The success of Retakaful

1
The success of Retakaful

• Arab Insurance, outlook and actual new economical
  situation

2
Overview

• Introduction
• Achievements
• Challenges ahead
• Strategy
• Conclusion

3
Introduction

• Conventional insurance
• Takaful Concept
• Retakaful concept

4
Insurance not permissible

• Uncertainty (Gharar)
• Gambling (Maisir)
• Interest (Riba)

5
Takaful concept

• 1985 Grand Council of scholars approved Takaful
• Method and means left to scholars and
  practitioners
• Must have
• Permanent Sharia Advisory Board
• Sharia compliant investment strategy
• Operating model based on Shariaa concepts

6
Operating models

• Pure mudharabah (Sudan)
• Modified mudharabah (Malaysia)
• Wakala (Bahrain)

• Family takaful
• General Takaful

7
Re-Takaful concept

• Preferred reinsurance is proportional (quota
  share or surplus)
• Non proportional permissible
• If Re-takaful is unavailable, then it is
  permissible to use a conventional reinsurer

8
Overview

• Introduction
• Achievements
• Challenges ahead
• Strategy
• Conclusion

9
Achievements

• Takaful industry
• Retakaful industry
• Best Res position

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

11
Takaful Industry in the World
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
• gt45

13
Main EM Takaful Markets

• GCC
• Malaysia
• Other Arab countries
• Other South East Asia

14
Retakaful cessions drivers

• Heavy exposure to cat events
• gt No exposure to cat events
• Small local players
• gt Larger international insurers
• Specific line or customer Group focused
• gt Multiline insurers
• Commercial lines (Aviation)
• gt Personal lines (Motor)

15
Retakaful cessions drivers

• Life protection lines
• gt Life saving
• Expansion into new products
• Or regions
• Regulatory and rating considerations
• Solvency ratio and claims payment ability

16
High demand for Retakaful

• Many of Takafuls are local players
• Many of them are also newly set up
• Small takaful market
• In number
• In size
• Rely heavily on Retakaful support
• Demand for Retakaful expected to grow with
  industry

17
Unsufficient supply

• Very few Professionnal Retakafuls
• 2 (Best Re, Asean Re - ARIL)
• Takafuls accept a small part of Retakaful
  business from each other

18
Takaful dilemma

• Participants opt for the product because it is
  sharia compliant
• Takafuls forced to cede business to conventional
  reinsurance
• Otherwise disappear !

19
Retakaful dilemma

• Retakafuls are Takafuls focused
• Retakafuls forced to accept business from
  conventional market
• Retakafuls forced to retrocede business to
  conventional market
• Otherwise disappear !

20
Best Re

• Modified Mudharaba model
• Permanent Shariaa Board
• Avoids Ribaa
• Interest on deposits are offset
• Investments are compliant with Shariaa
  requirements
• Manages separate accounts
• Ceding companies account (Technical operations)
• Shareholders account (Shareholders operations)

21
Best Re

• Niche market player set up in 1985
• Internationally recognized as Retakaful
• Strong capital basis and claims-paying ability
• Well rated by well reputed agencies
• Standard Poors BBB (Stable Outlook)
• AM Best B (Very Good)

22
Best Re

• Accepted contributions from Takafuls (2003)
• USD 8 millions out of 62
• In of whole portfolio
• 13
• Markets
• 16
• Number of Ceding Takafuls
• 28
• Number of Contracts
• 319

23
Overview

• Introduction
• Achievements
• Challenges ahead
• Strategy
• Conclusion

24
Challenges ahead

• Mission statement
• Takaful growth perspectives
• Learn from conventionals
• Retakafuls duties

25
Mission statement

• Pave the way for takafuls to achieve their
• growth potential and build a strong and
• sound industry

26
Takaful growth perspectives

• Non life insurance demand in EM
• Life insurance demand in EM
• Outlook

27
Non-life insurance demand

• Low Premium as of GDP
• Min 0.2 (Bangladesh)
• Max2.9 (Jamaïca, South Africa)
• Low per-capita Spending
• Min USD 8 (Africa)
• Max USD 54 (Latin America)

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)

29
Outlook

• Large 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.

30
Takaful Growth Perspectives

• New markets likely to introduce Takaful in the
  near future
• Philippines, Bangladesh, Former Soviet Union,
  South Africa etc.
• Takaful windows set up by conventional insurers
• Good indicators of brand success

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.

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)

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 SP (very strong financial
  security)
• Stable and sound capital base for reinsurance
  industry
• Negligeable bankrupties between 1980-2003

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

35
Reinsurers have to be financially secure
Insurer
Reinsurer
Part of underwriting risk
Counterparty credit risk
36
Reinsurers risk management

• Scope
• Long term survival of the reinsurance company
• Underwriting and investment risks are aligned
  with capital available (R.B.C)

Underwriting
Risk Management
Asset management
Capital management
37
Risk modelling
Exchange rates
Stock markets
Tsunami
Interest rates
Earthquakes
Insurance risk
Credit risk
Market risk
Operational risk
Inflation
Influenza epidemic
Tropical cyclones
Credit risks
38
Diversification across time
Less expensive reinsurance cover
Lower capital need or Lower Cost given the
exposure
Better diversification
Higher level of Protection _ given the level of
capital
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

40
Overview

• Introduction
• Achievements
• Challenges ahead
• Strategy
• Conclusion

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

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

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

44
Specific position of Middle East

• Homogenious religious status
• Oil producer countries generating financial
  surplus
• Eligible to play a major role in this strategy
• Strategy could benefit from the financial synergy
  existing in Dubai Bahrain

45
Overview

• Introduction
• Achievements
• Challenges ahead
• Strategy
• Conclusion

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

47
Retakaful Takafuls virtuous cycle
Less expensive takaful products
Higher profitability
Retakaful
Lower cost of capital
Stronger growth
Enhanced insurability
Secure industry
Takaful Company
Overall economy
48
Thank you

• Sources
• Islamic Insurance Conference, London, Sept.
  26-27, 2003
• Swiss Re, Understanding reinsurance, 2004
• Swiss Re, sigma N6/ 2002.