Family Retakaful Missions

Revisited in View of Current Financial Turmoil

Current Financial Crisis

Introduction

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● Triggered by US Housing-sub-prime crisis in august 2007.

● Became a huge Bank Liquidity Crisis within 6 to 9 months.

● Worst Financial/Economic crisis since 1929 (Great Depression)

● Global, it is affecting all Economic sectors worldwide.● Especially Banking and Insurance sectors are

dramatically hit.

Current Financial Crisis

Introduction

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● Stimulus plans by Gvnts by injecting trillions of dollars in the global economic system.

● So far, no one knows how efficient these actions will be.

● Stock markets still responding in an erratic manner and confidence is yet to be regained.

Current Financial Crisis

Impact on Conventional Financial sector

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● Crisis spread to the rest of the world impacting stock market, banks and insurance industry.

● AIG case due to problematic investments in securitization products while their core business is sound.

● Yamamoto Life and other well known companies followed revealing toxic assets damaging their balance sheets.

Current Financial Crisis

Impact on Islamic Financial sector

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● Shariaa compliance prevented Islamic companies from investing in Financial instruments, lending transactions and project finance without tangible assets as a collateral security.

● Excepting some “sukuks” (85% of which were considered by AAOIFI as non shariaa compliant before this Financial crisis).

● There is no known exposure by Islamic Banks or Takafuls to risks of credit defaults, swaps or other derivative driven instruments.

Current Financial Crisis

Impact on Islamic Financial sector

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● Islamic Financial System showed a certain ability to remain largely safe.

● Only at the end of 2008, several Islamic Financial Institutions were impacted by this crisis.

● Mainly in the forms of Credit squeeze and greatly depressed asset and equity prices.

Current Financial Crisis

Impact on Islamic Financial sector

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●Some Takafuls showed a drop in their short term financial performances .●Certain companies have already been put on negative watch by rating agencies.●Decline in value is much less than that of developed countries conventional insurance companies.

Current Financial Crisis

Impact on Islamic Financial sector

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●Like the conventional sector, Takafuls have to overcome the difficulties generated by the economic crisis, especially on the investment front.●Subsidizing technical losses with investment income is no more possible.●Takaful industry will have to capitalize on their strengths that allowed them to be resilient to this crisis .

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Current Financial CrisisThree Main Findings

Family Retakaful

Back to basics

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●Bottom line is generated from both technical and financials●Family Retakaful caters for specific demands of Takafuls.●Family Retakaful covers are mid to long term in nature●Family Retakaful companies are committed to develop Family Takaful industry

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Family Retakaful Missions Drivers of the demand

● Reduced volatiliy of the underwriting result (large risks or claims variation due to mortality deviation)

● Capital relief and flexible financing (Capital requirement reduction and free capital for expansion into new lines)

● Access to Retakaful expertise and services especially in:● Product development● Pricing● Underwriting● Claims management

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Family Retakaful Missions Structure and safeguard its portfolio● Spread its activity over many countries.● Keeps its probability of ruin low through:

● Suitable acceptance and underwriting policy.● Maintain long term client relationship to achieve

compensation in time.● Retrocede those risks which exceed its own

capacity.

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Family Retakaful Missions Financially secure● Effective management of the three main activity

risks:● Underwriting● Capital management● Asset management

● Efficient corporate governance

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Family Retakaful Missions Underwriting● Underwriting is the process of examining,

classifying and pricing risks.● Underwriting process aims to ensure that:

● Risks are assessed properly and terms and conditions are adequate.

● Limits of assigned capacity are respected.● Controls of accumulations and peak risks.● Pricing and wording are appropriate.

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Family Retakaful Missions Pricing● Should be sufficient to cover

● Expected cost ● Acquiring the business, & Administrating it

(Wakala fee)● Paying the claims.● Finance a profit for the shareholders

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Family Retakaful Missions Asset management● Family Retakafuls invest the contributions received

in the capital markets according to limits and guidelines (Financial and shariaa).

● Ensure that assets are allocated in a way that matches the features of the related liabilities and

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Family Retakaful Missions Capital management● Capital acts as a buffer against unexpected losses.● Family Retakaful capital has to be appropriate to its

risk profile and appetite.

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Current Financial CrisisThree Main Findings

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Regulation

Young industry, evolving regulation

● Regulation at different evolution stages from market to market.

● RBC regimes at different stages of discussion or implementation in markets like Malaysia.

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Shariaa compliance

Towards more standardisation

● Standardisation of operating models is required..● Varying interpretations in Islamic law remains a

challenge.

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Freedom of contract

Legal security

● The contract determines what risks are covered. So freedom of contract is essential for an efficient Retakaful market.

● No retroactive application of a law.● With this, the only limit of the list of covers will be

its insurability.

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International Risk transfer

Free capital flow

● Family Retakafuls have to act globally to balance their portfolio (law of large numbers).

● Cross-border operations. ● Free to use worldwide premium income to pay

worldwide claims. ● No restrictions (such as deposits requirements) are

preferable for achieving the best value for money.

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Capital requirements

Take into account Retakafuls spec.

● Promote transparency and aknowledge Family Retakaful Cies Risk models are preferable.

● They take into account their broad portfolio diversification & superior Risk Management capabilities.

● Preserves confidence in the robustness of the Family Retakaful companies.

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Current Financial CrisisThree Main Findings

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Opportunities1/5th world population are muslims

Big Dev potential

Huge dev potential

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Potential=Balance to reach developed countries penetration levels

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Huge opportunities

& Challenges

●Family Takaful could stimulate the underdeveloped life market in emerging and especially Middle East.●Shortage of Islamic investment opportunities and the lack of liquid markets for Islamic bonds.●Staff with insurance and shariaa expertise is scarce.●Limited number of Shariaa scholars.

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Huge opportunities

& Challenges

●Family Retakaful Companies, by providing sound financial support and needed expertise, can make it much easier for local Takaful Companies to achieve their forecast big development potential.

Thank you