Takaful Products and Development Issues

Sub TopicsClasses of TakafulGeneral Takaful ProductsFamily Takaful ProductsProduct DevelopmentRegulation on Products DevelopmentTakaful Performance by ProductsProduct Development Issues

Class of Takaful BizTwo main types of takaful business -

General Takaful and Family Takaful.

General Takaful provides protection on a short-term basis, normally covering a period of one year.

Family Takaful offers a combination of protection and long-term savings, usually covering a period of more than one year.

General Takaful - CharacteristicsUsually short-term contractsPremiums charged may varyContracts of indemnityPayment of a claim does not terminate a

contract The risk to be insured does not necessarily

increase over time

General TakafulMotorFireEngineeringMarineBondsMisc Accidents

Motor Takaful Comprehensive (Primarily for own damage) Third Party1. Bodily injury2. Property damage Personal Accident

Fire TakafulFire Takaful (fire and lightning) – usually for

properties in general not for dwellingHouseowners (plus other perils) – usually for

private dwellings and bundle with home financing

Consequential LossHome content

Engineering Takaful Usually refered to Plant and Machinery-1. Boliers2. Engine Plant3. Electrical/mechanical4. Lifting machinery

Marine TakafulHull – structural framework of vesselMarine CargoGoods in Transit

MiscellaneousBonds- Advance Payment and PerfomancePersonal AccidentBurglaryWorkman CompensationEmployer LiabilityFidelity GuaranteeMoney in TransitPublic Liability

Family Takaful - CharacteristicsLong term contractsPremium rate is usually fixedPayment of a claim usually terminates a life

insurable contractInsurable interest must be presentThe risk to be insured increases with time

Family TakafulIndividual (endowment)Investment LinkedGroup FamilyGroup CreditHealthCritical IllnessAnnuities

IndividualRegular contributionProvides for protection and savingsUpon maturity to receive the amount

accumulated in the investment account ( some with surplus sharing)

PIA on mudarabahUpon death to receive amount covered

Investment LinkedRegular or Single contributionProvides for protection and savingsParticipant have choice of investmentsCan vary sum to be coveredInclude Capital Protection and Structured

Products

Group FamilyAnnual basisEmployers, association affinity groups,

cooperatives.Usually protection onlySum covered usually fixed or a multiple of

salarySimplified underwritingContribution rates are preferred

Group CreditBundle with bank financial products Single Contribution* (sometimes financed by

the financier)Usually for protectionBenefits assigned to financierReturn of PIA amount on earlier redemption

Health TakafulHospitalization BenefitsDaily Room and BoardSurgical ProceduresPost and Pre Hospitalization CostsGroup or Individual plansAnnual basisSupplementary Spouse and Family benefits

Critical Illness TakafulFor Major Illnesses e.g. cancer, stroke, heart

and kidney failure36 related illnesses Usually individual plans

Product Development Management Committee will evaluate product

proposals. The Shariah Advisory committee will endorse

the product from the Shariah perspective. The Risk Management Committee of the Board

will evaluate the level of risk for the product for endorsement

External Appointed Actuary will attest the pricing and certify the product.

Ratification by the company’s Board of Directors and final approval of the product.

Submission to Regulatory Authority ( e.g. Bank Negara Malaysia) for their endorsement and approval.

BNM Guidelines – JPIT 9Guideline on Family Takaful ProductsActuarial Cert to include profit testingAssumptions must be realistic and prudent Section 3 - AssumptionsSection 4 - Discloser requirements

BNM Guidelines – JPIT 9Assumptions:

MEAve certificate sizeLevel of new businessExpected contingencies- short term v long termInvestmentsTaxesWithdrawal rates

BNM GUIDELINES – JPIT 16Guideline on Medical and Health BusinessSection 8 - Require clear underwriting

policiesSection 10 - Such policies properly

documented and communicated to staff concerned

Section 11- Repudiation of claim during underwriting period

BNM Guidelines – JPIT 16Section 19 - Consistency of definitions

amongst insurersSection 21– Appropriate product design Section 23 - Appropriate pricing policy

BNM GUIDELINES – JPIT 33Guideline on Investment Link BusinessSection 2 – Definition of IL PoliciesSection 4 – Scope of the GuidelinesSection 10,11,- Fund objectives must be clear

and Fund managed by its objectivesSection 14- Funds must be separatedSection 15-19 – Calculation of NAV and unit

price; company is responsible for any mistake.Section 24 – Minimum Death BenefitsSection 30 – Cooling off period of 15 days

BNM GUIDELINES – JPIT 33Section 34 – Allowable Charges to the FundSection 37 – Maximum Fund Management FeeSection 40 – Commissions for Single and Annual

premium policies ; Max 160% over 6 yearsSection 50 – sales illustration must meet the

minimum requirement with respect to content and disclosures

Section 54 – Must provide at least an annual report Section 57 to 59 – Must invest as illustrated, any

rebalancing must be done in 60 daysSection 75 – Only agents with CEILI can market IL

BNM GUIDELINES – JPIT 33

Capital Protected (Structured) IL1. 100% capital protection at maturity of 3 years

2. Takaful Protection up to 125% of Investment amount

3. Unique & Diversified twin exposure to High Demand Commodities (Oil, Copper & Zinc) and Real Estate Assets from Japan and Europe

4. Guaranteed highest return from the best portfolio (which offers investors a chance to earn as high as 15% p.a.)

Capital Protected IL

Initial Charges Max of 3.00% of Single Contribution

Commission Structure (Wakalah Fee to Distributor)

Max of 1.25% of Single Contribution(Inclusive in the above 3.00% Initial Charges)

Surrender /Premature Withdrawal Charges

None

Tabarru’ Charges

Max 0.5% of Single Contribution (inclusive in the 3.00% Initial Charges)

Wakalah Fee on Investment Return in Participant’s Inv. Account

10% of the investment return generated from the Participant’s Investment Account will be distributed to the Operator.

Family Takaful 603.7

725.5

1,266.6

1,467.2

1,905.4

Growth of Family Takaful New Business

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

2004 2005 2006 2007 2008*

Co

ntr

ibu

tio

ns

(RM

'mil

lio

n)

Individual Ordinary Group Ordinary Annuity Investment Link

29.9%

15.8%74.6%

20.2%18.1%

CAGR 31.7%

Data Source: BNM & ISM

Growth of Life Insurance New Business

-

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

2004 2005 2006 2007 2008

Pre

miu

ms

(RM

'mil

lio

n)

Individual Ordinary Group Ordinary Annuity Investment Link

32.1%0.5% 8.9%

6.1% -6.0%

CAGR 8.3%

Data Source: LIAM

Life Insurance 6,533.3

6,563.5

7,150.3

7,584.7

7,127.0

Takaful v Insurance in Malaysia

Market Share (Insurance vs. Takaful)

-

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

2004 2005 2006 2007 2008Pre

miu

ms

+ C

on

trib

uti

on

s (R

M

'mil

lio

n)

Life Insurance Family Takaful

Market Share 2004 2005 2006 2007 2008

Family Takaful 8.5% 10.0% 15.0% 16.2% 21.1%

Life Insurance 91.5% 90.0% 85.0% 83.8% 78.9%

Takaful v Insurance in Malaysia

Growth of General Takaful Business

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

900.0

2004 2005 2006 2007 2008Gro

ss C

on

trib

uti

on

s (R

M 'm

illi

on

)

Fire Motor MAT Misc

CAGR 16.6%

22.2%12.1%

28.5% -1.9%

22.0%

Data Source: ISM

Growth of General Insurance Business

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

2004 2005 2006 2007 2008

Gro

ss P

rem

ium

s (R

M 'm

illi

on

)

Fire Motor MAT Misc

CAGR 6.4%

10.0%-10.0%

7.2%

20.5%

Data Source: PIAM

4.3%

Takaful 491.9 551.4 708.8 695.2 848.1

Insurance 8,520.4 9,369.6 8,431.8 9,041.0 10,895.6

Takaful v Insurance in Malaysia

Market Share (Insurance vs. Takaful)

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0

2004 2005 2006 2007 2008Gro

ss P

rem

ium

+ C

on

trib

uti

on

s (R

M

'mil

lio

n)

Insurance Takaful

2004 2005 2006 2007 2008

Takaful 5.5% 5.6% 7.8% 7.1% 7.2%

Insurance 94.5% 94.4% 92.2% 92.9% 92.8%

100.0% 100.0% 100.0% 100.0% 100.0%

Takaful v Insurance in Malaysia

Takaful v Insurance in Malaysia

Growth Rate (Last 3yrs)

Asset size % GNICont/Prem % GNIAve Life Policy SizeAve Life Cont/PremAgents (per Co.)

Employees (per Co.)

Takaful Insurance

32.0% 6.7%

1.5% 18.3%

0.4% 3.8%

RM 40,000 RM 70,000

RM 900 RM 1,400

60,197

(7,525)*

113,653

(2706)*

2,411 (301) 20,825 (496)

*Life – 5528:4680

ISSUES Choice of Takaful Model The key to product development and pricing

is understanding what the expected outgoes are, where income is from and what risks are being taken.

Product Choice as a strategy? Pru Bsn – Family Biz and IL CIMB – Motor and Fire

ISSUES (…contd) Pricing of Products must provide for:-

Cost of marketingAdministration costClaim costFinancing cost

Profit (expected return on capital employed)

ISSUES (…contd)Different marketing channels have

different costsCosts can include:-

AdvertisingPrinting and brochuresCommissionTraining cost

ISSUES (…contd) Agency force (dedicated channel)

High training costHigh commission cost

Financial intermediaries (shared channel)Sales through banksConflict with other banking products

ISSUES (…contd) Financial Intermediaries

Little underwritingSimple products

Agency forceMore sophisticated products requiring

more “selling”Important: sophistication of products must have cognizance of administration support available

Syariah Council

Technical CommitteeActuary

Takaful Product

Shariah IssuesLifetime suicide clause…?Who can participate?Which businesses can be covered?Can operator co takaful with

conventional?

Legal IssuesExcept for some countries e.g. KSA

Common Law is applied Current Takaful contracts reflects

appropriately relationship of operator and participants?

Will the courts view takaful contracts as insurance contracts?

Who does the Tabarru’ Fund belongs to?

Agency ForceTakes time to built upMay be difficult for certain cultures to

acceptExpensive to train and maintainTested and proven intermediary sourceVery competitiveOpen to misrepresentation/misselling

risks (reputation risk)Best option with ‘complicated products’

Financial IntermediariesDistribution channel already in placeBank privy to customers financial

standingPackaging of products, e.g. motor

insurance, MRTA policiesLess price sensitiveSubject to internal competitionBest suited for ‘simple’ products

Administration CostIT CostUnderwriting cost/policy insurance

General management costMarketing/advertising cost

Claim CostActual claims (claim distribution)

Claims handling cost/legal costReinsurance/Retakaful cost

Financing CostsInsurance is a ‘money first’ business

Trust is paramountCapital intensive business (upfront expenses meeting statutory solvency margin)

All this capital requires financing

Product Success - KPIsTotal sum coveredNumber of certificatesTotal amount of contribution generated Profits realized Increase in the number of new clientsDemographic characteristics of customers

who purchased the productLapse rates, surrenders and claims

experience