By: Ravindra Mohan

Can System really help address Takaful Operators challenges?

February 2012AETINSAETINSMINDSHAREMINDSHARE

Can System really help address Takaful Operators challenges?Feb 2013By : Ravindra Mohan Vijalapuram

The market opportunity for Takaful is significant but penetrating the market effectively is a challenge for Takaful Operators. As newcomers, they have to compete with more mature conventional peers, who clearly have the advantage of scale. They also have to compete with fellow Takaful Operators, who aspire to secure major share of the pie.

Below are the practical challenges faced by Takaful Operators in implementing and achieving sustainable business growth:-

1. Market Penetration and Acquisition Costs: Lower market penetration and higher acquisition costs have been a major problem daunting Takaful operators in MENA. In many markets, increased competition and aggressive pricing is resulting in shrinking margins. Furthermore, industry reports show that Takaful operators have higher commission ratios compared to conventional insurers. This is due to the advantage of scale the conventional insurers have.

2. High Operation Expenses : Most operators have expense ratios (Administrative Expenses /Net Earned Premium) of more than 30%. This is substantially high compared to conventional companies who are around 10% lesser than the Takaful operators.

3. Compliance towards Shariah : Takaful operators need to manage the clear segregation of Operators and Takaful funds at all times to ensure Shariah compliance. With the complexity of Takaful business, this is a daunting task. Accurate calculation of surplus from various Takaful funds (Death, Disability, CI, Motor, etc..) and distributing back to participants poses an added challenge. This also adds onto the Operational costs and increases the Expense ratio.

4. Regulatory Evolution : Takaful industry is learning and evolving. Lack of standardization at this point of time is seen as a major risk. There are different models of takaful with different flavours implemented in each company. We have seen continuous regulatory changes in the last few years. Some are as sweeping as that of Saudi Arabia adoptingthe co-operative model. New standards are evolving (AAOFI, IFRS 9). There is an imperative call to move towards Solvency II regime. All these impact Takaful operators, unless they are prepared for change.

5. Shortage of Skilled Staff and High Staff Turnover : This is one of the key challenges faced by Takaful Operators. Shortage of skilled staff and frequent turnover leads to problems of knowledge transfer and thus affects service. More time is spent on service recovery when it should be on service delivery.

Some of the strategic ways PentaTAKAFUL framework can help Takaful operators:-

1. Market Penetration and Acquisition Costs: Understanding the market needs, ability to launch new innovative products in a timely manner, providing effective tools and service to agents at the point of action are the key success factors for business growth.

a. Launch Innovative Products : PentaTAKAFUL has a robust Product configuration framework, which has an extensive range of functional parameters to enable or regulate with. With parameterization and standardization at fundamental levels, it allows you to experiment freely to arrive at combinations which best suits your market and customers.

b. Bancassurance – Sell Policy on the Spot : PentaBANCASSURE allows bank staff to illustrate and sell policy on the spot without compromise on risk assessment or compliance. Simplified proposal capture, pulling data from bank systems, transfers of premium from customers’ accounts make the process seamless. With merely 30min to 1hour turnaround time, a bank customer walks out of the bank as a Takaful participant. This portal can also be extended to other distribution partners like Brokers or Agents.

c. Integrated Agency Management and KPI system : KPI’s and incentives are stimulants for agents. An integrated KPI tracking system supplemented with a flexible benefit compensation system allows you to understand and use the hot buttons of your agency force, thus enhancing the business.

How PentaTAKAFUL aligns to address Takaful Operator challenges

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2. Controlling Expense Ratios : It is important that Takaful operators align costs to necessary areas and have a framework which allows continuous optimization of costs. With PentaTAKAFUL as the backbone, with increase in scale, this expense ratio shall reduce considerably. Below are some of the reasons:-

a. Automated Underwriting : With all the underwriting rules and decision making configurable and automated, you can experience from 70% to 90% of cases going without any underwriter intervention in retail business. This cuts down the need of large number of underwriters and allows the underwriters to focus better on remaining cases, thus, improving the claims ratio too.

b. Shared Expertise Services: Customer centric service approaches allows us to integrate Finance, Agency, Claims and Reinsurance functions across lines of business. Hence, these can be as part of shared services for the overall organization. This enhances grouping of staff and cuts down staff costs.

c. Closed Loop Follow-ups : All the mundane work of communication, follow-ups are automated, thus reducing costs.

d. 100% accounting automation and compliance to standards: All the financial movements of business and the Takaful funds are automated. And with real time segregation of funds and daily posting allows for timely insights into business.

4. Handling Regulatory Changes : A good core system should be flexible to adapt to regulatory changes. PentaTAKAFUL with its robust approaches, allows to incorporate changes quickly and smoothly. Whether the change is with regards to switch in Takaful model ( Eg : Shift from Mudharabah to Wakala model in Malaysia), or a demand to switch the fundamental funds (Eg : Shift to co-operative model in Saudi Arabia), PentaTAKAFUL handles it smoothly with mere parameter changes. We can expect number of changes in regulations and accounting approaches in the near future. With its sound architectural base, PentaTAKAFUL can be align to changing needs with minimal impact.

3. Facilitating Governance and Shariah Compliance : Takaful business is more complex in management than conventional. The reality of Takaful operations shows that it requires 4 different funds in principle to be managed as part of operations. They are:

a. Operators Fund (Shareholder’s Fund): Wakala fees for commissions and administrative expenses collected and corresponding expenses from it. b. Tabarru Fund : This is the risk fund from which claims and reinsurance are handled. Underwriting surplus is calculated on this fund. c. Participants Fund (or Operations Fund) : These are amounts belonging to the participants which has not been allocated yet to respective funds. d. Participants Investment Funds : Applicable for Life products, wherein, the investment part is managed by Takaful operator.

Below picture illustrates the movement among the various funds for some of the sample transactions. Managing these movements in a manual or semi-automated system is not practical and leads to errors and approximations. And any error means that the funds are mixed and Shariah compliance is compromised.

In PentaTAKAFUL, these movements happen in real time with complete transparency. Status of each fund can be assessed on daily basis, thus enhancing management insight and assuring shariah compliance.

5. Handling Staff Turnover : Key challenge for both Insurers and Takaful operators is knowledge management. Discontinued products still needto be serviced over longer duration. People keep moving. With PentaTAKAFUL Plan wizard and rules base, all the business rules and product rules are centralized. This allows new people to understand the business and products quickly and get inducted as soon as possible. This substantially reduces the servicing risks.

PentaTAKAFUL is capable of addressing the challenges encountered by Takaful operators. With all the Takaful funds and inter-fund movements built in, it assures shariah compliance without incurring additional compliance costs. It will enhance your reach through different distribution channels with personalized products. With effective use, PentaTAKAFUL shall act as a strong backbone to your business.

TABARRU FUNDINVESTMENT FUNDPARTICIPANT FUND OPERATORS FUND

Contribution Subscription

Withdrawals Wakala Switch Free

Tabarru (MC)

Acquisition Charge, Policy Fee, Other Charges

ReTakaful Claims Recovery, Commission, Profit

Claims, ReTakaful Expenses

Surplus

Commission, Medical Fees

Participant/Agent/

Stakeholder

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AETINS is an Insurance & Takaful Software Solutions Provider.

We offer a single end-to-end Insurance & Takaful Solution that covers all lines of business: Individual and Group Life, Investment Linked, General, Health, Takaful Family and General. It spans across functions like illustration, quotation, new business, policy/contract servicing, claims, agency management, commission and benefits, accounting and services.

AETINS’ solutions are customer-oriented, process-driven, and designed the way people work. It comes ready with rich features, comprehensive functionalities, and off-the-shelf capabilities with most of the good practices of the industry already incorporated. This allows you to deploy ISF/ TSF without the need for intensive customisation, saving precious time and costs.

Insurance Products

ISF Life - ISF I-Life + ISF G-Life + ISF I-LinkedISF I-Life - Individual Life Insurance SolutionISF G-Life - Group Life Insurance SolutionISF I-Linked - Investment Linked SolutionISF Agent - Web Portal for Insurance AgentsISF Banca-Life - Selling Life Insurance through BanksISF Illustrate - Offline Illustration for Life InsuranceISF Gisa - Group Insurance Self Administration System for EmployersISF General-Life - General Insurance Solution (Property & Casualty)ISF Banca-General - Selling General Insurance through BanksISF Gensure - Web Portal for Selling & Servicing General InsuranceISF Financials - Financial & Accounting SolutionISF Health - Health Insurance Solution

Takaful Products

Penta Takaful Family - Family Takaful and Group Takaful SolutionsPenta Takaful General - General Takaful Solution (property & casualty)Penta Banca Family - Selling Family Takaful through BanksPenta Agent - Web Portal for Takaful AgentsPenta Illustrate - Offline Illustration for family takafulPenta Gisa - Group Insurance Self Administration System for EmployersPenta Gensure - web portal for selling and servicing general

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