Takaful to Surpass Conventional Insurance

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 © Copyright AETINS Solutions 2011. All rights reserved. Page | 1 $UWLFOH $SULO %\ .XDQ-6 5DYLQGUD0RKDQ 'DNVKLQD0RRUWK\ 7DNDIXOWRVX USDVV&RQY HQWLRQDO,QV XUDQFH"  Since the 1980s there is a surge to Takaful as a way for r isk management. Broadly categorized into Family Takaful (life, savings) and General Takaful (non life, such as motor, marine, home, accident, f ire, etc.), Takaful is not solely for Muslims. It is just another form of risk management albeit compliant with Islamic principles. Now established as an alternative to conventional insurance in GCC, many Asian countries are also catching on. Unique amongst these is Malaysia, where a signif icant proportion of the participants are not Muslims. Here the insurance market is growing rapidly, keeping up with the growing incomes, needs and sophistication of the f inancial market. Since the f irst Takaful operator was f irst licensed by Bank Negara (the Central Bank of Malaysia), Takaful is growing at a faster rate than conventional insurance. Takaful is now established as a proven way for the part icipants to address risks. Will the same scenario happen in other more developed markets such as USA, Europe or Japan which are predominant in conventional insurance? Just wait till the insurance consumers begin to realize the methods and advantages of Takaful! After its initial models, Takaful is now very much settled in its workings and regulations. With several proven models available (Mudharabah, or prof it sharing; Wakala or fee based; and where combinations of both are used), how then is Takaful superior to conventional insurance? Is it poised to be the next trend like when Universal Life replaced Ordinary Life endowment, which in turn was replaced by Investment Linked insurance and single premium structured products? Take away the jargon, unveil its workings, expound its guiding principles, and this is what you get: 1. With each particular Takaful scheme, participants do not pay a premium but agree to make regular contributions to his account (personal savings account) from which

Transcript of Takaful to Surpass Conventional Insurance

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Since the 1980s there is a surge to Takaful as a way for risk management. Broadly categorized

into Family Takaful (life, savings) and General Takaful (non life, such as motor, marine, home,

accident, f ire, etc.), Takaful is not solely for Muslims. It is just another form of risk management

albeit compliant with Islamic principles. Now established as an alternative to conventional

insurance in GCC, many Asian countries are also catching on. Unique amongst these is

Malaysia, where a signif icant proportion of the participants are not Muslims. Here the

insurance market is growing rapidly, keeping up with the growing incomes, needs and

sophistication of the f inancial market. Since the f irst Takaful operator was f irst licensed byBank Negara (the Central Bank of Malaysia), Takaful is growing at a faster rate than 

conventional insurance. Takaful is now established as a proven way for the participants to

address risks. Will the same scenario happen in other more developed markets such as USA,

Europe or Japan which are predominant in conventional insurance? Just wait till the insurance

consumers begin to realize the methods and advantages of Takaful!

After its initial models, Takaful is now very much settled in its workings and regulations. With

several proven models available (Mudharabah, or prof it sharing; Wakala or fee based; and

where combinations of both are used), how then is Takaful superior to conventional

insurance? Is it poised to be the next trend like when Universal Life replaced Ordinary Lifeendowment, which in turn was replaced by Investment Linked insurance and single premium

structured products? Take away the jargon, unveil its workings, expound its guiding principles,

and this is what you get:

1.  With each particular Takaful scheme, participants do not pay a premium but agree to

make regular contributions to his account (personal savings account) from which

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regular donations (Tabarru) are made to a pool which pays any participant who suffers

a given calamity. Unlike premiums, these funds belong to the participants but are

managed by a trustee, who is also the Operator of the scheme. As a trustee theOperator represents the interest of the participants, it should be less driven to make

business decisions, offer ex-gratia settlements, or favour large customers.

2.  The operation of scheme and the management of funds are transparent. Each scheme

is independently managed. There is no cost subsidy or mix with other operations. When 

properly managed, Operators will be competing on expense ratios and surplus returns

to participants. A track record of better expense ratios, which are available for any

prospective participant·s review prior to joining the scheme, will be its competitive

edge.3.  The Operator needs to exercise responsible risk appraisal of each new entrant to ensure

that the fund is sustainable and continue to give good returns. As a result, the focus on 

competition for better returns and better value will drive Operators to long term results

instead of short term top line achievements. Competition is thus less centred on pricing

and features, but on principles and best practices which are evident from expense ratio

and service quality measurements

4.  Once enrolled, the participant can be assured that their claims will be settled on merits

and be independent of current loss ratios, shareholders or business interests.

5.  Non payment for self destruction (suicide) and loss suffered while engaging in criminal

activities is another feature unique to Takaful. By the same token, funds are invested in 

morally correct businesses. Thus, investments in alcohol, cigarettes, gambling and the

like are not permitted.

6.  An independent Board (the Shariah Board) provides independent and unbiased

approvals of new products without pressure on sales and marketing demands, but base

their decisions on principles.

7.  Participants of a Takaful scheme receive annual dividends from the surplus of the funds.

Surplus is a more equitable and timely way to return value to participants. Surplus

comes from the risk (donation) account. For Family Takaful, participants are provided

statements on fund performance and expenses, status of reserves and provisions.

8.  Spirit of mutuality helps participants to appreciate the joint and shared outcome of the

fund. Participants recognise that they are also responsible for the expense component

of the fund·s performance. Thus, Participants· networking and sales are likely to result in 

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appropriate mortality and risk charges which are critical for the long term sustainability

of the scheme.

9.  The Operator does not assume any risk on the suff iciency of the fund, but may suffer areputational risk if it becomes insuff icient, and may be required to top up the funds

with a loan (Quardl Hasan) only to recoup it at a later date when the funds build up

again. Alternatively, contributions and/or donations may be increased.

With understanding of its transparency, good governance, independent supervision by a

compliance board, investments with a long term view, superior expense management, and

positive competition, Takaful stands as a credible choice for the future.

The potential for distribution of Takaful is huge. Takaful is more suited to be distributed bysocial and personal contacts, through word of mouth where participants may invite others to

subscribe. Social networks are natural places for Takaful subscription. Thus, Webtakaful may

be the future for Takaful distribution.

General Takaful is particularly attractive as there is the potential of dividends which can be

used to offset renewal contributions. In addition to the usual indemnity in the event of loss,

the participant is entitled to a share of the surplus if he suffers no loss. This is unlike

conventional General Insurance where premiums once paid are paid.

While Takaful has the potential to match its conventional peers, it has its own challenges aswell. Although Takaful growth rate continues to be signif icantly higher than conventional, it

has a relatively smaller market share. In addition, Shariah compliant investment instruments

are currently insuff icient and must grow in tandem with Takaful new business growth. When 

Takaful overcomes these limitations, it will be in a better position to challenge conventional

insurance.

About Us

AETINS Solutions is a Takaful Software Solutions Provider

We provide an integrated end-to-end Takaful Solution covering all lines of business: Family, Group and General

Takaful. It encompasses illustrations, quotation, new business, contract servicing, claims, agency management,

and commission, benef its, accounting and re-takaful. Our business is to help Takaful Companies to strategise and

operate by leveraging on Information Technology, a key enabler to achieve transformational growth through

Operational Excellence and Innovation.

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Contact Details:

AETINS Solutions Sdn Bhd

Suites 801 & 3A02, Menara PJ,

AMCORP Trade Centre,

No. 18, Jalan Persiaran Barat,

46050 Petaling Jaya,

Selangor, Malaysia

Website: www.aetinstakaful.com.my 

Email: [email protected] Tel: (603) 7955 3043 / 7620 3043

Fax: (603) 7957 1187

AETINS Solutions is the Takaful subsidiary of AETINS