deloitte the global takaful insurance market

The global Takafulinsurance marketCharting the road to mass markets

A Deloitte ME IFKC Practice Insights Series

Charting the road to mass markets | 3

Contents

Foreword 4

Executive summary 5

Adapting to industry challenges 6- Governance and regulatory compliance- Risk management and internal controls - Operational and business excellence- Product governance and strategy - Capacity building - Talent and leadership development

Generating growth in the Takaful sector 10- The economic setting- The GCC Takaful market - The case of Bahrain: a veteran Takaful center- General and family Takaful growth in Bahrain- Sustained penetration growth- Industry financial highlights

‘A forward plan’ for a new Takaful landscape 17- Thought leaders’ perspectives- Final thoughts

4 | Charting the road to mass markets

The Deloitte ME IFKC practice insights series is a series of knowledge-sharing reports published bythe Deloitte Middle East Islamic Finance KnowledgeCenter. These point of view reports address practice and policy challenges in the Islamic finance industry inareas of risk and regulatory compliance, governance,products and market strategies, human capital andleadership development. As part of our Islamic financeadvisory group, we are able to draw on our audit, tax,consulting, risk management services and financialadvisory expertise, as well as the Islamic financeknowledge and experience of our regional consultantsin 26 offices in the MENA region. Our research approachcombines our deep knowledge in Islamic finance,business and regulatory strategy with the competenciesof professional advisory services. This series aims topromote knowledge-sharing behavior and seeks to help inform market participants worldwide.

The sustainable growth of Islamic finance in many partsof the world and in particular MENA and SEA willstimulate additional growth in the Takaful sector asfinance and insurance services are intertwined. Theheightened focus on governance, fiduciary responsibility,risk management and accountability are directconsequences of the global financial crisis and will likelypresent Takaful with challenging practice and regulatoryissues during the next five years. It is my hope that theissues and trends in this report will intensify industrydiscussions and dialogue, provide direction and helpidentify potential business strategies to help address and deal with these compelling challenges.

This report looks at the emerging regulatory andpractice challenges that will impact the Takaful industry.It seeks to assess the business structures and strategies,market development and growth trends globally.

Throughout the report we explore key emergingpractical and strategy issues pertinent to the industryand suggest the ways in which Takaful operators canadapt and respond to these challenges for the comingnew phase of growth.

Preparing for assessment is an important exercise forTakaful executives and leadership, and one which willprovide them with insights and analysis on areas ofstrength, and areas that may be improved. This thoughtleadership report provides a case study of the industry in Bahrain and highlights growth trends and challengesto sustain growth.

The methodology of developing this report is basedon original research whose aim is to analyze key marketsin MENA and SEA. The report combines the insights andfirst-hand experience of Deloitte’s leading practitionersand prominent industry executives from the Takafulsector. Interviews were carried out with a number of thought leaders from academic and researchinstitutions, law firms, regulatory authorities andindustry self-regulatory organizations. I am most grateful to all who participated in the formal and private discussions and dialogue.

Dr Hatim El-TahirFCIB, FCISILeader, Deloitte ME IFKC

Foreword

The Deloitte ME Islamic FinanceKnowledge Center (IFKC)Al Zamil Tower. Government Avenue,Manama, Kingdom of BahrainPhone +973 1 721 4490 Ext 310Fax +973 1 721 4550

Refocus on competency-based

training and leadership program

Switching emphasis tointernal development to build specialized

knowledge

Emphasis on target markets, sales

and distribution

Improve product governance and product

development process

Improved technology capabilities to achieve

cost efficiency and productivity

New business models accommodating for new market niches

Risk-based businessa priority unified withstrategic planning

Improve risk and Sharia’a disclosures

and governance

More consistencyof regulatoryframeworks

Optimizing capitaladequacy through

consolidation

Governance and

regulatory

compliance

Capacity

building: talent

and leadership

development

Product

governance

and strategy

Operational

and business

excellence

Risk

management

and internal

controls

The ten challenges classified by industry disciplines

Executive summary


Achieving growth in the Takaful insurance sector andbreaking through into the mainstream might be easiersaid than done. This is especially true because theTakaful industry faces enormous challenges to achievegrowth and build mass coverage globally. Yet, thegrowing industry has a number of opportunities to setthe stage for both short- and long-term growth andachieve Takaful inclusion.

The prominence of concerns about market conductaround the world, and the emphasis placed onconsumer needs and protection are increasingly drivingus toward greater financial regulation, possibly as ameans to restore confidence and the ‘trust’ buzzwordamong consumers. Martin Wheatley, CEO of the newlyset up Financial Conduct Authority (FCA), whichreplaced the FSA, asserts that “the FCA is there to make

sure that consumers get well treated in financialmarkets, and that conduct of firms that provideproducts and services is beyond reproach.”

The discussion with industry practitioners yielded usefulinsights on practices and policy issues. Our analysis andassessment led to forming the debate on the future ofthe industry in ten key challenges worthy of attentionfrom industry policy-makers and practitioners. We groupthese ten challenges into five industry disciplines. Theseinterdependent challenges should be addressed byindustry stakeholders to embrace leading practices andimprove market conduct in the Takaful sector. Not everychallenge applies to every Takaful firm and there areother challenges not explored herein. To adapt to thesechallenges, the industry executives and policy-makersneed to address the following:

1. Governance and regulatory complianceHow can Takaful operators improve theirgovernance practices and capital and liquidity base?Strengthening the regulatory frameworks of the Takafulindustry requires focused effort and the support of allindustry stakeholders. National regulators as well asindustry standard-setting bodies (SSBs) need to worktogether to take bold actions and initiatives to improveTakaful practices and policy-making processes.1. There is a need for more consistent regulatory

frameworks amongst key markets and regulators.2. Optimizing capital adequacy through consolidation

will achieve growth and sound corporate structures.

Key messages:• Market conduct regulation - around the world - is

becoming increasingly intrusive and judgment-based,with regulators demonstrating readiness to interveneat all stages of the business cycle. This seems less of a regulatory concern in the Takaful industry, andoperators are left without adequate scrutiny inproduct governance and offerings. This is particularlytrue in the case of complex investment-linkedproducts.

• A number of national regulators across MENA andSEA are taking bold actions and collaborativeinitiatives with other government authorities toenhance regulatory and practice related issues in theTakaful business. Several European and Westerncountries are also implementing sound regulatorychanges to protect consumers and provide a levelplaying field for Islamic financial services in general.

• Takaful operators are being challenged by greatertransparency and oversight from different regulatoryand self-regulatory organizations, which requireincreased reporting and self-disclosure exercises thatwill necessitate greater investment in technology andinformation management.

• Further complications exist because of the inconsistentTakaful regulations around the world. Takafuloperators are often faced with the burden of tailoringtheir product features, distribution approach, statutoryreporting and disclosures, and in some parts aroundthe world, such as the GCC, hiring and employmentregulations, to take into account the particularnational regulatory requirements of markets in whichthey wish to operate. This is likely to persist for sometime unless a drastic regulatory harmonization isreached.

2. Risk management and internal controlsHow can Takaful operators establish effective risk controls and a sound corporate culture?With a confluence of regulatory changes likely to impactthe international expansion of Takaful business,executive management and boards are advised tostrategize risk management functions and governance.Sharia’a compliance risk should be embedded in allphases of operations and management. This effectively


Takaful operators are being challengedby greater transparency and oversightfrom different regulatory and self-regulatory organizations

Adapting to industry challenges

means that Takaful insurers will better equipped for abusiness cycle that develops new, innovative productsand services, penetrates new markets, competes withconventional counterparts, and be better prepared foradverse market turbulence and shocks. 1. Making risk-based business a priority, unified with

Takaful operators’ strategic planning.2. Improve risk and Sharia’a disclosures and governance.

Key messages:• Takaful firms are likely to face unprecedented

regulatory pressures on their risk management andinternal control processes to ensure that the Takafulbusiness model and product strategies deliver value toall stakeholders’ interests.

• Among the top regulatory issues facing insurance andTakaful firms is preparing for a full implementation ofthe Risk and Own Risk and Solvency Assessment (RM-ORSA). The key challenge to complying with this newact may involve changes or modification of Takafulcompanies’ business models, risk managementsystems, information systems, human resources, andSharia’a advisors.

• This in turn may also add impetus to industrypractitioners to coordinate efforts on practicesynergies and collaboration to adopt leading practicesthrough awareness programs and industry discussions.

3. Operational and business excellenceHow can Takaful operators achieve operationalefficiency to reach mass markets?The insurance industry in general is fast becoming atechnology business, so Takaful operators shouldembrace technology in all operational, sales andmarketing strategies. Operators could achieve costefficiency and improve productivity through the buildingof technology capabilities to tap into new markets andincrease revenue.

1. Need for new business models to accommodate forwider niche markets e.g. ‘generic’ insurance.

2. Improved technology capabilities to achieve costefficiency and productivity.

Key messages:• The existing intense competition amongst Takaful

product providers, on some of the high risk insurancemarkets such as auto and medical insurance, iscausing harm to the natural growth of the industryand risks the integrity of the impetus of the Sharia’a-compliance element in the Takaful business altogether.

• There is a need for improved operational processesand controls to accommodate new regulatorychanges and enhance compliance practice andbusiness excellence. New methods for distributionchannels and embracing technology will help reduceproduct costs and improve sales efficiency andmarketing.

• Takaful insurers should develop best practice customerservice management systems and processes to ensurethat policyholders and customers are treated honestly,fairly and professionally.


Takaful operators should embracetechnology in all operational, sales and marketing strategies


4. Product governance and strategyHow can Takaful operators improve penetrationrates more effectively and reach the mass‘uncovered’? Takaful firms are challenged with adapting newstrategies that provide cash flow streams anddeveloping innovative ‘protection and saving’ productsin general family Takaful. The social and demographicneeds of the key markets in MENA and SEA offer ampleroom for new product offering and growth. The globalrecognition and acceptability of Islamic finance, as analternative mode of investment and finance, will arguablyboost long-term growth for Takaful insurers and willenhance its internationalization and acceptability.1. Improve product governance and product

development processes including the Sharia’aprocess.

2. Emphasis on target market, sales and distributionchannels to achieve growth and profitability.

Key messages:• Takaful operators are required to develop a robust

product governance system to ensure thatpolicyholders and customers are treated honestly,fairly and professionally. Recent Deloitte research

addressed key areas of regulatory scrutiny in thisregard and identified five important areas of practicethat Takaful providers may well address to enhanceproduct offerings and governance:- Governance process- Target market- Product features and pricing- Transparency- Distribution channels and systems

• Life Takaful product development is poised to gainpriority amongst key operators, along with direct salesand BancaTakaful. The latter puts Takaful firms at anadvantage if they leverage Islamic banking growth andthe potential cross-selling of life Takaful, education,healthcare and investment-linked products.

• Clearly there is a low rate of penetration in keymarkets reviewed. Firms need to continue to explorenew niche markets and develop specialty productsand tap into mass markets in Indonesia, Egypt, Turkeyand KSA. Meanwhile, Takaful providers are required toinvest in educating consumers about their productofferings.

5. Capacity building - Talent and leadership developmentHow can Takaful operators solve the talent paradox?The role of leadership and talent in the Takaful businesshas become increasingly important as Takaful operatorsseek to respond to uncertain economic conditions andstagnant growth opportunities, as well as to address the aforementioned regulatory and organizationalstructures. 1. Switching emphasis on internal development to build

the specialized knowledge and skills required. 2. Refocus on competency-based training and

leadership programs.

Takaful firms are challenged withadapting new strategies that providecash flow streams and developinginnovative ‘protection and saving’products in general family Takaful


Key messages:• The human capital and talent challenge in the Takaful

industry is exacerbated by the shortage of skilled andqualified personnel, and the subsequent high turnoverrate this causes. This has created a pressing need forspecialized skills in areas of underwriting, riskmanagement, and product development.

• Takaful operators should strategize talentdevelopment and knowledge base in Islamic financeand Takaful, and explore personal, technical andprofessional attributes deeply.

• Three key influences that should be addressed to buildan effective competency-based training strategy:- Skill assessment and gap analysis- Knowledge and skills identification.- Develop a professional development education

encompassing three capabilities as shown in thechart on the right.

Professionalcompetence

Personalcompetence

Technicalcompetence

Evolving talent-building approach


The economic settingA recent report published by Forbes Middle East inassociation with the International Monetary Fund (IMF),entitled ‘the Best Performing Economies in the ArabWorld’, revealed that a number of countries in the Arab region have recovered from the impact of the Arab Spring. The report also noted that the Kingdom of Saudi Arabia outperformed its regional counterpartsand achieved 11% growth in total government revenuewhich stood at USD355.32 billion in 2012. In addition,the report highlights positive transformations in oil-exporting countries including economic diversificationand increased public spending in health, education andemployment. The table below charts the GDP growth inthe GCC, which shows a steady increase with combinedtotal GDP estimated to reach USD1.5 trillion in 2013.

At present, the biggest headwind facing the industry inthe Middle East region is the ‘Arab Spring syndrome’,which has resulted in the reluctance of corporates toinvest for expansion and to hire. In addition, growthrates of Takaful penetration are slowing due to a lack ofcustomer education and inadequate product awarenessprograms. This has been further hindered by a lack ofclear strategies from Takaful providers, and lack ofresearch and development (R&D) in product innovationand marketability, with the latter being a chronicpractice that has shaped the industry since its early days.

Generating growth in the Takaful sector

GDP (2005-2015-e) USD billion

800

700

600

500

400

300

200

100

02005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bahrain Oman Qatar Kuwait United Arab Emirates Saudi Arabia

Estimates


The GCC Takaful marketThe GCC Takaful market remains at the forefront of theindustry. The latest industry data reveals that the GCCcontributes more than 62% of the gross Takafulpremiums globally. Reports estimate that Takafulbusiness will grow significantly in the coming five yearsto reach USD20 billion by 2017. In 2010, the Far Eastregion recorded the highest growth rate of 32% on theback of USD1.95 billion in contributions, while the GCC,led by the Kingdom of Saudi Arabia (KSA), maintainedthe largest share of contributions, growing a further17% to USD5.7 billion. The GCC region accounted foralmost 40% of the total Takaful business with SouthEast Asia coming a distant second with an 11.8% sharein 2010, based on figures compiled through inputs givenby the various Takaful operators around the world.

Global Takaful CAGR (2009-2011)

Malaysia 23.10%

15.20%

60.70%

6.80%

UAE

SaudiArabia

Bahrain

Gross Takaful contribution by region (2008-2010, USD millions)

6000

5000

4000

3000

2000

1000

2008

Africa East Indian Sub Continent Far East

GCC Levant Middle East (Non Arab)

2009 2010(e)

0

295.3

1110.1

123.3 33.33 39.1 78.7

3753.54128.3

377.3192.9

1479.7

4886

4143.9

413.7 201.8

1951.4

5683.45345.6

GCC

79

12

18

32

40

77

Far East

Africa

Middle East (non Arab)

East Indian Sub Continent

Levant

Others

Number of Takaful firms (2010)

Source: World Islamic Insurance Directory 2012

Source: World IslamicInsurance Directory 2012

The GCC contributes more than 62%of the gross Takaful premiums globally


The case of Bahrain: a veteran Takaful centerThe Kingdom of Bahrain has long been a key market forTakaful. Bahrain continues to attract Takaful providersas well as other professional services firms, making theKingdom attractive to Islamic finance and Takafulinvestors. Local talent and international expertiseavailable in the country is one of the key factors makingthe Kingdom a jurisdiction of choice for the industry.This section attempts to showcase the Takaful growthtrend in the country and highlight aspects of the keybusiness and financial performance of Takaful firmsoperating in the Kingdom. The research analysisincluded a review of seven Takaful firms and twoReTakaful companies.

Gross contributions versus premium growthGross contributions of Takaful firms in the country haveincreased significantly in the last ten years, achieving aCAGR of 30.61 % compared to the 11.73 % recordedby conventional insurance firms. In addition, The Takafulfirms’ gross contributions represented 19% of Bahrain’stotal gross premiums/contributions in 2011, andamounted to USD106 million compared to USD102million, an increase of around 4% over the previousyear. Conventional insurance firms’ gross premiumsreached USD463 million in 2011, representing anincrease of 1.64% over 2010.

Bahrain continues to attract Takafulproviders as well as other professionalservices firms, making the Kingdomattractive to Islamic finance and Takaful investors

Gross contributions/premium growth in Takaful vs. conventional firms (2008-2011): USD’000

600,000

500,000

400,000

300,000

200,000

100,000

Conventional

2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

Takaful

CAGR: 30.61%

CAGR: 30.61%

Note: Data excludes Reinsurance and ReTakaful firms.Source: CBB Bahrain Insurance Industry Review andDeloitte Analysis


YoY% Change in gross claims of Takaful vs.conventional firmsGross claims of Takaful firms decreased significantly to USD55 million in 2011 from USD62 million in 2010.Over the same period conventional firms registeredgross claims of USD227 million, an increase of 1.46 %from the previous year. This is largely attributed to theimpact of lower business growth rates in some sectorsas a result of social and political issues in 2011.

General and family Takaful growth in BahrainThe General Takaful business has seen strong growth inrecent years. In 2011, General Takaful’s contributionsrepresented 89% of the total Takaful contributions and15.5% of the total gross premiums of the insurancesector in 2011. Likewise, the Family Takaful business hasincreased in recent years. Starting from 2007, Familygross contributions increased to reach USD3.93 millionin 2011, which represents 11% of total Takafulcontributions.

-12.51%

-5.41%

-20.00% 0.00% 20.00% 40.00% 60.00% 80.00%

1.46%

43.05%

10.62%

23.14%

51.94%

41.40%

59.57%

20.95%

24.03%

10.20%

2011

2010

2009

2008

2007

2006

Takaful Conventional

YoY% change in gross claims of Takaful vs.conventional firms (2008-2011)

Note: Data excludes Reinsurance and ReTakaful firms.Source: CBB Bahrain Insurance Industry Review and Deloitte Analysis

Gross contributions growth in family and general Takaful (2002-2011), USD’000

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

General Family

20,000 60,000

Family Takaful CAGR: 33.36%

General Takaful CAGR:General Takaful CAGR:

80,000 100,000 120,00040,0000

Source: CBB Bahrain Insurance Industry Review and Deloitte Analysis


YoY% Change in gross claims in family andgeneral TakafulTakaful’s gross claims increased to record USD55 millionin 2011 compared to USD4.8 million in 2001. Generaland Family Takaful’s gross claims accounted for 96%and 4% respectively of the total Takaful gross claims in 2011. The gross claims from Takaful businessrepresented 19% of the total gross claims in 2011.

Sustained penetration growthBased on past trends, it is clear that the Bahrain Takafulindustry has been growing rapidly and is continuing togrow faster than conventional insurance, evidenced bythe high Takaful penetration ratio CAGR of 25% (2001-2010) compared to a CAGR of 3% for conventionalinsurance providers over the same period.

Industry financial highlightsClaims ratioThe chart below shows claims incurred as a percentageof net contributions. The average claims ratio forBahrain amounted to 60% compared to 65.5% in Saudi Arabia, 57% in the UAE and 64.5% in Malaysia.

Based on past trends, it is clear that the Bahrain Takaful industry has beengrowing rapidly and is continuing togrow faster than conventional insurance

-9.97%

40.77%

89.53%

24.25%

49.96%

96.04%

59.74%

55.97%

4.17%

-51.06%2011

2010

2009

2008

2007

FamilyGeneral

YoY% Change in gross claims in family and general Takaful (2007-2011)

-100.00% 0.00%-50.00% 50.00% 100.00% 150.00%

Source: CBB Bahrain Insurance Industry Review and Deloitte Analysis

Penetration ratio (2001-2010)

300

250

200

150

100

50

0

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

TakafulInsurance

Note: Data excludes Reinsurance and ReTakaful firms. Source: CBB Bahrain Insurance Industry Review and Deloitte Analysis

Claims ratios 2008-2011

100

50

02008 2009 2010 2011

Saudi ArabiaBahrain

MalaysiaUAE

Source: CBB Bahrain Insurance Industry Review, Firms’ Financialsand Deloitte Analysis

Reinsurance ratioIn the same period, the Reinsurance ratio represents theproportion of the total gross premium ceded to otherinsurance companies. The ratio for Bahrain has declinedsince 2010 showing a strengthening of operators’confidence in the economy. The average in Bahrainstood at 26%, compared to the UAE with 19% andMalaysia with 14% over the period of 2008 to 2011.

Return on equityReturn on Equity improved for Bahrain in 2011,indicating improved growth in the economy. In the UAETakaful operators generated an average return of 4%,and in Malaysia Takaful companies achieved 6.08%between 2008 and 2011.

Return on investmentsTakaful operators in Bahrain, the UAE and Saudi Arabiahave high exposure to securities and the real estatemarket. Returns in Bahrain have been volatile as thecountry has gone through political turmoil in the lasttwo years. The average returns in Bahrain are 0.82%,compared to 2.18% in the UAE and 3.98% in Malaysia.

The ratio for Bahrain has declined since2010 showing a strengthening ofoperators’ confidence in the economy


Reinsurance ratios (2008, 2011)

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

0.00%2008 2009 2010 2011

Saudi ArabiaBahrain

MalaysiaUAE

Return on equity (2008-2011)

50.00%

40.00%

30.00%

20.00%

10.00%

0.00%

-10.00%2008 2009 2010 2011-20.00%

Bahrain Saudi Arabia UAE Malaysia

Return on investments (2008-2011)

10.00%

12.00%

14.00%

16.00%

8.00%

6.00%

4.00%

2.00%

0.00%

-2.00%2008 2009 2010 2011

Bahrain Saudi Arabia UAE Malaysia

Source: CBB Bahrain Insurance Industry Review, Firms’ Financials and Deloitte Analysis



Net contributions to equityThe chart below shows company risk levels due towritten premiums relative to the level of equity capital.The level is lowest in Bahrain indicating that companiesare taking less risk in relation to equity levels. Operatorsin other economies like Saudi Arabia and Malaysia havehigh risk-taking capabilities.

Equity to assetsA more static measure of leverage is the equity to totalassets ratio. For Bahrain the ratio has declined over thepast four years with an average of 46.82% at the end of2011, indicating increasing leverage.

The analysis shows that the studied group of Takafuloperators has made strong growth and that thepotential for firms to tap into regional and internationalmarkets is great. The support and commitment fromgovernment regulators and leadership will help attractmore Takaful operators and enhance the country’sposition as a key hub for Takaful solutions not only forthe GCC region, but, more importantly, for exportingtheir experience to global markets.

Net contributions to equity (2008-2011)

350.00%

300.00%

250.00%

200.00%

150.00%

100.00%

50.00%

0.00%

2008 2009 2010 2011

Saudi Arabia UAE MalaysiaBahrain

Equity to assets (2008-2011)

2011

2010

2009

2008

0.00% 20.00% 40.00% 60.00% 80.00%100.00%120.00%140.00%

Saudi ArabiaBahrain

MalaysiaUAE

The potential for firms to tap intoregional and international markets is great




Thought leaders’ perspectives on TakafulAt a recent Takaful conference, a deputy director at Bank Negara Malaysia (BNM), Azleena Idris said,“Combined efforts by industry players and marketparticipants are important in charting strategic directionfor the industry and maximizing its potential”. Deloitte’sanalysis shows maximizing industry potential lies inaddressing challenges and issues that will better positionthe industry to reach mass markets and achieve organicgrowth and development.

While the global regulation and industry self-regulatoryorganizations, such as the IFSB, the AAOIFI, and IIFM,have made significant advancements in developingstandards in governance, financial reporting, Sharia’a,and capital markets, they have uniformly struggled togain the wide support of regulators to enforceimplementation of these standards and leading bestpractices. In essence, practitioners as well as regulatorsneed to work together to ensure these well written and well presented standards find their way in a real,practical sense. Thus, the positioning of the new Takafulmodel and solutions has to address a number ofinfluences and enablers as addressed in the chart below.This section summarizes some of the discussions andinsights shared by prominent thought leaders in Islamic finance.

Governance and regulatory compliance “In discussing the matter of harmonization andstandardization, it has sometimes been argued thatsince diversity is an inherent aspect of Islam, completeharmonization is neither desirable, nor achievable.However, from AAOIFI's perspectives, greaterharmonization and wider application of standards woulddeliver benefit, especially if standards can help to giveclarity and consequently enhance confidence of users ofIslamic finance products including Takaful, and can helpto enhance cost efficiency of Islamic finance operationsand product development,” said Dr Khaled Al Fakih,Secretary General and CEO of Accounting and AuditingOrganization for Islamic Financial Institutions (AAOIFI).

“There are regulatory differences in the Takaful industrywith no uniformity in reporting processes. As aninternational firm with operations in many countries wehave to digest the different set of rules and practices ineach country,” said Mahomed Akoob, ManagingDirector, Hannover ReTakaful. He further pointed outthat “the IFSB’s Takaful standards need to be revised.The standards need to more specifically accommodatefor the business of ReTakaful.”

‘A forward plan’ for a new Takafullandscape

Core influences

Governancecompetence

Risk managementfunction

Sharia’acompliance

Product governanceand process

Enablers

• Board and executive leadership commitment from Takaful operators• Government support and direction• Regulatory framework acceptability and support in a particular market• Target market audience education and awareness

Strategictarget market

Sales and marketing capabilities

Design ‘generic’Takaful solutions

Positioning of new Takaful solutions: core influences and enablers


Practitioners have privately criticized the regulators’guidelines on solvency requirements and calculations of ratios for separate funds, e.g. the participants’ fund,operators’ fund, and shareholders’ fund are all treatedseparately. In addition, the way in which Takaful firmshave to calculate Risk Based Capital (RBC) has now beenintroduced in several countries such as Malaysia, andBahrain. This less-favored method of Takaful operatorsappears to penalize Takaful operators and has resultedin adverse practices such as delays in the distribution ofdividends, and the cost of additional capital requiredfrom the shareholders’ fund.

“However, it is essential to create a structure such thatthe Takaful operator (TO) is not taking on or beingexposed to the insurance risk of the participants’ riskfunds, as this would make the TO into a kind ofproprietary insurer. Hence, the segregation betweenparticipants’ and shareholders’ funds is essential, andeach needs to meet different solvency requirements. SeeIFSB’s ED-14 on Takaful Risk Management. The situationis complicated by the fact that the risk funds typically do not meet solvency requirements, as they have little or no reserves (participants’ equity) in them. Hence, they are reliant on capital support from the TO’s funds in the form of a Qard facility which, to be eligibleinternationally for regulatory purposes, has to meetcertain conditions that are set out in the IFSB Solvencystandard. These requirements and the resultantstructural complexity may not be fully understood bysome practitioners,” said Professor Simon Archer, HenleyBusiness School, University of Reading, UK, AdjunctProfessor, INCEIF, Malaysia.

“IFSB's Standard on Solvency Requirement for TakafulUndertakings provides an important basis for regulatorsand supervisors to put in place a regulatory andsupervisory framework relating to capital and solvencyrequirement for Takaful operators,” added Dr Khaled Al Fakih.

“The industry needs to understand the importance of acommon platform when it comes to financial reporting,”said Ashraf Bseisu, Group Chief Executive CEO, SolidarityGroup. He asserts that as an international firm operatingin many countries, they expect better coordinationbetween regulators to streamline financial reportingstandards and other practices. This view was alsosupported by A Aziz Al Othman, Deputy GeneralManager, Takaful International, who in particularhighlights that “the AAOIFI’s guidelines on thetreatment of Qard Hasan and commissions ofReInsurance need to be revised, and the discrepancy of treatment between AAOIFI and IFRS in severalaccounting and auditing reporting issues in the Takaful business is a point in case”.

“On many countries, with the notable exception ofBahrain, Malaysia, Pakistan, and more recently Qatarand Oman, Takaful firms operate in the absence of adedicated ‘rulebook’ or specific act of regulation for theTakaful business. This will clearly not help the industry togrow and adapt leading Takaful practices,” states DrOmar Fisher, Acting CEO at Al Hilal Takaful Co. “Moreemphasis should be put on regulation and oversight andthe industry should look into the priorities in two keyareas: first, financial rating has to be improved andmade universal, and secondly, technical softwarecompanies should aggressively innovate better methodsof selling and marketing Takaful products,” added Dr Omar Fisher.

On the point of legal risks in the industry, Oliver Agha,Partner, Head of Islamic finance and MENA Practices atHolland & Knight and Managing Partner, Agha & Co,assesses the concept of ‘Tabarru’ in Takaful andhighlights that the insurance contract at its core isunenforceable if ‘Tabarru’ is relied upon. He argues that

The industry needs to understand theimportance of a common platformwhen it comes to financial reporting


“by making a unilateral gift/donation, the premiumpayer is not entitled to a return upon the occurrence ofan insurance event”. He further elaborates that “by thesame token, the insurer is not required to pay back theinsured upon the occurrence of an event of loss becausethe insurer has received merely a donation (rather than acontractual premium payment). The AAOIFI standardson Takaful refer to both contributions and donations butcan only be read sensibly if contribution is understood to be the intent of the standard. In this regard, AAOIFIguidelines (and the Sharia’a position) need to beharmonized, otherwise we are looking at legally,logically and conceptually flawed constructs on whichthis nascent industry is being built.”

Risk management and internal controls The discussion with practitioners and thought leadershighlights the importance risk in Takaful and, inparticular, the impact that one type of risk could haveon other areas of practices or functions. For instance,the point of view about ‘Tabarru’ discussed above,addresses a Sharia’a compliance risk, as well asoperational risk, which ultimately causes a legal risk of enforceability and indeed a reputational risk issue in the event of any dispute between the participants’

fund and shareholders. Essentially, this point emphasizesthe importance of harmonization of Sharia'a standardsand the actual application of the law of the land to the Sharia’a pronouncements, internal controls andprocesses.

“Emphasis on enterprise-wide ERM systems andcorporate governance is the key to operationalexcellence in the industry,” stated Ashraf Bseisu, Group Chief Executive CEO, Solidarity Group.

“There seem to be different interpretations of structuressuch as the Mudaraba, which causes some confusion to market participants in the practices context," said Dr Fisher. The business model should be improved toaccommodate for increasing regulatory reforms andTakaful firms should design KPIs, consider measurementtools and dashboards and improve MIS frameworks,added Dr Fisher.

“Surplus distribution in the fund pool needs some formof standardization or uniformity to ensure fair andtransparent treatment, and perhaps mitigate anypossible Sharia’a compliance risks,” said Akoob.


Operational and business excellence“The importance of sound risk management andgovernance practices has been discussed more in thecontext of Islamic banking, relative to Takaful firms, andincreased focus on this third pillar of financial markets,with regards to Sharia’a and risk governance is nowdue. IIRA's fiduciary rating approach to Takaful firms hasvery recently been published and takes a wide rangeview of the assessed institution, including governancerelated aspects. Viewing the firm as an asset managerand thereby assessing funds separately, as well as from aholistic perspective, to assess its ability to protectparticipants, (as required by relevant regulations, whichoften declare funds transfers when needed, in the formof Qard-e-Hasna mandatory) gives a well-rounded viewof the firm and caters to multiple stakeholders,” saidSabeen Saleem, Chief Executive Officer, IslamicInternational Rating Agency (IIRA).

“A significant component of IIRA's fiduciary ratingmethodology is an analysis of the Sharia’a governanceinfrastructure of the Takaful provider and the degree of adherence to Sharia’a related best practices. Ourmethodology discusses both General and Family Takaful,and assesses the firm on two distinct levels, i.e. a TakafulFinancial Strength Assessment and a Fiduciary Score.The latter further devolves down to a two tiered scorecomprising an Asset Manager Quality Score, whichscales the financial resilience of the Takaful fund on astandalone basis, and the governance and policyframework employed to achieve financial objectives. A Sharia’a Governance Score is provided separately forgreater information on Sharia’a related practices ineffect, for increased information to stakeholders andparticipants. The methodology is also scalable to Re-Takaful firms,” said Sabeen.

“The harmonization of operational practices, especiallyin the form of underwriting, is essential so that co-Takaful can be coordinated well… Due to competition,the regulators have to be aware of the pricing strategiesadopted by various Takaful operations; in somejurisdictions the application of the tariff could haveresolved the pricing issues,” said Daud Vicary Abdullah,President and CEO, INCEIF.

“After sales service is a key driver of business excellence,and Takaful firms should be encouraged to enhancetheir capabilities in this important area. Consumerinterest groups should also be encouraged to play a role in this respect,” said Sohail Jaffer, Deputy CEO, FWU Global Takaful Solutions. Consumer watchdogsshould also be encouraged to play a role in this respect,he added.

“Strategically, the industry should pay more attention to the importance of educating customers and theworkforce. Private Takaful associations could take anactive role in this respect, and perhaps a premium tax(of say 0.5% or 1%), might be introduced for this causeto invest in the education and training of industrystakeholders,” said Dr Fisher.

“The use of dashboards is well overdue, and Takafulfirms must be encouraged to use dashboards to build up their business models, monitor their product coststructures and customer product relationships, anddevelop a strategic map of product value and costpositioning,” added Dr Fisher. “The joint venture model, blending internationalinsurance expertise with a local insurance firm that hasthe local market knowledge to offer Takaful solutions,has proved successful in many markets in the region,”said Gassan Marrouche, General Manager of TakafulEmarat, in an interview in Gulf News, July 11, 2011.“Life and medical Takaful products provide strong cashflow streams for Takaful firms, thus enhance theoperators’ solvency ratios and ultimately keep capitaladequacy base in line with regulators,” added Gassan.

Product governance and strategy“Takaful operators need to innovate and go into a‘generic insurance market’ that could involve bothFamily and General Takaful,” said Daud Vicary Abdullah.

Takaful operators need to innovate andgo into a ‘generic insurance market’that could involve both family andgeneral Takaful


“The defined contribution pension market in theemerging and frontier markets is underserved, and theindustry needs to develop annuity and lifetime incomeproducts to tap into this fast growing market. Takafulproviders need to develop suitable solutions and alsooptimize the use of Sukuk, particularly the long datedsecurities for asset/liability matching,” noted SohailJaffer. “Takaful operators’ departments of investmentshould be on a constant lookout for short-term andlong-term investments such as Sukuk to park theirfunds,” said Daud Vicary Abdullah.

“The recent surge in Sukuk issuances at domestic as well as international level and long dated tenor Sukuk by several issuers from Indonesia, Malaysia, Saudi Arabia etc., is a welcome news for Takafuloperators to plan out their investment portfolio”, said Ijlal A Alvi, Chief Executive Officer InternationalIslamic Financial Market (IIFM).

“In the UAE, for example, 85% of the Takaful productsare sold through brokerage. This makes price a key issuefor customers whereby many Takaful operators areforced to get into a ‘price war’ that shapes the industryscenes these days,” said Dr Fisher.

“Instead of just concentrating on the so-calledconventional family Takaful products, Takaful operatorsshould look into other areas such as education products,health products and other family products related tolife,” argues Daud Vicary Abdullah.

Capacity building: talent and leadershipdevelopment“Talent is the area of Takaful that seems most lacking;the Takaful operator can enhance its employees throughconducting in-housing training (over weekends) or bysending some selected employees to institutes of higherlearning especially in the area of Takaful…To enhancethe Takaful business, Takaful operators should inculcatethe culture of research, either through outsourcing the service to a third party or by forming a marketresearch-driven CRM team. Industry associations acrossthe region can assist in developing priorities andorganizations such as INCEIF, IRTI and the World Bankcan be asked to support,” said Daud Vicary Abdullah.

“There is clearly a shortage of expertise in Takafulgenerally and ReTakaful in particular. We expect morecooperation from labor and work regulators in the Gulf in particular, by allowing highly skilled foreignprofessionals in highly technical areas of practice such as special underwriting skills and actuarial analysis,” said Akoob.

“Islamic finance education and training is essential forthe innovation and growth of the industry,” said QasimAslam, Partner, Dentons.

“When the original UK Islamic finance workingcommittee reported to the Late Lord George (Governorof the Bank of England), its members from both theconventional banking and Islamic finance industriesconverged to advise the British government that alegitimate, sustainable Islamic finance market in the UKwill require a three-pronged solution, viz. (1) TheLicensing of Retail Islamic Banking, (2) IslamicInvestment Banking and (3) The creation of a workableTakaful alternative. These founding members motivatedme personally and far more senior experts to work ondelivering (1) and (2) above, which culminated with thecreation and subsequent licensing in August 2004 of IBB(Islamic Bank of Britain plc.) and EIIB (European IslamicInvestment Bank plc.) soon thereafter,” said ShabirRanderee, CBE, Member, UK Islamic Finance Task Force(IFTF). He continues, “With this, two parts of the three-pronged plan were in place, theoretically at least. Ibelieve that the growth of Islamic banking in the UK hasslowed much more than we anticipated post the CreditCrisis in 2008 and it is likewise most feasible to acceptthe same over the development of Takaful. However,this must be addressed and I am encouraged by theexperts in the field who are focusing thus. I refer back toour visionary members of that original task force, who

There is clearly a shortage of expertisein Takaful generally and ReTakaful inparticular


expressed the view that without a reliable, workable andprofitable Takaful industry, the development and growthof Islamic finance will be handicapped, if not impededseriously. From my experience of Al Baraka South Africa,I can suggest that there is a seriously adverse effect oncustomers fully committing to Islamic finance in theabsence of a widely available, competitive Takafuloption. Going forward, the need to legislate, educateand develop Takaful as a viable alternate is essential andurgent. It is one of the issues that the IFTF will also belooking at, working with those markets that are farmore developed in this area, like Malaysia."

Final thoughts It is clear that national and international regulatoryinitiatives will affect the way in which firms interact withtheir retail clients and regulation. Senior executives ofTakaful providers should begin assessing the challengesaddressed in this report that might affect their ability togenerate growth and profitability. As noted in thisreport, there is a lot going on in the regulatory andpractice environment. Takaful business strategies andmodels will need to be revamped, taking into accountexpanding regulation, increasing competition fromconventional insurers, pricing strategies and costingmodels. General and Life Takaful solutions may need tobe redesigned to accommodate a wider customer base

including non-Muslims and should provide for genericinsurance coverage in all kind of Takaful products.Product governance and processes should be improvedto ensure regulatory and Sharia’a compliance.

There is a strong message to Takaful firms who havebeen criticized as ‘unsatisfactorily Sharia’a-complaint’ to improve their product governance and internalSharia’a advising and audit mechanisms, to ensurefairness to policyholders and stakeholders. These planscannot simply be implemented or improved without a clear firm-wide strategy, to develop internalcompetencies in business and Sharia’a. Building on this, Takaful executives are expected to invest moregenerously in education and training and developleadership programs.

At the same time, it is not sufficient for these challengesto be addressed or implemented without thecommitment and support of boards and executives ofTakaful firms. Thus, the leadership of Takaful operatorsshould enhance their risk management governance and controls process. The impetus of an enterprise-widerisk strategy should not be overlooked, and support and oversight from boards is a key driver for theimplementation of an effective risk-based business in the Takaful sector.

Finally, perhaps the exercise of ‘preparing for assessment’to design a way forward plan should be the businessequivalent of an emergency checklist of review of thefirm’s existing business structures, addressed in thisdiscussion, to identify any impediments to growth. The plan should aim to set out, in detail, the practicalsteps a firm should take to map out its strategic visionand objectives. Most notably, the ‘forward plan’ shouldlay out how the firm plans to address these emergingchallenges and other related issues, to enhance itscapabilities in capital, risk, operations, products, and people.

The impetus of an enterprise-wide riskstrategy should not be overlooked, andsupport and oversight from boards is akey driver for the implementation of an effective risk-based business in theTakaful sector

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