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TAKAFUL – THE EMERGING CONCEPT

Takaful concept has brought a new dimension to the expanding insurance market. The aim of this article is to portray how the concept is spreading to various other regions, suggestions for rapid growth and challenges for growth.

This paper will conclude as to how the concept will post a challenge to the monopolistic traditional insurance concept.

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KRISHNA NANDAGOPAL

TABLE OF CONTENTS INTRODUCTION ................................................................................................................................. 3 WHO SHOULD READ THIS PAPER? ................................................................................................ 4 WHAT AND WHY? ............................................................................................................................... 4 BRANDING ............................................................................................................................................ 5 CURRENT GROWTH ............................................................................................................................ 5

Did you know..? .................................................................................................................................. 6 Benefits galore…. .............................................................................................................................. 6

INITIATIVES SO-FAR (The 5 E’s) .................................................................................................. 7 FURTHER GROWTH PROSPECTS ...................................................................................................... 8 CHALLENGES IN RAPID GROWTH .................................................................................................. 9 CONCLUSION ..................................................................................................................................... 12 WIPRO’S OPPORTUNITY ................................................................................................................. 12 APPENDIX – basics of Takaful ......................................................................................................... 13 REFERENCES ...................................................................................................................................... 15 ABOUT THE AUTHOR ....................................................................................................................... 15 ABOUT WIPRO TECHNOLOGIES ................................................................................................... 15 WIPRO IN INSURANCE ................................................................................................................... 16

Takaful - the emerging market

INTRODUCTION Takaful, a concept from the emerging and dynamic Islamic insurance has brought a new growth path to the insurance market. Considering the flair for Takaful concept and in the wake of globalization and consolidation in the insurance market one will wonder how rapidly will Takaful concept grow and can pose a challenge to conventional (traditional) insurance. The aim of the author is to analyze how Takaful is penetrating and various ways and means it can grow faster in the current market and can pose a threat for conventional insurance, despite significant challenges and stumbling blocks. The objective of this document is not to explain why Takaful has emerged or its various models. For readers information details about Takaful models are listed in Appendix.


WHO SHOULD READ THIS PAPER? Companies intending to adapt Takaful concept either through mergers or acquisitions, would be more interested to understand how better Takaful spread can be navigated through. Also insurance companies practicing Takaful would be interested to know how to spread their areas of operation based on the suggestions provided. It would also be of interest to other individuals in the firm who are involved in risk analysis and assessment process (e.g. Industry and risk analysts, investment advisors and financial consultants) Of interest would be for software consultants and solution design companies, which aim at providing solutions for the insurance companies.

WHAT AND WHY? Takaful is an Islamic insurance concept which is based on Islamic Muamalat (banking transactions), observing the rules and regulations of Islamic law being practiced in various forms for over 1400 years. “Takaful is defined as a mutual arrangement between parties in which they agree to provide material assistance among the group, at times of misfortune” One might wonder as to why only Takaful is being projected as a growth factory, in comparison with other products/concepts which evolved during the same time. It is because of the various benefits it provides to contributors that it is accepted and projected on high stakes. Takaful system is based on mutual co-operation, responsibility, assurance, protection and assistance between groups of participants and is treated as a form of mutual insurance. This is in response to the commonly accepted incompatibility between Islamic belief and the conventional insurance model, and is considered an alternative to conventional insurance among the Muslim world.


BRANDING Considering the acceptance and spread of Takaful in the burgeoning world market, why should one brand Takaful as an Islamic Insurance concept or Islamic alternative to insurance? It would be wise to stamp it as just “Takaful”.

CURRENT GROWTH Statistics depict Takaful market growth @ 20% per year currently. Considering the current market crises (consolidation and unstable capital among conventional players), and the disbelief among the public on the conventional players will the Takaful market win over an edge and grow @ 30% or 40% per year or even more? If public can have an alternative to conventional insurance will they try or want to explore it further to see the benefits? Let’s analyze further the facts and arrive at a conclusion. Statistics further depicts that only 5% of the world Muslim population is being covered and the remaining 95% untapped. Various significant steps are underway in the Muslim countries to spread the knowledge and awareness of General, Group, Family and various other new Takaful products. According to Ernst & Young’s recently-launched World Takaful Report 2008, accepted contributions are expected to rise to more than $4.3 billion in 2010 and that a 20% growth rate of the industry would be maintained, going forward. Ithmaar Banking Group and Islamic Banking and Finance Institute Malaysia (IBFIM), Global Islamic Finance Forum predicts that by 2015 the expected potential is $7.4 up to $14 billion, with a growth of 15% to 20% per annum.


Did you know..? Sudan, an African region, introduced the first general Takaful product in 1979. General perception is that it is an effective, fair and transparent measure of risk mitigation, set to have an exponential growth across the world. A religiously triggered and motivated goal of Takaful is community well being which does not aim in high profit making.

Benefits galore…. The inherent attraction of Takaful as an ethics-based product is always going to appeal more to individuals than organizations, which may be profit driven. In the current civilized market of transparency and knowledge among public the mass is being pulled towards Takaful concept. An assured return on their hard earned money (which is paid as premium) even if there is no eventuality, acts as a double burger (insurance coverage and profit dividend) The concept facilitates participants to obtain two forms of benefit, firstly the monetary profits through this protection scheme, and secondly the “profit” in the spiritual senses whereby participants can exercise their religious and social responsibilities through the 'Tabarru’ method which would be handed to those who suffer losses and misfortune. The system is not only for the benefit of Muslim but also for the prosperity of all participants, irrespective of their religious beliefs. One of the ultimate benefits in Takaful, unlike conventional insurance is it allows policyholders who have not lodged any claims during the period of their policy coverage to a profit dividend (mudharabah), even up to 30%. Apart from Muslim countries where the concept is rapidly growing at the rate of 20% each year, with Malaysia the largest Muslim populated country in the world leading the pack, awareness is spreading in regions like Asia and European countries with United Kingdom, France and Germany leading the band wagon.

Pictorial representation of Muslim population around the world:

Source: Freerepublic.com

The backbone of every business plan is assessment of the market potential. The potential is enormous considering the huge size of untapped market and more specifically the young urbanized Muslim population across the world whose preference is more towards Takaful. Customers expect Takaful operators to be on par with conventional insurers in respect of product offering, service level, financial security and value-for-money.

INITIATIVES SO-FAR (The 5 E’s) Early bird: The first branded Micro Takaful policy named “Navodaya”, (dawn of a new era) catering to the lower income groups was launched in Sri Lanka in April 2008. Education: The Bahrain Institute of Banking and Finance (BIBF) have introduced the world’s first qualification in Takaful, accredited by UK's Chartered Insurance Institute (CII). Encouragement: Every year in the World Takaful Conference a Takaful leader is awarded with “WTC Takaful Leader of the Year” award, which add as a motivational factor. Envy: Many countries are amending their existing country laws to cater to Takaful insurance companies in order not to be left behind in the race. Excogitate: Takaful specific brokers associations are thinking in lines of innovative products for untapped sectors.

Not to miss the boat many countries and its interested organizations are taking multiple rapid actions to create their own foot print.

FURTHER GROWTH PROSPECTS Organizations targeting Takaful to penetrate the lucrative market rapidly can try to adapt below enforcements: ¶ Takaful operators adhering to the standards of AAOIFI’s (the Accounting and

Auditing Organization for Islamic Financial Institutions) rigorous regimes whose products can be rolled out across the world

¶ Adopting world class standard in Underwriting, Claims Management, Risk Management and Capital Efficiency

¶ Forward thinking, not imitation, will succeed ¶ Value-for-money offerings in combination of customer service and standards ¶ Introduce new innovative and culturally sensitive products and/or solutions focused

on local market conditions ¶ Penetrate through Bancassurance (Banc Takaful) ¶ Initially target Micro Takaful – an ice-breaker to enter any hard market ¶ Use 5i framework of risk mitigation (Insight, Information flow, Incentives,

Investment and Institution) ¶ Importance to Takaful education (e-learning) ¶ Harmonization is important for facilitating growth on a global scale


CHALLENGES IN RAPID GROWTH - Competition with established traditional players:

- This is a real challenge as Takaful players have to get an edge over conventional players, with a convincing answer for the customers.

- Regulatory and legal framework - Lengthy process to set up a new company filled with red tape activities which can be tiresome and disheartening. - Shariah requirements differ between jurisdictions making it difficult to come up with products that can be offered internationally - Conflict between Federal and State laws, if applicable, which dilute the interest of operators

- Takaful rating approach, catering to the local and international market: - Since the initial concentration would be to capture the local market, rating approach should accommodate the local market conditions, at the same time should strike a balance for international market.

- Awareness and education: - Reaching and educating the lower-end of the population is a significant challenge.

- Research and Innovation: - In the current market meltdown the organizations should be willing to spend more on deriving new innovative Takaful products

- Capital efficiency and risk based solvency regimes (EU): - Not many new entrants will step forward to take the risk of investing, considering the current imbalanced trend.

- Scalability: - Takaful concept and its products should be capable enough to scale to greater heights in terms of risk coverage and spread, which it is not capable now.

- Re-Takaful (like reinsurance) capacity - Applications catering to Takaful products - Software applications suitable to Takaful products to be developed The final challenge lies not only in tapping extrinsic demand but also in developing their capacity and expertise to provide a competitive alternative to conventional insurance. In practice analyst say, Takaful can be a substitute of mutual insurance only which can be used for a limited type of risk like personal insurance, but commercial and complicated risk is difficult to insure on mutual basis. To accommodate complicated risks Takaful can go in for ReTakaful, which is taking shape with Munich Re, Allianz, AIG and GIC taking a step forward to reinsure Takaful business. Peter Hodgins, a senior legal consultant in the Islamic finance group at the DLA Piper Middle East, says that “the opportunity here for the Takaful industry is enormous, but it’s a

question of whether it has the capacity and the experience at this stage to write completion risk in the construction industry, since there are billions of dollars of projects currently underway”. “I think that will come in time, but there is a clear opportunity”. It is accepted that American and European market is untapped, for which the Takaful players have to really think very hard to try entering the market with their innovative and competitive products. Despite the significant challenges the outlook for the Takaful industry has entrusted the Islamic finance world to underwrite risk through Takaful. Highlights of Takaful spread for your eyes:

Global Takaful Group, successor of ASEAN Takaful Group has more than 23 members from Asia and Middle East, and continues to receive enquiries from across the globe for its membership.

A new Pakistan’s government policy says conventional insurers that wish to write Takaful business can do so now through "window operations" (operations affiliated with conventional insurers)

Pakistan government is likely to announce tax incentives for those who buy life insurance and Takaful in the 2008/09 fiscal Budget.

According to Dr Malaikah, in 2007 alone 21 operators joined the market and at the end of the year, the insurance business stood at $2.2 billion. This is predicted to more than double in three years. Joining in soon will be Takaful giant SALAMA, which is in the process of establishing a $300-million reTakaful out•t

Bahrain-based Solidarity to launch US$148 million Takaful Unit in Saudi Arabia, for which a preliminary approval from SAMA (Saudi Arabian Monetary Agency)

Baharin’s Takaful International awarded a 4 yr contract, one of the biggest-ever insurance signings in the Gulf and the first shariah-compliant model of its kind in Bahrain, to insure Bahrain Ministry of Electricity and Water properties which includes a catalogue of power plants, sewers and water treatment plants worth BHD1.6 billion (US$4.2 billion).

Bangladesh Takaful market looks to outplace conventional market, with 6 players already having a full fledged Takaful operation. Under the new ordinance law insured can now choose between conventional or Takaful insurance.

As always taking the lead Allianz has become the first major insurance company to offer Micro-Takaful insurance

According to Moody’s report the actual depth of Shariah-compliant financial intermediation was only $18 billion at the end of 2007, equal to a market share of less than 8% of its potential size

The Gulf Cooperation Council (GCC) is the heart of the global Takaful market, with accepted contributions in excess of US$1 billion as compared

to global contributions of $2 billion in 2006. According to Ernst & Young, of the world total of 133 Takaful operators, 59 are within the GCC.

Takaful IPO in UAE and Saudi Arabia was oversubscribed many times. Qatar now has 5 Takaful companies, following Qatar General Insurance &

Reinsurance Co’s launch of its Takaful subsidiary. Syria’s 3 Takaful companies intend to launch operations this year. Oman’s 1st Takaful Company operates under the name of Al Madina Gulf

Insurance Co. Kuwait already has 11, Egypt has 6 and many more in South Africa, Gambia,

Thailand, Brunei, Indonesia, Australia, Lebanon

Spread in non Muslim area… Ω Michael Bradford in the 4th Annual Middle Eastern Insurance Forum in

Manama says that by 2015, the Takaful market will attract from $7.4 billion to $14 billion in gross writings, with 27% of it originating in Europe and the United States. Asia will be the biggest producer in Takaful.

Ω India will have one shortly if Insurance Regulatory & Development Authority (IRDA) approves the association of Bajaj Allianz Life Insurance and the broking firm Parsoli Insurance Broking Ltd

Ω Sri Lanka’s Amana Takaful Insurance's gross written premiums grew by 41% year-on-year to LKR412 million (US$3.6 million) in the first half of 2007. Surprisingly the Takaful will grow along with conventional insurers.

Ω In UK Principle Insurance, formerly known as British Islamic Insurance Holdings, became Britain's first independent Takaful provider after receiving regulatory approval from the Financial Services Authority (FSA). It will offer Shariah compliant home and car insurance later this year

Ω Malaysia launched its first Takaful policy (BAI Takaful) through British American Insurance Co. (BA Insurance)

Ω ReOrient Legal Limited completed the legal work for the launch of the first Takaful Syndicate in Lloyd's of London

CONCLUSION Even though the Takaful market is premature in itself, but still if all the above challenges can be handled professionally and tactfully it will grow and emerge as a winner by the year 2025 or at least will take away a major pie from the conventional insurance. The current global market turbulence, at par with 1930 market collapse, is one of the major challenge for Takaful. Besides it is also a major opportunity to enter the cyclonic sweep across the world using the sub prime mess. In the market of mergers, acquisitions and consolidation in the insurance and banking industry market, it would be a global opportunity for the Takaful aspirants to initiate and introduce market favoring products so as to penetrate the market quickly. The strong belief is that Takaful can and has the capacity to replace the monopoly conventional insurance market in the coming decades, considering the vigor with which it is being adopted by different countries and the speed in which it is spreading across world community. Let’s watch the tussle between the muscles!

WIPRO’S OPPORTUNITY Wipro’s strong domain capabilities coupled with training on the Takaful concepts can proactively start to explore the market in which this concept is emerging or spreading and use its existing client base to move ahead. Wipro can help to provide solutions and/or suggestions based on its experience in various geographies. Wipro can analyze the insurance solutions/products being currently used by the insurance companies and provide value-add proactive suggestions, to help how to handle the new market situation. Wipro can also look into using its existing partnership with product based companies to see how the product can be customized for the new emerging market segment.


APPENDIX – basics of Takaful

Source: World Takaful Report 2008

Source: World Takaful Report 2008

Basic terms in Takaful market:

♦ Aaqilah: Mutual help. ♦ Gharar: Uncertainty, hazard, chance or risk, sale of a thing, which is not

present at hand. ♦ Hadith: Report of a Sunnah. ♦ Halal: Permissible. ♦ Hanafi: An Islamic School of Law founded by Imam Abu Hanifa. Followers

of this school are known as Hanafis. ♦ Haram: Not permissible. ♦ Maisir: Gambling, any form of business in which monetary gains come

from mere chance, speculation and conjecture or not from work or real sector business.

♦ Mudarabah: A form of a business contracts in which one part brings capital and the other personal effort. The proportionate share in profit is determined by mutual agreement. But the loss, of any, is borne only by the owner of the capital, in which case the entrepreneur gets nothing for his labor. The financier is known ad “rab-al-maal” and the entrepreneur as “mudarib”. As a financing technique adopted by Islamic bank it is a contract in which all the capital is provided by the Islamic bank while the business is managed by the other party. The profit is shared in pre-agreed ratios, and loss, if any, unless caused by negligence or violation of terms of the contract by the “mudarib” is borne by the Islamic bank. The bank passes on this loss to the depositors.

♦ Qur’an: Devine Book of Islam. ♦ Riba: An excess or increase. It covers interest both on commercial and

consumer loans. ♦ Ryals: Saudi Currency. ♦ Sharia: The way of Allah as shown by the Qur’an and the Sunnah of the

Prophet Muhammad (PBUH). The term is used to refer to the Islamic law. ♦ Tabarru: To donate for benefits of others. ♦ Takaful: Mutual support which is the basis of the concept of insurance or

solidarity among Muslims. ♦ Takaful Ta’awani: Mutual Insurance. ♦ Wakalah: Agency.

REFERENCES www.insurancereview.com www.arabianbusiness.com www.asiainsurancereview.com www.icmif.org www.wikipedia.org www.ikhlas4u.com

ABOUT THE AUTHOR The author is an Insurance Consultant with Wipro Technologies, Chennai, India. e-mail: [email protected]

ABOUT WIPRO TECHNOLOGIES Wipro is the first PCMM Level 5 and SEI CMMi Level 5 certified IT Services Company globally. Wipro provides comprehensive IT solutions and services (including systems integration, IS outsourcing, package implementation, software application development and maintenance) and Research & Development services (hardware and software design, development and implementation) to corporations globally. Wipro's unique value proposition is further delivered through our pioneering Offshore Outsourcing Model and stringent Quality Processes of SEI and Six Sigma.


WIPRO IN INSURANCE Wipro Technologies offers world class software and technology solutions for the insurance industry. Wipro has successfully executed several projects spanning Life, P&C, Re-insurance Companies and Insurance Brokers. We address Sales and Distribution, Underwriting, Policy Administration, Accounting, Claims Processing and Back-office. Wipro’s unique value proposition is delivered through our pioneering Offshore Development Model and stringent Quality Processes including ISO 9000, SEI CMM Level 5 and Six Sigma.

http://www.wipro.com/financesolutions/insurance/index.htm For more white papers logon to http://www.wipro.com/financesolutions/bfsiwp.htm © Copyright 2003. Wipro Technologies. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without express written permission from Wipro Technologies. Specifications subject to change without notice. All other trademarks mentioned herein are the property of their respective owners. Specifications subject to change without notice.

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