Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Abdul Rahim Abdul Wahab, FSA
Director & Actuary
Actuarial Services Division
abdul.rahim@sidathyder.com.pk
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Finance & Investment Symposium 6 - 7 Dec 2006, Karachi

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd
What is covered
• Gap in Islamic Finance
• Conventional Insurance
• Takaful Concept
• Takaful Rules
• Retakaful
• Market Potential
• Islamic Banks and BancaTakaful

Gap in Islamic Finance
• Islamic Banks contracts require assets to be insured
with a Takaful company as per Shariah requirement.
• Many potential consumers of Islamic Finance stay away due to Insurance
being on conventional basis.
• Doctrine of Necessity applied till Takaful was not available.
• Takaful Rules promulgated in September 2005.
• One General takaful operator since last one year. More to follow in coming
months giving consumers a choice within takaful.
• Takaful exists for almost 30 years – typically with 2 to 3 years lag with
Islamic banking development. Started with Sudan, later ME and Malaysia.
• Also number of synergies could be created with Islamic
banks distributing takaful products (BancaTakaful) or
setting up takaful companies with equity participation.
• Standing requirement of Islamic Banks for Islamic House Mortgage
schemes, Car Ijarah schemes as integrated benefits.
• Distribution of Takaful Savings and Protection plans in different forms.

Indemnification against unforeseen financial losses
(not to profit from loss)
Commercial Risk Transfer
Law of Large numbers - Insurance company pools
risks/reinsures above capacity.
Recovers expenses for managing the pool
Investment return under life insurance shared with
PHs based on Actuarial Valuation or otherwise.
Profit for the shareholders based on Underwriting
results and Investment income
CONVENTIONAL INSURANCE

Objections to Conventional Ins
 Elements of:
 Uncertainty – Gharrar (non-existence of
goods, un-known quantity, timing) in a
commercial risk transfer contract.
 Interest – Riba
OBJECTIONS TO CONVENTIONAL INS

 Takaful means “Joint Guarantee” for mutual
assistance within a group. Each member of the group
pools to support the needy within the group.
 Mutual protection contains elements of cooperation,
shared responsibility joint help – all encompassing in
takaful concept
 Principle objective is the same as Insurance - to
indemnify against unforeseen financial losses.
 Mechanism followed is however different.
 An economic institution whereby the losses of the
unfortunate few are shared by the contribution of the
fortunate many who are exposed to the same risk on
“Co-operative Risk Sharing” basis.
BASIC CONCEPT OF TAKAFUL

 Concept of “Risk Manager” NOT “Risk Taker”
 Underwriting Surplus belong to Participants
 Underwriting Deficit may be shared by participants
 Risk Management
 Underwriting as usual
 Ensure Risk premium adequate – not commercial
driven
 Retakaful Pool instead of Reinsurance
 Interest free loan by SH (Qard Hasnah)
 Investments compatible with Shariah based on Profit
Sharing principles
HOW IS IT DIFFERENT FROM INSURANCE

Issue Conventional Takaful
Organization
Principle
Profit for shareholders/
Risk transfer
Mutual for participants
Risk remains with participants
No underwriting profits for SHs
Form of
Relationship
Commercial
Exchange/Contract of
compensation
Cooperative, Shariah contracts of
Wakala or Mudarabah with
contribution for mutual assistance
Capital Shareholders Operator provides set-up capital.
Laws Regulations Regulations plus Sharia approval
Ownership Shareholders Participants of Takaful Fund
Investments Equity/debt-no
restrictions
Sharia compliant investments only /
No interest
Surplus Shareholders account Participants account
CONVENTIONAL vs TAKAFUL

Takaful Rules 2005
Capital requirement – 80 m for General and 150 m for
Family. Likely to be increased to Rs.300m for General
and Rs.500 m for Family. Board of Investment
requirement is $4 million (Rs. 240 million) at present.
Composite companies not allowed
Wakalah Model for Risk Protection
100% Surplus distribution for participants (after
reserves etc)
Underwriting deficit – Qard Hasnah by SH or recover
Mudaraba or Wakala Model for Investment Sharing.

Takaful Rules 2005
Takaful company can also share risks on
coinsurance basis from outside Pakistan
Can use conventional reinsurance, only if
retakaful is not available and if Shariah Board
permits. Wakala based would be preferred.
Windows not allowed for atleast 5 years
Transformation of existing conventional general
companies is allowed in one year
Three member Shariah Board and Annual
Shariah Audit

 Retakaful solutions evolving although not
enough capacity available.
 Best Re (Tunisia), Asean Re (Labuan) and
Tokyo Marine are providing retakaful based on
Mudaraba model. Shariah scholars and SECP
have objections to Mudaraba model. Need to
look for Wakala based Retakaful solutions as a
preferred route.
 Lloyds syndicate is setting up a Retakaful
solution for General Takaful.
RE TAKAFUL

 Takaful Re launched in Dubai by ARIG with $125 m capital.
Recently rated BBB by S&P becoming the 1st
Retakaful operator
with a rating and Wakala based model.
 Swiss Re recently launched Wakala based Family Retakaful Fund.
 Hannover Re is working on Retakaful solutions.
 Munich Re has also incorporated its Retakaful subsidiary in
Malaysia.
 “Doctrine of Necessity” may no longer be justified hopefully
leading to Takaful being backed by RETAKAFUL rather than
Reinsurance.
 Government/ SECP needs to encourage setting up of Retakaful
pools.
 Possibly within NICL / PRCL for General Retakaful
 State Life for Family Retakaful
RE TAKAFUL

Market Potential
Pakistan’s insurance
density and insurance
penetration rates low.
Reasons – Lack of
awareness and religious
concerns.
Takaful can help push
the penetration rates up.

Growth of Life Insurance Premium
6.98
1.35
8.39
1.93
9.92
3.11
11.11
3.57
13.90
4.65
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Billions
2001 2002 2003 2004 2005
Private
State Ow ned

Growth of General Insurance Premium
3.22
1.28
3.13
1.20
3.59
1.63
2.94
1.36
4.14
1.71
3.00
1.23
4.66
2.40
4.28
1.26
5.96
3.05
5.89
1.74
6.92
3.62
6.96
2.77
-
5.00
10.00
15.00
20.00
25.00
2000 2001 2002 2003 2004 2005
Misc
Motor
Marine
Fire

ROE OF INSURANCE INDUSTRY
RETURN ON EQUITY (%)
Year
Average Equity
Weighted (%) EFU AIC NJI Shaheen Askari
2005 58 56 63 57 39 28
2004 33 60 27 30 11 23
2003 32 33 29 41 21 16
2002 21 17 21 25 18 13
GENERAL INSURANCE
RETURN ON EQUITY (%)
Year
Average Equity
Weighted (%) EFU NJI ALICO METRO
2005 26 43 15 15 1
2004 27 47 21 6 8
2003 26 40 33 13 2
2002 14 17 -4 21 4
LIFE INSURANCE

Islamic Banking
Dec 02 Dec 03 Dec 04 Dec 05 Mar 06 June 06
Number of full fledge Islamic Banks 1 1 2 2 3 4
Number of Islamic Bank Branches 6 10 23 37 39 48
No. of conventional banks operating
Islamic Banking Operation
- 3 7 9 10 11
Number of stand alone Islamic
Branches of conventional banks
- 7 21 33 34 39
Number of Branches expected to grow exponentially
Two new banks Emirates Global Islamic Bank Limited and First Dawood Islamic
Bank Limited
State Bank growth estimates for Islamic Banks

Islamic Banking Growth
87602.67930171493.44414312914.7
6789.34829.94538.72700.81041.7Other assets
22877.419718.719314.311899.71978.5Cash, bank balance, placements
6333.16034.81854.220071242.3Investments
51602.848717.645786.227535.58652.2Financing
USES:
87602.77930171493.444143.112914.6
7121.76416.94744.82276.1624.8Other
12284.510268.978115123.11993.7Capital & Other funds
85398948.29005.86559.11899Borrowings
59657.55366749931.830184.88397.1Deposits
SOURCES
Jun-06Mar-06200520042003
Table-5.2: Sources and Uses of Funds Rs. In billion
Source: SBP Publication June 2006

 Islamic Banks have a mandated requirement / moral obligation to insure
assets from a takaful company if available.
• Islamic Banks had disbursed Rs.58 billion (approx) – June 2006 in
various assets
 General Insurance market size 2005– GWP Rs. 20 Billion (approx.), 38
companies
• Even if 10% switch to this basis it is more than Rs. 2.0 billion.
 Untapped Market - Individuals do not take insurance - Motor, PA, Health,
Home
• Even if 10% of existing market do not insure for religious reasons, its
over 2 billion.
A large number of industrial groups have shown interest in takaful.
Only one Takaful operator licensed in Pakistan, so far!! – More to follow
Opportunities – General Takaful

Islamic Banks require life cover for House financing etc.
Life Insurance market size 2005– GWP Rs. 18 Billion (approx.), 4
private sector companies. Talks of SLIC being privatised in some
form.
Even if 10% switch to this basis it is more than Rs. 1.8 billion.
Untapped Market - Individuals do not take insurance – Just 2.5
million individual life policies
Even if 10% of existing market do not insure for religious
reasons, its almost 2 billion.
A large number of industrial groups are interested in group life and
health benefits based on takaful.
No Life takaful operator so far!! – Some under formation
Opportunities – Family Takaful

• World Takaful Conference Dubai April 2006
• Around 70-80 companies are now operating in 28 countries.
• Takaful is one of the fastest growing sectors of the insurance
industry with around 20 per cent annual growth compared to
less than 10% for conventional.
• Global Takaful premiums are estimated at $3 billion, of which
60 per cent is general takaful and the remaining is family
takaful.
• Middle East accounts for 36 per cent of premiums and about
56 per cent is generated in South East Asia.
TAKAFUL IN THE WORLD

SYNERGIES AMONGST ISLAMIC
FINANCE PARTICIPANTS
Takaful Operators,
banks and Capital
market players
continuously focus on
product building to
offer more attractive
products that fulfill the
differentiated needs of
the customers.

Synergies in Islamic Financial System
• Islamic Banks, Capital Markets and Takaful Operators work together to develop
products using each others strengths leading to competitive products.
• Takaful Operators fill the gap by providing Shariah compliant protection for Islamic
Financing Products.
• Islamic Banks and takaful operators work together to distribute takaful savings
and protection products under bancatakaful arrangements in a more cost effective
manner leading to better consumer values.
• Takaful Operators need longer term investments which fulfill the long term
financing needs of Islamic financial institutions
• Long term investments enable takaful operators to offer better returns to its
customers and shareholders.

BANCATAKAFUL
• A mechanism for distribution of takaful products through banks.
Advantages for banks:
• Additional fee income from existing customers received upfront.
• Additional product offering
• Increase customer retention by offering long term plans
• Simple examples are:
• Motor Takaful policy with Car Ijarah of Islamic Bank
• Family Takaful cover with Housing or other financing facility.
• Depositors protection
• Credit card protection
• More complex products include:
• Savings products
• Education products
• Retirement products
• Protection products

BANCATAKAFUL TRENDS IN ASIA
• Based on research conducted by Swiss Re Sigma report (2002) “…
by 2006, bancassurance could potentially account for 13% of total
premiums collected in Asia’s life insurance sector and 6% in the non-life
sector”.
• A large interest from insurers at this time as they seek to diversify
from traditional and less productive agency channels.
• Distribution agreements appear to be increasingly common as a
business model in Asia Pacific but increasing focus by major banks
in JVs and ownership models.
• Most of the larger banks in each country have an interest in a
bancassurance operation, or plans to enter the ‘manufacturing’ area
– moving from ‘fee income’ to ‘value creation’, by setting up its own
insurance company.

Recap
• Protection against unforeseen financial losses is a
concern for many. Religious prohibition stops.
• Takaful Offers a huge potential market by filling the
gap which remains untapped at present.
• Competitive Pricing of Takaful products would remain
a key factor along with quality service.
• Bancatakaful could fast track efficient distribution and
better customer value.
• Adherence to Shariah principles in operational
practices would be the long term driver for success.

THANK YOU
Abdul Rahim Abdul Wahab, FSA
Director & Actuary
Actuarial Services Division
abdul.rahim@sidathyder.com.pk
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Finance & Investment Symposium 6 - 7 Dec 2006,
Karachi

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