Opinion of one Muslim Scholar

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Understanding Takaful the Challenges Ahead
General Takaful Agents Convention 2007
Berjaya Times Square Hotel Convention Centre
Kuala Lumpur 11th July 2007 by Mohd Tarmidzi bin
Ahmad Nordin tarmidzi_at_maybantakaful.com.my
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Contents

• Part 1 Understanding takaful
• One Scholars view on conventional insurance
• Modifying insurance to be Shariah compliant
• Definition of takaful
• Takaful as a concept
• Takaful in practice
• Operating Models
• Part 2 The challenges ahead
• Growing the takaful Contribution Asset
• Financial Sector Master Plan (FSMP)
• Malaysia as the Islamic Financial Centre (MIFC)
• Emergence of bancatakaful
• Meeting different customer needs
• Co-existence with conventional insurers

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One Scholars view on conventional insurance
According to Dr. Yusof Qaradawi

• Our observation that the modern form of
  insurance companies and their current practices
  are objectionable Islamically does not mean that
  Islam is against insurance not in the least - it
  only opposes the means and methods
• The Lawful and The Prohibited in Islam
• (English translation) pg.276

4
Modifying insurance to be Shariah compliant (1)
According to Dr. Yusof Qaradawi

• In my view insurance against hazards can be
  modified in a manner which would bring it closer
  to the Islamic principle by means of a contract
  of donation with a condition of compensation
• A further requirement is that the company must
  be free from usurious business.
• The Lawful and The Prohibited in Islam pg.276
  (English translation)

5
Modifying insurance to be Shariah compliant (2)
According to Badan Petugas Khas

• Under the Islamic insurance system, part of the
  contribution from every participant must be made
  with the intention of tabarru not for buying
  and selling, the existence of tabarru, makes the
  transaction permissible and valid according to
  the Shariah.
• Translated from the Badan Petugas Khas Report
  pg. 19
• Badan Petugas Khas was the special taskforce
  commissioned by the Government in 1982 to study
  the feasibility of setting up Islamic insurance
  in the Malaysia.

6
Takaful Act 1984

• Definition of takaful
• a scheme based on brotherhood, solidarity and
  mutual assistance which provides for mutual
  financial aid and assistance to the participants
  in case of need whereby the participants mutually
  agree to contribute for that purpose.
• Definition of takaful business
• business of takaful whose aims and operations do
  not involve any element which is not approved by
  the Shariah.

7
Takaful as a Concept (1) as envisaged by some
Scholars

• Concept is based on solidarity, shared
  responsibility brotherhood among participants
• Participants all agree to cooperate and be
  mutually responsible to help one another
  financially should a member suffer a loss defined
  in the policy
• This is achieved through making contribution
  (tabarru) to a common fund from which financial
  compensation can be paid to eligible
  participants

8
Takaful as a Concept (2) as envisaged by some
Scholars

• Participants mutually bear the risks themselves
  in the spirit of tabarru
• Participants are both the insurer as well as the
  insured at the same time.
• Takaful operator does not bear the risk
• The problem with such mutual aid concept is that
  Participants can be called upon to make
  additional contributions, if the common fund is
  not sufficient to pay the compensation / benefits
  guaranteed by the scheme.

9
Takaful in practice (modified mutuality concept)

• Participants would not be asked to pay additional
  contributions even if the takaful fund is in a
  deficit.
• Instead, Takaful Operator will provide interest
  free loan (Qard Hassan) to make up the deficit.
• Participants are not involved in the day to day
  operation or in the management of the takaful
  funds
• The management of the takaful fund is delegated
  the Takaful Operator (Takaful Nasional or Mayban
  Takaful).

10
Remuneration for the Takaful Operator

• Fixed fee
• Actual cost incurred
• Percentage of
• Contribution paid
• Underwriting surplus
• Investment income
• Combination of the above
• Mode must be pre-agreed and transparent.
• To facilitate the remuneration, one or more
  contracts can be put in place between the takaful
  operator and the participants.

11
Transparency of contract

• Wakalah or (agency) contract for managing the fund

• Takaful Fund
• General
• Family

• Other contracts may also be used such as
  Mudharabah, Wadiah or Waqaf for example

• or other contracts not forbidden by the Shariah

Tabarru Contract
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Two Operating Models Allowed
Takaful Operators in Malaysia are free to choose
different operating structures.
9 Takaful Operators 2 Operating Models
WAKALAH Fee Based Contract
MUDHARABAH Profit Sharing Contract

• Additional Difference
• Payment of operating fees
• Surplus sharing structures

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Definition of Mudharabah

• Mudharabah is a profit sharing contract whereby
  one party provides the capital (Ras ul maal) and
  the other party provides the expertise
  (Mudharib).
• Any profit from the venture is shared between the
  parties on a pre-agreed ratio e.g. 5050, 6040
  etc. Losses, however are borne solely by the
  capital provider.
• In the context of takaful, participants are the
  capital provider while the Takaful Operator
  provides the expertise to manage the Takaful Fund.

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Mudharabah Model (STMB) General Takaful
Operation
Investment Income
Participants

• Takaful Fund (TF)
• Less
• Underwriting cost reserves
• Retakaful
• Claims (paid outstanding IBNR)
• Reserves (UPR)
• Provisions
• doubtful debt
• diminution in investment value

40 of Profit
Payment of Contribution by Participant (based
on tabarru and Mudharabah contract)
Gross Profit (if any)
Qard Hassan to cover deficit
60 of Profit
Shareholder Fund (SF) Share of profits (if
any) Investment income of SF - Actual
Management Expenses
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Mudharabah Model Declaration (STMB)

• I/We hereby agree that on the basis of
  Al-Mudharabah and other related principles of the
  Syarak the Takaful Contribution which I/we hereby
  undertake to pay to STMB (Company) be credited
  into the Takaful Fund of the Company for the
  Company to manage the various schemes of takaful
  under its General Takaful Business including the
  investment of the said fund in the manner deemed
  fit by the Company, and in the consideration
  thereof I/We be entitled to share the net profit
  of the fund if any, in a proportion 40 to Me/Us
  and 60 to the Company provided always that I/We
  not incurred any claims and/or received any
  benefits under the Takaful contract whilst the
  same is in force, and in relation therefrom I/We
  also agree that any part of the said Takaful
  Contribution including its profit be made as
  tabarru for the Company to pay Takaful benefits
  to any Takaful Participant who shall be entitled
  to such benefits in accordance with the Takaful
  contract.

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Definition of Wakalah

• Wakalah is a contract whereby one party acts on
  behalf of another for a fee.
• In the context of takaful, the takaful operator
  manages the Takaful Fund on behalf of the
  participant for a fixed fee called a wakalah
  fee.

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Transparent Clear

• The participant as a party to the wakalah
  contract agrees that the takaful operator may
  take a portion of the contribution as
  remuneration for services provided
• Wakalah Fee
• Performance Fee (if any)
• The fee scale must be transparent and agreed to
  at the time of participation.

• Wakalah Fee
• Mgmt Exp
• Comm (OCC)

• Takaful Fund
• tabarru to Family or General Takaful Fund

• Performance Fee
• From surplus share if any.

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Wakalah Model - General
Investment Income
Participants
Payment of Contribution by Participant (based
on tabarru and Wakalah contract)

• Takaful Fund (TF)
• (100 - Y)
• Underwriting cost reserves
• retakaful
• claims
• reserves
• Provisions
• doubtful debt
• diminution in investment value
• Less Surplus Equalisation Reserve

50 of Surplus
Surplus (if any)
Qard Hassan to cover deficit
50 of Surplus
Wakalah Fee (Y)
Shareholder Fund (SF) Wakalah fee Share of
surplus (if any) Investment income of SF -
Commission - Actual mgmt. expenses
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Declaration by the Participant in Proposal Form
(TNSB)

• I agree to participate in this general takaful
  scheme based on the principle of takaful and to
  pay the contribution on the basis of tabarru
  (donation) for the purpose of helping other
  participants who have suffered tragedy and with
  this contribution, I am entitled to the takaful
  cover as expressed in the terms and conditions of
  this takaful contract.
• I further agree that my contribution be credited
  into the General Takaful Fund (Fund) and to elect
  Takaful Nasional Sdn. Bhd. (TNSB) to invest and
  manage the Fund according to the principles of
  the Shariah. I also permit TNSB to make payment
  of claims/takaful benefits, provisions and
  reserves based on the guidelines and policies
  laid down by the authorities and TNSB to be paid
  a wakalah fee based on the rate of Y of the
  contribution.
• If at the end of each financial year, there is a
  surplus of income over liabilities in the Fund, I
  agree that TNSB receive 50 of it as incentive
  while the balance 50 will be reserved for
  distribution amongst participants subject to the
  terms of this contract and fixed by the
  authorities.

20
Sharing of Surplus Qard Hassan clause in the
Takaful Certificate (TNSB)

• If at the end of each financial year, there is a
  surplus of income over liabilities in the Fund as
  set out in condition 10 of this Certificate, We
  will receive 50 of the surplus as incentive for
  operating and being responsible for the
  management of the Fund. The balance of 50 will
  be reserved for distribution amongst
  participants. But if the Fund is not sufficient
  to meet its takaful obligations, We will provide
  an interest free loan from Our standby capital as
  required by the authorities. This loan will be
  repaid by the Fund from future surpluses.

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Challenge of growing the Contribution

• Average annual rate of contribution growth of
  24.5 (2001-2006)
• Market penetration rose to 5.6 from 5.1 (2004)
  
• Combined contribution increase by 21.4 to RM1.7
  billion
• The increase in the market penetration is a
  manifestation of growing awareness of the public
  on the benefit of the takaful scheme

Note 2006 figures are based on forecast only
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Challenge of growing the Assets

• Total Takaful assets continued to increase at
  growth rate of 17.9 in 2006.
• Total Takaful Assets has grown to RM7.04 billion
  to account for 6.1 of total assets of insurance
  sector.

Note 2006 figures are based on forecast only
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Market Structure
Reinsurance 9
Composite 9
General 27
Takaful Operators 5 4
Life 7
The industry
Loss Adjusters 40
Brokers 35
International Offshore Financial Centre (I.O.F.C.)
Reinsurance 24
Other 1
General / Life / Underwriting Managers 9
Brokers 14
Captive 4
Recoveries Management (L) Ltd. Information
Source MNRB - The Malaysian Insurance Directory
2004-2005
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Challenge Financial Sector Master Plan (FSMP)
To create an efficient, progressive and
comprehensive Islamic financial system that
contributes significantly to the effectiveness
and efficiency of the Malaysian financial sector
while meeting the economic needs of the nation.
Slide courtesy of Tuan Syed Moheeb
25
Challenge of making Malaysia as the
International Islamic Financial Centre

• Bank Negara Malaysia launched the Malaysia as
  the International Islamic Financial Centre (MIFC)
  initiative in August 2006.
• This initiative provides Islamic banks and
  insurers, with tax incentives to set up an
  International Currency Business Unit (ICBU) to
  venture into offshore Islamic banking and Takaful
  business.
• ICBU allows takaful companies to operate
  internationally using international currencies.
  This gives takaful operators the advantage of
  quickly spreading and disseminating business
  offerings to the international public and
  customers, anywhere in the world, without having
  to go through the setting up of a local
  representative.

26
Challenge Emergence of bancatakaful

• Strong growth in 2005 was supported by three main
  distribution channel
• Emergence of Bancatakaful
• Strong performance by Agents Brokers
• Direct Business continue to be a dominant
  distribution channel.

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Challenge of meeting different customer needs
Different strokes for different folks
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Value proposition (additional)

• 1. Shariah Compliance
• Takaful was introduced to meet the demands of
  Muslims to conduct their economic activities in
  line with Shariah. They would value an
  alternative solution that
• is just as attractive, if not better than that
  offered by conventional insurance yet at the same
  time
• does not contravene the Shariah especially in
  respect of investments.
• Such solution will be especially valued by those
  who have some doubts about the permissibility of
  insurance.

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Value proposition (additional)

• 2. Sharing of Surplus
• Takaful operators in Malaysia offer to share the
  net surplus of income over liabilities in the
  takaful fund at the end of each year according to
  a pre-agreed ratio such as 5050, 4060 etc.
• Customers irrespective of faith can be delighted
  with the prospect of receiving some experience
  refund at the end of the day.

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Value proposition (additional)

• 3. Doing Good Deeds
• People are generally happy (to know) that their
  contribution would go into a pool to help others
  in need.
• Muslims believe that helping others is an act of
  piety to be rewarded by the All-Mighty.
• Takaful benefits not just the living but also for
  the deceased.
• For example the deceased can also derive eternal
  benefits if the policy proceeds used as follows
• Settlement of outstanding debts.
• Payment of outstanding zakat (tithes)
• Performance of the Haaj
• Purchase of useful property for purpose of waqaf
• Do other good deeds such as helping orphans, poor
  etc.
• Products from cradle to the hereafter.

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Differentiation Strategy

• To remain competitive takaful must strive to
  offer value that conventional insurance cannot
• Customers, staff and sales force must be made
  aware of the connection between the worldly act
  of buying / selling takaful and the spiritual
  benefits by having the right intention (niat).
• Crucial to have well trained employees and sales
  force who are motivated not by just salaries or
  commissions alone but by a sense of mission.
• The staff and sales force must believe that
  providing a Shariah compliant alternative to
  insurance is more than just a job but a religious
  obligation (fard kifayah).

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Challenge of co-existence e.g. Maybank Insurance
Takaful Sector
Mayban Fortis
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Thank You Peace to All