takaful and mutual insurance business challenges in mutual insurance and takaful serap gonulal...
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Takaful and Mutual Insurance
Business Challenges in Mutual Insurance and Takaful
Serap GonulalNovember 13, 2012
Business Challenges in Mutual Insurance and Takaful
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TakafulTakaful
The four pillars of Takaful
Business Challenges in Mutual Insurance and Takaful
•Which sharia contract aligns Participants and Operator’s interests the best and yet maximizes the concept of risk sharing rather than risk transfer?
•For long term sustainability it is important that the reward structure benefits both Operator and Participants fairly.
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maximize profits
maximize profits risk sharingrisk sharingcontributionscontributions
Operator Participants
Aligning stakeholder interests
Business Challenges in Mutual Insurance and Takaful
•Size of benefit payouts and required premium/contributions rate depends on level and certainty of investment income.
•Crucial that the Sharia compliant asset classes be expanded and ‘deepened’.
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Investment Income Premium
IncomePremium Income
Investment Income
Premium Income
Lower premium needed as higher investment income component
Higher premium required as there is lower contribution from investment income
Component of benefit payouts
Business Challenges in Mutual Insurance and Takaful
Adequate reserving and solvency margin ensures benefits promised are paid out.
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Benefit payout
Reserving
Solvency Margin
Importance of reserving and solvency margin
Premiums/Contributions
Business Challenges in Mutual Insurance and Takaful
Although there are shared competencies among those in conventional insurance and takaful, there are also differences. Given that the latter is currently sourced from the former there is a need for training.
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Job function How different is modern takaful (hybrid) from conventional insurance
Chief Executive Officer
Sales team
Actuary
Accounting
different same
The people makes the industry
Business Challenges in Mutual Insurance and Takaful
There is a need for a universally acceptable Sharia compliant model so as to minimize cost of implementation (systems, etc).
A universally acceptable model, other than being Sharia-compliant, should be able to align the various stakeholders interests or at the very least, allow for easy supervision by the Regulators.
•As a cooperative/Mutual set up
- As shareholders (owners of surplus in the Mutual fund) are also policyholders, management works for the same stakeholders for a wage. No controversial Sharia contract issues.
•As a hybrid with a stock management company
-Model needs to be able to balance shareholders and participants’ interests. The following tables summarizes the issues with the two predominant model, wakala and mudharaba.
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Should there be one takaful model for all?
Business Challenges in Mutual Insurance and Takaful
Should there be one takaful model for all?
-Consider sharing of Investment Performance
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Contract Type Model
Wakala Mudharaba
Investment performance of takaful risk pool is better than expected
No impact on Operator’s income
Operator’s income is higher
Investment performance of takaful risk pool is poor
No impact on Operator’s income
Operator’s income is lower
Takaful risk pool makes an investment loss
No impact on Operator’s income
Operator gets no income
Business Challenges in Mutual Insurance and Takaful
Should there be one takaful model for all?
-Underwriting Performance
•The above table assumes the Operator gets no share of any underwriting surplus.
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Contract Type Model
Wakala Mudharaba
The risk pool makes an underwriting profit
No impact on Operator’s income
No impact on Operator’s income
The risk pool makes an underwriting loss
No impact on Operator’s income
No impact on Operator’s income
Business Challenges in Mutual Insurance and Takaful
Should there be one takaful model for all?
-Business volume
•Generating higher business volume lower’s per unit business cost and increases expense surplus.
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Contract Type Model
Wakala Mudharaba
Increase in contribution income
Higher Operator’s income
No immediate impact
Reduction in contribution income
Lower Operator’s income
No immediate impact
Business Challenges in Mutual Insurance and Takaful
• Challenging investment environment, low investment return globally means operating margins are under pressure.
• ‘Soft’ market as a result of a world awash with cheap funds seeking opportunities in new markets, like insurance. As a result risk is ‘underpriced’.
• Global warming can result in more frequent occurrences of catastrophic events like Hurricane Sandy.
• Imminent introduction of Solvency II will increase the sophistication of regulatory reporting not just in Europe, but globally. Are the rest of the world equipped to adopt Solvency II type supervision?
• For non-stock companies, how will the regulatory need for more capital be met?
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Common challenges for Takaful, Mutuals and Insurance
Business Challenges in Mutual Insurance and Takaful
• From the operational perspective the Insurance industry globally is facing greater challenges.
• From the consumer side the demand for greater transparency and accountability from insurers and their agents opens an opportunity for non-stock insurance operation. These alternatives offer risk sharing rather than risk transfer which should result in fairer pricing. These institutions should project greater transparency and offer simpler products.
• For takaful, the opportunity to penetrate new currently untapped market is huge. The key to success is a holistic approach to market accompanied with the right regulatory support.
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Conclusion