salaam insurance

8/17/2019 Salaam Insurance

1/23

Identifying Causes for the Failureof Salaam Halal Insurance

Dr Aqsa AzizLecturer in Finance

http://www.google.co.uk/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&docid=4XEAVDjgnwlHzM&tbnid=dDpL3pBeuYYXPM:&ved=0CAUQjRw&url=http://www.tge-group.co.uk/case-studies/coventry-university&ei=EZ6sU86yKvGa0AWejoGgDw&bvm=bv.69837884,d.d2k&psig=AFQjCNHywV3cBSoWtx3bbv_2rmnrpzUJIQ&ust=1403907983316868


2/23

Background

• Salaam was the first Motor Takaful provider in the UK andreceived FSA authorisation in May 2008 raising >£60 millionof capital.

• Its aim was to provide British Muslims with insurance thatwas compliant with their faith.

• Former CEO of Salaam, Bradley Brandon-Cross stated that:

‘........conventional UK insurance options are in conflict withIslam and this creates a dilemma for British Muslims. Weare planning to create a British insurer that operates in away that removes this dilemma and creates an exciting newsector in the British insurance market ’.


3/23

Marketing Strategy

• Product was launched using an extensive marketingcampaign

•Salaam employed a number of marketing strategies: – Direct mail

– TV advertising

– Radio advertising

–Online advertising

– Outdoor campaign in target areas

– Community outreach programmes


4/23

Salaam advertisement.....

Source: Brandon - Cross, B. 2008


5/23

Model used by Salaam to illustrate how Takaful operates

Source: Sherzod, 2009


6/23

Salaam ran into

problems......

• In November, 2009 Salaam closed to newbusiness with the CEO stating that:

‘‘we are in a period of solvent run-off, which meansthat while we continue to offer existing policyholders

our full support, we are not providing any further

policies to new or existing customers at this time” .

• Reasons provided for the closure were that thecompany had failed to raise sufficient capital to

continue trading


7/23

Was the reason for Salaam’s failure due

to insufficient capital as claimed or were

there other underlying factors that

contributed to their failure?


8/23

Literature Review

• Anderson and Formisano (1988) found causes for insurance insolvency included: rapid growth and expansion, inadequate pricing, under-reserving, poor

underwriting, re-insurance failures and general management weakness

•

Rappaport (1989) found under pricing, fraud and failure of state supervision

• Report on ‘Failed Promises: Insurance Company Insolvencies’ by US House of

Representatives Energy and Commerce Subcommittee found:

excessive delegation of management, under-pricing, under-reserving, rapid

growth, over reliance on re-insurance and incompetent management

• Standard & Poor’s (2013) found poor liquidity management, under-pricing & under

reserving, high tolerance for investment risk, management issues and difficulties

related to rapid growth.


9/23

Literature Review

• A.M. Best (1999) looked out 640 US Companies who failed, and for 426

cases identified the primary cause of failure as shown below:

Primary Causes Number of

Companies

% of Total

Identified

Insufficient Reserves 145 34%

Rapid growth 86 20%

Alleged Fraud 44 10%

Overstated Assets 39 9%Catastrophe Losses 36 8%

Significant change in Business 28 7%

Impaired Affiliate 26 6%

Reinsurance Failure 22 5%


10/23

Research Methodology

CASE STUDY APPROACH

• Primary Data – Questionnaires:1. Shar’iah Scholars – SSB of Salaam

2. Former employees of Salaam

3. Former clients of Salaam

• Secondary Data:

1. Directors Report and Financial Statements of Salaam2. ABI Reports

3. Various websites

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.softwareag.com/blog/reality_check/index.php/soa-what/how-to-make-soa-a-boardroom-discussion/attachment/boardroom/&ei=52_aVLm8IoT1arnJgugH&bvm=bv.85464276,d.d24&psig=AFQjCNE6EknuNjIqxfjwXVYVHGKDwUg2LA&ust=1423688038369571


11/23

Response from the Shar’iah

Supervisory Board (SSB) of Salaam

Sheikh Nizam Yaquby

Dr Mohammad Elgari

Mufti Barkatullah

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.softwareag.com/blog/reality_check/index.php/soa-what/how-to-make-soa-a-boardroom-discussion/attachment/boardroom/&ei=52_aVLm8IoT1arnJgugH&bvm=bv.85464276,d.d24&psig=AFQjCNE6EknuNjIqxfjwXVYVHGKDwUg2LA&ust=1423688038369571http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.softwareag.com/blog/reality_check/index.php/soa-what/how-to-make-soa-a-boardroom-discussion/attachment/boardroom/&ei=52_aVLm8IoT1arnJgugH&bvm=bv.85464276,d.d24&psig=AFQjCNE6EknuNjIqxfjwXVYVHGKDwUg2LA&ust=1423688038369571http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.softwareag.com/blog/reality_check/index.php/soa-what/how-to-make-soa-a-boardroom-discussion/attachment/boardroom/&ei=52_aVLm8IoT1arnJgugH&bvm=bv.85464276,d.d24&psig=AFQjCNE6EknuNjIqxfjwXVYVHGKDwUg2LA&ust=1423688038369571


12/23

Response from Former Employees

• 8 out of 20 formeremployees

(40%)

• All respondents had >6 yrsprior relevant experience

Duration for which employed at

Salaam

No. of Respondents

0 – 6 months 1

13 – 18 months 3

19 – 24 months 4

Marketing

Management

Information Technology

Legal & ComplianceUnderwriting


13/23

Data from Clients

• Three former clients completed the questionnaire

(Muslim, male professionals aged between 31 – 50)

• Blog – several comments left by clients


14/23

Findings

INTERNAL FACTORS EXTERNAL FACTORS

1. Pricing

2. Underwriting procedure and

risk assessment

3. Poor management and

handling of administration

expenses

4. Marketing strategy

5. Absence of re-takaful

6. Capital adequacy

1. Incorrect time to enter the

insurance industry

2. Digital transformation


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Pricing

Shar’iah Scholar:

‘Salaam’s initial pricing was not competitive, but at a re-run of pricingmodel they eventually got it right….’

Former Client:

‘Their prices for the first year of operation were extremely high. Whenthey understood that they were not getting the mass required forinsurance operation, they reduced their price significantly and becamethe cheapest in the UK. By that time, it was too late to recover as theyhad spent most of their capital ’

Senior Management:

‘The key factor was the balance between price sensitivity and faith based product choice. Whilst market research and focus groups indicated amarket for an Islamic insurance product in the UK, potential customerswere very price sensitive and would choose the lowest cost insurancerather than a faith based product


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Underwriting and Risk Assessment

£0

£1,000,000

£2,000,000

£3,000,000

£4,000,000

£5,000,000

£6,000,000

£7,000,000

£8,000,000

£9,000,000

£10,000,000

Gross Takaful Contributions Net earned Takaful Contributions Claims & Claims expenses

2009

2008

Salaam’s Comprehensive Income and Claims Expenses Source: PIHL Report (2009)


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Poor Management and Handling of

Administration Expenses

£0

£5,000,000

£10,000,000

£15,000,000

£20,000,000

£25,000,000

Gross Takaful Contributions Takaful Deficit Administrative Expenses

2008

2009

Salaam’s Gross Takaful Contributions in relation to the takaful deficit and administrative expenses.

Source: PIHL Report (2009)

Former Employee: ‘Salaam mismatched its relationship with Capita having opted for a 100%

outsourced model to get to the market quickly ’….


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Marketing Strategy

• 75% of the Employees stated that the target market was‘Muslims’

• Salaam’s financial statements showed that the gross

written takaful contributions increased from £563,955 to£3.64 million in one year

• Former Employee:“the theory driving the business was that Muslim people wouldselect a Halal product; in fact the key factor was price in themarket. Given the target demographic risk and the availability ofHaram products that Muslims were selecting based on price, thebusiness was pressured from the outset ”


19/23

Absence of Re-takaful

Proportion of Takaful Contribution allocated to re-insurance Source: PIHL Report (2009)

• Salaam could have opted for re-takaful (E.g. Hannover Re-takaful).

• Re-takaful provider could have provided them with a benevolent loan

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

2008 2009

Proportion of contribution allocated

to re-insurance


20/23

Capital Adequacy

• Former CEO of Salaam ‘company had failed to raisesufficient capital to continue trading’

• Shar’iah Scholar 1 - ‘Salaam Insurance ran into capital

adequacy risk, therefore voluntary winding up due to failure of raising additional capital during a downturntime.’

•

Shar’iah Scholar 2 - ‘For any insurance company tosucceed, it needs to be well capitalised and must havea long term vision....anything less than 6 – 8 years tocover initial costs would not succeed’


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External Factors

1. Incorrect time to enter the insurance industry – coinciding with the

financial crisis

– 38% employees felt it was incorrect time to enter the insurance

industry

– Statistics from the ABI reports indicate that for 2008 and 2009; the

worldwide motor revenue accounts demonstrated an underwritingloss of £207 million and £1,467 million respectively

2. Digital Transformation

–

Salaam’s launch on a price comparison website was delayed by 6months….

– Senior Mgt : ‘slow technology enablement meant the company spent

more at the outset that it needed to and when it needed to raise

extra fund, the financial markets freeze meant it was unable to raise

more capital ’


22/23

Recommendations for Takaful

Operators

1. Takaful operators should not restrict themselves to the Muslimmarket

2. Risks must be appropriately calculated

3. Pricing should be carried out correctly

4. Costs must be carefully managed

5. Employees should be fully informed about all aspects of theirtakaful products

6. Takaful Operators should opt for re-takaful instead of re-insurance


23/23

Thank you

salaam insurance

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