The Retakaful market: Challenges Ahead … By Chakib Abouzaid C.E.O. Takaful Re

1. The Retakaful market: Challenges Ahead…By Chakib Abouzaid C.E.O. Takaful Re 09th,10th April 2006, Dubai International Insurance SocietyBerlin July 2007

2. Redefining the Industry: Regulation, Risk and Global Strategy Product Horizon for a New Age: Takaful Chakib Abouzaid C.E.O Takaful Re

3. Agenda • Takaful? • Definitions • Background • Models • Industry characteristics • Potential: • Insurance penetration / density in the ME • Challenges • Re Takaful • F.A.Q • Conclusions / Strategy

4. Takaful? Definitions • Takaful: To guarantee /help each other, The concept of Takaful, or Islamic insurance, where resources are pooled to help the needy does not contradict Shari 'a. The concept is in line with the principles of compensation and shared responsibilities among the community. It is not a new concept, in fact it had been practiced byMuslim communities. • What makes Takaful not acceptable to the scholars? • Uncertainty (Gharar) • Interest (Riba) • Gambling (Maisir)

5. Background • 1979: Pioneer’s phase: Sudan & Saudi Arabia. • 1985: First Retakaful operator launched. • 1984 to 2004: • expansion in Malaysia & Far East countries, • 2004 till now: • boom in Middle & Far East • The recent developments following the oil prices increase and the Islamic finance boom, new Takaful companies started operations in different countries: UK, South Africa, Saudi Arabia, Kuwait, UAE, and Malaysia.

6. Main models • Al Moudharaba (Profit sharing), • Used mainly in the Far East • Al Wakala: Management for a “up front” fee • Middle East • The trend is for a combination of both models: • Wakala for underwriting. • Mudharaba for investment

7. Example of al Mudharaba Model Takaful contribution (premium) Management expenses Takaful Pool Participants’ fund Takaful pool investment return Underwriting Surplus/ Deficit Investment performance fee Takaful operator

8. Wakala model Participants Wakala Fee Wakala Fee Contributions • Claims, • Reinsurance, • Reserves Takaful fund Investment Income Surplus Shareholder's fund Policyholder's fund

9. Islamic (*) / Takaful Industry - Characteristics • Takaful contributions : USD 4.3 billion (2005 Estimate) • Number of companies: 107 • Lack of statistics & information • Takaful operators are mostly new companies, local & small size players • Lack of Market research and R&D • Lack of expertise & standardization • Limited investment opportunities • Rely heavilyon Conventional Reinsurance However, umber and size of the operators are increasing. And the demand for the Shari'a compliant capacity is expected to grow with the industry. Islamic = Takaful + cooperative (KSA) + Iranian Market

10. Islamic (*) / Takaful Industry - Statistics (1) The Middle East including GCC was ranked 1st region worldwide in terms of Total Takaful Contribution Income.

11. Islamic (*) / Takaful Industry - Statistics (2) Arab countries

12. Islamic (*) / Takaful Industry - Statistics (3) Non-Arab Countries

13. Potential • The boom of the Islamic Finance is boosting the Takaful, • The oil prices increase is generating a huge surplus looking for opportunities inside the Middle & Far East, • New infrastructure projects, new economic cities, and more expatriates in the Gulf region, • Compulsory Medical Insurance (KSA & UAE) and Motor TPL (KSA), • The emergence of an educated new middle class and having more awareness is creating a demand for Shari' a compliant insurance solutions, • The low level of penetration and density and the volume of the Muslim population are huge opportunities for the global industry, requiring an adequate supply.

14. Potential: Insurance penetration & density in MENA region & Far East Source: Sigma Swiss Re 5/2006

15. Challenges for Takaful

16. Need for Retakaful • Retakaful was the “missing link” in the Takaful operation. • The existing capacities are still not sufficient to meet the demand. • Shari 'a Compliance: • The Takaful operators are required to cede to the existing Shari’a compliant capacities. • With the number of Re Takaful increasing, in the medium to long term, the obligation to cede to Retakaful will be implemented except for large risks and/or special lines

17. F.A.Q (1) • Is Takaful for Muslims only? • No, Takaful is an ethical and/or socially acceptable approach to insurance, • In Malaysia, the new licensed companies are “Chinese” and targeting both Muslim & Non Muslim population • Is Takaful different from conventional? • No, for technical matters: • The Risk Management and Underwriting are the same, • Yes, on the Business Model • Funds segregation, • Commitment to the surplus distribution to the policyholder's • Takaful is the solution acceptable from a Shari' a point of view, • Takaful is following the mutual principles,

18. F.A.Q (2) • Takaful “fashion” or trend? • 107 companies, from which 65 minimum are pure Takaful, • Islamic finance boom (USD 40 billion in Islamic bonds), • Conversion of some players to Takaful (Saudi Arabia) • New Takaful in UK, • Interest from the big players (AIG, HSBC, Swiss Re, Munich Re, Hannover…) • Why the big players are interested in Takaful? • Takaful is still a small but fast growing segment,; however, • Niche market to be explored & increasing demand from Middle & far East countries, and Muslim communities in the west, • Not to loose their market share, • Huge potential.

19. F.A.Q (3) • Is the Takaful business model viable? • Shareholder’s have 3 sources of income; • Return on capital, • Wakala, • And/or Mudharaba • What happen in case of an underwriting loss? • Free interest loan from the shareholder’s to the policyholder’s fund, to be reimbursed in the following years from any surplus. In practice, there is no case where the shareholder’s were obliged to finance an underwriting loss. • Is the pricing the same for Takaful? • The pricing should take into consideration the Wakala fee, which includes the cost of the capital, • The Takaful are competing against the conventional; therefore their pricing cannot be much different, in order to win their market share.

20. F.A.Q (4) • Is Takaful a marketing tool? • Why not? If it could increase the awareness and the penetration of insurance, • However, Takaful operators should also stick on the values of: • Solidarity, • Compliance, • Tolerance, • Professionalism & Ethics. • What are the conditions to be Takaful company: • Shari' a Board is a must, • Funds segregation, • Surplus Distribution, • Investment on Shari' a compliant instruments

21. Conclusion • Takaful is now a trend and no more a “fashion” or an exotic phenomena.Takaful operators must: • Bench mark themselves against the international • players, • Differentiate themselves by being innovative, • Add value to the customers and expand their market • share, • Corporate governance & compliance, • Takaful have to learn from the conventional experience and to look for moresynergy between the two models. • .

22. Strategy for Takaful? Medium term strategy: • To target retail business • Small & medium size business, • Personal lines & Family Takaful (Life) • Long term strategy: • To move from retail to corporate, • Industrial risks • Micro insurance At this stage, Takaful have no specific strategy and are competing with the conventional for same business; this is will not increase the penetration. Individuals are more sensitive to Takaful argument and corporations to the price vs. Coverage.

23. Takaful isabout solidarity and mutuality and not about religion.It’s a commitment to values. Without commitment, there is no credibility & no future for Takaful industry Thank you… www.takaful-re.ae