Case Study

EPF Takaful Annuity Scheme(SATK)1999 - 2001

TK 6413 Islamic Risk Management

Kartina Md Ariffin

One Risk Leads To More Risks

Monopoly

Pricing Risk Investment RiskBusiness Continuity

Risk

Reputation Risk Fiduciary Risk

Employees Provident Fund (EPF)

Agency under Ministry of Finance, Malaysia

The EPF is a social security institution formed according to the Laws of Malaysia, Employees Provident Fund Act 1991 (Act 452) which provides retirement benefits for members through management of their savings in an efficient and reliable manner.

The EPF also provides a convenient framework for employers to meet their statutory and moral obligations to their employees.

EPF

Employers 12% Employees 11%

monthlymonthly

Withdrawal Age

Age 50 or 55

ContributionAge

Age 18 – 50/55

RichRetirees

Lump sumFinish

Within 3 Years!

BEFORE ANNUITY

EPF

6 ConventionalInsurers

2 Takaful Operators

AFTER ANNUITY

Lump sum Lump sum

ParticipationAge

Age 18 – 55

AnnuityAge

Age 55 - 100

ConsciousRetirees

ConsciousRetirees

RM100 monthly

RM100 monthly

Relieved!

WHAT YOU DON’T KNOW ABOUT ANNUITY

PRODUCT WAS MISPRICED

Projected Investment Return - 8%Actual Investment Return 5% - 6%

PROMISES WERE ALMOST BROKEN

Monthly RM100 could not be paid, RM80 would be paid instead

CONTRACT WAS UNCLEAR

SALES ILLUSTRATION WAS MISLEADING

BNM’S MITIGATION ACTIONS

Shareholders

Qard

Qard RM100 Monthly

RM100 Monthly

Participants

• Actuarial consultancy was monopolized

• Non-existence of devil’s advocate

• Everything was based on good faith

• Over confidence over the stability of the investment environment

• Lack of disclosure

• Contract was drafted by a fresh graduate

• Highly unregulated

• Implied guarantee, no disclaimer

WHAT WERE THE CAUSES:

CONSEQUENCES TO THE INDUSTRY: YEAR 2002 TILL NOW

• BNM has been updating the Product Development guideline on a continuous basis

• Every insurer/ TO is required to have a Product Development Framework

• Product Development Framework becomes the book of life of Product Development staff

• Sales Illustration changed from 2-page to almost a 5 - page

• Every key personnel has to sign off a product sheet: Legal, Shariah, RM, IT,Appointed Actuary, Audit, Marketing

• CEO / Board of Directors / Shariah Board has to sign off

• BNM verifies for 3 months

• Product Development becomes a nightmare

• Fresh graduates get to sleep in the office

Product was withdrawn fromthe market in 2002 due to

objections by MTUC(Malaysian Trade Union Congress)

THANK YOU