RBC for Takaful Differences from Conventional, Impact and Opportunities Charlene Lee Senior Actuary Munich Re Retakaful
Agenda Typical Takaful Models in Malaysia Solvency Requirements in Malaysia Evolution RBC for Conventional Insurers RBC for Takaful Operators Key Differences Impact of RBC in Takaful To Participants To Operators Opportunities and Conclusion
Pure Wakala Model Participant Wakala = Agency contract, i.e. 3 rd party administrator Takaful Contribution Tabarru Tabarru = Donation Wakala Fee Participants Risk Fund (PRF) Tabarru Participants Investment Fund (PIF) Qard = Loan (interest-free) Claims Reserves Retakaful Shareholders Fund (SHF) If Deficit: Qard from SHF UW Surplus / Deficit Investment Profit / Loss Mngt Exp, Commission
Wakala Mudharaba Hybrid Participant Wakala = Agency contract, i.e. 3 rd party administrator Takaful Contribution Tabarru Tabarru = Donation Wakala Fee Participants Risk Fund (PRF) Tabarru Participants Investment Fund (PIF) Qard = Loan (interest-free) Claims Mudharaba = Profit-sharing Reserves Retakaful Shareholders Fund (SHF) If Deficit: Qard from SHF UW Surplus / Deficit Investment Profit / Loss Mngt Exp, Commission
SOLVENCY IN MALAYSIA
Evolution of Solvency Requirements in Malaysia
RBC FOR CONVENTIONAL INSURERS
RBC for Conventional Insurance Total Capital Available (TCA) Capital Adequacy Ratio (CAR) = Total Capital Required (TCR) Broadly speaking Deductions Tier 2 Tier 1 Investment Assets at Market Value CAR TCA Internal: 180% Supervisory Target: 130% Minimum:100% TCR Operationa l Liability Market Credit PRAD (75%) Max of BE Liabilities Surrender Calculated on Fund Level
Funds of a Conventional Insurer Insurer Insurance Funds Shareholders Fund Life General Par Non-Par Investment-Linked Life Life Unit Annuity Annuity Non-Unit Separate for onshore and offshore business
RBC FOR TAKAFUL OPERATORS (vs conventional insurers)
RBC for Takaful Operators vs Insurers Conventional Insurer Shareholders Fund Deductions Tier 2 Qard part of deductions Deductions Tier 2 Takaful Operator Shareholders Fund Expense risk of ALL funds fully borne by SHF Max of Operational risk of ALL funds fully borne by SHF Tier 1 Investment Assets at Market Value TCA TCR Operational Market Credit Tier 1 Investment Assets at Market Value TCA TCR Expense Operational Market Credit PRAD (75%) BE Liabilities Surrender Additional surrender value risk Additional expense reserves + PRAD
RBC for Takaful Operators vs Insurers Conventional Insurer Insurance Fund Deductions Tier 2 Tier 1 Investment Assets at Market Value TCA TCR Operational Liability Market Credit PRAD (75%) BE Liabilities Qard part of Tier 2 Max of Surrender Takaful Operator Participants Risk Fund Deductions Tier 2 Tier 1 Investment Assets at Market Value TCA capped at 100% of TCR TCA TCR Liability Market Credit PRAD (75%) BE Liabilities No operational risk charges Max of Surrender No implicit expense risk charges
Funds of a Takaful Operator Takaful Operator Participants Funds Shareholders Fund Family General* Protection Investment Fund Annuity *Can be further split into sub-funds depending on risk class Risk Fund* Separate for onshore and offshore business
KEY DIFFERENCES
Capital Charges Capital Charges Operational Expense Liability Market Credit Surrender Value SH Fund General Fund Life Funds / Family Risk Funds Insurance Takaful Insurance Takaful Insurance Takaful (for all funds) (for all funds) (implicit) (held in SH fund) (held in SH fund) (implicit) (held in SH fund) (held in SH fund)
Apart from Capital Charges Area Conventional Insurance Takaful Expense reserves In insurance funds (implicit) In shareholders fund During deficit Outright transfer from SHF SHF TCA = Insurance Fund TCA Qard from SHF SHF TCA Risk Fund TCA Total Capital Available (TCA) No limits on TCA recognition. Recognize TCA for risk funds only up to 100% of TCR.
IMPACT OF TAKAFUL RBC
Delay in surplus distribution? Impact on Participants Capital held back in funds to meet additional capital requirements Terminal surplus? Higher contributions? Products priced for cost of additional capital needed from SHF Greater fluctuation in surplus received? TCA limit + operational risk charges size of risk funds Less reserves to cushion fluctuating claims experience Greater cross-subsidy between participants? Regulator wants to reduce cross-subsidy Limit on TCA Limit on TCA Combine risk funds for capital efficiency?
Impact on Takaful Operators Additional capital requirements from shareholders To meet capital charges operational, expense, surrender To meet supervisory/internal CAR targets for risk funds Qard, write-off How many sub-funds? Fairness between different groups of participants vs Capital efficiency for SH How large a risk fund to hold? Operational charges Supervisory/internal CAR Claim fluctuations qard write-off Contingency reserves: Fairness between generations Competing against conventional products RBC appears more penal for takaful operators
OPPORTUNITIES
Opportunities Product design Capital efficiency via product models Shift towards investment-linked / drip model Differentiation via product models No strict regulation on product models, only must be well-documented, transparent Surplus sharing arrangement does not affect reserves and liability risk charges Product innovation Break free from the usual insurance -type designs New features, new models?
Opportunities Excel from within Management of assets and liabilities Better duration matching lower risk charges Balance risk/return levels in investment strategy against asset risk charges Reward good experience Assumptions for reserves and risk charges based on company s own experience Good underwriting / claims management / expense management lower capital charges Internal CAR Good risk management lower internal CAR
Retakaful To CAR Opportunities Risk Fund TCR Retakaful Before Retakaful After Retakaful SH Fund TCA Risk Fund TCA TCR Liability Market TCR Liability Market Credit Credit Retakaful has no impact to SH Fund TCA CAR Liability risk charges reduced Slight reduction in Risk Fund assets for retakaful contributions but Risk Fund TCA limited at 100% TCR anyway
Opportunities Retakaful The importance of smoothening claims Takaful RBC: Limit on risk fund TCA Risk funds operational risks borne by SH Minimize size of risk funds Retakaful Reduce impact of fluctuating claims experience Small fund size, susceptible to fluctuating claims experience, increase probability of qard
Opportunities Have your say! Framework not finalized Communicate with regulators Shape the future of the takaful industry Principles vs rules Syariah-compliance is rather subjective More room for creativity?
CONCLUSION
Conclusion Tough times ahead? To be a star, you must shine your own light, follow your own path and don't worry about the darkness for that is when stars shine the brightest.
Thank you! Charlene Lee Senior Actuary Munich Re Retakaful ChLee@munichre.com