Article

10 April, 2011
By:

Kuan J.S. Ravindra Mohan Dakshina Moorthy

Takaful to surpass Conventional Insurance?

Since the 1980s there is a surge to Takaful as a way for risk management. Broadly categorized
into Family Takaful (life, savings) and General Takaful (non life, such as motor, marine, home,
accident, fire, etc.), Takaful is not solely for Muslims. It is just another form of risk management
albeit compliant with Islamic principles. Now established as an alternative to conventional
insurance in GCC, many Asian countries are also catching on. Unique amongst these is
Malaysia, where a significant proportion of the participants are not Muslims. Here the
insurance market is growing rapidly, keeping up with the growing incomes, needs and
sophistication of the financial market. Since the first Takaful operator was first licensed by
Bank Negara (the Central Bank of Malaysia), Takaful is growing at a faster rate than
conventional insurance. Takaful is now established as a proven way for the participants to
address risks. Will the same scenario happen in other more developed markets such as USA,
Europe or Japan which are predominant in conventional insurance? Just wait till the insurance
consumers begin to realize the methods and advantages of Takaful!

After its initial models, Takaful is now very much settled in its workings and regulations. With
several proven models available (Mudharabah, or profit sharing; Wakala or fee based; and
where combinations of both are used), how then is Takaful superior to conventional
insurance? Is it poised to be the next trend like when Universal Life replaced Ordinary Life
endowment, which in turn was replaced by Investment Linked insurance and single premium
structured products? Take away the jargon, unveil its workings, expound its guiding principles,
and this is what you get:

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1. With each particular Takaful scheme, participants do not pay a premium but agree to
make regular contributions to his account (personal savings account) from which
regular donations (Tabarru) are made to a pool which pays any participant who suffers
a given calamity. Unlike premiums, these funds belong to the participants but are
managed by a trustee, who is also the Operator of the scheme. As a trustee the
Operator represents the interest of the participants, it should be less driven to make
business decisions, offer ex-gratia settlements, or favour large customers.
2. The operation of scheme and the management of funds are transparent. Each scheme
is independently managed. There is no cost subsidy or mix with other operations. When
properly managed, Operators will be competing on expense ratios and surplus returns
to participants. A track record of better expense ratios, which are available for any
prospective participant’s review prior to joining the scheme, will be its competitive
edge.
3. The Operator needs to exercise responsible risk appraisal of each new entrant to ensure
that the fund is sustainable and continue to give good returns. As a result, the focus on
competition for better returns and better value will drive Operators to long term results
instead of short term top line achievements. Competition is thus less centred on pricing
and features, but on principles and best practices which are evident from expense ratio
and service quality measurements
4. Once enrolled, the participant can be assured that their claims will be settled on merits
and be independent of current loss ratios, shareholders or business interests.
5. Non payment for self destruction (suicide) and loss suffered while engaging in criminal
activities is another feature unique to Takaful. By the same token, funds are invested in
morally correct businesses. Thus, investments in alcohol, cigarettes, gambling and the
like are not permitted.
6. An independent Board (the Shariah Board) provides independent and unbiased
approvals of new products without pressure on sales and marketing demands, but base
their decisions on principles.
7. Participants of a Takaful scheme receive annual dividends from the surplus of the funds.
Surplus is a more equitable and timely way to return value to participants. Surplus
comes from the risk (donation) account. For Family Takaful, participants are provided
statements on fund performance and expenses, status of reserves and provisions.

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8. Spirit of mutuality helps participants to appreciate the joint and shared outcome of the
fund. Participants recognise that they are also responsible for the expense component
of the fund’s performance. Thus, Participants’ networking and sales are likely to result in
appropriate mortality and risk charges which are critical for the long term sustainability
of the scheme.
9. The Operator does not assume any risk on the sufficiency of the fund, but may suffer a
reputational risk if it becomes insufficient, and may be required to top up the funds
with a loan (Quardl Hasan) only to recoup it at a later date when the funds build up
again. Alternatively, contributions and/or donations may be increased.

With understanding of its transparency, good governance, independent supervision by a

compliance board, investments with a long term view, superior expense management, and
positive competition, Takaful stands as a credible choice for the future.

The potential for distribution of Takaful is huge. Takaful is more suited to be distributed by
social and personal contacts, through word of mouth where participants may invite others to
subscribe. Social networks are natural places for Takaful subscription. Thus, Webtakaful may
be the future for Takaful distribution.

General Takaful is particularly attractive as there is the potential of dividends which can be
used to offset renewal contributions. In addition to the usual indemnity in the event of loss,
the participant is entitled to a share of the surplus if he suffers no loss. This is unlike
conventional General Insurance where premiums once paid are paid.

While Takaful has the potential to match its conventional peers, it has its own challenges as
well. Although Takaful growth rate continues to be significantly higher than conventional, it
has a relatively smaller market share. In addition, Shariah compliant investment instruments
are currently insufficient and must grow in tandem with Takaful new business growth. When
Takaful overcomes these limitations, it will be in a better position to challenge conventional
insurance.

About Us
AETINS Solutions is a Takaful Software Solutions Provider

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We provide an integrated end-to-end Takaful Solution covering all lines of business: Family, Group and General
Takaful. It encompasses illustrations, quotation, new business, contract servicing, claims, agency management,
and commission, benefits, accounting and re-takaful. Our business is to help Takaful Companies to strategise and
operate by leveraging on Information Technology, a key enabler to achieve transformational growth through
Operational Excellence and Innovation.

Contact Details:

AETINS Solutions Sdn Bhd

Suites 801 & 3A02, Menara PJ,
AMCORP Trade Centre,
No. 18, Jalan Persiaran Barat,
46050 Petaling Jaya,
Selangor, Malaysia

Website: www.aetinstakaful.com.my
Email: enquiry-takaful@aetins.com
Tel: (603) 7955 3043 / 7620 3043
Fax: (603) 7957 1187

AETINS Solutions is the Takaful subsidiary of AETINS

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