1

Issues and Challenges In Retakaful

Azman IsmailHIJRAH Strategic Advisory GroupTel : 603.4260.1995Fax : 603.4260.1994Email : hijrah@email.com

Why Retakaful?Same reason as takaful

Increase CapacityRisk management

Spreading the risk

Will not make the “road” better but the “driving” smoother

2

Why Retakaful…?Profit Maximization?Growth of SalesMarket ShareSolvency

Issues and ChallengesTechnical CompetenceSyariah CompetenceFinancial StrengthMarketSystems and MethodsCooperation

3

Technical CompetenceConventional insurance have developed over 500 years but takaful is less than 50 years old

Takaful & Insurance Compared

Ham

mur

abbi

Birt

h of

Jesu

s (pb

uh)

Khi

lafa

h O

thm

ania

h

Isla

mic

rese

arch

Con

gres

sIn

tern

atio

nal i

slam

ic E

cono

mic

Con

fere

nce

Birt

h of

Pro

phet

Muh

amm

ad sa

w

0001 0600 1400 2000

Italia

n tra

ders

‘Aqi

lah

&D

ham

an

Ahl

al-d

iwan

4

Technical Competence …Underwriting skillsQuantitative AnalysisFinancial AnalysisProduct Development

Shariah CompetenceApart from technical competence,Takaful practitioners lack sufficientshariah knowledge and shariah advisors lack sufficient operational knowledge to be able to develop the takaful industry at par with conventional insurance

5

Shariah knowledge …Usul FiqhQawaid FiqhiyahFiqh Mu’amalat

Financial StrengthConventional

Premium = USD 2 trillionEquity > USD trillion

RetakafulContribution < USD 1 billionEquity < USD 100 million (strictly speaking < USD 5 million)

6

Market

InsuranceMarket

TakafulMarket

Systems and MethodsProcesses and ProceduresIT SystemsTurnaround

7

CooperationCommon standardsResearchProduct DevelopmentContractFinancial Models

On sharing risksPools

Takaful operators agree to cede risks to share aggregate risks

RetakafulWith reinsurersWith retakaful operators

8

Concept of Lesser Evil (Danger)?

For general business, a large proportion is still with conventional reinsurersFor family business, retakaful is with one major reinsurerApplying the concept through fixing the “right” retention amount.

One Way of Facing This Challenge Is Through Understanding The Retakaful Impact On Business.

9

Optimizing RetentionThrough Scientific ApproachQuantitative Factor Apart From Qualitative factorsLearn from conventional insurers and reinsurers

Current Retention Ratio

10

Fixing Retentions…Rates &

Loadings

LossExperience

InvestmentPolicy

StaffExperience

FinancialStrength

ManagementPhilosophy

RetakafulCosts

ContributionIncome

RetentionLimits

RetainedContribution

Management PhilosophyManagement Attitude Towards RiskKnowledge of ManagementAcceptable nature & rangePriorities

11

Contribution IncomeGross ContributionRisk ProfileRetention = k CPer risk – 1% to 10%Per event - depends

Staff ExperienceUnderwriting skillsQuantitative skillsBackgroundTraining

12

Loss Experience

Either on gross or netDegree of fluctuation over timeEffectiveness of retakaful arrangements

Deviation …

13

Retakaful CostsUtilityProbability of RuinExpected Profits

Probability of Ruin

Expe

cted

Pro

fits

Investment PolicyCashflow - liquidityCurrently does not impact much on takaful retention but should consider long-tail business

14

Rates & LoadingsLower rated risks carry higher retentionsLoadings – expenses (including commission), profit -depending on financial model, contingency and tax (depending on the model & tax structure of the country)

Degree of Risk (Reflected by Contribution Rate)

Ret

entio

n Li

mit

Financial StrengthShareholders FundTakaful FundPotential Variation In Claims Experience

Example, (study on 300,000 fire risks – largest 5 million and 1,000)

15

Rule of ThumbR = y X (Capital + Free Reserves)

where - 1% < y < 5%

R = 100/n X A Where n is the # of times of large claims per year requiring immediate paymentAnd A equals the liquid assets (should be 5 X max retention per loss in company’s most important branch)

A more exhaustive methodR = X (S) (EC)

(GC) (L + E)WhereX = 1% - 5%S = surplusEC = earned contributionGC = gross contributionL = loss ratioE = expense ratio

16

So,Have we set the correct retention limits?Can we optimize our retention?Can we improve the bottom line of takaful and retakaful operators?

ConclusionRetakaful challenges can be met with :

Greater knowledgeEnhanced skillsHigher financial strengthPolitical willGreater cooperation

17

Wassalam