10% -12% Takaful Operators 11% 6% 5% 2007 10% 4% 4% 2008 2009 -5% 2010 2011 -2% -10% -15% Cooperative Insurance Companies 2007 2008 2009 2010 2011 GCC – Insurance 24 26 27 20 21 GCC – Takaful 11 11 12 6 6 Saudi Arabia – Cooperative Insurance 2 11 15 13 19 Malaysia – Insurance 7 6 6 6 6 Malaysia – Takaful Notes: 1. Where possible, publicly available corporate information has been used. 2. Quarterly results have been used in 2011 to approximate data where annual accounts were not available. 3. GCC Takaful sample excludes Saudi operators in this report. Therefore, the graph shows a significant variation from WTR 2011. 4. RoE = Net profit / Shareholders’ equity. Sample: No. of Companies 5 6 6 3 3 Source: Companies’ annual reports, Ernst & Young analysis Page 24 Source: Companies’ annual reports, Ernst & Young analysis 24 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change
  • 27. Combined operating ratio Malaysian Takaful operators have better COR than conventional peers while the reverse is true for the GCC COR for a sample of Takaful operators, insurance companies and cooperatives GCC Sample Saudi Arabian Sample Malaysian Sample 160% 160% 160% 140% 140% 140% 120% 100% 80% 90% 78% 90% 81% 87% 91% 102% 89% 81% 77% 120% 100% 120% 107% 91% 86% 86% 90% 100% 80% 80% 60% 60% 40% 20% 91% 92% 87% 78% 40% 20% 92% 60% 40% 89% 20% 0% 2007 2008 2009 2010 2011 0% Insurance Companies 2007 2008 2009 2010 Takaful Operators 2011 0% 72% 2007 70% 59% 2008 2009 61% 2010 2011 Cooperative Insurance Companies 2007 2008 2009 2010 2011 GCC – Insurance 23 24 26 20 21 GCC – Takaful 9 9 10 6 6 Saudi Arabia – Cooperative Insurance 1 3 12 14 19 Malaysia – Insurance 5 5 3 6 6 Malaysia – Takaful Notes: 1. Where possible, publicly available corporate information has been used. 2. Quarterly results have been used in 2011 to approximate data where annual accounts were not available. 3. GCC Takaful sample excludes Saudi operators in this report. Therefore, the graph shows a significant variation from WTR 2011. 4. Combined Operating Ratio = Net Claims Ratio + Net Commission Ratio + Net Expenses Ratio. Sample: No. of Companies 7 7 7 3 3 Source: Companies’ annual reports, Ernst & Young analysis Page 25 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 25
  • 28. Claims ratio Malaysian operators show lower claims ratios on general and family Takaful lines Malaysian general Takaful operators yielded significantly lower claims ratios compared to GCC counterparts in previous years. 2010 saw higher than expected claims in motor for the Malaysians. Malaysian family Takaful claims ratios were slightly lower compared to GCC operators as well. ► Overall, year 2010 saw a rise in claims in both, GCC and Malaysian markets. ► Average claims ratio - General Average claims ratio - Family 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 2005 2006 2007 2008 2009 Combined Life 0% Malaysia family Takaful UAE life insurance 2010 0% 2005 2006 Bahrain Saudi Arabia 2007 General 70% 2008 2009 2010 UAE general Malaysia general Notes: 1. Data for Bahrain and Malaysia is specific to the Takaful industry, while data for Saudi Arabia and UAE covers the insurance industry as a whole. 2. Data for Life/ Family and General Takaful are provided separately for UAE and Malaysia. For Saudi and Bahrain, only combined data was available publically. 3. Claims ratios for UAE, Saudi and Bahrain are provided on gross claims basis. Data for Malaysia was available on net claims basis. 4. Claims Ratio = Claims incurred / Earned contribution. Source: CBB Insurance Market Review 2011, Bank Negara Malaysia Annual Takaful Statistics 2010, UAE Insurance Authority Annual Statistics 2009, SAMA Insurance Review 2010 Source: CBB Insurance Market Review 2011, Bank Negara Malaysia Annual Takaful Statistics 2010, UAE Insurance Authority Annual Statistics 2009, SAMA Insurance Review 2010 Page 26 The World Takaful Report 2012 26 Industry Growth & Preparing For Regulatory Change THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change
  • 29. Average commission ratio Takaful operators pay higher net commission than conventional insurers, both, in Malaysia and the GCC In the GCC, conventional insurers are net commission earners. Their scale allows them to obtain favorable terms with reinsurers and brokers. Most GCC Takaful operators are less that 5 years old and still in the process of achieving scale. These operators are paying higher commissions to build market share. ► In Malaysia, Takaful Operators have historically paid more net commissions than conventional counterparts. However, by building market share, they have managed to reduce this difference in recent years. ► Saudi Arabian insurance sector is dominated by 3 players. A large number of new cooperatives have recently entered the market and are competing aggressively for market share. ► Average commission ratio for a sample of Takaful operators, insurance companies and cooperatives GCC Sample 20% Saudi Arabian Sample 17% 20% 14% 15% 9% 10% 4% -5% -10% -15% 10% 11% 11% 10% 6% 7% 2008 2008 -7% 2009 2009 -4% 2010 2010 2011 2011 -5% 0% -5% 2007 2008 2009 2010 2011 0% -5% 6% 8% 13% 12% 10% 14% 13% 2008 2009 2010 2011 -15% -20% 2007 -10% -15% -20% 12% 5% -10% -8% -10% 16% 15% 11% 5% 2007 2007 18% 20% 15% 9% 5% 0% Malaysian Sample -20% Insurance Companies Takaful Operators Cooperative Insurance Companies Sample: No. of Companies Notes: 1. Where possible, publicly available corporate information has been used. 2. Quarterly results have been used in 2011 to approximate data where annual accounts were not available. 3. GCC Takaful sample excludes Saudi operators in this report. Therefore, the graph shows a significant variation from WTR 2011. 4. Average Commission Ratio = Net Commission / Net Earned Premium. 2007 2008 2009 2010 2011 GCC – Insurance 17 19 21 20 21 GCC – Takaful 6 7 9 6 6 Saudi Arabia – Cooperative Insurance 1 5 12 14 19 Malaysia – Insurance 6 5 6 6 6 Malaysia – Takaful 3 4 5 3 3 Source: Companies’ annual reports, Ernst & Young analysis Page 27 Source: Companies’ annual reports, Ernst & Young analysis The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 27
  • 30. Average expense ratio Takaful operators in the GCC have higher expense ratios than GCC insurers as well as Malaysian Takaful operators Characterized by relatively young market players, the GCC Takaful industry has yielded higher expense ratios than insurers operating in the same market. These expense ratios are also higher than those of Malaysian Takaful operators who concentrate more on family Takaful business as opposed to general Takaful. ► Malaysian Takaful operators are at par with conventional counterparts in their expense ratio yields. This indicates the degree of maturity that the Takaful industry has achieved in the country. ► Saudi cooperatives have seen their expense ratios rise over the past few years. However, there is a significant decline in 2011. ► Average expense ratio for a sample of Takaful operators, insurance companies and cooperatives GCC Sample 40% 40% 35% 35% 30% Saudi Arabian Sample 33% 31% 27% 25% 28% 25% 24% 23% 20% 15% 23% 0% 21% 2007 2008 2009 2010 2011 Insurance Companies 24% 22% 23% 18% 16% 10% 5% 0% 2007 2008 2009 Takaful Operators 2010 2011 2007 2008 2011 2007 2008 2009 2010 2011 23 24 26 20 21 GCC – Takaful 7 6 6 6 6 Saudi Arabia – Cooperative Insurance 1 2 6 12 19 Malaysia – Insurance 7 7 7 6 6 Malaysia – Takaful 3 4 4 3 3 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change 2010 GCC – Insurance Source: Companies’ annual reports, Ernst & Young analysis 28 2009 Cooperative Insurance Companies Notes: 1. Where possible, publicly available corporate information has been used. 2. Quarterly results have been used in 2011 to approximate data where annual accounts were not available. 3. GCC Takaful sample excludes Saudi operators in this report. Therefore, the graph shows a significant variation from WTR 2011. 4. Average Expense Ratio = General and Administrative Expenses / Net Earned Premium. Page 28 22% 15% Sample: No. of Companies Source: Companies’ annual reports, Ernst & Young analysis 26% 26% 23% 20% 5% 0% 25% 23% 10% 5% 30% 28% 15% 10% 37% 35% 35% 25% 20% 40% 38% 30% 28% 27% Malaysian Sample
  • 31. Reinsurance ratio Takaful operators generally retain more business, which reflects a focus on less complex business lines Takaful operators, in both GCC and Malaysia, retain more business than conventional counterparts. This may be a reflection of their business mix, with Takaful operators predominantly relying on less complex retail business. ► GCC Takaful operators, having predominantly general Takaful business, have significantly higher reinsurance ratios than Malaysian counterparts that have majority family Takaful business. ► Saudi cooperatives have seen a decrease in their reinsurance ratio in recent years. ► Reinsurance ratio for a sample of Takaful operators, insurance companies and cooperatives GCC Sample Saudi Arabian Sample 60% 60% 52% 50% 50% 42% 40% 47% 47% 52% 50% 50% 45% 34% 34% 60% 42% 50% 40% 37% 40% 40% 32% 30% 30% 27% 30% 20% 10% 10% 0% 2007 2008 2009 2010 2011 Insurance Companies 2007 2008 2009 2010 Takaful Operators 2011 0% 20% 12% 9% 6% 2007 8% 2008 2009 2010 2011 Cooperative Insurance Companies Sample: No. of Companies Notes: 1. Where possible, publicly available corporate information has been used. 2. Quarterly results have been used in 2011 to approximate data where annual accounts were not available. 3. GCC Takaful sample excludes Saudi operators in this report. Therefore, the graph shows a significant variation from WTR 2011. 4. Reinsurance Ratio = Insurance premium ceded / gross premium written. 25% 23% 23% 22% 20% 18% 10% 20% 0% Malaysian Sample 2007 2008 2009 2010 2011 GCC – Insurance 24 26 27 20 21 GCC – Takaful 9 9 11 6 6 Saudi Arabia – Cooperative Insurance 1 1 2 14 19 Malaysia – Insurance 7 6 6 6 6 Malaysia – Takaful 5 6 6 3 3 Source: Companies’ annual reports, Ernst & Young analysis Page 29 Source: Companies’ annual reports, Ernst & Young analysis The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 29
  • 32. Investment composition Investment strategies have remained largely unchanged over the last couple of years Average investment portfolio composition for a sample of Takaful operators, insurance companies and cooperatives GCC and Saudi Arabian Sample 120% 100% 16% 80% 19% 68% 32% 28% 26% 22% 11% 31% 31% 80% 37% 37% 4% 5% 8% 2007 2008 2009 2010 Real Estate 44% 5% 2011 Equity 0% Source: Companies’ annual reports, Ernst & Young analysis 27% 25% 57% 20% 27% 6% Sukuk 5% 2% 3% 2008 2007 Notes: 1. Where possible, publicly available corporate information has been used. 2. GCC and Saudi Arabian sample includes cooperative insurance companies. 3. Quarterly results along with discussions with industry leaders, have been used in 2011 to approximate data where annual accounts were not available.. 30 56% 48% 20% 20% 40% 22% 20% 38% 20% 5% 28% 31% 60% 40% 66% 20% 0% Malaysian Sample 100% 10% 60% 40% 120% 2009 2010 2011 Deposits Sample: No. of Companies 2007 2008 2009 2010 2011 GCC and Saudi Arabia 6 9 6 5 5 Malaysia 3 4 2 3 3 THE WORLD TAKAFUL Page 30 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 33. Investment returns GCC Takaful operators have experienced high volatility in investments. Overall, conventional insurers have achieved better investment returns Average return on investments for a sample of Takaful operators, insurance companies and cooperatives GCC Sample Saudi Arabian Sample 20% 15% Malaysian Sample 20% 15% 13% 10% 10% 9% 5% -5% 2007 2008 -2% 2009 15% 14% 10% 8% 5% 0% 15% 11% 20% 2010 10% 6% 0% 2% 2007 2008 2% 2% 2010 2011 1% 2009 5% 0% -5% -10% 6% 3% 2007 4% 2008 3% 2009 6% 5% 4% 2010 2011 -5% -10% -4% 9% 6% 5% 2011 12% -10% Insurance Companies Takaful Operators Cooperative Insurance Companies Sample: No. of Companies 2008 2009 2010 2011 14 16 16 20 21 GCC – Takaful 10 10 11 6 6 Saudi Arabia – Cooperative Insurance 1 1 1 12 19 Malaysia – Insurance 7 7 7 6 6 Malaysia – Takaful Notes: 1. Where possible, publicly available corporate information has been used. 2. Quarterly results have been used in 2011 to approximate data where annual accounts were not available. 3. GCC Takaful sample excludes Saudi operators. Therefore, the graph shows a significant variation from WTR 2011. 4. Average Yield on Investments = Total Investment Returns / Total Investment. 2007 GCC – Insurance 4 5 4 3 3 Source: Companies’ annual reports, Ernst & Young analysis Page 31 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 31
  • 34. Key Strategic Issues Financial performance remains a challenge for Takaful operators in many markets Key Strategic Issues 1 ► ► ► 32 Efficiency in operation Most Takaful operators are yet to achieve critical business volume, despite incurring substantial establishment costs over formation years. Expense ratio remains higher than conventional peers in the GCC market, although improvements have been made in the Malaysian market. Distribution capabilities, along with service quality remain a key challenge to better performance for Takaful operators. Quality of underwritten business 2 ► ► ► Solvency and capital requirements 3 Most takaful operators are startups or small players, limiting their access to quality customers which negatively impacts their loss ratios. There is concentration of business in the retail segment. Access to potentially lucrative commercial lines is limited due to underdeveloped broker relationships, limited operational history and scale. Complex risks are not well understood and potentially mispriced. THE WORLD TAKAFUL Page 32 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change ► Stricter solvency and capital requirements will make it harder for smaller players to achieve profitability. Young Takaful players will need to either quickly build scale or consider mergers to meet these requirements.
  • 35. Contents Introduction Industry Growth Financial Performance ► Rising competition and evolving regulations and shortage of Takaful expertise were identified as key risks in both GCC and South East Asia Business Challenges Regulations for Growth Appendices Page 33 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 33
  • 36. Takaful business risks Higher competition, evolving regulations and shortage of Takaful human resource expertise are key contemporary business risks for Takaful Takaful Global Business Risks Key Business Risks 2012 1 Financial Compliance Rising competition 2 Evolving regulations 3 Shortage of expertise 4 Misaligned costs 5 Limited financial flexibility 6 High-risks investment portfolios 7 Limited diversification in exposures 8 Enterprise risk management 9 Evolving regulations High-risk investment portfolios Political risks and implications 10 Misaligned costs Competition Limited financial flexibility Shortage of expertise Strategic Inability to tap pentup demand Sources: Executives’ and experts’ interviews, Ernst analysis Source: Executives’ and experts’ interviews, Ernst & Young & Young analysis Operational Key to Symbols Up from 2011 Page 34 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 THE WORLD TAKAFUL Industry Growth & Preparing For Regulatory Change 34 Down from 2011
  • 37. Takaful business risks Rising competition and evolving regulations have been identified as key risks in both GCC and South East Asia Takaful in the Gulf Cooperation Council (GCC) Financial High-risk investment portfolios Compliance Evolving regulations 6 Takaful in South East Asia (SEA) Compliance High-risk investment portfolios Misaligned costs 1 2 3 1 Competition 3 Competition Strategic Evolving regulations 6 2 5 Financial Shortage of expertise 4 Inability to achieve underwriting profit Operational Business Risks in the GCC ► Competition and varying regulatory regimes remain key business risks for Takaful operators. ► Misaligned costs base have also been identified as a key area of concern. 4 Inability to tap pentup demand Strategic 5 Limited diversification in exposures Shortage of expertise Operational Business Risks in SEA ► Inability to tap pent-up demand is pushing up strategic risks, while varying regulatory regimes have also become more prominent. Source: Executives’ and experts’ interviews, Ernst & Young analysis Page 35 Source: Executives’ and experts’ interviews, Ernst & Young analysis The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 35
  • 38. Rising competition Commentary and contributing factors Aggressive pricing for market share: ► Young Takaful operators are having to rely upon aggressive pricing strategies to compete against the established, older, conventional players. Most interviewees agree that such pricing is not sustainable and causing significant pressure on the industry‟s profitability. ► The regional and global economic conditions, together with a stricter stance by regulators, has restricted the entry of additional players in the GCC which already has a high number of operators. ► Malaysia has a larger insurance and Takaful market with higher contributions per operator. However, the recent addition of three new Takaful operators will raise competition in that market. Market consolidation: ► Most interviewees argued that the industry would benefit from consolidation. There are increasingly stringent regulatory requirements on capital and solvency, indicating the regulators‟ desired future direction. ► The current economic climate is making it difficult for small operators to survive and remain financially sustainable. Interviewees thought that consolidation would allow Takaful operators to compete with the larger, more established conventional insurers and also reduce unhealthy prices wars. ► However, the industry is still growing rapidly which is keeping shareholders interested in their Takaful operations. Untapped opportunities for Takaful remain: ► Despite competition in certain customer segments and business lines, there are areas where there is very limited Takaful presence. Family Takaful in the GCC is underpenetrated and effective distribution still remains a challenge. Sources: Executives’ and experts’ interviews, Ernst & Young analysis 36 Page 36 REPORT 2012: Industry growth and preparing for regulatory change THE WORLD TAKAFUL The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change “ Takaful operators face competition from conventional peers as well as each other.” - GCC Takaful Executive “ The industry is too young to be forced to consider consolidation. It needs more time to establish itself before it can be decided which players can sustain themselves and which can not” - GCC Family Takaful Executive “ GCC has some new players building up portfolios. However, focus is on running after the same business and not creating new avenues.” - GCC Consultant Actuary
  • 39. Evolving regulations Commentary and contributing factors Regulations vary significantly across jurisdictions and continue to evolve: ► A number of regulatory changes were rolled out in different Takaful markets. While most interviewees agreed that the new regulations were a positive development, there was concern over the increased variances in regulatory regimes in place across jurisdictions. It was felt that such variances in Takaful regulations make it difficult for Takaful operators to function across regions and also lead to confusion for customers and multinational insurers. ► SAMA‟s efforts in creating uniformity in insurance practices in the country were thought to provide an even playing field for insurers and Takaful operators. However, it remains to be seen how Shari‟a scholars and Takaful customers view the Shari‟a compliance of the enforced cooperative model. ► Pakistan has proposed to allow insurers to offer Takaful products through window operations. Whereas this step will enhance market reach of Takaful, it will bring the young pure Takaful operators under considerable competitive pressure. ► Higher solvency and capital requirements being introduced across various jurisdictions is likely to result in better capitalized companies but will impact shareholder profitability in the short term. ► Malaysia has introduced a draft paper on risk-based capital for Takaful firms to strengthen the country‟s governance and risks management practices. Again, the short term profitability is likely to be affected. ► For most interviewees in the GCC, the key regulatory issue for the year was AAOIFI‟s ruling on the sharing of underwriting surplus. The ruling allows sharing of underwriting surplus by management but does not allow for the surplus to be shared with shareholders. Interviewees expressed concern that Takaful shareholders were barred from sharing in underwriting profits but required to indirectly share risk of loss through a mandatory Qard facility. The industry practitioners and regulators are attempting to find a way to implement Takaful‟s conceptual requirements as defined by Shari‟a scholars in a way that is commercially viable for shareholders and considerate of participants interests. “ Bahrain, Malaysia and Pakistan have comprehensive Takaful regulations in place that take into account the unique requirements of the industry.” - GCC Takaful Executive “ Regulations are becoming cumbersome to deal with and regulators need to be cohesive in their approach for the growth and stability of the Takaful market.” - GCC Takaful Executive “ Self-sustainability and solvency of the pools is the most crucial regulatory challenge for Takaful.” - GCC Consultant Actuary Sources: Executives’ and experts’ interviews, Ernst & Young analysis Page 37 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 37
  • 40. Shortage of Takaful expertise Commentary and contributing factors Human resources risks continue to be high on the executive agenda: ► Takaful continues to suffer from a shortage of human resources with requisite expertise. This risk was considered important in both the GCC and South East Asia. According to interviewees, human resource risk is particularly acute in specialist fields, including life insurance, risk management and Shari‟a compliance. ► Retention was identified as a key element of this risk, where significant competition for resources has led to aggressive recruitment strategies backed by attractive remuneration. ► Key-person-risk was also identified by a number of interviewees as a key concern. Institutionalization of knowledge and expertise was a priority for these companies as they tried to mitigate these risks. ► Interviewees highlighted that inadequate training of people selling Takaful products is hurting the industry as they are not able to differentiate Takaful versus insurance successfully. ► A number of Shari‟a scholars interviewed raised the concern that the senior management at many Takaful operators came from the insurance industry. Whilst they were professionals with deep understanding of insurance, many were not familiar with the key Shari‟a issues associated with the conventional insurance model. Therefore, they were trying to run Takaful as they would run an insurance company. Sources: Executives’ and experts’ interviews, Ernst & Young analysis 38 Page 38 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 THE WORLD TAKAFUL Industry Growth & Preparing For Regulatory Change “ Retaining skilled employees definitely remains a challenge.” - GCC Takaful Executive “ We have outsourced our investment function because of its critical nature at this point and to capitalize on the expertise of our holding company.” - Malaysian Takaful Executive “ We have a mixed approach with respect to investment management activities, with some being done in-house and others being out sourced to competent asset management partners.” - GCC Takaful Executive
  • 41. Contents Introduction Industry Growth Financial Performance Business Challenges Regulations for Growth Appendices Page 39 ► Regulations from the Islamic finance standards setting bodies, AAOIFI & IFSB and the global accounting reporting standards from IASB & IFRS, need greater convergence. This standardization will make it easier for market regulators to provide a framework to regulate the Takaful Operators. The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 39
  • 42. Key issues facing the regulators and industry that will influence the industry growth rate As the industry continues to grow and develop, market regulators and the two bodies that set the Islamic finance industry standards, AAOIFI and IFSB, are facing head on the challenges of implementing a successful and effective regulatory framework. Follow Principles of Shari‟a Compliance with Solvency I & II Sustainable Profitability 40 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 40 Industry Growth Consumer Confidence Safeguard Shareholder /Contributor Funds The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 43. The role of the Regulator Regulators across the world have different objectives and roles to play in their domestic markets. Most have the common goal of protecting consumers and this translates into a number of the activities Takaful operators have to comply with. License, Supervise, Inspect Safeguard consumers’ interests Consumer Education Orderly growth of the Takaful industry Appropriate Regulations Licensing Of New Firms Promote high standards of behaviour, competence Fit & Proper Requirement Monitor Sales Process Take punitive action where needed Censure Discipline Fine Revoke Licence Ensure financial stability and soundness of firms and industry Page 41 Policyholder Protections Solvency I & II Regulatory Capital The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 41
  • 44. Comparison of capital requirements and integration with AAOIFI A& IFSB across markets Minimum Regulatory Capital Requirement (in US$m) Features UAE Bahrain Saudi Arabia Kuwait Malaysia Qatar 31.85 10 Domestic insurance company 0.4 General 28.32 13.2 26.64 Foreign insurance company 0.6 13.2 26.64 Same as above 31.85 10 Reinsurance 70.8 26.4 66.6 n/a 31.85 20 N Y N N N N Shari’a N Y N N N N Governance AAOIFI Standards 28.32 Accounting IFSB Standards Life N Y N N N N IFSB Standards are yet to be considered for adoption by most of the countries. Malaysia is taking lead by incorporating various recommendations of IFSB in its regulations. Source: Ernst &Young analysis, Market Regulators Source: Ernst &Young analysis, Market Regulators 42 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 42 The World Takaful Report 2012
  • 45. Significant developments over the past 12 months There have been 3 major developments which could have a material impact on the future growth story of the Takaful industry. AAOIFI begins consultation on Takaful companies allowing performance fees for g Management but not the Shareholders Page 43 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 43
  • 46. AAOIFI’s decision on performance fee’s Development 1 AAOIFI Shari‟a Appellate Bench (SAB) Proposes Surplus Participation To Be Available To The Operators Management Takaful Operators have long been making the case to allow participation in any surplus distributions made on an annual basis. An announcement by AAOIFI in May 2011 indicated that performance fees to the Operator could be paid out of surplus This went some way to allowing the Operators to increase their income, however AAOIFI have been very explicit in stating the beneficiaries can only be the management and not shareholders. A solution that causes governance issues Such an arrangement could have difficult practical implications, namely conflict of interest between management and shareholders, and (ii) shareholders loosing the ability to control management as for at least part of the remuneration „by-passes‟ the shareholders representatives (i.e. the boards of directors). Ernst & Young Point of View Aligning performance incentives for Takaful operators with the interests of participants is a difficult task. The concept of risk sharing makes a clear distinction of why surplus distribution should go only to the participants and not the Operator. Takaful Operators sharing in the profit of the participants‟ risk fund (the mutual insurance mechanism) is problematic since the operator is not making donations to the participants‟ fund and is not itself a participant in the mutual assistance scheme. However, the commercial realities dictates that the shareholders money is at risk if the participants‟ fund is in deficit. Takaful, in the same manner as conventional insurance is a commoditized product and pricing remains an important aspect of the buying decision making process for customers. This has led to some leading Scholar‟s and industry professionals to question the importance of surplus distribution as a proposition to attract customers. There is anecdotal evidence to suggest some Takaful Operators are front loading the contribution they expect from customers, in the hope they will be able to give them a surplus distribution, but in doing so, their pricing becomes uncompetitive. With greater use of actuaries and risk based pricing, Takaful Operators would better placed to offer a reduction at the onset to the customers rather than the promise of any surplus distribution. For the Takaful Operator, this approach would lessen the emphasis on surplus distribution, avoid conflicts between management and shareholders that may arise from AAOIFI‟s ruling and most importantly, compete against conventional insurance companies for the whole of market GWP based upon price as well as service offerings. 44 Page 44 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 THE WORLD TAKAFUL Industry Growth & Preparing For Regulatory Change
  • 47. Saudi cooperative model Development 2 Recent regulatory changes by SAMA In mid 2011, the insurance regulators engaged with Cooperatives which market themselves as Takaful operators to discuss their approach to the provision of insurance activities. As a result of these consultations, these operators were asked to fully align to the regulations for the cooperative insurance model by the end of 2011. In response, these operators have had to adjust their internal accounting structures, remove the use of Wakala in their financial reporting and subsequently amend product terms and conditions. These changes are not expected to impact on financial performance of these companies and we understand that approval from respective Shari‟a boards has been forthcoming. However, the impact on customer perception may be more significant, particularly if these changes affect the public‟s perception of Shari‟a compliance. Summary of regulations In summary, the regulations issued by SAMA require licensed cooperative insurers to: ► ► ► ► ► Segregate shareholders‟ and policyholders‟ funds, with all expenses relating to management of insurance operations charged to the policyholders‟ fund; Allocate 10% of the net surplus generated from insurance and investment activities in the policyholders fund to policyholders directly, or in the form of reduction in premiums for the next year. The remaining 90% of the net surplus shall be transferred to the shareholders‟ income statement; 20% of the net shareholders‟ income shall be set aside as a statutory reserve until this reserve amounts to 100% of the paid capital; Any deficit in the policyholders‟ fund is borne solely by the shareholders; and Adhere to further regulations pertaining to solvency, investments, reinsurance and technical provisions. Ernst & Young Point of View Claiming to be a Takaful operator was considered a unique selling proposition in the religiously sensitive market of Saudi Arabia, particularly for life and savings insurers. Intervention from the regulator has effectively leveled the playing field and all but removed this perceived source of competitive advantage. The impact on consumer behaviors is uncertain, particularly given the multifaceted approach cooperatives have taken to addressing Shari‟a compliance (i.e. positioning as a Takaful operator, use of Shari‟a committees). This uncertainty is exaggerated by the low levels of insurance product knowledge held by Saudi consumers relative to mature markets. What is certain is that these regulatory changes, paired with intense competition across the insurance industry (clearly evident in general insurance and set to emerge in life and savings) will require cooperative insurers to carefully consider their market positioning and propositions. The sensitivity of the customers to Shari‟a compliant solutions remains and awareness of conflicts between Takaful and cooperative models will inevitably grow thereby providing a dilemma that will need addressing by the regulator. Page 45 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 45
  • 48. Preparing for IFRS 4, IFRS 9 & Solvency II Development 3 Numerous regulatory changes coming at once which could require overhaul of data systems The development of a new standard to replace IFRS 4 Insurance Contracts will profoundly change accounting for insurers, both for insurance contracts issued and for investments held. Under IFRS 4 Phase 1, there were limited changes to statutory accounting rules for insurers. However, the complexity of implementing IFRS 4 Phase II in conjunction with IFRS 9 Financial Instruments is likely to be at the level of a full IFRS conversion or a large Solvency II project, and will significantly impact accounting, processes, systems and people. Furthermore, in the next two years insurance groups will simultaneously have to consider and implement other accounting changes issued by the International Accounting Standards Board (IASB) on topics such as consolidation, leases, fair value measurement and revenue recognition. Main impacts on systems Feeder systems like policy administration, claims, investment or pricing systems deliver the input data for actuarial modeling and financial reporting and, therefore, need to be adjusted. Key design decisions must be made around changes to source systems versus building data warehouses. While source system changes are often not feasible due to legacy system landscapes in many insurance companies, designing and building data warehouses for Solvency II purposes takes significant time. Some leading insurance groups are currently in the process of building Solvency II data warehouses, leaving a placeholder to extend the development to cover future IFRS data requirements. Other institutions are currently heading towards interim non-sustainable solutions, building upon existing data tools across the organisation. Actuarial systems (or alternative tools) will have to be significantly enhanced or developed to comply with new measurement rules. Insurance companies developing an internal Solvency II model should analyze to what extent their solution can be enhanced to include IFRS 4. Accounting and reporting systems need to be adjusted to provide new output data, e.g., residual margin, risk margin, effect of changes in assumptions, stress test data and new KPIs. New internal and external reporting templates will also be required, with typical functionality systems that include multiple GAAP accounting, and support changes to the reporting content and structure. Systems also must be ready to provide two different complete sets of financial statements during the transition period. Ernst & Young Point of View The size and complexity of IFRS 4 Phase II, IFRS 9 and Solvency II implementation will place enormous demands on insurers and Takaful operators alike, requiring the establishment of significant programme infrastructure that has the ability to deal with and respond to changing requirements and timetables. For Takaful Operators, there is the added complexity of the segregation of the Shareholder fund and the Participant‟s fund for accounting and solvency purposes. In addition, different Operators have different methods of allowing and calculating surplus distribution and this technical calculation requires complex financial modeling which would itself then have to feed into the regulatory requirements. Takaful Operators should have begun the planning by now and must cross reference Solvency II requirements against the best practice promoted by IFSB. The reporting requirements set out by IFRS 4 & IFRS 9 should also be understood at the earliest and the data sources needed to achieve this. Changes to IT applications and infrastructure will require considerable lead times and capital expenditure so it is in the Shareholders interests that Management undertake this planning across all the regulatory changes and then map out an implementation plan to ensure compliance by the deadlines being set out in a cost effective way. 46 THE WORLD TAKAFUL Page 46 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 49. Key strategic issues Mitigating key regulatory challenges – the way forward Solvency – treatment of funds 1 ► ► ► A key issue is the solvency for the policyholders‟ funds. IFSB solvency standard and almost all regulatory regimes require the company as a whole to be solvent. This is on the ground that through a mandatory or constructive obligation of payments of Al-Qard Al-Hasan, Takaful Operators (TO) eventually become subject to a similar risk level, as of a conventional insurance company. IFSB standard further requires that TOs need to endeavor to ensure that the policyholders‟ funds also become solvent at their own. A balance between the two is probably amongst the most important regulatory challenges that regulators are facing. This is also important to note that Shari‟a scholars throughout the world are discouraging the increasing use of Al-Qard AlHasan and hence the need for self-solvent funds is increasing. As of today, very few policyholders‟ funds in across most regions cannot be considered to be solvent by themselves, and accordingly, taking this challenge can prove to be an uphill task. Accounting regulations – applicability of IFRS 4 2 ► In the regions where IFRS is the regulatory accounting framework, there are significant issues arising on the matter of applicability of IFRS framework on Takaful entities, particularly IFRS 4 (Insurance Contracts) ► The list of issues is a long one, including how to tackle the policyholders‟ fund, whether or not to apply IFRS 4 on the company as a whole, how to treat financial instruments, how to treat Al-Qard Al-Hasan, and so on. ► Malaysia is taking a lead by trying to come up with a conceptual basis for applying IFRS 4 to Takaful business, looking at IFRS requirements on consolidation and control. Moreover, it is expected a revised IFRS 4 will be issued in the next couple of years, addressing measurement issues that are not currently dealt with. ► Accounting standards issued by AAOIFI are not being followed generally by the Takaful Operators in most parts of the world. However, applying IFRS without suitable modification is also not suitable for the Takaful business. As a result, the regulators are facing the daunting challenge of setting-up accounting regulations for the Takaful industry. Sources: Discussion with regulators and experts, Ernst & Young research and analysis Sources: Discussion with regulators and experts, Ernst & Young research and analysis Page 47 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 47
  • 50. Key strategic issues Mitigating key regulatory challenges – the way forward Standardization 3 Risk management 4 ► Throughout the world, a number of Takaful and insurance models are in place, claiming to be Shari‟a-compliant insurance solutions. Even within those models, there can be a number of variants that can be identified between regions and countries, or even those the players within the same market. ► While having flexibility is generally considered to be a benefit, at times it makes other tasks difficult. For the purpose of global acceptability, growth and stability, there is an increasing need of standardizing the models and eliminating differences between them. This is currently a major barrier to cross-border operation and merger and acquisitions activity, limiting access to scale. ► Accordingly, it is now becoming a severe challenge for the regulators to standardize the models and practices within their markets, as well as cross various jurisdictions for global acceptability. Whilst risk management is intertwined with capital needs, it also has a broader spectrum. Risk management in Takaful is complicated by the existence of the segregated funds and the fact that the TO is managing the risks on behalf of the participants and therefore needs to stand in their shoes. A TO cannot generally look to participants' funds to meet risks that are those of the TO alone, though as a matter of commercial reality the TO‟s fund are standing behind the participants' risk fund, because of regulatory requirements for Al-Qard Al-Hasan. ► Risk management is a central pillar of Solvency II, and of the IAIS ICP and has also been given due recognition by the IFSB solvency standard. According to IFSB standard, the TOs is managing two distinct sets of risks i.e. the TO‟s fiduciary responsibility to manage the policyholders‟ funds so as to protect the interests of the participants and the risks relating to the TO itself in the process of meeting its financial obligations. The TOs need to have risk management processes and controls in place. Risk computations should be available for both of these distinctive sets of risk. ► The regulators face a real challenge in enforcing risk management measures that are commensurate with the business of Takaful. The state of compliance with the only available Shari‟a standard i.e. AAOIFI‟s Shari‟a Standard on Takaful / Islamic Insurance is not satisfactory. Even the regulators and the market players have not considered the same something important to be complied with. ► ► Sources: Discussion with regulators and experts, Ernst & Young research and analysis Sources: Discussion with regulators and experts, Ernst & Young research and analysis 48 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 48 The World Takaful Report 2012
  • 51. Key strategic issues Mitigating key regulatory challenges – the way forward Governance – Policyholders‟ interest 5 ► ► ► ► Governance for Islamic financial institutions has to address additional concerns compared to their conventional counterparts. The most distinctive additional issue relates Shari'a compliance, but the additional fiduciary responsibilities that arise because of the unique relationship between a TO and the participants is also key. Governance in Islamic finance and insurance is not only about following a set of legal principles. It involves following a defined set of values and ethics as well. And when dealing with a diversified set of individuals, trusting you with their moneys and to manage their risks, the additional fiduciary responsibilities are also central. While Shari'a compliance is, and always remains, a great challenge in itself, the associated governance issues pose challenges for regulators, not only because of their inherent importance, but also because of practical difficulty in regulating and supervising them. Regulation alone is not sufficient to ensure fair treatment, honesty and trust relationships. Unlike Shari'a compliance, which may or may not be an assigned responsibility of the regulators, ensuring fair and transparent treatment of stakeholders is invariably within the regulators' area of responsibility. Good governance mechanisms are essential to address these issues. AAOIFI‟s and IFSB‟s governance and Shari'a governance standards, as well as nationally endorsed codes of conduct and ethics provide guidance. Formal representation of participants or their nominees (as in Sudan) may be beneficial. Shari‟a compliance 6 ► ► Globally, Shari'a compliance is a crucial issue for Islamic financial institutions, including Islamic insurance / Takaful companies. The role and responsibility of insurance regulators on this issue varies. While a number of regulators are seriously chasing experts and market players to devise and implement standards for insuring Shari'a compliance, others are more prepared to leave it to market forces. Political will and public demand play an important part in the approach taken. Regulators are not necessarily formally tasked with supervising Shari‟a compliance in Takaful companies. However, from the point of view of stakeholders, Shari'a non-compliance is a serious matter and potentially damaging to the sector as well as individual institutions, and regulators may reasonably be expected to require a company to have a proper governance framework for Shari'a compliance, even if the regulator does not have explicit responsibility for supervising Shari'a compliance. IFSB standards provide some light on the supervisory role in Shari'a compliance. National practices are likely to continue to vary, as conditions vary country to country and achieving a standard practice on this issue will not be easy. Sources: Discussion with regulators and experts, Ernst & Young research and analysis Sources: Discussion with regulators and experts, Ernst & Young research and analysis Page 49 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 49
  • 52. Contents Introduction ► Industry Growth ► ► Financial Performance ► Business Challenges ► A history of Takaful Business models Report methodology and interviews Sources of data and samples References and Acknowledgments Regulations for Growth Appendices 50 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 50 The World Takaful Report 2012
  • 53. A brief history of Takaful Emergence of Takaful and mutual risk sharing concepts Between 7th-13th century arrangements were developed in response to perils and risks associated with long-distance trade via caravans or sea voyage that gradually evolved into a system of community self-help and financial assistance which formed basis for modern day Takaful. 7th Century 1985 Saudi Arabia 1979: Sudan OIC Islamic Fiqh Academy Resolution No. 9 (9/2) prohibited conventional insurance and allowed Islamic cooperative insurance i.e. Takaful Takaful launched with the establishment of Islamic insurance company 1977: Saudi Arabia Fatwa issued by higher council in favor of Islamic insurance model 1980: Saudi Arabia 1991: Bahrain 1995: Qatar Accounting and Auditing Takaful launched with Organization for Islamic Financial Institutions (AAOIFI) was registered the establishment of Qatar Islamic insurance in Bahrain. AAOIFI issues company accounting, auditing, governance and Shari‟a standards for IFIs 1985 Tunisia: Islamic Arab insurance company formed, later relocated to UAE Re-Takaful launched with the establishment of Saudi Takaful Limited 1981: Switzerland Dar Al Maal Al Islami Trust formed to setup Islamic banks and Takaful companies Europe A system of community self help and financial assistance developed in early 7th century. 1976: Makkah First international conference on Islamic economics 1983: Luxembourg Takaful launched with the establishment of Takaful S.A. 1994: Indonesia 1984: Malaysia Takaful Act 1984 enacted SA & SEA System of Kafala and Akhuwat GCC & MENA (7th Century – 1995) Takaful launched with the establishment of PT Syarikat Takaful 1984: Malaysia Takaful launched with the establishment of Takaful Malaysia 1975 1980 1990 1995: Singapore Takaful launched with the establishment of Syarikat Takaful 1995 Note: This chart intends to provide timelines of certain important events with reference to evolution of Takaful and the same shall not be construed to include all significant events. Page 51 The World Takaful Report 2012 51
  • 54. A brief history of Takaful GCC & MENA (1996 – 2012) 1997: Dubai Takaful launched with the establishment of Dubai Islamic insurance company 2002: Lebanon 2010: Bahrain Takaful launched with the establishment of Al Aman Takaful AAOIFI Islamic insurance Standards No. 26 issued 2005: Bahrain Bahrain Monetary Authority Rules enacted which included rules for Takaful companies 2005:Saudi Arabia SAMA regulations for cooperative insurance supervision enacted 2011: Palestine Takaful launched with the establishment of Al-Takaful Palestinian Insurance 2008: Britain Europe Takaful launched with the establishment of Salaam Insurance 2007: Germany Hannover-Re entered the reTakaful industry SA & SEA 2003: Pakistan 1996 2000 2005: Pakistan SECP issued Takaful Rules 2005 2009: Switzerland IFSB -8 issued on Takaful governance 2002: Malaysia Islamic Financial Services Board (IFSB) inaugurated. IFSB Takaful launched with issues global standards and the establishment of guiding principles for IFIs Amana Takaful 1999: Sri Lanka 2010: Germany Munich-Re entered the reTakaful industry Swiss-Re entered the reTakaful industry 2009: Malaysia Takaful launched with the establishment of First Takaful Company incorporated 2011: Kenya Takaful launched with the establishment of Takaful Insurance Africa 2010: Brunei 2009: Takaful launched with the Malaysia establishment of Takaful Brunei IFSB -10 issued on Shari‟a governance principles Darussalam 2012: Pakistan SECP draft Takaful Rules 2012 allowing window Takaful operations 2010: Malaysia IFSB-11 issued on solvency for Takaful 2010 2012 Note: This chart intends to provide timelines of certain important events with reference to evolution of Takaful and the same shall not be construed to include all significant events. 52 THE WORLD TAKAFUL Page 52 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 55. Business models: Mudaraba Mudarib‟s Share Takaful Company / Operator (Percentage share of underwriting results and total surplus including investment returns – in case of surplus only) Qard Al-Hasan (in case of deficits) Return of Qard (in case of surplus) Contributions Policyholders / Participants The policyholders are considered Re-Takaful Contributions Takaful Fund / Policyholders’ Fund Funds invested in Shari‟a compliant opportunities – adequate reserves and provisions created to be the capital providers of the Takaful fund. The shareholders are designated as the Mudarib / Re-Takaful Claims Surplus (as per policy) Re-Takaful Fund (through ReTakaful Operator) management of investment and underwriting functions. Net surplus in the Takaful pool is shared with the Takaful operator as Mudarib as per an agreed ratio considering it to be its share of profit / surplus against both, good Re-Takaful Commission Claims entrepreneur whose task is the investment management and prudent underwriting. Surplus Notes 1. Generally this model, as prevalent in Malaysia, is not accepted by scholars from other regions. Critics of the Mudaraba model argue that, the technical result should not be considered a profit and the Takaful operator does not therefore, have any right to it. Additionally, sharing surplus fails the overall concept of Takaful and makes it a remunerative arrangement. Any deficit, however, relates to the Takaful fund which is normally covered through provision of Qard Al-Hasan by the Takaful operator. As a result, the overall resemblance with conventional insurance is increased. Moreover, Mudaraba is basically an instrument for business and investment per se and using it as a main Takaful component, brings Shari’a complications. 2. This illustration covers the risk pooling and risk sharing part only. Source: Ernst and Young analysis Source: Ernst and Young analysis Page 53 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 53
  • 56. Business models: Wakala Upfront Wakala Fee Takaful Company / Operator (both, for underwriting activity and investment management – irrespective of surplus or deficit) Qard Al-Hasan (in case of deficits) Return of Qard (in case of surplus) Contributions Policyholders / Participants Re-Takaful Contributions Fee driven Wakala contract in Takaful Fund / Policyholders’ Fund Funds invested in Shari‟a compliant opportunities – adequate reserves and provisions created Claims which policyholders collectively own the Takaful pool while the Re-Takaful Claims Surplus (as per policy) Re-Takaful Fund (through ReTakaful Operator) operator manages the investment and underwriting function against a known fixed fee irrespective of results. The surplus in the fund relates to the participants. Re-Takaful Commission Surplus Notes: 1. Generally, all Takaful fees are preapproved as limits by the Shari'a board and vary between general and family offerings. The actual fees charged to participants is at the discretion of management. For example, if the Shari’a board approves a Wakala fee of up to 40% the operator is permitted to charge anything equal to or below that number. 2. In a variation of such an arrangement, the Takaful operator is also entitled to variable returns (or incentives) based on investment returns or underwriting surplus, or both. 3. This illustration covers the risk pooling and risk sharing part only. Source: Ernst and Young analysis Source: Ernst and Young analysis 54 Page 54 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 THE WORLD TAKAFUL Industry Growth & Preparing For Regulatory Change
  • 57. Business models: Combined (Hybrid) Upfront Wakala Fee (for underwriting activity – irrespective of surplus or deficit) Takaful Company / Operator Mudarib‟s Share (for investment management – in case of investment profits) Qard Al-Hasan (in case of deficit) Return of Qard (in case of surplus) Contributions Policyholders / Participants Re-Takaful Contributions Takaful Fund / Policyholders’ Fund Funds invested in Shari‟a compliant opportunities – adequate reserves and provisions created Re-Takaful Claims Surplus (as per policy) Re-Takaful Fund (through ReTakaful Operator) This model is a combination of Mudaraba and Wakala model, where Wakala contract is used for underwriting activities while Mudaraba contract is adopted for investment management activities Re-Takaful Commission Claims Surplus Notes: 1. There is growing consensus that the combined model be considered leading practice. It is now mandatory in a number of markets including Bahrain and Malaysia. 2. Critics of the combined model claim that there is a conflict of interest between the operator which seeks to maximize shareholder profits and the participants which seek to collectively and sustainably indemnify themselves from risk and benefit from any surplus that is created. Furthermore, the Shari'a board is tasked with representing the rights of participants, but this feature of Islamic corporate governance does not provide input at the executive decision making level. 3. This illustration covers the risk pooling and risk sharing part only. Source: Ernst and Young analysis Source: Ernst and Young analysis Page 55 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 55
  • 58. Business models: Wakala Waqf Waqf Cede Money Takaful Company / Operator Upfront Wakala Fee (for underwriting activity – irrespective of surplus or deficit) The Wakala Waqf model has Re-Takaful Contributions proved popular in Pakistan. It Qard Al-Hasan (in case of deficits) Mudarib‟s Share (for investment management – in case of investment profits) Return of Qard (in case of surplus) Contributions Policyholders / Participants Takaful Fund / Policyholders’ Fund Funds invested in Shari‟a compliant opportunities – adequate reserves and provisions created Claims mandates creation of a legal entity through an initial donation from Re-Takaful Claims Surplus (as per policy) Re-Takaful Fund (through ReTakaful Operator) the shareholders to a Waqf for the benefit of the participants. Only the investment and returns from this fund, (and not the Waqf amount itself), may be used to pay claims. Other characteristics are similar to combined (or at times, Wakala) model. Re-Takaful Commission Surplus (discretionary) Notes: 1. At times the investment management function is also based on Wakala or Wakalat Al Istithmar 2. Generally the Waqf cede money is an immaterial amount. 3. A few scholars argue that Waqf must be created on immovable property. 4. Scholars supporting Waqf model argue that creation of Waqf ensures real Tabarru. This is because in this model, the ownership of the participants over Takaful fund is not created. Hence, the issues of Zakat and inheritance etc. out of Takaful fund are avoided. Additionally, the second Tabarru i.e. loss / claim payments become fully independent of the first Tabarru. This avoids a small link between the two Tabarru transactions as prevalent in other models. 5. This illustration covers the risk pooling and risk sharing part only. Source: Ernst and Young analysis Source: Ernst and Young analysis 56 THE WORLD TAKAFUL Page 56 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 59. Business models: Cooperative Insurance Policyholders’ Fund Cooperative Insurance Company’s Shareholders Deficit (in full) Surplus (90%) Premiums Policyholders / Participants Claims Surplus (Minimum of 10%. Can be more at the managements discretion) (Fund managed, controlled completely by the cooperative insurance company and no separate legal status of the Fund exists although by law it is required to be separated from shareholder funds) Funds invested in various investment opportunities – adequate reserves and provisions created Cooperative model is the only Reinsurance Premiums permissible model in Saudi Arabia. The regulator does not allow Qard Reinsurance Claims Re-Insurance Company facility or charging of Wakala fee. However, a percentage of premium is allowed to be deducted as shareholder income if net surplus is sufficient Re-Takaful Commission Notes: 1. For the purpose of this report cooperative model is represented separately from Takaful, where ever possible. 2. This illustration covers the risk pooling and risk sharing part only. Source: Ernst and Young analysis Source: Ernst and Young analysis Page 57 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 57
  • 60. Business models: comparison of features From the investors‟ perspective, the four Takaful models entail a few differences, and significant commonalities Mudaraba Share of technical results N/A (see “share of surplus” below) Share of investment result N/A (see “share of surplus” below) Share of surplus (technical and investment results) Wakala Percentage of surplus Combined Wakala Waqf None (fixed Wakala fee without any consideration to the technical results – certain variants of Wakala / Combined model, however, include an incentive) None (at times include an incentive profit) Agreed profit sharing ratio Agreed profit sharing ratio (at times a fixed fee or a fixed fee with incentive profit) None Loss on investments None (unless found negligent) Operating expenses Borne solely by shareholders‟ fund; direct expenses may be passed on to the policyholders‟ fund Investment instruments Acceptable Shari‟a compliant instruments Deficit in the policyholders’ fund Al-Qard Al-Hasan provided to policyholders‟ fund Policyholders‟ contributions Initial Waqf ceding by shareholders and policyholders‟ contributions Accrue to policyholders only, except provisions and reserves that have to be paid in charity Waqf cede money must go to another Waqf; balances to be paid in charity or disbursed amongst participants Creation of Takaful fund Liquidation of policyholders’ fund Prevalent in countries Partially in Malaysia, Brunei and Saudi Arabia* Sudan, UAE and United Kingdom Bahrain, Malaysia and Sudan Pakistan and South Africa * Note: See subsequent page on regional characteristics. Source: Ernst and Young analysis 58 THE WORLD TAKAFUL Page 58 REPORT 2012: Industry growth and preparing for regulatory change The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 61. Business models: strengths and constraints Each model has its own inherent strengths and constraints Characteristics Mudaraba Wakala Combined Wakala Waqf    Enhanced profitability as the operator shares in the surplus     Excessive risk taking in investments mitigated as no upside exists for the operator     ► Two sources of revenues – Wakala from contributions and Mudaraba from investments     ► The provision of Al-Qard Al-Hasan partially limits excessive risk taking by operators     ► Incentive for prudent underwriting  / /  ► Shareholders are permitted to share in the technical results     ► Legal framework support is limited and complicated     ► The operator has incentive to take on excessive risk in investments (partially mitigated through Al-Qard Al-Hasan)    / ► Direct financial incentives to improve technical results are limited (indirect benefits are realized through distributions to participants and through increased fund size)     ► No system of corporate governance that effectively addresses and represents the rights of the participants     ► Constraints  ► Notes: Comparatively simple model ► Strengths ► No accounting policy which addresses issues of equitable distribution of surplus over time given varied entry and exit by participants     1. Wakala Waqf model may be formed by Wakala on both ends. 2. Only Sudan’s model is an exception whereby policyholders have been provided some rights. 3. At times in Wakala and combined models, there is a surplus sharing option for shareholders in various forms for incentive purposes. Source: Ernst and Young analysis Page 59 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 59
  • 62. Regional characteristics and comparison The business execution of Takaful varies significantly between key markets Characteristics Saudi Arabia Malaysia Bahrain UAE ► Started in 1986 1985 1979 1995 ► Windows allowed *N/A N/A N/A N/A ► Model used Cooperative model Mudaraba / Combined model Combined model Combined Model / Wakala Model ► Surplus sharing with Shareholders Yes - 90% Yes - - ► Regulator Saudi Arabian Monetary Agency Bank Negara Malaysia Central Bank of Bahrain The UAE Insurance Authority Law On Supervision of Cooperative Insurance Companies Takaful Act 1984 Central Bank of Bahrain and Financial Institutions Law 2006 Federal Law Number 9 - - Yes Yes New companies are following combined model. Benefits from both the Wakala and Mudaraba models can be enjoyed by the operators. CBB requires each Takaful operator to have a Shari‟a Supervisory Board. Benefits from both the Wakala and Mudaraba models can be enjoyed by the operators. ► Regulations ► Separate Participants Investment Account (PIA) for Family Takaful ► Special characteristics / Comments Certain companies endeavor to follow Takaful principles and have appointed Shari‟a boards to supervise business operations, including investments and ensure compliance with Islamic law. Situation will change with recent changes in regulations. Notes: * There are no conventional commercial insurance operators in Saudi Arabia Source: Ernst and Young analysis Source: Ernst and Young analysis 60 Page 60 REPORT 2012: Industry growth and preparing for regulatory change THE WORLD TAKAFUL The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change
  • 63. Regional characteristics and comparison The business execution of Takaful varies significantly between key markets Characteristics Indonesia Kenya Sudan Pakistan ► Started in 1994 2008 1979 2003 ► Windows allowed Yes Yes - No * ► Model used Wakala / Mudaraba Combined model Wakala / Combined model Wakala Waqf model ► Surplus sharing with Shareholders Yes Yes - Yes The Capital Market and Financial Institution Supervisory Board (BAPEPAM) Insurance Regulator Authority - Securities and Exchange Commission of Pakistan Insurance Act of 2009 Insurance Act 2003 Insurance Ordinance 2000, Takaful Rules 2005 ► Regulator ► Regulations ► Separate PIA for Family Takaful Yes Yes - Yes ► Special characteristics / Comments - - Takaful companies in Sudan are founded as shareholding companies but operate the basic system of Takaful. The Takaful fund is created in form of charitable trust fund i.e. Waqf. Source: Ernst and Young analysis Source: Ernst and Young analysis Page 61 Article 3 Minister of Finance Decree No:503/KMK.01/1997 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 61
  • 64. Key features of IFSB solvency standard compared with leading practices Whereas traditionally insurance solvency requirements have been based on simple metrics such as percentages of premiums or of actuarial reserves, this approach is now widely regarded as inadequate. Solvency requirements based on risk are now seen as a core element of an effective regulatory framework. And many countries now use such an approach (including several where Takaful is also present). The International Association of Insurance Supervisors endorses risk-based solvency in its Insurance Core Principles and its Common Structure for the Assessment of Insurance Solvency. In addition, it is now widely recognized that capital is not a sufficient guarantee of solvency and that whilst capital is a vital pillar of a solvency regime, proper risk management and governance, and adequate disclosure to regulators and to the public, are also essential elements. The 'three-pillar' approach to solvency supervision, familiar from banking regulation, is now widely seen as necessary for insurance as well. Among different national approaches to the implementation of the Insurance Core Principles, proceeding at different paces, the European Union's Solvency II project, due for implementation in 2014, stands out as cutting-edge. Although Solvency II is not unique and a number of countries are revising their solvency frameworks along similar lines, Solvency II is widely known and we have selected this as a leading example of good practice, against which to compare the IFSB Solvency Standard. Solvency II [Future good practices] IFSB Solvency Standard Issued by Islamic Financial Services Board Commission of the European Communities Effective from December 2010 January 2014 Approach Total balance sheet approach Proposes the adoption of total balance sheet approach Source: Ernst & Young research and analysis Source: Ernst and Young research and analysis 62 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 62 The World Takaful Report 2012
  • 65. Key features of IFSB solvency standard compared with leading practices Solvency II [Future good practices] IFSB Solvency Standard Solvency control levels Solvency control levels should be established at the respective Takaful and shareholders‟ funds. The solvency requirements should be based on the following four concepts: - minimum capital requirement (MCR) - prescribed capital requirement (PCR) - minimum target capital (MTC) - prescribed target capital (PTC) Proposes Minimum Capital Requirement (MCR) and Solvency Capital Requirement (SCR) Assessment of solvency resources Criteria be established for assessing the quality and suitability of solvency resources in the Takaful and shareholders‟ funds to absorb losses in different stages Proposes the asset valuation method(s) adopted internationally Risk management framework Takaful undertakings must have separate risk adjusted computation and assessment This framework should enable risk profiling, risk qualification and assessment, risk warning, risk supervision and disclosure Supervisory reviews Supervisory review process is to assess for each undertaking that adequate risk management arrangements are in place through which the TO can, and does, monitor, measure, report and control the management of the assets and liabilities Supervisory reviews from designated qualified party. Such review will enable supervisory intervention if an insurer‟s capital does not sufficiently buffer the risk Disclosure of material information Information regarding the solvency requirements for a Takaful undertaking should be publicly disclosed to enhance market discipline and the accountability of the TO Solvency II requires the production of following documents: - Solvency and Financial Condition Report - Report to Supervisors (RS) Source: Ernst & Young research and analysis Page 63 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 63
  • 66. IFSB solvency standard – key requirements Effects Key features Solvency requirements Balance sheet approach It ensures that risks are appropriately recognized and consistently valued and identifies the interdependence between assets, liabilities, regulatory solvency requirements for Participants‟ Risk Fund (PRF) and the shareholders‟ funds of the Takaful Operator (TO). The total balance sheet approach must address the clear separation of PRF and the shareholders‟ funds of the TO. Solvency resources in the Takaful and shareholders’ funds be adequate to meet their respective financial obligations The TO should endeavour, over time, to bring the reserves in a PRF to a level at which the fund becomes self-sustaining with sufficient resources to meet solvency requirements without the need to rely on Al-Qard AlHasan. Solvency control levels should be established at the respective Takaful and shareholders’ funds Regulatory framework should either define, or allow discretion to supervisory authorities to determine the control level applicable to the PRF. The supervisory authorities would then be able to request the TO to draw down the AlQard Al-Hasan facility to the PRF immediately once the control level is breached in order to expedite the restoration of the required solvency control level. Criteria be established for assessing the quality and suitability of solvency resources in the Takaful and shareholders’ funds to absorb losses in different stages Supervisory authority may choose a variety of approaches which categorize solvency resources into different quality classes and apply certain limits; ii. approaches which rank capital elements on the basis of the identified quality characteristics; or iii. approaches which apply individual restrictions or charges where necessary. Takaful undertakings must have separate risk adjusted computation and assessment The TOs might be seen as managing two distinct sets of risks. The first set relates to the TO‟s fiduciary responsibility to manage the PRFs under its management so as to protect the interests of the Takaful participants. The second set of risks relates to the TO itself in the process of meeting its financial obligations. Supervisory review is to assess for each undertaking that adequate risk management arrangements are in place through which the TO monitor, measure, report and control the management of the assets and liabilities Solvency requirements regime should place emphasis on the TO having appropriate controls in place and taking great care to ensure that all persons or entities with operational and oversight responsibilities act in the best interests of Takaful participants and beneficiaries. Source: IFSB - Standard on Solvency Requirements for Takaful (Islamic Insurance) Undertakings ] Page 64 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Source: IFSB - Standard on Solvency Requirements for Takaful (Islamic Insurance) Undertakings ] 64 Information regarding the solvency requirements for a Takaful undertaking should be publicly disclosed to enhance market discipline and the accountability of the TO A TO should describe the overview of the risk management framework for identifying, measuring, monitoring and controlling relevant risks in maintaining the solvency control level in its annual report. Governance framework This standard refers to and suggests that the same should be read together with IFSB-8 Guiding Principles on Governance for Takaful (Islamic Insurance) Undertakings.
  • 67. Ernst & Young’s Islamic Financial Services Group ashar.nazim@bh.ey.com Abid Shakeel +973 1751 2916 abid.shakeel@bh.ey.com Bahrain Noman Mubashir +973 1751 2818 noman.mubashir@bh.ey.com Kuwait Walid Al Osaimi +966 5000 0938 al-osaimi.waleed@aw.ey.com Qatar Robert Abboud +974 4573 444 robert.abboud@qa.ey.com Saudi Arabia Abdulaziz Al Sowailim +966 1215 9438 abdulaziz.al-sowailim@sa.ey.com UAE Michael Hasbani + 971 505515628 michael.hasbani@ae.ey.com Pakistan / Afghanistan Omar Mustafa Ansari + 92 21 3565 0007 omar.mustafa@pk.ey.com Dong Xiang Bo +86 10 5815 2289 xiang-bo.dong@cn.ey.com Indonesia Yasir Yasir +62 21 5289 4171 yasir.yasir@id.ey.com Malaysia Brandon Bruce +603 7495 8762 brandon.bruce@my.ey.com Russia Jahangir Juraev +7 727 259 7206 jahangir.juraev@kz.ey.com France Jean-Paul Farah +33 1 46 93 64 15 jean-paul.farah@fr.ey.com Luxembourg Pierre Weimerskirch +352 42 124 8312 pierre.weimerskirch@lu.ey.com United Kingdom James Smith +44 7920 701102 JSmith6@uk.ey.com United Kingdom Asia Pacific +973 1751 2808 China Europe Ashar Nazim MENA Middle East & North Africa MENA Mark Stanley +44 7557 089884 MStanley1@uk.ey.com Page 65 The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change 65
  • 68. Report methodology and our interviews Survey Methodology ► Our survey sought to identify key trends and business risks for the global Takaful industry through in-depth interviews with executives, experts and industry observers. ► These discussions were used to gauge business sentiment and identify key areas for inquiry. ► Interviews were conducted in February and March of 2012. A total of 11 interviews (and surveys excluding informal discussion) were conducted in five different countries by Ernst & Young staff. ► Interviews centered on three main topics of discussion, namely: ► Business confidence, demand and supply; ► Mega trends; and ► Business risks . Business Risk Ratings ► Ernst & Young subject matter experts from the Middle East, Asia and Europe developed a list of Takaful business risks and contributing factors. ► All interviewees were provided with a list of business risks and requested to rate each to reflect its severity to their respective business over the coming 12 months. Interviewees were also asked to add any additional risks they felt were important. ► The results of this rating process were tabulated and a relative ranking assigned to each. This rank formed the basis for our comparative study with 2011 results. 66 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 66 Business Risks Radar ► The Ernst & Young risk radar is a simple device that allows us to present the top 6 business risks in the Takaful industry. ► The risks at the center of the radar are those that the individuals we interviewed thought would pose the greatest challenge to the industry in 2012. Business Risk Categories The radar is divided into four sections that correspond to the Ernst & Young Risk Universe™ model. ► Compliance threats originate in politics, law, regulation or corporate governance; ► Financial threats stem from volatility in markets and the real economy; ► Strategic threats are related to customers, competitors and investors; and ► Operational threats impact the processes, systems, people and overall value chain of a business. ► Anonymity and Quotes ► All interviewees were assured of anonymity and minutes were documented during our discussions. ► Quotations have been used to support arguments made in the report. The World Takaful Report 2012
  • 69. Sample of Takaful operators and insurance companies Takaful operators: Bahrain ► Qatar ► Qatar Islamic Insurance Company Bahrain ► Takaful International Company Malaysia ► ► ► ► ► Allied Cooperative Insurance Group E C CIMB Aviva Takaful Berhad Etiqa Takaful Berhad Hong Leong Tokio Marine Takaful Berhad Takaful Ikhlas Sdn. Bhd. UAE ► ► ► ► ► Abu Dhabi National Takaful Company PSC Dar Al Takaful Methaq Takaful Insurance Company Islamic Arab Insurance Company (Salama) Takaful Al Emarat - Insurance ► ► Malaysia ► ► ► ► ► ► ► ► ► ► ► ► ► ► ► ► Kuwait ► ► ► Al Ahleia Insurance Company Gulf Insurance Company Warba Insurance Company Qatar ► ► Qatar Insurance Company Doha Insurance Company Page 67 Lonpac Insurance Bhd Allianz Life Insurance PacificMas Berhad Manulife Malaysia MNRB Holdings Berhad Jerneh Asia Berhad Kurnia Asia Berhad MAA Holdings Berhad Pacific & Orient Berhad UAE ► Insurance companies: Al Ahlia Insurance Bahrain Kuwait Insurance Company Bahrain National Insurance ► ► ► ► ► ► ► ► ► Abu Dhabi National Insurance Company Al Ain Ahlia Insurance Company Al Buhaira National Insurance Company Al Dhafra Insurance Company Al Fujairah National Insurance Company Al Khazna Insurance Company Al Sagr National Insurance Company Al Wathba National Insurance Company Arab Orient Insurance Company Arabian Scandinavian Insurance Company Dubai Insurance Company Emirates Insurance Company Green Crescent Insurance Company National General Insurance Oman Insurance Company Sharjah Insurance Company Union Insurance Company Cooperative insurance companies: Saudi Arabia ► ► ► ► ► ► ► ► ► ► ► ► ► ► ► ► The World Takaful Report 2012 Industry Growth & Preparing For Regulatory Change Allied Cooperative Group Sanad for Cooperative Insurance and Reinsurance Alahli Takaful Company Company for Cooperative Insurance - Tawuniya SABB Takaful Saudi Indian Company for Cooperative Insurance Saudi IAIC Cooperative Insurance Company Saudi Fransi Cooperative Insurance Company Saudi Arabian Cooperative Insurance Company AXA Cooperative Insurance Company Al Sagr Cooperative Insurance Company Amana Cooperative Insurance Company Arabian Shield Cooperative Insurance Company BUPA Arabia for Cooperative Insurance Gulf General Cooperative Insurance Company Gulf Union Cooperative Insurance Company 67
  • 70. References and acknowledgements Sources ► Global Insight – Comparative World Overview Tables ► Middle East Insurance Review ► World Islamic Insurance Directory (WIID) 2008 – 2011 [Author: Takaful Re] ► Saudi Arabian Monetary Agency (SAMA) Insurance Review ► Annual Insurance Statistics – Insurance Authority (UAE) ► CBB Insurance Annual Reviews ► Annual Insurance Statistics 2011 - Bank Negara Malaysia ► Companies Annual Reports (published information for Takaful operators and insurance companies) ► Alpen Capital Report (GCC Insurance Industry 2011) ► Pew Forum Ernst & Young’s Project Team Ashar Nazim Omar Mustafa Ansari Abid Shakeel Muhammad Shahzad Khan Mehdi Zaidi Rima Farooq Noman Mubashir Mark Stanley Danish Iqbal James Smith For questions or comments, please contact : Noman Mubashir: noman.mubashir@bh.ey.com 68 THE WORLD TAKAFUL REPORT 2012: Industry growth and preparing for regulatory change Page 68 The World Takaful Report 2012
  • 71. Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com. The MENA practice of Ernst & Young has been operating in the region since 1923. For over 85 years, we have evolved to meet the legal and commercial developments of the region. Across MENA, we have over 4,000 people united across 18 offices and 13 Arab countries, sharing the same values and an unwavering commitment to quality. For more information, please visit www.ey.com/mena © 2012 Ernst & Young. All Rights Reserved This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Page 69 The World Takaful Report 2012 69
  • 72. MEGA BRANDS. MEGA CLIENTS. MARKET LEADERS. MEGA is the market leading business information firm focused on achieving business results for the global Islamic banking & finance industry since 1993. The portfolio of MEGA brands represents the landmark industry conferences and our clients are the leading players in the international financial markets. International Summit on Islamic Corporate Finance Strengthening the Collaboration Between Conventional & Islamic Financial Institutions to Meet the Needs of Corporate Borrowers WTC is a MEGA Brand ©2012 The World Takaful Report is documented for the World Takaful Conference. No part of this document may be republished, distributed, retransmitted, cited or quoted without the prior written permission from MEGA or Ernst & Young.

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