Critical Issues Facing (Malaysian) Takaful Operators

Syed Moheeb
Chairman, Malaysian Takaful Association President/CEO, Takaful Ikhlas Sdn. Bhd.
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Takaful and Retakaful Worldwide

Takaful and Retakaful Worldwide

Others Pakistan Bangladesh SriLanka Luxembourg UK Takaful& Retakaful Operators(TO &RTO) TO(4) TO(3) TO(2) TO(1) TO(2) GCC SaudiArabia Kuwait UAE Qatar Bahrain Takaful& Retakaful Operators (TO&RTO) TO(11);RTO(2) TO(9);RTO(1) TO(9);RTO(2) TO(5);RTO(1) TO(6);RTO(2) Indonesia Brunei Singapore TO(9);RTO(3) TO(3) TO(3);RTO(1) SEACountries Takaful& Retakaful Operators(TO&RTO)

Malaysia

TO(11);RTO(19)

African countries Egypt Sudan Algeria Senegal Gambia Kenya Tunisia

Takaful & Retakaful Operators (TO & RTO) TO (4) TO (11); RTO (3) TO (1) TO (1) TO (1) TO (1) RTO (1)

Estimated to be over 200 takaful companies

Source:MEIR2011,GIFF:CountryandBusinessGuide:2010, Labuan FSA

Takaful and Retakaful Worldwide

Global takaful industry growth: 39% (2005-2008) vs 10.2% in conventional insurance

Still less than 1% of global insurance premiums

Malaysiacontributes 21% ofitstotalcontributions

PAST 6 YEARS TREND: Highest global gross takaful contribution is from the GCC region
Source: GIFF 2010

OUTLOOK: Highest takaful contribution is expected to come from Asia Pacific 4

The Market in Malaysia

Diverseplayers No.of takaful operators Composite takaful operators Family takaful operators No.of retakaful operators No.of takaful brokers No.of takaful adjusters Takaful visavis Insurance: TotalAssets&TotalPremium(inRMmillion) 12 8 4 4 35 36

*Marketpenetration=numberof policiesinforce/totalpopulation
MarketPenetration*

Takaful 5.7% 6.6% 7.7% 7.9% 9.1% 11.2%

Insurance 38.9% 39.6% 40.1% 41.6% 41.7% 42.9%

2005 2006 2007 2008 2009 2010

Increasingmarketshareintermsof contributions&assetsineveryyear
MarketShare Contributions Assets 2005 5.5% 5.9% 2006 6.7% 6.1% 2007 8.9% 6.9% 2008 10.3% 7.7% 2009 11.0% 7.9% 2010 12.4% 8.3%

InsurancePenetration&RealGDPGrowthforSelectedCountries
Malaysiaranked 32ndgloballyin2010 InsurancePenetration(%ofGDP) Malaysia OICAverage Asia UK US World 4.8% 1.47% 6.2% 12.4% 8.0% 6.9%

Takaful

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Source:BankNegaraMalaysia Source:SigmaRe,Ernst&YoungWorldTakafulReport2011

Other Markets served

Significant opportunities remain untapped

UK HongKong, Japan, SouthKorea

MiddleEast,Africa andLevant
Americas

India,SriLanka, Bangladesh
26%(RM481.17m)

Shareholding Composition in Malaysian Takaful Operators Participation of 12 foreign shareholders from 10 countries

Islamic Finance Growth

Takaful grew the least (less than 1%) compared to other Islamic finance components

Resilient, viable and profitable

How can takaful capture a bigger share of USD1 trillion industry?

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Global Takaful Industry

Gross Contributions by Continent

Increasing Trend in Gross Contributions

GCC is expected to continue its domination in global Takaful, to deliver a gross contribution of USD6.4 billion in 2010. This will be followed by South East Asia with USD1.8billion, largely driven by Malaysia. The projected growth worldwide is about 29%. of Takaful

Product Mix : MENA vs South East Asia

Different Preferences among regions

Family & Medical plan was the most preferred plan in South East Asia. MENA in contrast saw higher participation in General Takaful Business compared to Family plans. Interestingly, the record shows the upward trend in Family & Medical Plans for both regions, suggesting potential of the plans to be untapped by the players.

2008 Financials

- Malaysia vs GCC
Driver
Risk retention

Malaysia Takaful Industry can be considered matured as compared with other countries. This is reflected by the underwriting capability, better returns and stable operation efficiency.
Key financial Indicator ( Malaysia vs GCC)

Malaysia
Retaining a larger proportion of business on their books and converting this into better technical results. Its requires greater underwriting competence and track record (using historical data) to build a quality book. Claims ratio of 28% is reflective of stronger underwriting discipline and diversified business Average equity of US$84m and an underwriting leverage ratio of 260% in 2008 imply significant scale and enhanced returns. However, proposed risk-based capital rules may impact operators abilities to write riskier lines of business without adequate capital cushion. Average yield on investments have remained stable and reached 5% in 2009. Average combined ratios have remained steady at around 53%.

GCC
The broking approach result the higher reTakaful outflow. Reduces their ability to generate potentially positive underwriting results. Higher average claims ratio of between 40-60% can be improved through stronger underwriting competence. Average equity of US$ 70m and an underwriting leverage ratio of 150% in 2008 (skewed upward by a small number of large players) implies that scale has not yet been achieved. Achieving critical mass is key to enhancing shareholder returns Average yield on investments have fallen sharply to below 4% In 2008. Average combined ratios have continued to improve and reached 72% in 2008, indicating improving 9 operational efficiency

Underwriting Result

Indicators Returnonequity NetRetentionratio NetClaimRatio NetIncomeBreakUp (InvestmentIncome: underwritingIncome) Contribution/ shareholderEquity InvestmentYield CombinedRatio

Malaysia 7.6% 95.5% 28% 22:78

GCC 6.5% 63.0% 50% 16:84

Investment Result Underwriting Leverage

263% 5.0% 53.3%

150% 3.5%

Operating efficiency

71.9%

Malaysian Takaful Industry 2010

Viable, progressive & resilient industry with strong growth over the last 25 years..

Mkt Share (%) Net contributions Assets Market Penetrations

'85 .

90 0.8 0.4 0.1

95 1.0 0.7 0.3

00 3.8 3.7 2.5

05 5.4 5.7 5.6

06 6.8 6.3 6.6

07 9.5 7.1 7.7

08 10.7 8.0 7.9

09 11.8 8.3 9.1

10 13.3 8.7 11.2

Note: - Negligible Penetration rate is referred to number of Takaful certificates over populations Net contribution is without contribution from EPF Annuity Scheme.

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Malaysian Takaful Industry update

Net Contribution and A ssets for Takaful
RM Billion 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 2006 2007 2008 Year Net Contribution Assets 2009 2010 Jan-11 1.7 2.6 3.0 3.5 6.9 4.3 8.8 10.6 12.4

Robust expansion
14.7 14.9

experienced 5 year (2005-2010) compound average growth rate of 27% p.a. (net contributions); 20% p.a. (assets)
0.4

achieved 12.4% market share (net contributions) of total insurance and takaful market in 2010

Growth of Net Contribution and Assets for Takaful

60.0 50.0 40.0 30.0 20.0 10.0 2006 2007 2008 Year 2009 2010 % 29.0 49.3

With greater diversity of players

8 Composite TOs
19.8 17.7 16.4 23.2 17.8 17.8

27.9

5 ICBUs

17.3

4 Family TOs 1 ITO 4 RTO 4 ICBU

Net Contribution

Assets

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Issue 1 :

International Connectivity in Takaful

a) Clarity of takaful as a protection product

Clarity in how each model operates and can co-exist

Emergence of different takaful models across jurisdictions presents opportunities for greater understanding and acceptance Rights of takaful participants Duties, responsibilities and obligations of takaful operators and re-takaful operators Protection elements of the takaful funds Co-takaful and re-takaful compatibility Permissible takaful risks

Pa rt

AlWakalah

ici pa

nts

AlTaawuni HybridAlWakalah & AlMudharabah

AlWaqf

Takaful Funds
AlMudharabah

Newconcepts?

Collaboration through ICMIF/GTG/FOIITC? Greater collaboration with brokers?

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SnapshotofMalaysianTOF SnapshotofMalaysianTOF
Purpose: Ensurebusinessactivitiesandinnovationsarewithin TOs riskmanagementcapacityand donotcompromiseprudence Ensurelongtermbusinesssustainabilityandsafeguardinterestofstakeholdersvia comprehensiveinternalcontrols KeyRequirements: Coversoperationalprocessesrelatingto takaful andshareholders fund,includethe requirementsrelatingto: Establishoperationalmodelthatbasedonthecontractandapprovedby Shariah Committee Settingupfund Segregateshareholders fundand takaful fund Managementof takaful operations Adequate tabarru allocationintoPRFtocoverriskandobligationsassociatedwith takaful contract Establishwrittenpolicyonthemanagementofsurplusthatareapprovedby Shariah CommitteeandBoard Managementofoperatingcostsandincomeof takaful operators Managementofassets,liabilitiesandsurplus Rectificationofdeficiencyof takaful fund Establishwrittenpolicyonmechanismtorectifydeficitand/orlossinPRFthatare approvedbytheBoard

Guidelinesof Takaful Operational Framework

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Issue 1 :

International Connectivity in Takaful

b) Mutual recognition of Shariah interpretation and enforcement

Mutual recognition of Shariah interpretation and enforcement: Two main issues

Seizing a more sizeable share of Shariah compliant investible universe

Addressing leakages of business and investments

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Issue 1 :

International Connectivity in Takaful

c) Intensify development of international best practices

A good start but more needed in augmenting the uniqueness yet comparability of takaful as a mainstream protection product which co-exists alongside insurance
(eg risk-based capital for takaful and impact of Solvency II requirements on takaful)

Facilitates rating of takaful operators

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Regulatory Challenges - IFSB implementation Issues

1. Do the existing law and legal systems adequately address insolvency issues arising from Takaful operations? 2. Clarity from Shariah standpoint on the treatment of outstanding Qard (i.e. that has been made but not repaid) in the case where a PR F enters into an insolvent winding-up.
IFSB recommends that: Any outstanding Qard would rank pari passu with participants claims, so that the deficiency would be shared pro rata; Participants claims would rank above any outstanding Qard.

3. Clarity on earmarking concept from Shariah standpoint, accounting etc 4. How to determine sufficient level of the Qard draw-down to provide reasonable assurance those adequate resources will be available within the PRF to meet any obligations arising in the process of run-off before a PRF be allowed to be run off? 5. Should TOs failed to meet of solvency requirement, required to disclose to the public? Accountability vs market confident

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Issue 2 : Market Penetration

Distribution of New Business for Family Takaful and Life Insurance for Dec 2010 Business Endowment & Whole Life* Life Insurance
37.0 10.2 7.7 5.4 31.5

Family takaful product mix heavily concentrated in mortgage-related products; Health, endowment & annuity underserved in takaful Less innovation in family takaful compared to life insurance - In 2010, on average a life insurer
launched 4 times more new basic (ordinary & IL) product and double the number of riders launched by a family takaful player

Mortgage Medical & health Other plans Riders Annuity Investment-linked (IL)

Family Takaful

13.2

51.5

9.1

2.0 15.6

20

40

60

80

100

Endowment products: Average Size of Annual Premium 2008 RM Takaful Insurance 802 1,338 2009 RM 863 1,536 2010 RM 923 1,764

Average size of contributions and sum assured still lower than insurance, although gradually increasing Need to develop capability to serve all consumer segments including higher income range

Issue 3 : Family Takaful not as competitive

Investment yield with capital gain
% 10.0 8.0 6.0 4.0 2.0 0.0 2005 2006 2007 Year Family Takaf ul Fund Lif e Insurance Fund 2008 2009 2010 9.4 6.5 4.8 6.5 4.4 5.7 5.8 4.7 5.6 4.8 6.1 5.2

TOs need to improve investment performance Investment yields of family takaful fund consistently underperform life insurance, although gap narrowing

Incurred management expense ratio

% 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2005 2006 2007 Year Takaful Insurance 2008 2009 2010 6.7 7.3 7.5 9.7 8.4 11.6 12.1 10.9 10.7 12.3

Operate more efficiently

Takaful industry currently less costefficient than insurance - Underlying trend reflects consistently
higher expense ratio

8.2

8.3

Cost containment vital to enhance attractiveness of takaful products

- Avoid consumer perception that takaful an expensive option

Incurred Agency Rem uneration Ratio %

25.0 20.0 15.0 10.0 5.0 0.0 16.4 14.4 14.8 20.5 20.3 14.8

And improve productivity

Based on benchmarking, takaful agents consistently getting higher remuneration for producing much less business than insurance agents
-Takaful average new contributions per agent of RM17,185 vs insurances RM38,325 (Q4 2009)

2008

2009 Year Takaful Insurance

2010

Issue 4 : Retakaful Sector

Leakage to conventional players Domestic focused

% 80

Distribution of Retakaful Ceded RM 318 m RM 187 m

Net Contribution for Retakaful Business (Dec 2010)

70 60 50 40 30 20 10 2008 2009 2010 Takaful/Retakaful companies Year RM 71 m RM 105 m RM 170 m RM 150 m

51%

49%

Local business

Foreign business

Insurance/Reinsurance companies

Increasing trend of retakaful ceded to conventional players despite growing retakaful capacity in the market
Genuine and progressive efforts to reduce leakage vital for maintaining credibility of takaful and Islamic financial system

Encouraging progress achieved, but some retakaful operators still domestic-focused

Need to capitalise more on growth opportunities arising from enlarging global takaful market

Issue 5 : Takaful Industry underperforming

Recent benchmarking exercises reveal
Higher surrender rate in family takaful than life insurance Longer turnaround time for settling family takaful claims from intimation date
- 46 days vs 20 days (life insurance) in Q4 2009 - 36 days vs 17 days (life insurance) in Q2 2010

Lower customer retention in motor takaful than insurance

Only 28% certificates renewal vs insurances 48% in Q2 2010

Common areas of takaful consumer complaints to BNM:

Mis-selling: exaggeration of benefits, no explanation on product exclusion Use of scare tactics & intimidation merely using halal/haram argument as selling point

Issue 6 : Readiness to comply with new Regulations

Takaful regulatory framework
BNM Guidelines Takaful Operational Framework Valuation Basis for Liabilities of Family Takaful Business Valuation Basis for Liabilities of General Takaful Business Shariah Governance Framework Investment-linked Business Internal Audit Function of Licensed Institutions Product Transparency and Disclosure Introduction of New Products IFSBs international standards & best practices IFSB-8: Guiding Principles on Governance For Takaful (Islamic Insurance) Undertakings IFSB-9: Guiding Principles on Conduct of Business for Institutions Offering Islamic Financial Services IFSB-10: Guiding Principles on Shariah Governance Systems for Institutions Offering Islamic Financial Services IFSB-11: Standard on Solvency Requirements for Takaful Undertakings Effective date 1 Oct 2011 FYE beginning on or after 1 July 2011 FYE beginning on or after 1 July 2011 1 Oct 2011 15 April 2010 20 July 2010 Various 1 July 2009 Issued date Dec 2009 Dec 2009 Dec 2009

Domestic and international regulatory framework for takaful is evolving : Takaful operators to keep up-todate with regulatory developments & ensure capacity towards effective implementation MTA to play effective role in providing balanced views that reflects industry consensus on issues for the greater good and benefit of industry as a whole

Contribute to.. Enhanced industry readiness in implementation Pragmatic and orderly industry growth and development.

Dec 2010

Issue 7 : Human Capital Development

More concerted action required from all key stakeholders MTA, takaful operators and training providers - Talent development as a strategic focus area under a permanent committee of MTA - Industry to leverage more on INCEIF, IBFIM & ISRA as dedicated education and training solution providers for Islamic finance INCEIF: Out of 1710 students (2006-2010), only 27 students or less than 2% from takaful industry; all sponsored by only 1 TO Support INCEIF, IBFIM & ISRAs capability building agenda Harness closer industry academia/training providers partnership to create synergies for mutual benefits - Industry to define required skill-set to better integrate industry needs into programs on offer - Collaborative internship provide real involvement with industry that allows students to gain valuable practical experience Ensure no duplication of efforts or competing objectives to optimise limited resources available Review Agency distribution training needs - 20% of agents producing 80% results Develop right-mind set and sales skills Provide sales tools and harness technology for ease-of-doing business with Improve agency management skills and discipline Recruitment, training, sales, logistics

Issue 8 : Shariah Governance

Malaysian Takaful Industry: Way Forward

To develop a new blueprint for significant expansion of the financial system, emphasis on the development of a vibrant regional financial market that can support the expansion in trade and investment activities within the region.

Standardised to customised products Value-added activities: white-labelling, outsourcing centre

Operational excellence Cost-efficiency Multichannelling & partnership

Technical ability to underwrite LSR, mega-projects, microTakaful Supported by comprehensive & efficient data-mining & advanced analytics tools

Brand leadership attained from superior service quality & professionalism that command customer loyalty

Conclusion : Key Priorities for Msian Takaful Operators

1. Sharpen business focus & competitiveness to increase market share, increase takaful penetration and strengthen takaful ecosystem Ensure well-planned transition process towards pricing deregulation of motor insurance and takaful Strengthen operational efficiency and market conduct to attain clear ethical leadership and competitive advantage Ensure readiness for effective implementation of domestic regulatory framework & international best practices Secure success through continuous focus in human capital development Enhance Shariah governance to earn public trust, enhance awareness and facilitate braanding

2. 3. 4. 5. 6.

Thank you.
For more information, contact:

smoheeb@takaful-ikhlas.com.my

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