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Farid Benbouzid Damas 01&02-06-2005 1
The success of Retakaful
Arab Insurance, outlook and actual new economical situation
Damas 01&02-06-2005 2
Overview
IntroductionAchievementsChallenges ahead StrategyConclusion
Damas 01&02-06-2005 3
Introduction
Conventional insuranceTakaful ConceptRetakaful concept
Damas 01&02-06-2005 4
Insurance not permissible
Uncertainty (Gharar)Gambling (Maisir)Interest (Riba)
Damas 01&02-06-2005 5
Takaful concept
1985 Grand Council of scholars approved TakafulMethod and means left to scholars and practitionersMust have : Permanent Sharia Advisory Board Sharia compliant investment strategy Operating model based on Shariaa concepts
Damas 01&02-06-2005 6
Operating models
Pure mudharabah (Sudan)Modified mudharabah (Malaysia)Wakala (Bahrain)
Family takaful
General Takaful
Damas 01&02-06-2005 7
Re-Takaful concept
Preferred reinsurance is proportional (quota share or surplus) Non proportional permissibleIf Re-takaful is unavailable, then it is permissible to use a conventional reinsurer
Damas 01&02-06-2005 8
Overview
IntroductionAchievementsChallenges ahead StrategyConclusion
Damas 01&02-06-2005 9
Achievements
Takaful industryRetakaful industryBest Re’s position
Damas 01&02-06-2005 10
Takaful Industry in the World
World Premiums 2003 USD 2.6 trillions
Takaful contributions 2002 USD 2.1billions
Number of companies 59
Number of countries 23
Damas 01&02-06-2005 11
Takaful Industry in the World
Geographical Spread
56%36%
7% 1%Mid-East
South &East AsiaAfrica
Others
Damas 01&02-06-2005 12
Takaful industry in EM
EM Takaful contributions 2002 USD 2 billions
EM/WW Takaful contributions 99%
EM Total Premiums USD 217 billions
Number of Companies >45
Damas 01&02-06-2005 13
Main EM Takaful Markets
GCC MalaysiaOther Arab countriesOther South & East Asia
Damas 01&02-06-2005 14
Retakaful cessions drivers
Heavy exposure to cat events > No exposure to cat events
Small local players > Larger international insurers
Specific line or customer Group focused
> Multiline insurers
Commercial lines (Aviation) > Personal lines (Motor)
Damas 01&02-06-2005 15
Retakaful cessions drivers
Life protection lines > Life saving
Expansion into new products Or regions
Exit from markets Run off market
Regulatory and rating considerations
Solvency ratio and claims payment ability
Damas 01&02-06-2005 16
High demand for Retakaful
Many of Takafuls are local playersMany of them are also newly set upSmall takaful market
In number In size
Rely heavily on Retakaful supportDemand expected to grow with industry
Damas 01&02-06-2005 17
Unsufficient supply
Very few Professionnal Retakafuls 2 (Best Re, ARIL)
Takafuls accept a small part of Retakaful business from each other
Damas 01&02-06-2005 18
Takaful dilemma
Participants opt for the product because it is islamic
Takafuls forced to cede business to conventional reinsurance
Otherwise disappear !
Damas 01&02-06-2005 19
Retakaful dilemma
Retakafuls are Takafuls focused
Retakafuls forced to accept business from conventional marketRetakafuls forced to retrocede business to conventional market
Otherwise disappear !
Damas 01&02-06-2005 20
Best Re
Modified Mudharaba model Permanent Shariaa BoardAvoids “Ribaa”
Interest on deposits are offset Investments are compliant with “Shariaa”
requirements
Manages separate accounts Ceding companies account (Technical operations) Shareholders’ account (Shareholders’ operations)
Damas 01&02-06-2005 21
Best Re
Niche market player set up in 1985Internationally recognized as RetakafulStrong capital basis and claims-paying abilityWell rated by well reputed agencies
Standard & Poor’s : BBB (Stable Outlook) AM Best : B++ (Very Good)
Damas 01&02-06-2005 22
Best Re
Accepted contributions from Takafuls (2003)
USD 8 millions
In % of whole portfolio 13%
Markets 16
Number of Ceding Takafuls 28
Number of Contracts 319
Damas 01&02-06-2005 23
Overview
IntroductionAchievementsChallenges ahead StrategyConclusion
Damas 01&02-06-2005 24
Challenges ahead
Mission statementTakaful growth perspectivesLearn from conventionalsRetakafuls’ duties
Damas 01&02-06-2005 25
Mission statement
Pave the way for takafuls to achieve theirgrowth potential and build a strong andsound industry
Damas 01&02-06-2005 26
Takaful growth perspectives
Non life insurance demand in EMLife insurance demand in EMOutlook
Damas 01&02-06-2005 27
Non-life insurance demand
Low Premium as % of GDP Min = 0.2% (Bangladesh) Max=2.9% (Jamaïca, South Africa)
Low per-capita Spending Min = USD 8 (Africa) Max = USD 54 (Latin America)
Damas 01&02-06-2005 28
Life insurance demand
Very low Premium as % of GDP Min = 0% (Saudi Arabia) Max = 3.8% (Trinidad & Tobago)
Very low per-capita Spending Min = USD 14 (Middle East) Max = USD 30 (South & East Asia)
Damas 01&02-06-2005 29
Outlook
Largely untapped potential to be captured
Takaful is a specific answer to an unfulfilled demand
Takaful could capture a large part of the population
which would not, otherwise, insure.
Damas 01&02-06-2005 30
Takaful Growth Perspectives
New markets likely to introduce Takaful in the near future
Philippines, Bangladesh, Former Soviet Union States, South Africa etc.
Takaful windows set up by conventional insurers
Good indicators of brand success
Damas 01&02-06-2005 31
Takaful Growth Perspectives
Strong growth trend in South & East Asia
+30% p.a. in Malaysia likely to continue
Sustained average growth in double digits in the coming years
+15% p.a. reasonable to assume
Damas 01&02-06-2005 32
Learn from conventionals
250 professional reinsurers
2003 ceded premiums : USD 176 billion
Non life reinsurance : USD 146 billion (13.7% insurance
premiums)
Life reinsurance : USD 30 billion (1.9% insurance premiums)
Damas 01&02-06-2005 33
Learn from conventionals
Top ten reinsurers market share : 54%
Shareholders equity of top 40 : USD 249 billion
Of top ten, 6 have a financial strength rating:
At least “AA-” by S&P (very strong financial security)
Stable and sound capital base for reinsurance industry :
Negligeable bankrupties between 1980-2003
Damas 01&02-06-2005 34
Reinsurance cessions drivers
Reduced uw results volatility Escape from insolvency in case of cat event
Capital relief and flexible financing Accept more business with the same capital
Access to reinsurers’ expertise and services
Product development Pricing Underwriting Claims management
Damas 01&02-06-2005 35
Reinsurers have to be financially secure
Insurer Reinsurer
Part of underwriting risk
Counterparty credit risk
Damas 01&02-06-2005 36
Reinsurers’ risk management
Scope : Long term survival
of the reinsurance company
Underwriting and investment risks are aligned with capital available (R.B.C)
Capital management
Asset management
Underwriting
Risk Management
Damas 01&02-06-2005 37
Risk modelling
Operational risk
Insurance risk Credit risk Market risk
Earthquakes
Influenza epidemic
TsunamiExchange ratesStock markets
Interest rates
Inflation
Credit risks Tropical cyclones
Damas 01&02-06-2005 38
Diversification across time
Better diversification
Lower capital need
or Lower Cost
given the exposure Higher level of
Protection _ given thelevel of capital
Less expensive reinsurance cover
Damas 01&02-06-2005 39
Retakafuls’ duties
Providers of secure covers Strong capital base Focus on Risk Management models Diversification across time
Expertise providers Product development Pricing Underwriting Claims management
Damas 01&02-06-2005 40
Overview
IntroductionAchievementsChallenges ahead StrategyConclusion
Damas 01&02-06-2005 41
Strategy – 1st step -
Establish an annual meeting of ArabTakafuls and Retakafuls
Networking benefits
Set up a « Takaful Association » Practitioners’ intelligence networks Best practices’ exchange Reinsurance placing facilities
Set up an informative Takaful & Retakaful website
Wise information exchange among members
Damas 01&02-06-2005 42
Strategy – 2nd step -
More and more cooperation between Takafuls Web site becomes transactional« Takaful Association » is efficient
Improved structures Successful Annual Meeting
New well rated Retakafuls are set up 2 to 3
Damas 01&02-06-2005 43
Strategy – 3rd step -
Design a framework of cooperation with conventional reinsurers
Associate members’ status Interested in the Takaful market
development
Set up a brokerage company focused on Retakaful placing
By the Association
Damas 01&02-06-2005 44
Specific position of Middle East
Homogenious religious statusOil producer countries generating financial surplusEligible to play a major role in this strategyStrategy could benefit from the financial synergy existing in Dubai & Bahrain
Damas 01&02-06-2005 45
Overview
IntroductionAchievementsChallenges ahead StrategyConclusion
Damas 01&02-06-2005 46
Conclusion
To be or not to be? Is no longer the question
Other questions prevail now How many? How much strong? Capital, rating? How much knowledgeable?
Successful answers to those questions will involve a virtuous business cycle
Takaful & Retakaful development Benefits for overall economy and society
Damas 01&02-06-2005 47
Retakaful &Takaful’s virtuous cycle
Retakaful
Less expensive takaful products
Higher profitability
Lower cost
of capital
Stronger growth
Enhanced insurability
Secure industryTakaful Company
Overall economy
Farid Benbouzid Damas 01&02-06-2005 48
Thank you
Sources Islamic Insurance Conference,
London, Sept. 26-27, 2003Swiss Re, Understanding
reinsurance, 2004Swiss Re, sigma N°6/ 2002.
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