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The success of Retakaful

The success of Retakaful. Arab Insurance, outlook and actual new economical situation. Overview. Introduction Achievements Challenges ahead Strategy Conclusion. Introduction. Conventional insurance Takaful Concept Retakaful concept. Insurance not permissible. Uncertainty (Gharar)

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The success of Retakaful

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  1. The success of Retakaful Arab Insurance, outlook and actual new economical situation Damas 01&02-06-2005

  2. Overview • Introduction • Achievements • Challenges ahead • Strategy • Conclusion

  3. Introduction • Conventional insurance • Takaful Concept • Retakaful concept

  4. Insurance not permissible • Uncertainty (Gharar) • Gambling (Maisir) • Interest (Riba)

  5. Takaful concept • 1985 Grand Council of scholars approved Takaful • Method and means left to scholars and practitioners • Must have : • Permanent Sharia Advisory Board • Sharia compliant investment strategy • Operating model based on Shariaa concepts

  6. Pure mudharabah (Sudan) Modified mudharabah (Malaysia) Wakala (Bahrain) Family takaful General Takaful Operating models

  7. Re-Takaful concept • Preferred reinsurance is proportional (quota share or surplus) • Non proportional permissible • If Re-takaful is unavailable, then it is permissible to use a conventional reinsurer

  8. Overview • Introduction • Achievements • Challenges ahead • Strategy • Conclusion

  9. Achievements • Takaful industry • Retakaful industry • Best Re’s position

  10. Takaful Industry in the World • World Premiums 2003 • USD 2.6trillions • Takaful contributions 2002 • USD 2.1billions • Number of companies •  59 • Number of countries • 23

  11. Takaful Industry in the World

  12. Takaful industry in EM • EM Takaful contributions 2002 • USD 2 billions • EM/WW Takaful contributions • 99% • EM Total Premiums • USD 217 billions • Number of Companies • >45

  13. Main EM Takaful Markets • GCC • Malaysia • Other Arab countries • Other South & East Asia

  14. Retakaful cessions drivers • Heavy exposure to cat events • > No exposure to cat events • Small local players • > Larger international insurers • Specific line or customer Group focused • > Multiline insurers • Commercial lines (Aviation) • > Personal lines (Motor)

  15. Retakaful cessions drivers • Life protection lines • > Life saving • Expansion into new products • Or regions • Exit from markets • Run off market • Regulatory and rating considerations • Solvency ratio and claims payment ability

  16. High demand for Retakaful • Many of Takafuls are local players • Many of them are also newly set up • Small takaful market • In number • In size • Rely heavily on Retakaful support • Demand expected to grow with industry

  17. Unsufficient supply • Very few Professionnal Retakafuls • 2 (Best Re, ARIL) • Takafuls accept a small part of Retakaful business from each other

  18. Takaful dilemma • Participants opt for the product because it is islamic • Takafuls forced to cede business to conventional reinsurance • Otherwise disappear !

  19. Retakaful dilemma • Retakafuls are Takafuls focused • Retakafuls forced to accept business from conventional market • Retakafuls forced to retrocede business to conventional market • Otherwise disappear !

  20. Best Re • Modified Mudharaba model • Permanent Shariaa Board • Avoids “Ribaa” • Interest on deposits are offset • Investments are compliant with “Shariaa” requirements • Manages separate accounts • Ceding companies account (Technical operations) • Shareholders’ account (Shareholders’ operations)

  21. Best Re • Niche market player set up in 1985 • Internationally recognized as Retakaful • Strong capital basis and claims-paying ability • Well rated by well reputed agencies • Standard & Poor’s : BBB (Stable Outlook) • AM Best : B++ (Very Good)

  22. Best Re • Accepted contributions from Takafuls (2003) • USD 8 millions • In % of whole portfolio • 13% • Markets • 16 • Number of Ceding Takafuls • 28 • Number of Contracts • 319

  23. Overview • Introduction • Achievements • Challenges ahead • Strategy • Conclusion

  24. Challenges ahead • Mission statement • Takaful growth perspectives • Learn from conventionals • Retakafuls’ duties

  25. Pave the way for takafuls to achieve their growth potential and build a strong and sound industry Mission statement

  26. Takaful growth perspectives • Non life insurance demand in EM • Life insurance demand in EM • Outlook

  27. Non-life insurance demand • Low Premium as % of GDP • Min = 0.2% (Bangladesh) • Max=2.9% (Jamaïca, South Africa) • Low per-capita Spending • Min = USD 8 (Africa) • Max = USD 54 (Latin America)

  28. Life insurance demand • Very low Premium as % of GDP • Min = 0% (Saudi Arabia) • Max = 3.8% (Trinidad & Tobago) • Very low per-capita Spending • Min = USD 14 (Middle East) • Max = USD 30 (South & East Asia)

  29. Outlook • Largely untapped potential • to be captured • Takaful is a specific answer • to an unfulfilled demand • Takaful could capture a large part of the population • which would not, otherwise, insure.

  30. Takaful Growth Perspectives • New markets likely to introduce Takaful in the near future • Philippines, Bangladesh, Former Soviet Union States, South Africa etc. • Takaful windows set up by conventional insurers • Good indicators of brand success

  31. Takaful Growth Perspectives • Strong growth trend in South & East Asia • +30% p.a. in Malaysia • likely to continue • Sustained average growth in double digits in the coming years • +15% p.a. • reasonable to assume

  32. Learn from conventionals • 250 professional reinsurers • 2003 ceded premiums : USD 176 billion • Non life reinsurance : • USD 146 billion (13.7% insurance premiums) • Life reinsurance : • USD 30 billion (1.9% insurance premiums)

  33. Learn from conventionals • Top ten reinsurers market share : • 54% • Shareholders equity of top 40 : • USD 249 billion • Of top ten, 6 have a financial strength rating: • At least “AA-” by S&P (very strong financial security) • Stable and sound capital base for reinsurance industry : • Negligeable bankrupties between 1980-2003

  34. Reinsurance cessions drivers • Reduced uw results volatility • Escape from insolvency in case of cat event • Capital relief and flexible financing • Accept more business with the same capital • Access to reinsurers’ expertise and services • Product development • Pricing • Underwriting • Claims management

  35. Reinsurers have to be financially secure Insurer Reinsurer Part of underwriting risk Counterparty credit risk

  36. Reinsurers’ risk management • Scope : • Long term survival of the reinsurance company • Underwriting and investment risks are aligned with capital available (R.B.C) Underwriting Risk Management Asset management Capital management

  37. Risk modelling Exchange rates Stock markets Tsunami Interest rates Earthquakes Insurance risk Credit risk Market risk Operational risk Inflation Influenza epidemic Tropical cyclones Credit risks

  38. Diversification across time Less expensive reinsurance cover Lower capital need or Lower Cost given the exposure Better diversification Higher level of Protection _ given the level of capital

  39. Retakafuls’ duties • Providers of secure covers • Strong capital base • Focus on Risk Management models • Diversification across time • Expertise providers • Product development • Pricing • Underwriting • Claims management

  40. Overview • Introduction • Achievements • Challenges ahead • Strategy • Conclusion

  41. Strategy – 1st step - • Establish an annual meeting of ArabTakafuls and Retakafuls • Networking benefits • Set up a « Takaful Association » • Practitioners’ intelligence networks • Best practices’ exchange • Reinsurance placing facilities • Set up an informative Takaful & Retakaful website • Wise information exchange among members

  42. Strategy – 2nd step - • More and more cooperation between Takafuls • Web site becomes transactional • « Takaful Association » is efficient • Improved structures • Successful Annual Meeting • New well rated Retakafuls are set up • 2 to 3

  43. Strategy – 3rd step - • Design a framework of cooperation with conventional reinsurers • Associate members’ status • Interested in the Takaful market development • Set up a brokerage company focused on Retakaful placing • By the Association

  44. Specific position of Middle East • Homogenious religious status • Oil producer countries generating financial surplus • Eligible to play a major role in this strategy • Strategy could benefit from the financial synergy existing in Dubai & Bahrain

  45. Overview • Introduction • Achievements • Challenges ahead • Strategy • Conclusion

  46. Conclusion • To be or not to be? • Is no longer the question • Other questions prevail now • How many? • How much strong? Capital, rating? • How much knowledgeable? • Successful answers to those questions will involve a virtuous business cycle • Takaful & Retakaful development • Benefits for overall economy and society

  47. Retakaful &Takaful’s virtuous cycle Less expensive takaful products Higher profitability Retakaful Lower cost of capital Stronger growth Enhanced insurability Secure industry Takaful Company Overall economy

  48. Thank you Sources Islamic Insurance Conference, London, Sept. 26-27, 2003 Swiss Re, Understanding reinsurance, 2004 Swiss Re, sigma N°6/ 2002. Damas 01&02-06-2005

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