arthur white: takaful and takaful models

LON-MOWSG1MKT-082

Financial Services

CONFIDENTIAL | www.oliverwyman.com

Takaful and Takaful models

30th June 2009

LON-MOWSG1MKT-082

Our clients’ industries are extremely competitive. The confidentiality of companies’plans and data is obviously critical. Oliver Wyman will protect the confidentiality of all such client information.

Similarly, management consulting is a competitive business. We view our approaches and insights as proprietary and therefore look to our clients to protect Oliver Wyman’s interests in our proposals, presentations, methodologies and analytical techniques. Under no circumstances should this material be shared with any third party without the written consent of Oliver Wyman.

Copyright © 2009 Oliver Wyman

Confidentiality

2LON-MOWSG1MKT-082© 2009 Oliver Wyman www.oliverwyman.com

Objectives for today

Short recap of Takaful worldwide opportunity

Discuss some of the challenges Takaful players are facing to go “from walking to running”


Introduction to Oliver Wyman (1): We bring deep industry expertise and broad functional knowledge to financial services clients

Clients include 75 of the global top 100 financial institutions

More than 1,000 professionals exclusively dedicated to the financial services industry

We have an unparalleled understanding of the market structure, economics, and possible future development of the segments of the financial services industry

Our distinct approach is characterized by deep specialization and rigorous fact-based analysis

In addition Oliver Wyman Group companies offer specialized consulting solutions;

– Organizational change (Delta)– Brand strategy (Lippincott)– Economic consulting (NERA)

MMC sister companies Guy Carpenter, Marsh, Mercer and Kroll can be used for market and competitor intelligence at the discretion of our clients

Corporate Strategy

Finance & Risk

Corporate & Institutional Banking

Insurance

Corporate Risk

Strategic IT & Operations

Retail & Business Banking

Wealth & Asset Management

Private Equity andMergers & Acquisitions

Industry groups

Key capabilities


Introduction to Oliver Wyman (2): Our specialist insurance practice covers a wide range of “hot” industry topics for insurers and reinsurers

Value

Global (life/non-life) reinsurance strategiesPrimary life and non-life strategies Corporate enterprise risk strategiesInternational strategies for reinsurance/insurance groupsMarket entry strategies

Value chain and process re-designValue-based claims managementP&C pricingEconomic profit measurement and managementStrategic expense managementCost efficiency improvementAsset management performance enhancement

Distribution effectiveness review and reorganizationLarge account management reviews

Risk capital measurement and managementRisk appetite frameworks and operational integrationRisk-/value-based management and steeringRisk management governance, organization and operationsAsset and liability management…

1

Corporate strategy

2

Customer and distribution

Profitability and effectiveness4

Finance and M&A

5

Risk measurement and management

Due diligence support (target selection, valuation support, financial modeling/ stress testing, post merger integration planning)Post merger integrationPhysical and economic capital allocation/ value generation reviewsReinsurance optimization

3

Distribution channel strategies (direct, broker/IFAs, tied agent networks, affinity)

Customer valuation and segmentation, target group strategies

Anti-churn strategies


Global competitors in Malaysia

Fortis: Expanded JV in Malaysia (MaybanFortis), acquired Takaful Nasional Sdn Bhd

Prudential Asia (PCA): Awarded Malaysian Takaful license with Bank Simpanan Nasional

Munich Re: Wins general insurance retakafullicence, sets up Munich Re Retakaful

Scor Global Life granted operating license for retakaful

Friends Provident purchased 30% stake in AmBank's life unit, AmLife Insurance Bhd

Allianz announces plans to partner with a local takaful operator to enter retakaful

Converium: License for international retakafulfrom Malaysian offshore base

Global competitors elsewhere (examples)

Swiss Re: Announced launch of “family” (life) retakaful product

AXA aiming to treble revenues from the Middle East in five years, including Takaful entry

Hannover Re: General and life retakaful license in Bahrain

Zurich Financial Services has signed an agreement with Abu Dhabi National Takaful Company to establish a joint venture company to create a new business based in DIFC.

Allianz launched Takaful subsidiary in Bahrain

L&G granted Takaful (and conventional) license in Bahrain

Friends Provident have a distribution partnership with Riyadh Bank in Saudi Arabia

There has been significant competitor movement in Takaful in the last few years, with particular focus on Malaysia and the Middle East


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Muslim worldwide population "Muslim GDP" "Muslim insurance premiumpotential"

However, Takaful is not necessarily just for traditional Islamic countries (or just for Muslims)

Share of today’s potential Islamic market by region

W Europe

USA

Asia Pacific

Mid East

S Asia

Africa

E Europe

Source: Swiss Re Sigma, census data, Oliver Wyman analysis1. Muslim insurance premium potential insurance spend’ estimates the amount spent by the Muslim population on insurance products (conventional or otherwise) today


Different regions will clearly need different approaches

8-12%<1%5%Typical insurance penetration (as % GDP1)

“Capturing share with a new model”– Getting premium from

already-insured Muslims and non-Muslims

– Some potential to increase penetration among non-insured Muslims

“Raising insurance penetration rates”– Building insurance

awareness in low-penetration markets

“Building out the existing model”– Getting foothold in

already “proven”concept

– Growing insurance penetration

– Capturing share from existing insurers

Key challenges for insurers

HighLow-MediumMediumWealth levels (GDP/capita)

LowHighMediumMuslims as % population

W Europe (e.g. UK, Germany)USA

Middle East, e.g. Bahrain, Saudi, Turkey

Malaysia, SingaporeExamples Major developed marketsDeveloping Islamic marketsExisting Takaful countries

Classification of potential markets

1. Source: Sigma, including Life and non-Life premiums


A Takaful model needs to be designed carefully

Scope

Customer Selection& Value Proposition

Business Design framework

What target customer segments, with what needs ?What proposition and products?Through which channels?

Examples of key questions to resolve

What are the potential premium, claims & expense flows?What are the risks and likely economic/regulatory capital costs?Where will Takaful requirements create new cost or risk factors?What will the potential reinsurance/retakaful needs be?

Make versus outsource?With which partners?

How to build a differentiated retail or commercial brand?How to build a defensible long term position?

Strategic Control

What resources, staffing is needed?What IT / systems requirements?What governance, reporting and risk management model?

OrganizationalSystems

Economic Model


For example a key question in all markets is the marketing & distribution approach

Example of attitudinal segmentation (Disguised non-UK client example)

Size (MM)

Client current positioning

Main locations

Secular

Moderate

Devout

Likely affinity for Takaful

Est. % of populationSegment

Examples of potential marketingapproaches/channels

Primarily targeting ethnic angle (e.g. Bangadeshi/Pakistani) rather than religious– E.g. Deutsche Bank “Bank Amiz”

Ethnic marketing

Aim to market products as “ethical investments” (not directly religious)– Targeting moderate and secular

customers

Ethical product

Highlighting the cooperative/mutual nature of insurance, not Islam– E.g. Turkish “Participation bank”

approach

Mutual insurance

Marketing direct to a “faith based”associations

Faith-based associations

“Affinity marketing” approach in co-operation with mosques

Mosque marketing

DescriptionChannel

Also needs to take into account (e.g.) location, ethnic background, demographics, etc


Another major challenge is manufacturing/sourcing the product with sufficient cost efficiency and a suitable risk profile

Price premium for Takaful over conventional

Example of cost/risk analysis:NPV sensitivity to Takaful “price premium”

Wakalah

Conventional

Mudhabarah

Policyholders share all underwriting risk

Operator (shareholder) is paid a set fee to cover expenses. Fee expressed as a percentage of premium and Takaful fund under management.

Operator is also required to fund policyholder deficits interest free until repaid from profits

Example: Wakalah model

PremiumShareholder Fund

ClaimsProfit

Underwriting surplus (less investment and operating expenses) returned to policyholder

PolicyholderShareholder

Agency fee(pre defined)

Wakala fee income

Policyholder Fund

General

Investment Fund

FamilyRisk Fund

Takaful Fund

All expenses

Inv. profit income on s/h

Fund

NPV


The Takaful market opportunity is no longer questioned – the focus is increasingly on creating an efficient operating model

Takaful players recognise the benefits in theory of increased harmonisation and standardisation of Shariah regulation, standards and interpretations

However, global Takaful standards unlikely to in the short term as competing associations and standards boards attempt to reconcile different approaches

Local smaller “first movers” will be challenged by the entry of multinational players with scale and international competencies – We expect to see increased use of hub and spoke models with a single

manufacturing platform but wide variation in local product and distribution skills

Surplus calculation and distribution methodologies in use vary tremendously between Takaful players and regions with active debates amongst Takaful actuaries on their treatments– A highly flexible surplus calculation and distribution functionality will be required to

meet the different methodologies

Regulation and standards

2

Entry of multinational

players

1

Surplus and accounting

issues

3

Takaful players face the same consumer education issues as conventional players in low-penetration markets, but also a number of Takaful-specific challenges– Local regulators also likely to apply transparency regulations to Takaful players,

adding further pressure to educate consumers and agents

Consumer education

4


Entry of Multinational (MNC) playersThe entry of MNC Takaful players will be a serious challenge to existing local players

A window within a conventional financial institution/insurer via which customers can conduct business utilising only Shariah compatible instruments

Stand-alone Takaful operators selling only Shariah-compliant products and services

Description

MNC’s are quickly catching up: exploiting parent company economies of scale in front and back offices, and wider international experienceTypically examining “hub and spoke” models with single manufacturing platform but distribution in multiple locations/markets

First wave of Takaful primarily smaller / local players with first-mover advantage and local knowledge However, ability to expand beyond national borders has been hampered by lack of capital and/or experienceOrganic growth of operations and supporting technology makes for an inflexible base for international growth and adaptation

Current status

Takaful window (global players)Greenfield/stand-alone (local/regional players)

BranchY

ChannelX

Shariah compliant Takaful

Conventional financial institution

Shariah compliant Takaful


Regulation and standardsTakaful players recognise the benefits of increased harmonisation…but global Takaful standards are unlikely to emerge in the short term

Cross-border groups emerging (but slowly)

Some emerging regulatory / accounting bodies, but guidelines are not yet binding, e.g.– Islamic Financial Services Board (IFSB):

aiming to develop Shariah-consistent standards to be adopted globally

– Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI): Publishing guidelines for Islamic accounting, auditing, governance and Shariah standards,

A number of trade federations e.g.– International Cooperative and Mutual

Insurance Federation Takaful (20 Takaful operators from SE Asia and ME)

– Global Takaful Group (20 Takaful operators (mostly S.E. Asian region)

– International Takaful Association (15 Middle Eastern Islamic banks as initial members)

– etc

Varying standards across regions

Malaysia and Bahrain: Only countries with a national Takaful specific regulatory framework running in parallel with conventional regulation. Malaysia additionally has a national Shariah council

Rest of the world: Governed by conventional regulatory framework with individual Shariah boards informing each Takaful operator


Surplus issueThe surplus calculation and distribution methodologies in use are highly differentiated between Takaful players and regions, requiring a highly flexible surplus calculation function

Surplus calculation

issue examples

Surplus distribution

issue examples

“Calculating surplus on an underwriting year basis will result in distribution some time (2 to 3 years) after the end of that underwriting year. Is this generally accepted among current Takaful providers?”

“Where there is a number of product lines, is it essential that the surplus is calculated for each product which could leave the company in deficit but paying surpluses on individual lines? Could it be argued that as a collective enterprise its the good derived by all that drives the shared result as opposed to breaking it down to subsets of clients.”

“Regarding the distribution of surplus, which of the following is the “best” method?: Surplus for year one goes to all policyholders who renew in the next year Surplus goes to policyholders who took out or renewed a policy in the year in question irrespective of whether they renew in the next year or not Surplus from the prior year goes to all current policyholders at the time that surplus is distributed; irrespective of whether they are new or renewal policyholders in the next year ”

Surplus calculation variables Surplus distribution variables

Source: ICMIF forum and Oliver Wyman analysis

Frequency of surplus calculation (e.g. biannual, annual or multiyear)

Need to maintain separate pools for each line of business or fund

Need to use different models for different pools within the same provider

Region/country-specific regulations

Timing of surplus distribution (e.g. before or after renewal)

How the surplus is to be distributed: % of premium paid vs. % of sum assured; taking account of duration of contract

Means of distribution: Cash vs. “contra” discount on policy renewals

To whom the surplus should be distributed: Policyholders existing at time of distribution/policyholders that were “live” during the period of contribution


Consumer educationThe added complexity of the Wakala or Mudharaba models will pose further hurdles in educating consumers about Takaful

Consumers will increasing be more aware of the product and as more products come online, will begin to compare. They will also increasingly demand the same level of customer service as provided by (larger) conventional operators

Competitive pricingEase of understanding/overcoming complexityCustomer service

Consumer

A two prong approach addressing external (consumers) and internal (agency force) to – Enhance agency force knowledge and

professionalism– Enhance consumer knowledge

Priority will be on sufficiently recruiting, educating and equipping a Takaful agency forceA wider consumer education and marketing campaign to promote Takaful in the target markets

Operator

Regulators will continue to push for transparency and accountability by the Takaful operator across all Takaful and non Takaful processes

Ensure consumer protectionProhibit unfair trade practice

Regulator

Key considerationsObjectives

An increasing focus on consumer education to overcome sales force, consumer and regulatory pressures


Contact details

Arthur White:

[email protected]

arthur white: takaful and takaful models

Documents