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Aon Hewitt (Actuarial) / QED Actuaries & Consultants (Pty) Ltd

Johan Potgieter

13 May 2013

Presentation to Bancassurance Conference

Takaful Products

1

Contents

Overview – Islamic Law

Principles

Models of Takaful Insurance

Opportunities

Examples of Takaful Products

Challenges

2

Overview – Islamic Law

Permits trade and profit.

Interest is forbidden.

Money should only be made through trade and

services.

Mutual co-operation, responsibility, assurance,

protection and assistance between groups of

participants.

3

Overview – Islamic Law (contd)

Takaful insurance company run by shareholders on

behalf of the participants.

Shareholders paid in 2 general ways:

– Fee upfront i.e. Wakalah.

– From pre-determined portion of profits made i.e.

Mudurabah.

Provides transparency to participants on how their

funds are utilised.

Sharia scholars monitor Sharia companies to ensure

compliance.

4

Principles

Takaful : Arabic word meaning “guaranteeing each

other” or “joint guarantee”.

Participants requiring protection must participate with

sincere intention to donate to other participants faced

with difficulties.

Each participant contributes to a fund used to support

one another – cover expected claims with

contributions.

Objective of Takaful insurance : Pay defined loss from

defined fund.

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Principles (contd)

The principles of Takaful insurance are as follows:

Mutual co-operation - participants co-operate amongst

themselves for their common good.

Mutual responsibility - all participants pay their subscription (or

contribution) to help those that require assistance.

Mutual assurance - losses are divided and liabilities spread

according to the community pooling system.

Mutual protection - uncertainty is eliminated in respect of

subscriptions and compensation.

Mutual assistance - no advantage is derived at the cost of

others.

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Principles (contd)

Takaful : Perceived as co-operative insurance.

Contribute sum of money to a common pool where objective is

not profits but to uphold principle of bear ye one another’s

burdens”.

Participants (not shareholders) are the underwriters of risk.

Principle of investment: reward must be accompanied by risk.

Permissible to invest in Sharia-approved stocks (i.e. no

gaming, brewery, tobacco, highly leveraged companies) as

prices of equities command no certainty in value.

Investment in bonds provides capital protection and fixed

returns – no permissible.

Interest on a loan is prohibited.

7

Models of Takaful Insurance

Takaful can be implemented on the following

4 variations:

Mudharabah Model (profit sharing model)

Wakalah Model (fee model)

Co-operative insurance

Combination

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Mudharabah

Profit sharing model.

Shareholders accept payment of Takaful contributions

from participants (providers of capital).

Contract specifies manner in which profits will be

shared.

Losses will be funded from interest-free loan from

shareholders fund.

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Mudharabah (contd)

Model of Mudharabah Operation

y%

Contributions

(participants)

Participants’

Accounts Pool

Investment Income

+

Underwriting Surplus

Takaful

Operator

Re-Takaful

Operator

Max [(100 – y)%,

0%] x share in

profits

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Wakalah

Fee model.

Participants appoint an agent to run Takaful operation.

Agent has admin, actuarial, IT, accounting, legal, etc.,

skills.

Operation is run on participants’ behalf or as their

representatives on agreed terms and conditions for a

certain fee.

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Wakalah (contd)

Model of Wakalah Operation

Contributions

(participants)

Participants’

Accounts Pool

Investment

Income

Takaful

Operator

Re-Takaful

Operator

Underwriting

Surplus

Wakala

Fees

Administration

Fees

Note: Re-Takaful is similar to reinsurance

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Opportunities - Numbers

– Global gross Takaful contributions +/- USD12 billion.

– African gross Takaful contributions +/- USD500 million.

– Estimated growth over past 3 years:

• 50% for global market

• 45% for African market

– Estimated Muslim population in Africa is 500 million.

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Opportunities - Banks

– Banks have larger penetration than insurers.

– Recent work in Middle East showed Islamic finance has 25%

market share.

– Takaful insurance made up 15% of market share.

– Good opportunity to leverage off Islamic finance.

14

Examples of Takaful Products Examples of products developed for a bank in Middle East

Example 1 – Term Assurance

– Decreasing Term Assurance e.g. loan repayment.

– Benefit payable on death or disability.

– Company manages portfolio for benefit of participants for

percentage not exceeding fixed% of total annual contributions

deducted at end of fiscal year.

– Ratio is announced in advance before the start of fiscal year.

– Amount is shown in all documents and renewal notices.

– Hybrid model using Mudharabah and Wakalah models on

investment profits.

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Examples of Takaful Products (contd) Example 1 – Term Assurance (contd)

– Surplus is calculated as:

Where:

Total Contributions = Monthly premiums.

Agency Fees and Share of

Investment Profits

= Benefit received by the Company for

managing the portfolio set at the start of the

fiscal year, e.g. 10% of total contributions.

Re-Takaful fee amounts = Reinsurance premium.

Coverage = Expenses.

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Examples of Takaful Products (contd)

Example 2 – Group Life and Savings Plan

– Benefit payable if death occurs within policy term

– Optional savings benefit selected at inception

– Offered to corporate clients of the bank

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Examples of Takaful Products (contd) Example 2 – Group Life and Savings Plan (contd)

Where:

Savings Benefit = [Accumulated fund Value (t – 1) + (allocation

Value (t) * Percentage (t) (allocation value (t))

* Percentage (t) – subscription fee (t))] x (1 +

l) – Shareholder Mudharabah charge (t) –

Claims.

t = month

Subscription fee (t) = Wakala expenses, the pre-determined fee

due in month t.

i = Monthly return net of tax and external and

investment manager charges.

Shareholders Mudharabah

charge (t)

= 10% of investment return

Claims (t) = Claims made in month t.

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Examples of Takaful Products (contd) Example 2 – Group Life and Savings Plan (contd)

– Contributions are invested collectively for benefit of

participants on a Mudharabah basis in return for participation

of realised profits at rate stated in Takaful certificate.

– Savings contributions (net of Wakala fees) of say, 50% of

amount deposited are accumulated over the policy term in the

selected savings funds to build the Savings Benefit available

at maturity date or any other date if the participant elects to

withdraw from the fund.

– At maturity, Savings Benefit can be paid as lump sum or as

installments. Over payout term, remaining funds will be

invested in low risk savings fund.

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Challenges

– Most Takaful insurers are new – critical business volumes not

yet reached.

– Expense ratio is high as a result compared to conventional

insurers.

– Education of potential customers and agents/brokers.

– Increased competition.

– New regulations

– New accounting standards.

– Investment restrictions.

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Thank you

Questions?