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Hybrid Structures – why?

Hybrid Structures – why?. Mutual Insurance and Takaful in Changing World Istanbul November12 and 13, 2012 Rodney Lester. Hybrid: ‘ Composite; formed or composed of heterogeneous elements’ For our purpose: Combined mutual risk sharing and profit making activity. Hybrids are not uncommon.

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Hybrid Structures – why?

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  1. Hybrid Structures – why? Mutual Insurance and Takaful in Changing World Istanbul November12 and 13, 2012 Rodney Lester

  2. Hybrid: ‘Composite; formed or composed of heterogeneous elements’ For our purpose: Combined mutual risk sharing and profit making activity

  3. Hybrids are not uncommon • US Reciprocals – 25% members USAA Group, US Physicians • US Mutual Holding Companies – Pacific Life • Segregated and statutory funds – British Commonwealth insurers • Friendly Societies – Europe and ex colonies • Takaful –mutual guarantee

  4. Why do they exist – 6 vectors • Mutual but with capacity to raise capital • Prudential controls enhanced • Client base – self selected group • Taxation differentiation • Principal/ agent concerns – better control of conflicts. • Nature of client relationship to institution – exchange, commuting, utmost good faith, transparency ,ability to assign etc?

  5. Mutual holding companies Mutual HC > 50% Investors < 50% Voting rights Policyholder/ member Shareholder holding company Policy Shareholder insurer

  6. Reciprocals Subscribers Subscriber’s Advisory C’tee Individual Subscribers’ Savings Accounts Unincorporated association Paid in surplus account Attorney – usually operates on combined cost recovery/ partnership basis.

  7. Family Takaful Participants Savings Fund – individual accounts Risk sharing fund Fluctuation provisions Board Operator – partnership or agency or combined Sharia Board

  8. The key challenge for Takaful Trading off the attributes of an efficient risk sharing mechanism with the design limitations imposed by the relevant market – • Risk pricing • Reinsurance • Asset risk • Capital management • Treatment of surplus • Governance

  9. Prophet Muhammad asked a Bedouin who had left his camel untied, “Why do you not tie your camel?” The Bedouin answered “ I put my trust in God”. The prophet then said, “Tie up your camel first and then put your trust in God”.

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