Farid Benbouzid Damas 01&02-06-2005 1

The success of Retakaful

Arab Insurance, outlook and actual new economical situation

Damas 01&02-06-2005 2

Overview

IntroductionAchievementsChallenges ahead StrategyConclusion

Damas 01&02-06-2005 3

Introduction

Conventional insuranceTakaful ConceptRetakaful concept

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Insurance not permissible

Uncertainty (Gharar)Gambling (Maisir)Interest (Riba)

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Takaful concept

1985 Grand Council of scholars approved TakafulMethod and means left to scholars and practitionersMust have : Permanent Sharia Advisory Board Sharia compliant investment strategy Operating model based on Shariaa concepts

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Operating models

Pure mudharabah (Sudan)Modified mudharabah (Malaysia)Wakala (Bahrain)

Family takaful

General Takaful

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Re-Takaful concept

Preferred reinsurance is proportional (quota share or surplus) Non proportional permissibleIf Re-takaful is unavailable, then it is permissible to use a conventional reinsurer

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Overview

IntroductionAchievementsChallenges ahead StrategyConclusion

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Achievements

Takaful industryRetakaful industryBest Re’s position

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Takaful Industry in the World

World Premiums 2003 USD 2.6 trillions

Takaful contributions 2002 USD 2.1billions

Number of companies 59

Number of countries 23

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Takaful Industry in the World

Geographical Spread

56%36%

7% 1%Mid-East

South &East AsiaAfrica

Others

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Takaful industry in EM

EM Takaful contributions 2002 USD 2 billions

EM/WW Takaful contributions 99%

EM Total Premiums USD 217 billions

Number of Companies >45

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Main EM Takaful Markets

GCC MalaysiaOther Arab countriesOther South & East Asia

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Retakaful cessions drivers

Heavy exposure to cat events > No exposure to cat events

Small local players > Larger international insurers

Specific line or customer Group focused

> Multiline insurers

Commercial lines (Aviation) > Personal lines (Motor)

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Retakaful cessions drivers

Life protection lines > Life saving

Expansion into new products Or regions

Exit from markets Run off market

Regulatory and rating considerations

Solvency ratio and claims payment ability

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High demand for Retakaful

Many of Takafuls are local playersMany of them are also newly set upSmall takaful market

In number In size

Rely heavily on Retakaful supportDemand expected to grow with industry

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Unsufficient supply

Very few Professionnal Retakafuls 2 (Best Re, ARIL)

Takafuls accept a small part of Retakaful business from each other

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Takaful dilemma

Participants opt for the product because it is islamic

Takafuls forced to cede business to conventional reinsurance

Otherwise disappear !

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Retakaful dilemma

Retakafuls are Takafuls focused

Retakafuls forced to accept business from conventional marketRetakafuls forced to retrocede business to conventional market

Otherwise disappear !

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Best Re

Modified Mudharaba model Permanent Shariaa BoardAvoids “Ribaa”

Interest on deposits are offset Investments are compliant with “Shariaa”

requirements

Manages separate accounts Ceding companies account (Technical operations) Shareholders’ account (Shareholders’ operations)

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Best Re

Niche market player set up in 1985Internationally recognized as RetakafulStrong capital basis and claims-paying abilityWell rated by well reputed agencies

Standard & Poor’s : BBB (Stable Outlook) AM Best : B++ (Very Good)

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Best Re

Accepted contributions from Takafuls (2003)

USD 8 millions

In % of whole portfolio 13%

Markets 16

Number of Ceding Takafuls 28

Number of Contracts 319

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Overview

IntroductionAchievementsChallenges ahead StrategyConclusion

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Challenges ahead

Mission statementTakaful growth perspectivesLearn from conventionalsRetakafuls’ duties

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Mission statement

Pave the way for takafuls to achieve theirgrowth potential and build a strong andsound industry

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Takaful growth perspectives

Non life insurance demand in EMLife insurance demand in EMOutlook

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Non-life insurance demand

Low Premium as % of GDP Min = 0.2% (Bangladesh) Max=2.9% (Jamaïca, South Africa)

Low per-capita Spending Min = USD 8 (Africa) Max = USD 54 (Latin America)

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Life insurance demand

Very low Premium as % of GDP Min = 0% (Saudi Arabia) Max = 3.8% (Trinidad & Tobago)

Very low per-capita Spending Min = USD 14 (Middle East) Max = USD 30 (South & East Asia)

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Outlook

Largely untapped potential to be captured

Takaful is a specific answer to an unfulfilled demand

Takaful could capture a large part of the population

which would not, otherwise, insure.

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Takaful Growth Perspectives

New markets likely to introduce Takaful in the near future

Philippines, Bangladesh, Former Soviet Union States, South Africa etc.

Takaful windows set up by conventional insurers

Good indicators of brand success

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Takaful Growth Perspectives

Strong growth trend in South & East Asia

+30% p.a. in Malaysia likely to continue

Sustained average growth in double digits in the coming years

+15% p.a. reasonable to assume

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Learn from conventionals

250 professional reinsurers

2003 ceded premiums : USD 176 billion

Non life reinsurance : USD 146 billion (13.7% insurance

premiums)

Life reinsurance : USD 30 billion (1.9% insurance premiums)

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Learn from conventionals

Top ten reinsurers market share : 54%

Shareholders equity of top 40 : USD 249 billion

Of top ten, 6 have a financial strength rating:

At least “AA-” by S&P (very strong financial security)

Stable and sound capital base for reinsurance industry :

Negligeable bankrupties between 1980-2003

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Reinsurance cessions drivers

Reduced uw results volatility Escape from insolvency in case of cat event

Capital relief and flexible financing Accept more business with the same capital

Access to reinsurers’ expertise and services

Product development Pricing Underwriting Claims management

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Reinsurers have to be financially secure

Insurer Reinsurer

Part of underwriting risk

Counterparty credit risk

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Reinsurers’ risk management

Scope : Long term survival

of the reinsurance company

Underwriting and investment risks are aligned with capital available (R.B.C)

Capital management

Asset management

Underwriting

Risk Management

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Risk modelling

Operational risk

Insurance risk Credit risk Market risk

Earthquakes

Influenza epidemic

TsunamiExchange ratesStock markets

Interest rates

Inflation

Credit risks Tropical cyclones

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Diversification across time

Better diversification

Lower capital need

or Lower Cost

given the exposure Higher level of

Protection _ given thelevel of capital

Less expensive reinsurance cover

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Retakafuls’ duties

Providers of secure covers Strong capital base Focus on Risk Management models Diversification across time

Expertise providers Product development Pricing Underwriting Claims management

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Overview

IntroductionAchievementsChallenges ahead StrategyConclusion

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Strategy – 1st step -

Establish an annual meeting of ArabTakafuls and Retakafuls

Networking benefits

Set up a « Takaful Association » Practitioners’ intelligence networks Best practices’ exchange Reinsurance placing facilities

Set up an informative Takaful & Retakaful website

Wise information exchange among members

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Strategy – 2nd step -

More and more cooperation between Takafuls Web site becomes transactional« Takaful Association » is efficient

Improved structures Successful Annual Meeting

New well rated Retakafuls are set up 2 to 3

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Strategy – 3rd step -

Design a framework of cooperation with conventional reinsurers

Associate members’ status Interested in the Takaful market

development

Set up a brokerage company focused on Retakaful placing

By the Association

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Specific position of Middle East

Homogenious religious statusOil producer countries generating financial surplusEligible to play a major role in this strategyStrategy could benefit from the financial synergy existing in Dubai & Bahrain

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Overview

IntroductionAchievementsChallenges ahead StrategyConclusion

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Conclusion

To be or not to be? Is no longer the question

Other questions prevail now How many? How much strong? Capital, rating? How much knowledgeable?

Successful answers to those questions will involve a virtuous business cycle

Takaful & Retakaful development Benefits for overall economy and society

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Retakaful &Takaful’s virtuous cycle

Retakaful

Less expensive takaful products

Higher profitability

Lower cost

of capital

Stronger growth

Enhanced insurability

Secure industryTakaful Company

Overall economy

Farid Benbouzid Damas 01&02-06-2005 48

Thank you

Sources Islamic Insurance Conference,

London, Sept. 26-27, 2003Swiss Re, Understanding

reinsurance, 2004Swiss Re, sigma N°6/ 2002.