1 / 23

The asset side of Takaful and implications on product design

13 November 2012. The asset side of Takaful and implications on product design. Hassan Scott Odierno, FSA Istanbul. Conventional bonds.

jennis
Download Presentation

The asset side of Takaful and implications on product design

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. 13 November 2012 The asset side of Takaful and implications on product design Hassan Scott Odierno, FSAIstanbul

  2. Conventional bonds Bonds are the backbone of conventional life insurance, providing the means to offer investment return and capital guarantees. Conventional bonds provide guaranteed cash flows which can be used to pay insurance liabilities

  3. Islamic bonds Takaful does not have this asset class as a backbone, thus requiring product design to be different. A few countries such as Malaysia have Islamic bonds with fixed cash flows, but with questionable shariah acceptability it is not clear how long this will continue.

  4. The Current Takaful Market • 2010 Takaful Sales (US$ million): • Total US$4.37 billion excluding Saudi Arabia and Iran, from 2012 EY World Takaful Report 1. Malaysia 1,441 2. UAE 818 3. Sudan 363 4. Indonesia 314 5. Qatar 260

  5. Focus on Life Although general takaful is more common than life (family) worldwide, we will focus on family products as investment returns are more critical

  6. Current Malaysia Family MarketSplit by Product • Annual Contribution Equivalent Jan – June 2012

  7. Implied Guarantees Although we don’t have formal guaranteed investment returns or capital guarantees (yet) in takaful, sometimes guarantees are implied

  8. Unit Linked Takaful ModelWakala – Drip with incentive compensation Participant Policy Benefit Contribution (Premium) 50% 100% Wakala Fee (Operator) Unit Linked Account (PIF) Risk Account (PRF / PSA) Investment Profit NAV and per policy Wakala Fee (Operator) Underwriting Surplus 50% Wakala Fees Operators Fund Actual Management Expenses

  9. Unit Linked Takaful ModelWakala – Drip with incentive compensation • Used for education and retirement savings, often sold with medical coverage as riders • Usually there are several unit funds, such as cash, balanced (bond) and equity

  10. Unit Linked Takaful ModelWakala – Drip with incentive compensation • Ideal to have assets such as bonds, especially when the policy nears maturity • If there are no bond type investments participant must understand the risks he is taking

  11. Traditional Takaful savings modelWakala With Mudharaba – Drip with incentive compensation • Operates similar to the unit linked model but there is only one savings fund, and the operator shares in investment returns • Benefit illustrations must be carefully shown as they could create expectations

  12. MRTT ModelWakala – Long term risk fund with sharing Participant Policy Benefit Contribution (Premium) 50% Wakala Fee (Operator) Risk Account (Common) Valuation Surplus 50%

  13. MRTT ModelWakala – Long term risk fund with sharing • In Malaysia these are single contribution with duration 20 years or more • To match liabilities the assets should be long term Islamic bonds, unavailable in many markets

  14. Future product types • In Malaysia there are discussions on how to provide capital guarantees in takaful (wadiah structure) • Annuities are also being explored • Both will require careful matching of assets and liabilities

  15. Equity • It is possible to invest in equity worldwide on an Islamic basis • Avoid industries such as gambling, pork, alcohol and tobacco • Avoid highly leveraged companies to ensure not indirectly investing in interest bearing asset classes

  16. Islamic Bonds (Sukuk) Sukuktends to look like conventional bonds but would have partial ownership in a debt (sukukmurabaha), asset (sukukijara), project (sukukistisna’) or business (sukukmusharaka)

  17. Sukuk Controversy • The president of the Shariah council of AAOIFI estimated that 85% of all sukuk in existence were not shariah compliant • The Malaysian structure in particular appears identical to conventional bonds (fixed returns)

  18. Sukuk Challenges • Should floating rate sukuk become the norm it will be difficult to match liabilities • Sukuk structures can be very complicated, making it difficult for an operator to understand what exactly are the risks it is taking

  19. Fixed Deposits • Islamic fixed deposits are in the form of mudharaba (profit sharing), wadiah (demand deposits) or commodity murabaha (purchase and reselling of commodities)

  20. Real Estate • Investments can be either directly or in the form of Real Estate Investment Trusts (REIT) • A screening process is done similar to equities with a cleansing process to purify rental from non-permissible activities

  21. Conclusion • Assets and investments are an integral part of family takaful. • Product design needs to take account of the types of assets available

  22. Final Thought With the general lack of guaranteed cash flows of conventional bonds in Takaful, should Takaful have guaranteed features?

  23. Questionshassan.odierno@actuarialpartners.com

More Related