Abdul Rahim Abdul Wahab, FSA
Director & Actuary
Actuarial Services Division
abdul.rahim@sidathyder.com.pk
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Finance & Investment Symposium 6 - 7 Dec 2006, Karachi
What is covered
• Gap in Islamic Finance
• Conventional Insurance
• Takaful Concept
• Takaful Rules
• Retakaful
• Market Potential
• Islamic Banks and BancaTakaful
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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.
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CONVENTIONAL INSURANCE
 Indemnification against unforeseen financial losses
(not to profit from loss)
 Commercial Risk Transfer
 Law of Large numbers - Insurance company pools
risks/reinsures above capacity.
 Recovers expenses for managing the pool
 Investment return under life insurance shared with
PHs based on Actuarial Valuation or otherwise.
 Profit for the shareholders based on Underwriting
results and Investment income
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OBJECTIONS TO CONVENTIONAL INS
Objections to Conventional Ins
 Elements of:
 Uncertainty – Gharrar (non-existence of
goods, un-known quantity, timing) in a
commercial risk transfer contract.
 Interest – Riba
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BASIC CONCEPT OF TAKAFUL
 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.
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HOW IS IT DIFFERENT FROM INSURANCE




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
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CONVENTIONAL vs TAKAFUL
Issue
Conventional
Takaful
Organization
Principle
Profit for shareholders/
Risk transfer
Mutual for participants
Risk remains with participants
No 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
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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 allowed
Wakalah Model for Risk Protection
100% Surplus distribution for participants (after
reserves etc)
Underwriting deficit – Qard Hasnah by SH or recover
Mudaraba or Wakala Model for Investment Sharing.
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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 years
Transformation of existing conventional general
companies is allowed in one year
Three member Shariah Board and Annual
Shariah Audit
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RE TAKAFUL
 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.
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RE TAKAFUL
 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
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Market Potential
Pakistan’s insurance
density and insurance
penetration rates low.
Reasons – Lack of
awareness and religious
concerns.
Takaful can help push
the penetration rates up.
Actuarial Services Division
Sidat Hyder Morshed Associates (Pvt) Ltd
Growth of Life Insurance Premium
Billions
20.00
18.00
4.65
16.00
14.00
3.57
12.00
3.11
Private
10.00
8.00
1.93
State Ow ned
1.35
13.90
6.00
9.92
11.11
8.39
4.00
6.98
2.00
0.00
2001
2002
Actuarial Services Division
2003
2004
2005
Sidat Hyder Morshed Associates (Pvt) Ltd
Growth of General Insurance Premium
25.00
20.00
2.77
Misc
1.74
15.00
6.96
1.26
10.00
1.20
3.13
5.00
1.28
3.22
1.36
2.94
1.23
Motor
5.89
4.28
3.62
3.05
3.00
Marine
2.40
1.63
3.59
1.71
4.14
4.66
5.96
6.92
Fire
2000
2001
Actuarial Services Division
2002
2003
2004
2005
Sidat Hyder Morshed Associates (Pvt) Ltd
ROE OF INSURANCE INDUSTRY
GENERAL INSURANCE
RETURN ON EQUITY (%)
Year
Average 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
LIFE INSURANCE
RETURN ON EQUITY (%)
Year
Average 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
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
Actuarial Services Division
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Banking Growth
Rs. In billion
Table-5.2: Sources and Uses of Funds
2003
2004
2005
Mar-06
Jun-06
8397.1
30184.8
49931.8
53667
59657.5
1899
6559.1
9005.8
8948.2
8539
1993.7
5123.1
7811
10268.9
12284.5
624.8
2276.1
4744.8
6416.9
7121.7
12914.6
44143.1
71493.4
79301
87602.7
Financing
8652.2
27535.5
45786.2
48717.6
51602.8
Investments
1242.3
2007
1854.2
6034.8
6333.1
Cash, bank balance, placements
1978.5
11899.7
19314.3
19718.7
22877.4
Other assets
1041.7
2700.8
4538.7
4829.9
6789.3
12914.7
44143
71493.4
79301
87602.6
SOURCES
Deposits
Borrowings
Capital & Other funds
Other
USES:
Source: SBP Publication June 2006
Actuarial Services Division
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Opportunities – General Takaful
 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
Actuarial Services Division
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Opportunities – Family Takaful
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
Actuarial Services Division
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TAKAFUL IN THE WORLD
• 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.
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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.
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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.
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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
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.
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.
Actuarial Services Division
Sidat Hyder Morshed Associates (Pvt) Ltd
THANK YOU
Abdul Rahim Abdul Wahab, FSA
Director & Actuary
Actuarial Services Division
abdul.rahim@sidathyder.com.pk
Sidat Hyder Morshed Associates (Pvt) Ltd
Islamic Finance & Investment Symposium 6 - 7 Dec 2006,
Karachi
Actuarial Services Division
Sidat Hyder Morshed Associates (Pvt) Ltd