Presentation to Bancassurance Conference Takaful Products Johan Potgieter 13 May 2013 Aon Hewitt (Actuarial) / QED Actuaries & Consultants (Pty) Ltd 0
Contents Overview Islamic Law Principles Models of Takaful Insurance Opportunities Examples of Takaful Products Challenges 1
Overview Islamic Law Permits trade and profit. Interest is forbidden. Money should only be made through trade and services. Mutual co-operation, responsibility, assurance, protection and assistance between groups of participants. 2
Overview Islamic Law (contd) Takaful insurance company run by shareholders on behalf of the participants. Shareholders paid in 2 general ways: Fee upfront i.e. Wakalah. From pre-determined portion of profits made i.e. Mudurabah. Provides transparency to participants on how their funds are utilised. Sharia scholars monitor Sharia companies to ensure compliance. 3
Principles Takaful : Arabic word meaning guaranteeing each other or joint guarantee. Participants requiring protection must participate with sincere intention to donate to other participants faced with difficulties. Each participant contributes to a fund used to support one another cover expected claims with contributions. Objective of Takaful insurance : Pay defined loss from defined fund. 4
Principles (contd) The principles of Takaful insurance are as follows: Mutual co-operation - participants co-operate amongst themselves for their common good. Mutual responsibility - all participants pay their subscription (or contribution) to help those that require assistance. Mutual assurance - losses are divided and liabilities spread according to the community pooling system. Mutual protection - uncertainty is eliminated in respect of subscriptions and compensation. Mutual assistance - no advantage is derived at the cost of others. 5
Principles (contd) Takaful : Perceived as co-operative insurance. Contribute sum of money to a common pool where objective is not profits but to uphold principle of bear ye one another s burdens. Participants (not shareholders) are the underwriters of risk. Principle of investment: reward must be accompanied by risk. Permissible to invest in Sharia-approved stocks (i.e. no gaming, brewery, tobacco, highly leveraged companies) as prices of equities command no certainty in value. Investment in bonds provides capital protection and fixed returns no permissible. Interest on a loan is prohibited. 6
Models of Takaful Insurance Takaful can be implemented on the following 4 variations: Mudharabah Model (profit sharing model) Wakalah Model (fee model) Co-operative insurance Combination 7
Mudharabah Profit sharing model. Shareholders accept payment of Takaful contributions from participants (providers of capital). Contract specifies manner in which profits will be shared. Losses will be funded from interest-free loan from shareholders fund. 8
Mudharabah (contd) Model of Mudharabah Operation Takaful Operator Re-Takaful Operator Max [(100 y)%, 0%] x share in profits Contributions (participants) Participants Accounts Pool y% Investment Income + Underwriting Surplus 9
Wakalah Fee model. Participants appoint an agent to run Takaful operation. Agent has admin, actuarial, IT, accounting, legal, etc., skills. Operation is run on participants behalf or as their representatives on agreed terms and conditions for a certain fee. 10
Wakalah (contd) Model of Wakalah Operation Contributions (participants) Takaful Operator Wakala Fees Participants Accounts Pool Underwriting Surplus Re-Takaful Operator Administration Fees Investment Income Note: Re-Takaful is similar to reinsurance 11
Opportunities - Numbers Global gross Takaful contributions +/- USD12 billion. African gross Takaful contributions +/- USD500 million. Estimated growth over past 3 years: 50% for global market 45% for African market Estimated Muslim population in Africa is 500 million. 12
Opportunities - Banks Banks have larger penetration than insurers. Recent work in Middle East showed Islamic finance has 25% market share. Takaful insurance made up 15% of market share. Good opportunity to leverage off Islamic finance. 13
Examples of Takaful Products Examples of products developed for a bank in Middle East Example 1 Term Assurance Decreasing Term Assurance e.g. loan repayment. Benefit payable on death or disability. Company manages portfolio for benefit of participants for percentage not exceeding fixed% of total annual contributions deducted at end of fiscal year. Ratio is announced in advance before the start of fiscal year. Amount is shown in all documents and renewal notices. Hybrid model using Mudharabah and Wakalah models on investment profits. 14
Examples of Takaful Products (contd) Example 1 Term Assurance (contd) Surplus is calculated as: Where: Total Contributions = Monthly premiums. Agency Fees and Share of Investment Profits = Benefit received by the Company for managing the portfolio set at the start of the fiscal year, e.g. 10% of total contributions. Re-Takaful fee amounts = Reinsurance premium. Coverage = Expenses. 15
Examples of Takaful Products (contd) Example 2 Group Life and Savings Plan Benefit payable if death occurs within policy term Optional savings benefit selected at inception Offered to corporate clients of the bank 16
Examples of Takaful Products (contd) Where: Example 2 Group Life and Savings Plan (contd) Savings Benefit = [Accumulated fund Value (t 1) + (allocation Value (t) * Percentage (t) (allocation value (t)) * Percentage (t) subscription fee (t))] x (1 + l) Shareholder Mudharabah charge (t) Claims. t = month Subscription fee (t) = Wakala expenses, the pre-determined fee due in month t. i = Monthly return net of tax and external and investment manager charges. Shareholders Mudharabah charge (t) = 10% of investment return Claims (t) = Claims made in month t. 17
Examples of Takaful Products (contd) Example 2 Group Life and Savings Plan (contd) Contributions are invested collectively for benefit of participants on a Mudharabah basis in return for participation of realised profits at rate stated in Takaful certificate. Savings contributions (net of Wakala fees) of say, 50% of amount deposited are accumulated over the policy term in the selected savings funds to build the Savings Benefit available at maturity date or any other date if the participant elects to withdraw from the fund. At maturity, Savings Benefit can be paid as lump sum or as installments. Over payout term, remaining funds will be invested in low risk savings fund. 18
Challenges Most Takaful insurers are new critical business volumes not yet reached. Expense ratio is high as a result compared to conventional insurers. Education of potential customers and agents/brokers. Increased competition. New regulations New accounting standards. Investment restrictions. 19
Thank you Questions? 20