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.