Hybrid Structures – why?
Mutual Insurance and Takaful in
Changing World
Istanbul
November12 and 13, 2012
Rodney Lester
Hybrid: ‘Composite; formed or
composed of heterogeneous elements’
For our purpose: Combined mutual
risk sharing and profit making activity
Hybrids are not uncommon
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US Reciprocals – 25% members USAA
Group, US Physicians
US Mutual Holding Companies – Pacific Life
Segregated and statutory funds – British
Commonwealth insurers
Friendly Societies – Europe and ex colonies
Takaful –mutual guarantee
Why do they exist – 6 vectors
Mutual but with capacity to raise capital
 Prudential controls enhanced
 Client base – self selected group
 Taxation differentiation
 Principal/ agent concerns – better control
of conflicts.
 Nature of client relationship to institution
– exchange, commuting, utmost good
faith, transparency ,ability to assign etc?
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Mutual holding companies
Voting
rights
Policyholder/
member
Mutual HC > 50%
Shareholder holding
company
Policy
Shareholder insurer
Investors <
50%
Vector
MHC Attributes
Client base
Unrestricted
Taxation
Corporate tax. Tax free internal roll
up for life.
Prudential
In line with commercial insurance
Principal / Agent
Governance – MHC board, insurer
boards – question over conflicts of
interest. A transition vehicle?
Client relationship
Risk transfer
Capital raising
Equity, surplus notes etc
Reciprocals
Subscriber’s
Advisory
C’tee
Unincorporated
association
Subscribers
Individual
Subscribers’
Savings Accounts
Paid in surplus
account
Attorney – usually
operates on combined
cost recovery/
partnership basis.
Vector
Reciprocal Attributes
Client base
Common interest group –with liability
exposures if risk retention group tax
status.
Taxation
Fees to Attorney and dividends to SSAs
are tax deductible to exchange.
Prudential
Normally in line with commercial
insurance. Surplus through two member
accounts.
Principal / Agent
Governance through subscriber appointed
committee that appoints attorney.
Client relationship
Mutual guarantee through subscriber /
attorney agreement and joint subscriber
agreement; insurable interest is intrinsic.
Capital raising
Capital contribution at entry.
Family Takaful
Participants
Savings Fund – individual
accounts
Risk sharing
fund
Fluctuation
provisions
Board
Operator –
partnership or
agency or
combined
Sharia Board
Vector
Reciprocal Attributes
Client base
Unrestricted
Taxation
Tax incentives in Malaysia – otherwise
tax neutrality.
Prudential
Still evolving but normally in line with
commercial insurance – an issue
because of Qard..
Principal / Agent
Governance still being resolved – but
contributors typically not
represented.
Client relationship
Ideally a non commuting joint
guarantee, no assignment w.o. genuine
exposure
Capital raising
Qard from operator, surplus
accumulation
The key challenge for Takaful
Trading off the attributes of an efficient
risk sharing mechanism with the
design limitations imposed by the
relevant market –
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Risk pricing
Reinsurance
Asset risk
Capital management
Treatment of surplus
Governance
Prophet Muhammad asked a Bedouin who had left
his camel untied, “Why do you not tie your
camel?”
The Bedouin answered “ I put my trust in God”.
The prophet then said, “Tie up your camel first
and then put your trust in God”.