1. Takaful and Mutual Insurance Business Challenges in Mutual Insurance and Takaful Serap Gonulal November 13, 2012

2. Business Challenges in Mutual Insurance and Takaful 2 Takaful Regulatory and legal framework Transparency and consumer protection Uniform accounting standards Consensus of Shariah principles The four pillars of Takaful

3. 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. 3 maximize profits risk sharing contributions Operator Participants Aligning stakeholder interests

4. 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’. 4 Investment Income Premium 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

5. Business Challenges in Mutual Insurance and Takaful Adequate reserving and solvency margin ensures benefits promised are paid out. 5 Benefit payout Reserving Solvency Margin Importance of reserving and solvency margin Premiums/Contributions

6. 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. 6 Job functionHow different is modern takaful (hybrid) from conventional insurance Chief Executive Officer Sales team Actuary Accounting different same The people makes the industry

7. 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. 7 Should there be one takaful model for all?

8. Business Challenges in Mutual Insurance and Takaful Should there be one takaful model for all? -Consider sharing of Investment Performance 8 Contract Type Model WakalaMudharaba 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

9. 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. 9 Contract Type Model WakalaMudharaba The risk pool makes an underwriting profit No impact on Operator’s income The risk pool makes an underwriting loss No impact on Operator’s income

10. 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. 10 Contract Type Model WakalaMudharaba Increase in contribution income Higher Operator’s income No immediate impact Reduction in contribution income Lower Operator’s income No immediate impact

11. 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? 11 Common challenges for Takaful, Mutuals and Insurance

12. 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. 12 Conclusion