Kuwait International Conference on

“The Experiments of Change Towards the Application of Islamic Shari’ah in the

Economic Field”

Takaful Ta’awuni – The Bank Aljazira Takaful Ta’awuni – The Bank Aljazira ExperienceExperience

byby

Mr Samee ThanviMr Samee ThanviDivision Manager, Individual SalesDivision Manager, Individual Sales

30th & 31st May 2005 at the J W Marriott Hotel, Kuwait

Presentation OverviewPresentation Overview

A Brief Overview of the BAJ Takaful Ta’awuni (BAJ/TT) – Islamic Life Insurance

Takaful Ta’awuni Development Road Map

What Is Takaful What Is Takaful Ta’awuni?Ta’awuni?

““A ShariA Shari’’a complianta compliant,, long term, long term, mutual life mutual life insurance, savings and insurance, savings and investment program.”investment program.”

Definition of Takaful Definition of Takaful Ta’awuniTa’awuni

Mutual guarantee orMutual guarantee or indemnificationindemnification among the group membersamong the group members

TTakafulakaful

Ta’awunTa’awunThe act of mutual help and assistance The act of mutual help and assistance between the participants within the between the participants within the groupgroup

““The fortunate few assisting the The fortunate few assisting the unfortunate many”unfortunate many”

Life Takaful Development Life Takaful Development “Road Map”“Road Map”Initial Takaful Concept Development

Finalise Retakaful/Reinsurance Treaties

Initial Sharia Approval of Model

Final Shari’a Approval

OPEN FOR BUSINESS

Marketing & Sales Development

Final Regulatory Approval Recruit and Train Staff

Business/Actuarial Model Development

Initial Regulatory Approval

IT Development

Operational Development

Product Development

Business Evaluation

Steps to ConsiderSteps to Consider

Develop in conjunction with specialist consultants to provide expertise or in partnership with a Takaful or insurance company

Research and identify the potential target market

Take decision on General or Life products or a composite offering both

Decide on investment strategy; unit-linked funds or pooled investments

Determine which Takaful model to adopt: Wakala or Mudharabah ?

Initial ShariInitial Shari’’a a AApproval of pproval of ModelModel

Wakala - A Fee Driven Islamic Contract

MMudharabahudharabah -- A Profit A Profit Sharing Islamic Sharing Islamic CContractontract

Family TakafulFamily Takaful - - Long Term Plans/Group Takaful Long Term Plans/Group Takaful -- 11 Year Plans Year Plans

Participan

t

ContributionSpecifiedAs:• Tabarru’• Savings• Fees

Risk A/CTabarru’

IndividualSavings A/CInvest. P

rofits

Fees

Wakeel/Operator

Risk A/CTabar’ru

IndividualSavings A/C

Claims/Direct Exps.

Surplus

Fees

BBAJAJ AAdopted dopted WAKALA MWAKALA Modelodel

IIA IRIA

Fees

IIAIRIA

Full Operational Expenses

Salient Features of Salient Features of a Wakala a Wakala ModelModelFees only taken if a product is sold

No charging of expenses to the participants fundOperator alone totally responsible for all start up expenses and operational costs

No issue of agency or commission sales

Clear separation between participant and operatorWakala Fee on Surplus accepted by Shari’a advisorsTotal transparency on all aspects of the operation and fee structure

Business Actuarial Model Business Actuarial Model DevelopmentDevelopmentProduct pricing requires research on

competitor products (Islamic & conventional), sales compensation costs and Operator profits/income needs

Competitor Analysis. Takaful products should not need to be more expensive than conventional products

Breakeven Scenarios

Sensitivity Analysis: Eessential to understand the possible future scenarios to help management plan accordingly

Synergies withSynergies with

BankingBanking

andand

Investment IndustriesInvestment Industries

Benefits for Islamic Banking and Investment Industries

BBENEFITENEFITSS

Assets Under

Management

Image and Reputation

Synergies:Opportunit

y for Internation

al Expansion

Reduced Up-Front Costs for TT/IT-

OperationsCustomer Retention

•Cross-selling

First Mover

Advantage

Shari’a/SAMA

Approvals - time to

business

Full Product Suite-

Indiv/Group

TT-IT-System-

(Bilingual)

Expanded Customer

Base- Indiv &

Corp

Core Takaful Management Competencie

s

Assets Under Assets Under ManagementManagement

Utilizes existing Islamic Equity and Other Funds

Significant increase in AUM as TT Program grows

Avoids risk of fund withdrawals during an economic crisis due to the Long-Term savings goals of Takaful

Expanded Client BaseExpanded Client Base

Takaful will expand and deepen client base, adding

both new Individual and Corporate clients

Customer RetentionCustomer RetentionHeightened Client Retention due to Takaful

relationshipBancassurance in combination with Current and Deposit Accounts extends the odds of losing a Customer

Current Account Only 1:1

Deposit Account Only 1:2

Current & Deposit Account 1:10

Current, Deposit & Bancassurance1:1001:100

Source: American Bankers Association

Synergies: Cross-SellingSynergies: Cross-Selling

Cross-Selling: Banking Products sold by TT distribution network

Valued-added services for existing Corporate relationships and improving portfolio profitability via TT cover on corporate and individual loans

Product DevelopmentProduct Development

Develop the range of Individual products that best suits your market. This could be a single “Jack of all trades” product, or a product range capable of providing for the needs of the participants in your market

Development of a Group product range can complement the individual product range

Supplementary riders can add value to a product range whilst providing essential risk cover for the participants

IndividualIndividual

ProductsProducts

Corporate and Corporate and Group PlansGroup Plans

Group Takaful Group Takaful ProductsProducts

Group Term LifeGroup Term Life

Group Credit LifeGroup Credit Life

Group Retirement/PensionsGroup Retirement/Pensions

Initial Regulatory Initial Regulatory ApprovalApprovalDevelopment received full support of Development received full support of

Saudi Arabi Saudi Arabi Monetary Agency.Monetary Agency.

Explanation of takaful concepts so that Explanation of takaful concepts so that the regulator the regulator can fully understand the can fully understand the basic principles.basic principles.

The need to have 100% Sharia and The need to have 100% Sharia and SAMA approved SAMA approved funds was essential to the funds was essential to the approval process.approval process.

MarketingMarketing

&&

Sales StrategiesSales Strategies

Sales ModelSales ModelAgency?

Direct Sales Force?

Bancassurance?

Cross Selling?

Through Islamic banks or Islamic windows in conventional banks?

Operational DevelopmentOperational DevelopmentAgree underwriting arrangements with

reinsurers/retakaful operator

Medical examination facilities to be evaluated and medical examiners to be appointed

Forms Design-All BAJ takaful forms are stored in a central library on the IT system.

Policies and Procedures developed and publishedContribution Payment Facilities established. In BAJ’s case, principal payments made through SAMA direct debit system-SARIE

External and Internal Legal review of all contracts and documents

IT DevelopmentIT DevelopmentEssential that Takaful life operation is underpinned by

a fully developed and comprehensive IT system

No known life takaful software system in existence

Bi-Lingual capabilities essential

Multi-Currency facility required for international development

Future flexible product development an essential part of the IT development

Sales Lap top illustration capability essential

Unitized Investment module essential to maintain a fully auditable record of a clients savings/investment account over the life of the contract

Fully tested by external actuaries before going live.

Penta Takaful - Penta Takaful - ComponentsComponentsNew

BusinessContract Servicing

Claims

Contribution Processing

Unitization

Agency Management

Reports and Enquiries

Consists of three main functions independent of each other.

Eight major functions span across the three independent functions.

Payments Processing

Plan Wizard / Product Setup

Retakaful

Security

External Business External Business EvaluationEvaluationAn internal audit requirement to bring in external

business consultants to evaluate the development, processes, IT system and business prospectsExternal business and process evaluation included but was not limited to the following:

Business strategy

Market segments and prospects

Processes

Pricing

Profit projections

IT development

Business Model

Final Sharia approvalFinal Sharia approvalReview of all contracts and contract wording

Review and approval of contentious issues:

Suicide-Beneficiaries to be paid or not?

Age-Minimum and maximum age of contract holders

Can the contract be whole of life or to a maximum age?

Personal Accident. Can it be included to pay as double indemnity?

Islamic Inheritance Laws-Are they applicable?

Surplus sharing-On what basis and can the operator receive a surplus share or surplus performance fee?

Reinsurance/Retakaful-Dispensation, can it be given for reinsurance?Issuing of Fatwa, declaring that the takaful Issuing of Fatwa, declaring that the takaful

program is sharia program is sharia compliant-compliant- 1st in KSA1st in KSA

BAJ FatwaBAJ FatwaBAJ FatwaBAJ Fatwa

FinaliFinalisse Reinsurance/Retakaful e Reinsurance/Retakaful TreatiesTreatiesReinsurance or Retakaful

Group and Individual treaties-one or two reinsurers/retakaful operators

Rates-significant issue in a new life marketPayment arrangements formulated

Claims process to be agreed

Surplus arrangements

Facultative Arrangements

Final Regulatory Final Regulatory AApprovalpprovalFull documentation to be provided to the

regulator-Saudi Arabian Monetary Agency (SAMA)

Standard illustrations with hypothetical growth rates for comparison to local competitor products

Brochures provided for evaluation

Contract wording and cancellation charges to be transparent

Reinsurance treaties

Official SAMA Approval issued-1Official SAMA Approval issued-1stst in in KSAKSA

Recruit and Train StaffRecruit and Train StaffAdvertise and recruit staff

Expatriate v Saudi-significant issue for BAJ. Policy taken that all Takaful sales advisors (TSAs), would be Saudi Nationals

Tied “Agency” development-Salary plus advanced commission concept

Develop with legal division a sales staff contract

Training-must consist of both traditional insurance sales concepts with a major element of takaful theory and practices.

Open for Open for BBusinessusinessSoft Launch into the market was the BAJ

approachEvaluate market penetration and sales after

six months in the market

Amend sales approach or direction after initial evaluation, if proven necessary

Accelerate development to include nationwide sales operations

In SummaryIn SummaryDetermine which area of Islamic insurance

you wish to enterEvaluate the Islamic contract best suited to

your needs

Either hire or contract with experienced insurance and takaful practitioners

Work closely with your regulators