SUDAN Outperforming the Region

2. SUDAN Outperforming the Region

3. Introduction This presentation is not a case study on Shiekan Insurance & Reinsurance Company, it is on the market experience since the whole market is a Takaful market. But at the end I will submit a short presentation on Shiekan as successful model in the Sudanese Insurance Market

4. Sudan started Islamic Insurance in 1979. In 1992 a new supervision law was issued under which all companies are required to operate according to Sharia principles. The 1992 Act activated article 487 of the Civil Transaction Act 1984. The 1992 Act was replaced by the 2001 Supervision Act. In 2003 Insurance and Takaful Act was issued. This latter act is implemented by the courts.

5. Major Difference between Traditional and Islamic Contracts Traditional Ins. Contract is the contract of financial exchange containing Gharar Uncertainty) which made the ins. Sale contract void as per Sharia rules The uncertainty is the core of ins. Islamic cooperative contracts are donation contract

6. 1- The Framework 1-1 The Model Islamic Cooperative Insurance and Takaful are practiced under a mixed model. Wakala for insurance activities and Mudaraba for investment. 1-1-1 Alwakala: The Company as Manager for policyholders account look after the technical and administrative activities of the policyholders fund for a fee which is a portion of the contributions (actual management expenses).

7. 1-1-2 Almudaraba The company invests the shareholders fund according to Mudaraba agreement in which the company is the Mud rib and the shareholders are the owners of the money (arbab almal) Profits are distributed between shareholders and policyholders. 1-2 The Principles Sudan experience is based on the common principles of Takaful cooperative insurance which are distinguished from traditional insurance , these are:-

8. 1-2-1 Sharia Compliant transactions: Not only the contract between the company and the participant has to be sharia compliant, but all activities of the company have to be free from any contravention of sharia rules e.g. the subject matter of the contracts, the investment avenues …etc. 1-2-2 Contributions are paid as donations in whole or in part to a common fund: participants (policyholders) fund.

9. 1-2-3 Technical and management expenses are met from the participants fund. The surplus in the fund belongs to the participants , the company has no claim on it. Participants meet the deficit in the fund themselves if it can not be met from reinsurance, reserves or "Quard Hassan" from shareholders. 1-2-4 Share capital is to be kept in a separate fund. Shareholders are under no obligation to make good bad underwriting results.

10. 2- The Practice We highlight hereunder the main characteristics of cooperative Islamic insurance practice 2-1 Sharia Supervision Compliance with sharia is controlled at two levels: The High Sharia Supervisory Board (HSSB) and the companies Sharia Supervisory Boards. These Boards are not ad hoc, their work is continuous.

11. 2-1-1 The High Sharia Supervisory Board (HSSB): Formed under Article (7) of 1992 Act, its members come from sharia, legal, economics and insurance professions. The HSSB is part of ISA structure. The objectives of the Board are:- To give sharia point of view “fatwa” on all matters raised to it. To remove from the insurance system any non- Islamic transactions. To unify the concept of Sharia Supervisory Boards of the insurance companies on Islamic transactions in insurance, finance and economics

12. The order detailed the functions of the Board as follows:- To revise policy wording for all types of insurance in collaboration with the Insurance Supervisory Authority and the specialized people in the insurance sector. To approve Islamic models of insurance transactions. To advise and to give opinion on matters referred to it by the Insurance Supervisory Authority. To study and suggest solutions for the problems that face the insurance sector with regards to the application of sharia principles to insurance. To revise all laws that regulate insurance to remove any contradictions with sharia principles.

13. To follow up the implementation of sharia with regards to insurance and investment transaction. To help the Insurance Supervisory Authority in formulating appropriate training programmes for its staff in Islamic insurance models and Islamic aspects of other financial transactions. To submit to the Minister of Finance annual reports on the consistency of insurance transactions with sharia principles. To prepare studies and researches that enhance implementation of Islamic insurance. Any other functions which the Board deems necessary to achieve its objectives.

14. The High Sharia Supervisory Board has the final decision in cases where there are different opinions on an issue specific to insurance. To carry out its functions, the Board is empowered to read any document, register, contract or correspondence belonging to the Insurance Supervisory Authority or any other body regulated by the Insurance Supervision Act. The Board is also empowered to inspect insurance companies to ensure proper implementation of Sharia principles.

15. 2-1-2.Companies’ Sharia Supervisory Boards (SSB):- Every company has its SSB. Consist of three, two of whom must be sharia Scholars, the third from the legal profession but must be well versed in sharia. Nominations to the membership of SSB are made by the management after approval by the general assembly, they have to be ratified by HSSB. Vacancies are filled in the same way.

16. The role of SSB covers the following Revising policy wording and all text that the company uses. Examining and revising all company transactions. Issuing fatwa on matters refered to it by the company. Attending the shareholders and policyholders general meetings. The chairman or any SSB member has the right to attend a BOD meeting. SSB certifies conformity of the company’s performance with sharia principles. It discusses with management the contents of the financial statements and the directors report.

17. The Insurance Supervisory Authority will not check the audited accounts of a company unless a certificate from SSB that there is no contravention with sharia is attached thereto.

18. 2-2. Technical Aspects Islamic Insurance practice touched the technical aspects of insurance in very few areas: 2-2-1. Underwriting and claims settlement: Underwriting remains the same except for the limitation that the insured

19. subject matter should not contravene any sharia rule, bars and breweries are typical examples. HSSB has banned insurance of certain risks such as performance guarantee 2-2-2. Reserves Technical reserves are kept as required by the Insurance Supervision Regulations of 2002. HSSB directed the companies not to distribute surplus to the policyholders until there are enough free reserves in the policyholders account.

20. 2-2-3. Reinsurance Reinsurance with non Islamic reinsurers is allowed only due to necessity. Reinsurance is transacted in the following priorities:- Local Islamic reinsurer (the National Reinsurance co.). Foreign Islamic reinsurers (e.g. Takaful Re.) Cooperative reinsurers. Mutual reinsurers. Others.

21. HSSB allowed reinsurance with reinsurance companies which are established under regional agreements to which Sudan is a signatory, (national interest) When dealing with a conventional reinsurers an Islamic insurer should not:- Receive any commission from reinsurer, to deal on net premium basis. Pay any interest on the premium reserves Receive any profit commission from reinsurers.

22. 2-2-4. Accounts The most important feature of the accounts is the clear distinction between Policyholders and Shareholders funds. Starting 2006 results, companies have to disclose their financial performance according to AAOIFI standard 12. The detailed information required by the statements and the accompanying explanatory notes will give a transparent view of the financial positions of the companies

23. 2-3. Investment 2-3-1. Investment Model The company under Mudaraba arrangement invests Shareholders fund. The company is the mudarib and participates in the profits at a preagreed rate as explained earlier. Shiekan Insurance Company SSB has recently issued a fatwa, on the co-investment of policyholder and shareholders funds. The fatwa which has been ratified by HSSB and implemented by many companies, put the following conditions:

24. Shareholders should establish an independent investment department (independent from the company) and bear all its management expenses. Profits are divided equally or at preagreed rates between shareholders and policyholders. Shareholders are responsible for any loss attributed to the negligence or incompetence of the investment department appointed by them:

25. Investment returns under this fatwa proved to be very rewarding for shareholders. It mitigated their complains that the Islamic system has deprived them from what they used to get from the companies which they had established long before the practice of Islamic Insurance.

26. 2-3-2. Investment Avenues HSSB and companies SSB check investment contracts for conformity with sharia principles. The companies select the avenues that they deem best. The Insurance Supervisory Authority decides on the investment of the statutory reserves. So for Sudanese companies have no problem in finding sharia compliant instruments since all economic activities in the country are sharia compliant and the companies are investing in national portfolios. All civil transactions are governed by the Civil Transaction Act 1984 which is enacted according to sharia rules.

27. 2-4. Policyholders Rights: Policyholders have the right to monitor the performance of the company in two ways 2-4-1. Policyholders General Assembly: Before the shareholders general assembly convenes, every company should invite its policyholders for a general assembly. In principle every policyholder is a member of this assembly, but in practice only policyholders with a minimum contribution (premium) as fixed by the BOD are invited. The meeting agenda are:

28. The annual audited accounts and the directors report . Comments and recommendations to the shareholders and BOD on the performance of the company and all relevant matters. BOD recommendation on surplus. Election of representatives to the shareholders general assembly and the BOD. Distribution of surplus is always a hot item in the agenda of the policyholder assembly. The attending of the general assembly is fixed by the company.

29. 4-2. Policyholders Membership in the BOD Policyholders elect one or two members from the policyholders general assembly for membership of the BOD.

30. 2-4-3. Insurance and Takaful Act 2003. This piece of legislation, which is implemented by the courts is issued for the protection of policyholders by regulating the contractual relationship between the parties to insurance and takaful contracts. Some articles of the law state the void and violable conditions in the policies which affect the policyholder rights to indemnity e.g. “any condition in an insurance or takaful contract which deprives an insured from his right to indemnity due to a law offence, as far as that offence is not a crime committed intentionally, is void etc……

31. 2-5. Policyholders Protection 2-5-1. Policyholders Protection Fund Insurance Supervision Act 2001 has recently been amended to give the Minister of Finance and National Economy the right to establish the fund. The fund will help Islamic Cooperative Insurance companies to meet their obligations towards policyholders in case the policyholders fund is short of meeting such obligations. The main source of the fund is contributions made by Islamic Cooperative companies from their gross premiums. Donations and other payments can be made subject to the consent of the HSSB. The fund will be engaged by the Insurance Supervisory Authority the companies are represented in its Board of Trustees.

32. 2-5-2. Supervisory Measures Examples of these measures are: The Insurance Supervisory Authority may revoke a licence of a company if that company proved, among other things, to be unable to meet its obligations towards its policyholders. The Act details the steps to be taken by ISA in case of revocation. ISA revoked two licenses in 2002 for insolvency, it suspended two licenses temporarily during 2005. A company should get the approval of ISA before it change or amend any information contained in its application for licence. ISA may not approve the change if it affects the policyholders rights.

33. 3- The Stakeholders 3-1 Shareholders The rights and obligations of shareholders are dealt with in detail in the Companies Act. These rights and obligations are not specific to shareholders in insurance companies. The standard memorandum and articles of association of insurance companies are drafted within the requirements of the Companies Act.. The only reference to shareholders under The Insurance Supervision Act 2001 is under “Credit and Finance” whereby a company should not give credit to or finance any of its directors or shareholders or guarantee their debts to others before it gets the approval of ISA.

34. 3-2 Employees Each company has its terms and conditions of service which are governed by the provisions of the Employment Act. The benefits in the Act are minimum. Insurance companies are among the best employers in the country. 3-3 The Insurance Supervisory Authority (ISA) ISA implements the Insurance Supervision Act 2001 and the Insurance Supervision Regulations 2002. Both Act and Regulation need to be redrafted to incorporate the standards of corporate governance, risk management, solvency and all issues relevant to prudent insurance supervision.

35. Challenges Facing Sudanese Insurance Industry Low of disposable income Lack of Insurance awareness Islamic Reinsurance (Retakaful) Training and Human resources Marketing Problems

36. Shiekan Insurance & Reinsurance Co. Ltd. Established 1983. 62% Market Share 2006 $125m Prem. Income 2006 1000 employees 28 branches all over Sudan All Traditional Classes of Insurance, plus : Agriculture (Crops & Livestock) Medical (Group & Family), Travel … & Export Credit Insurance

37. Shiekan Ins.-Agri Ins.2000-2007 Agricultural Ins. Is known worldwide as one of the most difficult among all types of ins. Covers. Agri. Hazards are considered catastrophic with enormous losses. That is why most insurance companies stay away from it. That is why Agri. Cover is almost impossible in developing countries where the support is hardly available in addition to this the diversity of crops and Agri. System to hydroponics and biotechnology. With respect to the national responsibility of supporting the national economy Shiekan Ins. Co. ventured to practic the complex agri. cover

38. Global Agricultural Ins. Market North America 44% Latin America 5% Central/East Europe 5% West Europe 31% Asia/Pacific 7% Asia 3% Africa/M`east 5%

39. Government subsidy 2002/2003 1,000,000 50% 2003/2004 1,016,747 50% 2004/2005 2,444,839 50% 2005/2006 2,560,394 50% 2006l2007 6,904,000 50% Total 13,925,981

40. Medical & travel Insurance 2003 2004 2005 2006 2007 Premium 3,7 4,6 12,8 16,1 25,0 Insured Members 11879 17875 19085 42152 58000 Loss Ratio 51,7% 97% 60% 79% 70% In Thousand SDG

42.  Rating Shiekan has been rated BBB (Stable Outlook) - by a regional rating agency- . reflecting a good liquidity position and a good underwriting profitability of the company as compared to its peers in the Arab region.  The regional rating comes as preparatory to S&P rating which the company will conduct soon. Shiekan Member of CreditAllinace In an endeavour to enhance its export credit insurance business, Shiekan has joined the Coface CreditAlliance network in 2007, thus benefiting from a fabulous worldwide source of credit information.

43. Shiekan acquired the ISO 9001-2000 certification Shiekan acquired the ISO 9001-2000 certification in April 2006 in management systems, Provision of Insurance Services, by the British Standards Institute (BSI) London. Shiekan, being the fist Sudanese insurer to have obtained such a certification, is pursuing to win the Excellence & Quality Award 2007 of European Foundation for Quality Management (EFQM) in Sudan.

44. Sudanese Market & Shiekan Insurance Co.Premium Income Growth (in Thousand SDG)

46. Today Takaful is gaining an ever-increasing global recognition, major players stepping in: Munich Re, Honover Re , HSBC, Lloyd ……. The global premium income is estimated to reach US$7,5 billion,

47. The effects of application of cooperative Insurance in Sudan First: The Social Effects Second: The Economical Effects

48. ?Applying the cooperative Insurance has had a very great and positive impact on the field of Insurance Industry in Sudan. The outlook towards Insurance has changed drastically from something against Islamic Sharia to a kind of good and pious activity seeking the benefit of the society. This has persuaded the Insurance companies to promote their activities and develop different types of Insurance to meet different needs of their clients. Conclusion

49. I hope the greatest success for your conference. Thank you Osman El Hadi Ibrahim Managing Director Sheikan Insurance & Reinsurance Company Khartoum / Sudan