Building a Takaful from ground zero - Part IV

I ended Part III discussing about Takaful Model.  Since the model is the center or heart of a takaful company, I would like to pick up few points and continue from there.  Again takaful models commonly used in markets today are Mudharabah and Wakalah.  Nevertheless, there have been few attempts to introduce new concepts such as Wakaf in takaful however not much details available to talk about it.  Why takaful model is so crucial?  By understanding the model, one can easily tells how his premium is managed and where his claims benefit comes from.  This is very important  in order to avoid the element of "gharar" or uncertainty in takaful.  Majority of ulama' or Islamic scholars labelled conventional insurance as "haram" or prohibited due to 3 main elements, i.e. 1.  "gharar" (uncertainty), 2. "maisir" (gambling) 3. "riba" (interest/usury).  Thus, all takaful players must emhasize and publicize its takaful model in all its marketing communications so that participants (policyholders) are well aware.  It should also be advisable that all relevant staff to always share and explain the model during sales promotion.

I guess all regulators nowadays will not object the selection of takaful model used however they may request to review the parameters used within the model which affect the distribution of suplus, investment profits and acquisition cost.  Regulator may request for a review should they feel that the amount going to takaful operator is considered excessive unless the management is able to convince based on actual facts from the industry.  For instance, the wakalah/ujrah fees for general takaful may be much higher in order to cover the higher acquisition cost such as commissions to intermediary.  As a compromise, the distribution of surplus to operator may be much lower compared to family/life takaful.  This is also due to the fact that general takaful is mostly short term compared to long term in family takaful.   Actuary usually will run a profit testing simulation to determine whether the product to be introduced is giving reasonable returns to all stakeholders whether policyholders as well as shareholders.  This simulation will determine the prudent parameters to used.

Global Financial Crisis

It started from subprime mortgage issue in US 1-2 years ago but unfortunately almost everybody ignores the signal of a major disaster in capital market which is happening today. After the subprime, the world was haunted with the escalating fuel prices which touched USD150 per barrel, the highest ever in history. As a result, higher inflation was the main issue globally. Not many had expected that the next headline will be the plunged in stock market which had caused several casualties including nation bankruptcy besides corporates failures.

If you follow the market reports regularly, you would have sleepless nights and haunting nightmares. A question usually asked is whether now is the right time to buy? No analyst dare to give you the answer as the indices keep tumbling down everyday as if that there is no bottom line. It is a free fall to the stock market and several regulators around the globe had to suspend their markets couple of times mainly to curb the index from further deteriorating.

Personally, I feel that the bottom is almost there and for those who really consider as investors you should grab the golden opportunity now before it's too late! What I consider as genuine investors are those who look for long term returns with strong fundamentals with respect to the target stocks or companies. Dividends yield should be the sole consideration in the decision making. This is what investment is all about. You invest in a company in order to enjoy the dividend returns attributable to its excellent business operations. If this is the objective you should definitely grab the opportunity whilst the price of share is very low with low PE ratio and high dividend yield. Capital gain is only a bonus and not the prime objective for investment in stock market.

For companies, this financial crisis will hit your paper loss or unrealised loss for fair values of marketable securities. In other words, it will hit your balance sheet due to the mark to market treatment for investment in securities. Should you have strong holding power this paper loss may be viewed as temporary volatility in investment risk. Don't sell your stocks due to market sentiment or fear instead you should collect bargain hunting stocks to average your price. "Collect and hold" as recommended and practiced by Warren Buffett.

Building a Takaful from Ground Zero - Part III

Once the right and competent people employed, it is now the period of producing a blueprint of the company which charts short, medium and long term objectives which is incorporated in the business plan. I will elaborate in more detail on the right ingredients of a good business plan for a takaful company later as a separate title.

In general, we need to determine the types of products to be sold, distribution channels to penetrate the market, capital requirement to ensure sustainability of the business and other statutory requirements as prescribed by the relevant authority. In Malaysia, Bank Negara Malaysia is the governing authority whilst Ministry of Finance in Indonesia supervises all takaful companies. Nevertheless, the financial projection or budget is the key element in the blueprint as all initiatives will be derived from it.

As mentioned earlier, we need to establish a strong syariah board as well as syariah unit internally which will oversee the day to day operations of the company in compliance with syariah jurisprudence. Currently, the number of syariah personnel suitable for employment with takaful is rather limited and shortage. There have been incidents of 'pinching' amongst takaful companies due to the demand and supply. We should evaluate the condition seriously and take necessary action to ensure that staff pinching will no longer happen in the future and there's more than sufficient human capital to meet with the increasing demand attributable to significant surge in number of takaful operators.

Subsequently, we need to determine the best takaful model to be adopted. This is crucial as the takaful model is the foundation and center of a takaful company. Cash flow, pricing, expenses, profits and surplus distribution, aqad or contract, etc are determined based on the takaful model. Different model will lead to different results. Common models are Mudharabah and Wakalah however the later is more commonly seen in new takaful established after 1990s. Besides selecting the model, the operator needs to determine the parameters to be adopted and these parameters may differ from product to product depending on business strategy. For instance, we need to determine how much wakalah fees or ujrah to be charged to the gross contribution (premium) to cover for acquisition cost. The net contribution will then be transferred to the tabarru' fund to cater for all claims benefits related expenses. Similarly, we need to also determine the distribution allocation between operators, participants and perhaps retaining in the tabarru' fund should there be surplus arising from the tabarru' fund. Besides, we need to determine the distribution allocation for investment profits as well.

As the takaful model is crucial, it needs to be approved by the authority as well as syariah board prior to its adoption. Extensive simulation must be done by the actuary to confirm whether the model meets with the stakeholders expectation. As takaful is like any other profit making organisation, we need to ensure that the business will generate sufficient return to all stakeholders based on minimum expectation. Shariah board will evaluate from shariah perspective whilst authority will focus on the going concern of the business or solvability of the company.

Building a Takaful from Ground Zero - Part II

Four commonly used categories which shall be developed are:
1. People
2. Product
3. Process
4. Promotion

The question now is which one shall be address first? Obviously, People shall be top of the list as good people is an asset to the company. We have to ensure that the right people are employed and the rest, namely Product, Process and Promotion, shall be easily developed. The right people means those with competent and right skill sets, knowledge as well as attitude. The first two factors may be easily assessed however it is a challenge to choose a candidate with the right attitude. Here, referrals play an important role to assist in the selection of the right candidate.

Prior to the mass recruitment, we shall establish the desired organisation structure for an effective and efficient delivery of services to the customers. During the development of the structure, emphasis must be given to the shariah aspect of the entity. In other words, the entire activities within the organisation must be guided by a center point with solid shariah principles and background. In this respect, it is recommended that a takaful entity must be led by a strong and competent shariah council externally and a shariah advisory team internally.

Building a Takaful from Ground Zero - Part I

As there are many investors today eyeing for a share in takaful business globally, I wish to share my actual experience in setting up a new takaful starting from year 2002 in Malaysia. Moreover, the company had survived its infancy stage successfully and now become one of the prominent takaful players in Malaysia.

I remember the early days of the company where we can see the number of staff keep increasing from less than 10 to reach about 50 people. We always ask ourselves whether this new company will be able to compete with the existing players in the market. Whatever it is, we always comfort ourselves that our intention is good and for the sake of Allah thus we are confident that the help will come should we face with any hurdles.

We brainstormed almost everyday on the vision and mission of the company as we strongly believe that the vision/mission of a company should be the driving force to achieve greater success. An independent consultant was hired to assist and guide us to determine what is the right vision/mission. As most people will usually do, we had compiled as many samples as possible from several multinational companies which are champions in their respective industries. It was a very hectic exercise as there was no specific rules to guide us and confirmed by those vision/mission of those samples. Nevertheless, I can conclude the key components of the vision/mission as follows:
1. What do we want to achieve in medium and long term?
2. What are the tangible and non-tangible benefits we would like to deliver?
3. How to achieve our aspiration?
4. When do we desire to accomplish?
5. Who are our target markets?

Once the vision/mission had been agreed upon, it should be the management's responsibilities to ensure that all staff within the organisation understand and start to align their activities towards achieving the common vision/mission of the company.

After vision/mission, we should establish the core values to be adopted within the organisation. This core values is the binding principles for all strategic objectives and initiatives within the organisation. Examples of core values:
1. Islamic values
2. Quality cultures
3. Customer centric
4. Financial strength

Foreign Holding in Takaful

For foreign investors interested to invest in Indonesia for takaful business shall observe certain strict regulations. Foreign shareholding is limited to only 80% at inception however there is an opportunity to increase above the limit should the situation warrant it. For instance, if the company is facing solvency issue under Risk Based Capital (RBC), the foreign shareholders may increase their stake higher than 80% if local shareholders fail to inject additional capital. Nevertheless, the number of shares of local should remain status quo.

Ensure that all article of associations (known as Anggaran Dasar) are properly lodge to Ministry of Law (Hukum dan HAM) and Ministry of Finance for approvals. The process is undertaken by a Notaris and should be guided by a legal advisor. MOL will issue an approval letter known as SK whilst MOF will issue a business license to reflect the latest situation of the company's capital structures.

Unlike Malaysia, there is no Takaful Act adopted in Indonesia. Thus all regulations and laws for takaful operators are prescribed under conventional insurance law. Nevertheless, MOF had initiated some efforts to incorporate few new articles in the law to address the gap in syariah insurance requirements. New accounting guidelines had also been introduced by regulator to tackle the syariah accounting principles in takaful.

Strategies for Takaful during economic downturn

With the hike of oil price and depreciating in USD, the inflation of many countries including Indonesia seriously affected. Price of basic consumer goods had been escalating as a result of oil price hike. In this situation, takaful players must be extra careful in accepting new cases especially those with high sum covered. Due diligence must be carried out onto small companies without clear article of association and nature of business. There might be potential corporate clients which setup their companies mainly to benefit from takaful coverage whether life or general via claims. Any irregularities of the company should trigger for comprehensive investigation prior to acceptance.

Investment performance is also seriously affected nowadays. Nevertheless, takaful players should view it as opportunity to make profit by collecting those equities with high potential for growth. New premiums should be invested in selected shares with the highest drop in values. If the company is still operating very well then their shares should be a favourite to investors due to low price. As most life policies are long term in nature thus the investment in equities should be for long term strategy to ensure higher return on investment.

Claims processing also require special attention especially those with shorter duration of policies. Accidental causes need further investigation.

Health Cover Upon Retirement?

It is not uncommon to cease insurance or takaful protection upon retirement especially health cover. Simple and frequent reason is that the retiree is no longer actively at work. This is obviously against the consumer needs as it is the period where medical attention is desired most due to the deteriorating health condition.

We can overcome with the situation by introducing a special scheme where the underwriter need not to worry on the escalating risk exposure. The scheme is a simple sinking fund or pure endowment with minimal death cover with the target desired fund as the sum cover upon maturity at retirement age. Upon retirement, the total accumulated fund will be utilized to cover all medical costs till depleted. To ensure longer period of cover, the amount required to manage the medical cost shall be as minimal as possible so that the balance of the fund will continue to be invested for optimum investment return.

Real Estate and Takaful

Many developers experience difficulties in their property sales currently mainly due to the uncertainty in global economy as a result of oil price hike and depreciating in US dollars. Thus, developers must create innovation in their marketing strategies such as incentive to lure more potential buyers. One 'out of the box' idea is to package strategically with takaful products. Assuming that the price of an apartment is say USD50,000. The developer may allocate say 20% or USD10,000 for takaful package to add several benefits such as cash back equivalent to USD50,000 at the end of 20 years, death benefits equivalent to the outstanding balance of financing, fire insurance, and personal accident cover. It can be promoted in such a way that the buyer will obtain an apartment, fully covered against loss due to death or permanent total disability for any causes, fire and moreover money back "guaranteed" at the end of certain period which can be utilized as a pension benefit should the buyer survives the period.

New Insurance Regulations in Indonesia

On May 23, 2008, Ministry of Finance of Indonesia or Depkeu had issued a revised insurance regulations covering several important aspects. The most important area affected is the minimum paid capital required for conventional and syariah based insurers. The regulator had set Rp100 billion and Rp50 billion as minimum paid up capital for conventional and syariah based insurer, respectively. Moreover, syariah window operator is required to maintain a minimum of Rp25 billion as their paid up compared to none previously. Consequently, I foresee few insurers may restructure their equity and operation accordingly in order to comply with the new requirement. Based on preliminary findings, it is estimated that at least 37 insurers whether life or general plus 2 reinsurers failed to meet with the new capital requirement.

For instance, a conventional insurer needs to maintain a minimum of Rp125 billion if they intend to continue their syariah window. If their existing paid up is say Rp75 billion, the additional capital required is Rp50 billion. Should they decide to withdraw their syariah window license and focus on conventional license solely they just need to add a minimum of only Rp25 billion against Rp50 billion.

Perhaps, the main objective of the above revised regulation is to reduce the number of syariah insurance operators from 42 currently where only 3 are full-fledged whilst the rest are just windows. The 3 full-fledged syariah operators are PT Asuransi Takaful Keluarga, PT Asuransi Takaful Umum and PT Asuransi Syariah Mubarakah. The first two capture about 65% of takaful market share in Indonesia and being the pioneer syariah insurance since 1994.

This new development in the insurance industry in Indonesia can be viewed by investors as potential for mergers and acquisitions of those without sufficient capital to meet the new regulations.