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Abdul Rahim Abdul Wahab, FSA Director & Actuary Actuarial Services Division [email protected] Sidat Hyder Morshed Associates (Pvt) Ltd Islamic Finance & Investment Symposium 6 - 7

Alhuda CIBE - Presentation on Takaful by Abdul Rahim

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Page 1: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Abdul Rahim Abdul Wahab, FSADirector & Actuary

Actuarial Services [email protected]

Sidat Hyder Morshed Associates (Pvt) LtdIslamic Finance & Investment Symposium 6 - 7

Dec 2006, Karachi

Page 2: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

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

Page 3: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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.

Page 4: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

Indemnification against unforeseen financial losses (not to profit from loss)

Commercial Risk TransferLaw of Large numbers - Insurance company pools risks/reinsures above capacity.

Recovers expenses for managing the poolInvestment 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

Page 5: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 6: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 7: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 8: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

Issue Conventional TakafulOrganization Principle

Profit for shareholders/Risk transfer

Mutual for participantsRisk remains with participantsNo 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

Page 9: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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 allowedWakalah Model for Risk Protection100% Surplus distribution for participants (after

reserves etc)Underwriting deficit – Qard Hasnah by SH or recoverMudaraba or Wakala Model for Investment Sharing.

Page 10: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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 yearsTransformation of existing conventional general

companies is allowed in one year Three member Shariah Board and Annual

Shariah Audit

Page 11: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 12: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 13: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

Market PotentialPakistan’s insurance density and insurance penetration rates low.

Reasons – Lack of awareness and religious concerns.

Takaful can help push the penetration rates up.

Page 14: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 15: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 16: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

ROE OF INSURANCE INDUSTRY RETURN ON EQUITY (%) 

YearAverage 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 (%) 

YearAverage 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

Page 17: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 18: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 19: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 20: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 21: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

• 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

Page 22: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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.

Page 23: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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.

Page 24: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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

Page 25: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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.

Page 26: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

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.

Page 27: Alhuda CIBE - Presentation on Takaful by Abdul Rahim

Actuarial Services Division Sidat Hyder Morshed Associates (Pvt) Ltd

THANK YOUAbdul Rahim Abdul Wahab, FSA

Director & ActuaryActuarial Services Division

abdul[email protected] Hyder Morshed Associates (Pvt) Ltd

Islamic Finance & Investment Symposium 6 - 7 Dec 2006, Karachi