Takaful and Mutual Insurance Business Challenges in Mutual Insurance and Takaful Serap Gonulal November 13, 2012
The four pillars of Takaful Takaful Regulatory and legal framework Transparency and consumer protection Uniform accounting standards Consensus of Shariah principles 2
Aligning stakeholder interests Operator Participants maximize profits contributions risk sharing Which sharia contract aligns Participants and interests the best and yet maximizes the concept of risk sharing rather than risk transfer? For long term sustainability it is important that the reward structure benefits both Operator and Participants fairly. 3
Component of benefit payouts Lower premium needed as higher investment component Higher premium required as there is lower contribution from investment Premium Income Investment Income Premium Income Premium Income Investment Income Size of benefit payouts and required premium/contributions rate depends on level and certainty of investment. Crucial that the Sharia compliant asset classes be expanded and deepened. 4
Importance of reserving and solvency margin Premiums/Contributions Solvency Margin Reserving Benefit payout Adequate reserving and solvency margin ensures benefits promised are paid out. 5
The people makes the industry Although there are shared competencies among those in conventional insurance and takaful, there are also differences. Given that the latter is currently sourced from the former there is a need for training. Job function How different is modern takaful (hybrid) from conventional insurance Chief Executive Officer Sales team Actuary Accounting different same 6
Should there be one takaful model for all? There is a need for a universally acceptable Sharia compliant model so as to minimize cost of implementation (systems, etc). A universally acceptable model, other than being Sharia-compliant, should be able to align the various stakeholders interests or at the very least, allow for easy supervision by the Regulators. As a cooperative/mutual set up - As shareholders (owners of surplus in the Mutual fund) are also policyholders, management works for the same stakeholders for a wage. No controversial Sharia contract issues. As a hybrid with a stock management company - Model needs to be able to balance shareholders and participants interests. The following tables summarizes the issues with the two predominant model, wakala and mudharaba. 7
Should there be one takaful model for all? - Consider sharing of Investment Performance Investment performance of takaful risk pool is better than expected Investment performance of takaful risk pool is poor Takaful risk pool makes an investment loss Contract Type Model Wakala Mudharaba is higher is lower Operator gets no 8
Should there be one takaful model for all? - Underwriting Performance The risk pool makes an underwriting profit The risk pool makes an underwriting loss Contract Type Model Wakala Mudharaba The above table assumes the Operator gets no share of any underwriting surplus. 9
Should there be one takaful model for all? - Business volume Increase in contribution Reduction in contribution Contract Type Model Wakala Higher Lower Mudharaba No immediate impact No immediate impact Generating higher business volume lower s per unit business cost and increases expense surplus. 10
Common challenges for Takaful, Mutuals and Insurance Challenging investment environment, low investment return globally means operating margins are under pressure. Soft market as a result of a world awash with cheap funds seeking opportunities in new markets, like insurance. As a result risk is underpriced. Global warming can result in more frequent occurrences of catastrophic events like Hurricane Sandy. Imminent introduction of Solvency II will increase the sophistication of regulatory reporting not just in Europe, but globally. Are the rest of the world equipped to adopt Solvency II type supervision? For non-stock companies, how will the regulatory need for more capital be met? 11
Conclusion From the operational perspective the Insurance industry globally is facing greater challenges. From the consumer side the demand for greater transparency and accountability from insurers and their agents opens an opportunity for nonstock insurance operation. These alternatives offer risk sharing rather than risk transfer which should result in fairer pricing. These institutions should project greater transparency and offer simpler products. For takaful, the opportunity to penetrate new currently untapped market is huge. The key to success is a holistic approach to market accompanied with the right regulatory support. 12