AIIF 2013 The International Insurance –Reinsurance Forum 19 – 21 May, 2013 Trends and new business lines on the insurance markets of the Caucasus Region TAKAFUL INSURANCE Menekşe Uçaroğlu IUC

Content 1.Presentation of IUC 2.General Aspects of Takaful Insurance IUC

IUC is a management and Consultancy Services Group which operates in area of insurance business and is established to add quantifiable value to -Reinsurance -Claims -Product -Training Processes of Insurance Business We present our services via 4 different brand and company organisations IUC is based in Istanbul, Turkey and has a representative office in Bakü, Azerbaijan. IUC

o Technical Trainings o Events Organization o International CII Trainings o Management Consulting o Actuarial Consulting o Cost Containment Services for Insurance Industry o Marine&Aviation Loss Adjusting Services o International Recovery Services o Fire & Water Damage, Restoration Sevices o Dental Health Plan o General Health Plan o Eye & Ear Plan o Drug Plan o Consumer Plan o Psychological Consultancy Service o Dietician Consultancy Service IUC Insurance & Reinsurance Broking o Reinsurance Broking o Insurance Broking o Special Risks U/W IUC

Takaful first started in 1979 in Sudan, soon followed by the countries in the GCC. It is now sold in 32 countries, making inroads in markets and customer segments where conventional insurance has hitherto failed to successfully penetrate Takaful is an insurance contract that is compliant with Shariah, the body of Islamic law. The name derives from the Arabic verb “kafalah” that means mutual guarantee. Islamic insurance is based on the principle of mutuality where policyholders own the company and share in its profits The business operations are strictly focused on aspects of social goodness with all its monies and funds invested according to certain Shariah principles for the greater good of Society and Environment IUC.

Takaful, for what it stands for in its essence of ethics, should rightly be the mainstream form of insurance in countries where takaful is a customer driven phenomenon. It is this customer driven push that led lots of local and regional companies to be established. Many big international players for many years continued to argue that takaful was no different from insurance because its end ‐ result is the same. But the fact of the matter is that they did not really penetrate specific customer segments. The customer preference for takaful, i.e., the demand side, triumphed in the end, as big international players eventually established their own takaful companies and windows. Amongst such companies are Tokio Marine, AIG, Prudential, HSBC Insurance, Zurich, AXA, Munich Re, Swiss Re, Hannover Re etc..

GENERAL VS FAMILY TAKAFUL General Takaful covers all kinds of non-life risks motor, marine, property etc. Family Takaful offers life coverage and long term products. IUC

There are three main types of takaful: mudharaba, wakala and a hybrid of the two Mudharaba Mudharaba is one of the oldest concepts in Islamic finance and is based on profit-sharing. This type of takaful is practiced widely in the Asia-Pacific region. The company’s management is paid from the profits the company makes and shares in the surplus and losses. The ratio of profit-sharing is pre-agreed on the basis of the company’s performance Wakala The wakala version of takaful is an arrangement where an agent manages the company and receives a fee for his services. The fee is pre-agreed at the beginning of a financial year and may be a fixed amount or an agreed share of investment profits or shareholder or policyholders' funds. The agent does not share in any of the company’s liabilities. This type of takaful was developed in Sudan Hybrid The mudharaba and wakala models can be combined to produce a hybrid type of takaful. The managing agent of the company receives a fixed fee from policyholders’ funds as in the wakala model and also a share of the profits on the basis of the mudharaba model, but from the company’s investments only. The policyholders have a right to share in both the underwriting profits and in investment profits

IUC Introduction to Takaful Takaful is the Shari ‟ a compliant alternative to conventional insurance Conventional Insurance (non-mutual) The company accepts premiums from the insured at a level which it anticipates will cover claims and result in a profit. This process of anticipation is akin to Maysir (speculation). The insured pays premiums to the company in exchange for indemnity against risks that may not occur This process of ambiguity is akin to Gharar (uncertainty). The company engages in investments that may derive their income from interest and/or prohibited industries. This process is akin to Riba (usury) and relates to Haram (prohibited) activities. TakafulTakaful is based on the concept of social solidarity, cooperation and mutual indemnification. It is a pact amongst a group that agrees to donate contributions to a fund that is used to jointly indemnify covered losses incurred by the members. While the concept of Takaful revolves around mutuality and is founded on non-commercial basis, the operations and the fund are commonly managed by a Takaful operator on commercial basis.

IUC Mutual Guarantee - The basic objective of Takaful is to pay a defined loss from a defined fund. The loss is covered by a fund created by the donations of policyholders. Liability is spread amongst the policyholders and all losses divided between them. In effect, the policyholders are both the insurer and the insured. Ownership of the Fund - Donating their contributions to the Takaful fund, policyholders are owners of the fund and entitled to its profits (this varies slightly between the adopted models which are described later). Elimination of Uncertainty - Donations, causing transfer of ownership to the fund, are voluntary to mutually help in the case of a policyholder ‟ s loss without any pre- determined monetary benefit. Management of the Takaful Fund - Management is by the operator who, depending on the adopted model, utilises either (or a combination) of two Shari'a compliant contracts, namely Mudaraba or Wakala. Investment Conditions - All investments must be Shari ‟ a compliant, which prohibits investment in Haram industries and requires the use of instruments that are free of Riba. 5 Key Elements of Takaful

IUC TakafulCooperative insurance P& C Insurance Contracts utilised ►Donation and mutual undertaking based on nonremunerative/noncommutative contract ► Mutual contract ►Remunerative / commutative exchange contract Company’s responsibility ► Manage the participants ‟ fund ► Pay claims from U/W fund ► Provide interest free loan to U/W fund in case of deficit ►Pay claims with underwriting fund ► Pay for deficits if any ► Pay claims Participants’ responsibility ► Pay contributions►Pay contributions & pay for deficits in some models) ► Pay premiums Capital utilised for underwriting business ► Participants ‟ funds and in case of shortfall, temporary access to shareholders ‟ equity on a qard al hassan basis ► Participating capital and accumulated surplus ► Shareholders ‟ equity Investment considerations ► Shari ‟ a compliance and prudential ► No restrictions except prudential ► No restrictions except prudential

IUC ► Global Takaful contributions grew by 19% in 2010, to S$8.3b ► Global Takaful contributions are expected to reach US$12b by 2012 ► Saudi Arabia remained the largest market in GCC ► The World Takaful Report 2011 forecasted total contributions to reach US$9.1b by ► The results have been lower (US$8.3b) due to industry slow down in core markets relative to the high growth rates seen in previous years. The anticipated compulsory medical insurance regulation in Dubai and other UAE emirates was not rolled out either. ► Current growth trends would suggest US$12b in gross contributions by ► Excluding Saudi cooperative contributions, total Takaful contributions are expected to be reach US$7b by 2012.

IUC Takaful insurance is potentially a solution to make insurance acceptable to religious and cultural tradition. According to Ernst & Young’s 2012 World Takaful Report, Saudi Arabia is the largest market for takaful (Islamic insurance) contributing $4.3 billion, or 52% of volumes. However, several insurance sector officers and supervisors throughout the region believe that to date it is more of a marketing tool than a genuine attempt to create a product that is consistent with Shariah law There are challenges in collation, analyzing and dissemination of credible and relevant financial and technical statistics.

IUC There are challenges of standardization in accounting and operational approaches by markets, regions and jurisdictions and There are challenges of how takaful standards being put together by takaful bodies like AAOIFI and IFSB align with insurance standards set by IAIS, IFRS etc. Overcoming these challenges is of paramount importance as takaful is an integral part of the global insurance industry, the fastest growing, and likely to increase the overall size of the insurance industry manifold in years to come. Takaful has already contributed a lot to the global insurance industry by demonstrating that it can boldly go places and succeed where conventional insurance has not been able to succeed, especially in life insurance.

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Policyholders' Fund In an arrangement that bears some similarity to mutual, or cooperative, insurance, takaful policyholders pay premiums into a policyholders' fund. Administrative expenses and reinsurance are paid from this fund. Any surplus at the end of the financial years is the underwriting profit. This may be allocated in part to a policyholders' reserve fund, and in part distributed among policyholders as a dividend. Underwriting losses in the policyholders’ fund are covered by an interest-free loan from a shareholders’ fund. Shareholders' Fund The shareholders’ fund consists of paid-up shareholders’ capital and reserves together with investment income. All investments must be Shariah-compliant, meaning that these should be on a profit-and-loss sharing basis rather than speculative investment in capital markets. The shareholders are liable for the losses of the policyholders' fund, but this liability is limited to the amount of equity they hold in the company Religious Prohibitions Islamic law forbids “riba,” a concept that means interest, usury and the exploitation of the poor. It also prohibits “gharar,” meaning risk, uncertainty, hazard and deceit. “Maysir,” which is the acquisition of wealth by chance, or gambling, is also proscribed. Conventional insurance works on the concept of risk transfer where an insurance company accepts a risk from a policyholder in exchange for a premium. The company invests the premiums on capital markets to make further profits. In Islamic jurisprudence, this is viewed as gambling on uncertainty and in the process, exploiting a policyholder by making money from money.