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

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Presentation Transcript
conventional bonds
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

islamic bonds
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.

the current takaful market
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

focus on life
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

current malaysia family market split by product
Current Malaysia Family MarketSplit by Product
  • Annual Contribution Equivalent Jan – June 2012
implied guarantees
Implied Guarantees

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

unit linked takaful model w akala drip with incentive compensation
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

unit linked takaful model w akala drip with incentive compensation1
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
unit linked takaful model w akala drip with incentive compensation2
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
traditional takaful savings model wakala with mudharaba drip with incentive compensation
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
mrtt model wakala long term risk fund with sharing
MRTT ModelWakala – Long term risk fund with sharing

Participant

Policy Benefit

Contribution (Premium)

50%

Wakala Fee

(Operator)

Risk

Account (Common)

Valuation Surplus

50%

mrtt model wakala long term risk fund with sharing1
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
future product types
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
equity
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
islamic bonds sukuk
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)

sukuk controversy
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)
sukuk challenges
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
fixed deposits
Fixed Deposits
  • Islamic fixed deposits are in the form of mudharaba (profit sharing), wadiah (demand deposits) or commodity murabaha (purchase and reselling of commodities)
real estate
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
conclusion
Conclusion
  • Assets and investments are an integral part of family takaful.
  • Product design needs to take account of the types of assets available
final thought
Final Thought

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