Operational and Actuarial Aspects of Takaful Takaful Products and Development Issues
Sub Topics • Classes of Takaful • General Takaful Products • Family Takaful Products • Product Development • Regulation on Products Development • Takaful Performance by Products • Product Development Issues
Class of Takaful Biz • Two main types of takaful business - General Takaful and Family Takaful. • General Takaful provides protection on a short-term basis, normally covering a period of one year. • Family Takaful offers a combination of protection and long-term savings, usually covering a period of more than one year.
General Takaful - Characteristics • Usually short-term contracts • Premiums charged may vary • Contracts of indemnity • Payment of a claim does not terminate a contract • The risk to be insured does not necessarily increase over time
General Takaful • Motor • Fire • Engineering • Marine • Bonds • Misc Accidents
Motor Takaful • Comprehensive (Primarily for own damage) • Third Party • Bodily injury • Property damage • Personal Accident
Fire Takaful • Fire Takaful (fire and lightning) – usually for properties in general not for dwelling • Houseowners (plus other perils) – usually for private dwellings and bundle with home financing • Consequential Loss • Home content
Engineering Takaful • Usually refered to Plant and Machinery- • Boliers • Engine Plant • Electrical/mechanical • Lifting machinery
Marine Takaful • Hull – structural framework of vessel • Marine Cargo • Goods in Transit
Miscellaneous • Bonds- Advance Payment and Perfomance • Personal Accident • Burglary • Workman Compensation • Employer Liability • Fidelity Guarantee • Money in Transit • Public Liability
Family Takaful - Characteristics • Long term contracts • Premium rate is usually fixed • Payment of a claim usually terminates a life insurable contract • Insurable interest must be present • The risk to be insured increases with time
Family Takaful • Individual (endowment) • Investment Linked • Group Family • Group Credit • Health • Critical Illness • Annuities
Individual • Regular contribution • Provides for protection and savings • Upon maturity to receive the amount accumulated in the investment account ( some with surplus sharing) • PIA on mudarabah • Upon death to receive amount covered
Investment Linked • Regular or Single contribution • Provides for protection and savings • Participant have choice of investments • Can vary sum to be covered • Include Capital Protection and Structured Products
Group Family • Annual basis • Employers, association affinity groups, cooperatives. • Usually protection only • Sum covered usually fixed or a multiple of salary • Simplified underwriting • Contribution rates are preferred
Group Credit • Bundle with bank financial products • Single Contribution* (sometimes financed by the financier) • Usually for protection • Benefits assigned to financier • Return of PIA amount on earlier redemption
Health Takaful • Hospitalization Benefits • Daily Room and Board • Surgical Procedures • Post and Pre Hospitalization Costs • Group or Individual plans • Annual basis • Supplementary Spouse and Family benefits
Critical Illness Takaful • For Major Illnesses e.g. cancer, stroke, heart and kidney failure • 36 related illnesses • Usually individual plans
Product Development • Management Committee will evaluate product proposals. • The Shariah Advisory committee will endorse the product from the Shariah perspective. • The Risk Management Committee of the Board will evaluate the level of risk for the product for endorsement • External Appointed Actuary will attest the pricing and certify the product. • Ratification by the company’s Board of Directors and final approval of the product. • Submission to Regulatory Authority ( e.g. Bank Negara Malaysia) for their endorsement and approval.
BNM Guidelines – JPIT 9 • Guideline on Family Takaful Products • Actuarial Cert to include profit testing • Assumptions must be realistic and prudent • Section 3 - Assumptions • Section 4 - Discloser requirements
BNM Guidelines – JPIT 9 • Assumptions: • ME • Ave certificate size • Level of new business • Expected contingencies- short term v long term • Investments • Taxes • Withdrawal rates
BNM GUIDELINES – JPIT 16 • Guideline on Medical and Health Business • Section 8 - Require clear underwriting policies • Section 10 - Such policies properly documented and communicated to staff concerned • Section 11- Repudiation of claim during underwriting period
BNM Guidelines – JPIT 16 • Section 19 - Consistency of definitions amongst insurers • Section 21– Appropriate product design • Section 23 - Appropriate pricing policy
BNM GUIDELINES – JPIT 33 • Guideline on Investment Link Business • Section 2 – Definition of IL Policies • Section 4 – Scope of the Guidelines • Section 10,11,- Fund objectives must be clear and Fund managed by its objectives • Section 14- Funds must be separated • Section 15-19 – Calculation of NAV and unit price; company is responsible for any mistake. • Section 24 – Minimum Death Benefits • Section 30 – Cooling off period of 15 days
BNM GUIDELINES – JPIT 33 • Section 34 – Allowable Charges to the Fund • Section 37 – Maximum Fund Management Fee • Section 40 – Commissions for Single and Annual premium policies ; Max 160% over 6 years • Section 50 – sales illustration must meet the minimum requirement with respect to content and disclosures • Section 54 – Must provide at least an annual report • Section 57 to 59 – Must invest as illustrated, any rebalancing must be done in 60 days • Section 75 – Only agents with CEILI can market IL
BNM GUIDELINES – JPIT 33
Capital Protected (Structured) IL • 100% capital protection at maturity of 3 years • Takaful Protection up to 125% of Investment amount • Unique & Diversified twin exposure to High Demand Commodities (Oil, Copper & Zinc) and Real Estate Assets from Japan and Europe • Guaranteed highest return from the best portfolio (which offers investors a chance to earn as high as 15% p.a.)
Capital Protected IL
CAGR 31.7% 29.9% 15.8% 74.6% 20.2% 18.1% Data Source: BNM & ISM CAGR 8.3% 6.1% -6.0% 0.5% 8.9% 32.1% Data Source: LIAM Takaful v Insurance in Malaysia
Takaful v Insurance in Malaysia
Takaful v Insurance in Malaysia CAGR 16.6% 22.0% 28.5% -1.9% 12.1% 22.2% Data Source: ISM CAGR 6.4% 20.5% 10.0% 7.2% -10.0% 4.3% Data Source: PIAM
Takaful v Insurance in Malaysia
Takaful v Insurance in Malaysia • Growth Rate (Last 3yrs) • Asset size % GNI • Cont/Prem % GNI • Ave Life Policy Size • Ave Life Cont/Prem • Agents (per Co.) • Employees (per Co.) *Life – 5528:4680
ISSUES • Choice of Takaful Model • The key to product development and pricing is understanding what the expected outgoes are, where income is from and what risks are being taken. • Product Choice as a strategy? • Pru Bsn – Family Biz and IL • CIMB – Motor and Fire
ISSUES (…contd) • Pricing of Products must provide for:- • Cost of marketing • Administration cost • Claim cost • Financing cost • Profit (expected return on capital employed)
ISSUES (…contd) • Different marketing channels have different costs • Costs can include:- • Advertising • Printing and brochures • Commission • Training cost
ISSUES (…contd) • Agency force (dedicated channel) • High training cost • High commission cost • Financial intermediaries (shared channel) • Sales through banks • Conflict with other banking products
ISSUES (…contd) • Financial Intermediaries • Little underwriting • Simple products • Agency force • More sophisticated products requiring more “selling” Important: sophistication of products must have cognizance of administration support available
ISSUES (…contd) Syariah Council Technical Committee Actuary Takaful Product
Shariah Issues • Lifetime suicide clause…? • Who can participate? • Which businesses can be covered? • Can operator co takaful with conventional?
Legal Issues • Except for some countries e.g. KSA Common Law is applied • Current Takaful contracts reflects appropriately relationship of operator and participants? • Will the courts view takaful contracts as insurance contracts? • Who does the Tabarru’ Fund belongs to?
Agency Force • Takes time to built up • May be difficult for certain cultures to accept • Expensive to train and maintain • Tested and proven intermediary source • Very competitive • Open to misrepresentation/misselling risks (reputation risk) • Best option with ‘complicated products’
Financial Intermediaries • Distribution channel already in place • Bank privy to customers financial standing • Packaging of products, e.g. motor insurance, MRTA policies • Less price sensitive • Subject to internal competition • Best suited for ‘simple’ products
Administration Cost • IT Cost • Underwriting cost/policy insurance • General management cost • Marketing/advertising cost
Claim Cost • Actual claims (claim distribution) • Claims handling cost/legal cost • Reinsurance/Retakaful cost
Financing Costs • Insurance is a ‘money first’ business • Trust is paramount • Capital intensive business (upfront expenses meeting statutory solvency margin) • All this capital requires financing
Product Success - KPIs • Total sum covered • Number of certificates • Total amount of contribution generated • Profits realized • Increase in the number of new clients • Demographic characteristics of customers who purchased the product • Lapse rates, surrenders and claims experience
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