The success of Retakaful

Arab Insurance, outlook and

actual new economical situation

Farid Benbouzid Damas 01&02-06-2005 1

Overview
Introduction
Achievements
Challenges ahead
Strategy
Conclusion

Damas 01&02-06-2005 2
Introduction
Conventional insurance
Takaful Concept
Retakaful concept

Damas 01&02-06-2005 3
Insurance not permissible
Uncertainty (Gharar)
Gambling (Maisir)
Interest (Riba)

Damas 01&02-06-2005 4
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

Damas 01&02-06-2005 5
Operating models
Pure mudharabah
(Sudan) Family takaful
Modified
mudharabah General Takaful
(Malaysia)
Wakala (Bahrain)

Damas 01&02-06-2005 6
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

Damas 01&02-06-2005 7
Overview
Introduction
Achievements
Challenges ahead
Strategy
Conclusion

Damas 01&02-06-2005 8
Achievements
Takaful industry
Retakaful industry
Best Re’s position

Damas 01&02-06-2005 9
Takaful Industry in the World
World Premiums 2003
 USD 2.6 trillions

Takaful contributions 2002

 USD 2.1billions

Number of companies
  59

Number of countries
 23

Damas 01&02-06-2005 10
Takaful Industry in the World
Geographical Spread

Mid-East
7% 1%
South &
East Asia
Africa
36% 56%
Others

Damas 01&02-06-2005 11
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

Damas 01&02-06-2005 12
Main EM Takaful Markets
GCC
Malaysia
Other Arab countries
Other South & East Asia

Damas 01&02-06-2005 13
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)

Damas 01&02-06-2005 14
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

Damas 01&02-06-2005 15
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

Damas 01&02-06-2005 16
Unsufficient supply
Very few Professionnal Retakafuls
 2 (Best Re, ARIL)

Takafuls accept a small part of

Retakaful business from each other

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Takaful dilemma
Participants opt for the product because
it is islamic

Takafuls forced to cede business to

conventional reinsurance

Otherwise disappear !

Damas 01&02-06-2005 18
Retakaful dilemma
Retakafuls are Takafuls focused

Retakafuls forced to accept business

from conventional market
Retakafuls forced to retrocede business
to conventional market

Otherwise disappear !
Damas 01&02-06-2005 19
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)

Damas 01&02-06-2005 20
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)

Damas 01&02-06-2005 21
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

Damas 01&02-06-2005 22
Overview
Introduction
Achievements
Challenges ahead
Strategy
Conclusion

Damas 01&02-06-2005 23
Challenges ahead
Mission statement
Takaful growth perspectives
Learn from conventionals
Retakafuls’ duties

Damas 01&02-06-2005 24
Mission statement

Pave the way for takafuls to achieve their

growth potential and build a strong and
sound industry

Damas 01&02-06-2005 25
Takaful growth perspectives
Non life insurance demand in EM
Life insurance demand in EM
Outlook

Damas 01&02-06-2005 26
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)

Damas 01&02-06-2005 27
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)

Damas 01&02-06-2005 28
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.

Damas 01&02-06-2005 29
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

Damas 01&02-06-2005 30
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

Damas 01&02-06-2005 31
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)

Damas 01&02-06-2005 32
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

Damas 01&02-06-2005 33
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

Damas 01&02-06-2005 34
Reinsurers have to be financially
secure

Part of underwriting risk

Insurer Reinsurer

Counterparty credit risk

Damas 01&02-06-2005 35
Reinsurers’ risk management
Scope : Underwriting

 Long term survival of

the reinsurance
company

Underwriting and Risk

Management
investment risks are
aligned with capital Capital Asset
available (R.B.C) management management

Damas 01&02-06-2005 36
 Risk modelling
Exchange
Stock markets rates Tsunami

Interest Earthquakes
rates
Insurance risk Credit risk Market risk

Inflation Operational risk Influenza

epidemic

Credit risks Tropical

cyclones

Damas 01&02-06-2005 37
 Diversification across time

Less expensive
Lower capital reinsurance cover

Better need
diversification or
Lower Cost Higher level of
given the exposure Protection _ given the
level of capital

Damas 01&02-06-2005 38
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

Damas 01&02-06-2005 39
Overview
Introduction
Achievements
Challenges ahead
Strategy
Conclusion

Damas 01&02-06-2005 40
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

Damas 01&02-06-2005 41
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

Damas 01&02-06-2005 42
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

Damas 01&02-06-2005 43
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

Damas 01&02-06-2005 44
Overview
Introduction
Achievements
Challenges ahead
Strategy
Conclusion

Damas 01&02-06-2005 45
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

Damas 01&02-06-2005 46
Retakaful &Takaful’s virtuous cycle

Less expensive takaful products

Higher profitability

Retakaful Lower cost

Enhanced Stronger Secure
insurability growth of capital industry
Takaful Company

Overall economy

Damas 01&02-06-2005 47
 Thank you
Sources
Islamic Insurance Conference, London,
Sept. 26-27, 2003
Swiss Re, Understanding reinsurance,
2004
Swiss Re, sigma N°6/ 2002.

Farid Benbouzid Damas 01&02-06-2005 48