Overview of BCM

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(No Transcript)
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What is covered

• Gap in Islamic Finance
• Conventional Insurance
• Takaful Concept
• Takaful Rules
• Retakaful
• Market Potential
• Islamic Banks and BancaTakaful

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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 SP 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

• Pakistans insurance density and insurance
  penetration rates low.
• Reasons Lack of awareness and religious
  concerns.
• Takaful can help push the penetration rates up.

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Growth of Life Insurance Premium
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Growth of General Insurance Premium
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ROE OF INSURANCE INDUSTRY
 RETURN ON EQUITY ()   RETURN ON EQUITY ()   RETURN ON EQUITY ()   RETURN ON EQUITY ()   RETURN ON EQUITY ()   RETURN ON EQUITY ()   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
GENERAL INSURANCE
  RETURN ON EQUITY ()    RETURN ON EQUITY ()    RETURN ON EQUITY ()    RETURN ON EQUITY ()    RETURN ON EQUITY ()    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
LIFE INSURANCE
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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
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Islamic Banking Growth
Rs. In billion
Source SBP Publication June 2006
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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

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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

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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

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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 Asias 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.

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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.

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THANK YOU

• Abdul Rahim Abdul Wahab, FSA
• Director Actuary
• Actuarial Services Division
• abdul.rahim_at_sidathyder.com.pk
• Sidat Hyder Morshed Associates (Pvt) Ltd
• Islamic Finance Investment Symposium 6 - 7 Dec
  2006, Karachi