Appointed Actuary Guidelines

Bank Negara Malaysia had recently issued a concept paper titled “Appointed Actuary: Appointment and Duties” where the consultation period for the paper ended on 2nd August 2013. The concept paper proposed BNM’s enhanced supervisory expectations on the duties and responsibilities of the Appointed Actuary as well as greater clarity on the Appointed Actuary’s relationship and interaction with various stakeholders. Some of the major changes are: Appointed Actuary requirement extended to general insurance business, removal of product pricing duty from the Appointed Actuary and, greater oversight by the Board of Directors on actuarial issues. The introduction of the Appointed Actuary system to the general insurance industry is a timely development as it moves towards a de-tariffied business environment. Furthermore, this is also in tandem with the new regulation under FSA and IFSA to split composite license into separate life/family and general entities. The removal of the pricing role from the Appointed Actuary will necessitate more clarity on the requirements and duties of the Pricing Actuary which will hopefully be addressed soon. Additionally, it is a welcome development that the concept paper proposes an explicit condition on the appointment of an Appointed Actuary, that the candidate meets relevant CPD requirements. The final major change, the greater oversight by the Board of Directors on actuarial issues, means that actuaries must rise up to the communication challenge of explaining technical issues using less jargon and to make complex issues comprehensible to non-actuarial stakeholders.

Islamic Finance Services Act

Bank Negara Malaysia had recently introduced Islamic Finance Services Act which replaces all relevant Acts for Islamic Financial Institutions.  Under Part III Div 2 Sec 16 of IFSA, it prohibits any takaful operator to transact both family and general business under one entity.  Consequently, existing 8 composite TOs are given 5 years to restructure their organisation and capital to comply with the provision.  Frankly speaking, it is rather complicated matter and challenges are different from one to the other.  My personal opinion is that few shareholders will give up their general licenses and retain solely their family business only.  Reason is simply because of family takaful generally contributes higher profit margin as compared to general takaful and furthermore it is a long term in nature thus kind of guarantees future profit for shareholders.  Comparatively, general takaful is usually short term contract with normal one year tenure. There are few composite TOs are not developing their general business significant enough as their resources are fully utilized for family business. We would expect to see some M&A to happen in the next 2-3 years arising from the above argument.

For those which decide to retain both family and general business, they will need to setup a separate entity for family and general with definitely separate resources. However, BNM may allow some shared services for a certain period of time after which there might be a requirement to split 100%.  The challenge now is to look for the right talent to lead and manage those 2 separate entities from CEO, senior mgmt team, heads of divisions etc.  Moreover, BNM had also required general takaful to engage a qualified Actuary to supervise their fund accordingly as required under family.  Again, whether the industry is ready to supply sufficient actuaries qualified in property and casualty which is totally different than the currently widespread actuaries in Malaysia. As an interim measures, partly qualified Actuaries who had attained Associateship should be given certain authorities to certify.

I believe setting up a holding company to manage both subsidiaries in family and general will create more problem as the holding company must employ the right talents which is scarce and the new IFSA requires such holding company to be registered as a financial institution within 12 months (if ownership > 50%).  As a result, the current shareholding structure will remain as long as possible.  

If you are interested to learn further on this matter, you can study the takaful or insurance industry in Indonesia where their law does not allow any composite business. In particular, you can study Syarikat Takaful Indonesia which is merely a holding company with 2 subsidiaries ie. PT Asuransi Takaful Keluarga (family) and PT Asuransi Takaful Umum (general).

"16. (1) A licensed takaful operator, other than a licensed
professional retakaful operator, shall not carry on both family takaful
business and general takaful business.
(2) Notwithstanding subsection (1), a licensed family takaful
operator may carry on the general takaful business relating to
medical by reason of disease or sickness or medical expenses subject
to such requirements and conditions as may be specified by the
Bank.
(3) Any licensed takaful operator who contravenes subsection (1)
commits an offence and shall, on conviction, be liable to
imprisonment for a term not exceeding eight years or to a fine not
exceeding twenty-five million ringgit or to both."

Window vs Full-fledged Takaful

In Malaysia, all takaful operators are operating based on full-fledged takaful business model. Comparatively, most of takaful operators in Indonesia are based on window concept business model.  Window takaful concept are more towards product manufacturer and distributor relationship where takaful operator will launch takaful products to meet with the need of conventional insurer which act as distributor.  Moreover, takaful operator is established with minimal infrastructure where most of the core back-end and supports are outsourced to the conventional insurer which has comprehensive infrastructure and establishment.  Nevertheless, regulator in Indonesia is trying to move towards full-fledged model.

Coming back to Malaysia takaful landscape, there are several takaful operators particular new ones are more towards window concept business model where their main shareholders, established insurers, are responsible to distribute the takaful products via their existing conventional distribution channels.  In addition, several core functions including actuarial, IT, underwriting, etc are heavily outsourced to the conventional expertise.  This should be allowed by regulator only for newly setup companies with limited duration say 3 years after which the takaful operator shall manage internally with few exception like IT which may require longer period say 5 years.  By imposing such condition, takaful industry shall see strong development of talents to boost the market penetration in the medium term.  When Bank Negara approved 4 new takaful licenses in 2010, it has selected those with strong and established conventional insurers (mainly foreign) with the intention to promote the transfer of knowledge and technology to takaful operators. This can only be achieved provided that the takaful operator is required to be independent from the conventional insurer within specified timeframe. Therefore, all those relevant takaful operators must establish a clear roadmap to indicate their specific deadline to separate themselves from the conventional insurer in totality. The separation between conventional and takaful is vital to ensure that the takaful business is 100% sharia compliance end to end.  

ING PUBLIC Takaful Ehsan part of AIA AFG Takaful

18 December 2012 marked a historic date for ING Malaysia group of companies where the acquisition by AIA Malaysia was completed.  Companies affected were ING Insurance Berhad, ING Employees Berhad and ING PUBLIC Takaful Ehsan Berhad (IPTEB).  With the closure, AIA now owns two takaful licenses thus it must relinquish one of the licenses under several options.  It may sell one of the entities entirely to any interested party without affecting the business as well as the resources.  However, after several meetings with Bank Negara Malaysia (BNM), AIA had decided to merge the two entities and return one of the licenses to BNM for their further action to offer to new investor.  In the process of integrating the two takaful entities, four senior management including CEO of IPTEB have been terminated and it is expected similar casualties may happen to other levels in the near future.  It is interesting to note that the four senior management terminated had a total relevant working experience of close to 100 years. Whilst the regulator and industry had identified shortage of talent as one of critical success factors for takaful industry, it is amazing to note that talents with about 100 years of relevant working experience can easily be laid off.

Takaful Ehsan was established on 11 March 2011, obtained takaful license from BNM on 1 April 2011 and officially launched the operation and business on 5 April 2011.  It embarked on a multi-distribution channel strategy namely agency, bancatakaful and employees benefit (EB) or corporate business.  Among several achievements, Takaful Ehsan had successfully introduced a full-fledged e-submission or iPOS since it launched it’s business thus making it the first among takaful companies to embark on full-fledged iPOS.  With the facility, customer or intermediary can easily submit cases via online and can print the letter of approval on the spot within 1-2 minutes upon successful online underwriting using smart underwriting.  Takaful Ehsan had also received tremendous acceptance on it’s EB business in view of stability of the system.

Now, upon completion of integration between the two takaful operators which is expected by mid of 2013, Takaful Ehsan will no longer exist in the industry.  It may be the shortest life span for a takaful company in the world and should be recorded accordingly.  May Allah bless all those who had contributed tremendously in the establishment of Takaful Ehsan and wish them all the best in the future pursuit to enhance Islamic financial sector in Malaysia as well as global.

Takaful - Global Development & Opportunities Ahead

Based on 2009 statistics, Saudi Arabia recorded the biggest takaful market in the world with approximately US$3.6 billion worth of business. Malaysia recorded second with US$1.2 billion; United Arab Emirates third with US$640 mil; followed with Sudan and Indonesia of US$340 mil and US$252 mil, respectively.  However, in terms of population Saudi Arabia consists of about 27 mil; Malaysia about 29 mil; UAE about 9 mil; and Indonesia about 240 mil of people.  Based on the above statistics it is obvious that Indonesia has the biggest potential takaful business due to high population and Moslem with low business penetration.  Furthermore, Indonesia has currently only 4 full fledged and 36 takaful operators and windows, respectively, with separate license for family and general business.  Takaful market penetration is still low at slightly above 1% compared to it's neighbor of about 12%.

There are several interesting factors in Malaysia which can be the benchmark for other markets like Indonesia:
1. CAGR in the last 5 years about 25% (double digit)
2. Not adversely affected by the global financial crisis
3. Global insurers had participated in takaful business via JV partners (high growth potential)
4. No. of takaful operators surged to 12 from 8 previously

With low takaful market penetration especially in Indonesia, it indicates a huge growth potential ahead for existing and new operators to grab.  Conventional insurers in the said countries registered double digit market penetration for instance Malaysia with more than 40%.  For countries with high Moslem population, takaful market penetration is expected to surpass the conventional rate in the next 5-10 years given the right strategies in place.  Moreover, Moslem comprise of about 25% of world population thus making takaful a huge potential awaiting ahead.  Statistics also indicated that significant proportion of the population consist of those aged 35 and below with highly sophisticated education and IT savvy.  This will lead to high demand for product like takaful in the near future.

What needs to be done in order to achieve the aspiration to increase market penetration beyond conventional?

Firstly, existing takaful operators shall ensure strong financial capabilities to be able to absorb or underwrite large and specialised risks with bigger retention capabilies. Shall be robust in new product development to fulfill financial needs of modern days consumers.  Takaful operators shall also minimize their dependencies onto conventional reinsurers as well as insurers thus giving full support to retakaful players.  With stronger financial capabilities, the operators can look into expanding across borders and become global takaful operators.

Technically, takaful operators shall build sufficient financial strength in order to meet with minimum risk based capital requirement.  This will include prudent actuarial reserving requirements.

Wealthier countries including Islamic Development Bank (IDB) might want to consider to extend their funds into takaful operators mainly to support the Islamic financial institutions.  With additional funds (less emphasize on returns), takaful industry can equip with latest and efficient information system to ensure the best process flow leading towards beyond expectation deliverable.

Last but not least, the industry shall find ways and means to attract best talents who will build their career within the industry.

Do we really need microtakaful?

We always hear several quarters or parties urging the takaful industry to promote the microtakaful business whether in Malaysia, Indonesia, or any other countries.  Despite of those numerous efforts, the outcome of microtakaful business is not as what expected.The number of operators which participated in this business is less than 3 players even though the main objective of this initiative is really ethical and jive with the concept of takaful i.e. helping each other.  Now we need to do really assess whether this is the right strategy or not.

In Malaysia, the government is working hard to develop the nation into a high income population.  This is in line with the aspiration to become a developed country by 2020.  However, this high income population initiative definitely will result in lower low income population.  This segment of population is actually the main target market for microtakaful business.  Therefore, the appetite of takaful industry to promote microtakaful business is obviously eroding.  This could be the main reason why the response from the industry in microtakaful business is almost negligible.  We need to review the initiatives thoroughly and decide whether we should continue in promoting microtakaful business.

Ehsan ILT Med