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RBC for Takaful –Differences from Conventional, Impact and Opportunities
Charlene LeeSenior ActuaryMunich 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
Tabarru
Wakala = Agency contract, i.e. 3rd party administrator
Tabarru = Donation
Qard = Loan (interest-free)
Takaful Contribution
Participant
Shareholders’Fund (SHF)
Wakala Fee
Mngt Exp, Commission
Participants’ Risk Fund
(PRF)
Participants’Investment Fund (PIF)
UW Surplus /
DeficitInvestment Profit / Loss
If Deficit: Qard from SHF
Claims
Pure Wakala Model
Tabarru
Reserves
Retakaful
Tabarru
Wakala = Agency contract, i.e. 3rd party administrator
Tabarru = Donation
Qard = Loan (interest-free)
Mudharaba = Profit-sharing
Takaful Contribution
Participant
Shareholders’Fund (SHF)
Wakala Fee
Mngt Exp, Commission
Participants’ Risk Fund
(PRF)
Participants’Investment Fund (PIF)
UW Surplus /
DeficitInvestment Profit / Loss
If Deficit: Qard from SHF
Claims
Wakala – Mudharaba Hybrid
Tabarru
Reserves
Retakaful
SOLVENCY IN MALAYSIA
Evolution of Solvency Requirements in Malaysia
RBC FOR CONVENTIONAL INSURERS
RBC for Conventional Insurance
Capital Adequacy Ratio (CAR) = (TCR) Required Capital Total
(TCA) AvailableCapital Total
Broadly speaking…
BE
Liabilities
PRAD
(75%)Investment
Assets at
Market
Value
Deductions
Tier 1
Tier 2
Credit
Market
Liability
Operationa
l
Surr
end
er
TCA
TCR
Max of
Minimum:100%
Supervisory Target: 130%CAR
Internal: ≈ 180%
Calculated
on Fund
Level
“Funds” of a Conventional Insurer
Insurer
Life General
Par Non-Par Investment-Linked
Life
Annuity
Life
Annuity
Unit
Non-Unit
Separate for onshore and offshore business
Shareholders’ FundInsurance Funds
RBC FOR TAKAFUL OPERATORS(vs conventional insurers)
Expense
RBC for Takaful Operators vs Insurers
Investment
Assets at
Market
Value
Deductions
Tier 1
Tier 2
Credit
Market
Operational
TCA
TCR
Conventional Insurer –Shareholders’ Fund
BE
Liabilities
PRAD
(75%)Investment
Assets at
Market
Value
Deductions
Tier 1
Tier 2
Credit
Market
Operational
Surr
ende
r
TCA
TCR
Max of
Takaful Operator –Shareholders’ Fund
Expense risk
of ALL funds fully borne by
SHF
Operational risk
of ALL funds fully borne by
SHF
Additional
surrender value risk
Qard part of deductions
Additional expense
reserves +
PRAD
RBC for Takaful Operators vs Insurers
BE
Liabilities
PRAD
(75%)Investment
Assets at
Market
Value
Deductions
Tier 1
Tier 2
Credit
Market
OperationalTCA
TCR
Conventional Insurer –Insurance Fund
BE
Liabilities
PRAD
(75%)Investment
Assets at
Market
Value
Deductions
Tier 1
Tier 2
Credit
Market
Liability
Surr
ende
r
TCA TCR
Max of
Takaful Operator –Participants’ Risk Fund
LiabilityS
urr
ende
r
Max of
No
operational risk charges
Qard part of Tier 2
TCA capped
at 100% of TCR
No implicit expense risk
charges
“Funds” of a Takaful Operator
Takaful Operator
Family General*
Protection Annuity
Investment Fund
Risk Fund*
*Can be further split into sub-funds depending on risk class
Separate for onshore and offshore business
Shareholders’ FundParticipants’ Funds
KEY DIFFERENCES
Capital Charges
Capital Charges
SH Fund General Fund Life Funds /Family Risk Funds
Insurance Takaful Insurance Takaful Insurance Takaful
Operational
Expense
Liability
Market
Credit
Surrender
Value
� �(held in
SH fund)
� �(held in
SH fund)
�(for all
funds)
�
� �(for all
funds)
�(implicit)
�(held in
SH fund)
�(implicit)
�(held in
SH fund)
� � � �
� �
�
�
�
� ��
��
�� �
��
�
�
�
�
�
Area Conventional Insurance Takaful
Expense
reservesIn 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.
Apart from Capital Charges…
IMPACT OF TAKAFUL RBC
Impact on Participants
Delay in surplus distribution?
• 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
Competing against conventional products
• RBC appears more penal for takaful operators
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
OPPORTUNITIES
OpportunitiesProduct 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?
OpportunitiesExcel from within
Internal CAR
• Good risk management � lower internal CAR
Reward good experience
• Assumptions for reserves and risk charges based on company’s own experience
• Good underwriting / claims management / expense management � lower capital charges
Management of assets and liabilities
• Better duration matching � lower risk charges
• Balance risk/return levels in investment strategy against asset risk charges
OpportunitiesRetakaful – To ↑ CAR
Credit
Market
Liability
TCR
Risk Fund TCR
SH Fund
TCA
Credit
Market
Liability
TCR
Before Retakaful
After Retakaful
Liability risk charges reduced
Risk Fund
TCA
Risk Fund
TCA limited at 100% TCR
anyway
Slight reduction in
Risk Fund assets for retakaful
contributions
Retakaful has no impact to SH Fund
TCA
but…
↑ CAR
Retakaful
OpportunitiesRetakaful – The importance of smoothening claims
Small fund size, susceptible to fluctuating claims experience, increase probability of qard
Minimize size of risk funds
Takaful RBC:• Limit on risk fund TCA• Risk funds’ operational
risks borne by SH
Retakaful – Reduce impact of fluctuating claims experience
OpportunitiesHave your say!
Principles vs rules
• Syariah-compliance is rather subjective
• More room for creativity?
Framework not finalized
• Communicate with regulators
• Shape the future of the takaful industry
CONCLUSION
Conclusion
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.
Tough times ahead?
