Takaful 2.0 - Making it a reality!

During the opening of Takaful Rendezvous 2014 recently in Kuala Lumpur, Director of Islamic Banking and Takaful Department of Bank Negara Malaysia, Wan Nazri, had urged the takaful operators to take the next leap forward to achieve a Takaful 2.0 status.  He had even put forward three possible strategies that could promote the sector to the next level of development, namely, designing products that meet the critical needs of today, empowering consumers, and enhancing industry collaboration.

Takaful 2.0 can be seen as a new chapter to Takaful industry in the next 30 years period compared to the past 30 years since existence.  It shall be among others, unique, different, and with a world class standard.  In the past 30 years, we can generally notice a situation of “takafulizing” conventional insurance to comply with shariah requirements.  In fact, many claim that the industry is merely an Islamic insurance instead of pure takaful business.  Whatever it is, we shall salute those who had contributed to the takaful industry (or Islamic insurance) successfully from day one of its existence despite of numerous obstacles including shariah, regulatory, technical, human capital as well as marketing concern.  As a result, Moslem communities had no more excuse to opt for conventional insurance.

Setting the right direction is paramount to ensure that all stakeholders remain focus with end in mind.  Nevertheless, I am of the opinion that having the right people is vital prior to setting the right direction.  We may develop the best business or strategic plan with clear direction but lacking of the right people to drive and execute the plan may lead to nowhere.  Thus, the aspiration of achieving Takaful 2.0 shall be supported by highly qualified leaders of the industry.  The question to address now is whether the industry is ready with sufficient supply of the right talent to lead the industry.

Whilst quantity is a concern, we shall not ignore the quality aspect of it.  Therefore, I personally feel that there shall be a robust assessment process in selecting the leaders of the industry.  They shall be qualified leaders instead of merely managers of the company.  During the process of appointing CEO and CEO-1 team for takaful, the incumbents MUST meet with at least one of the following criteria, namely;

1.  Ten (10) solid years in insurance / takaful industry at managerial level and above; AND/OR
2. Completed relevant professional qualification to insurance / takaful business; AND/OR  
3. Undergo specially designed coaching program by recognized relevant institutions such as IBFIM.

The main objective is basically to strengthen the industry with leaders with the right knowledge and capable of making the right decision for takaful business.  This may also be extended to members of BOD as well as SC with appropriate adaptation as they are part and parcel of key decision making process.  For those who had sufficient extensive working experience in insurance with minimal exposure in takaful business shall undergo a special familiarization and understanding program to takaful organized by recognized entities by Islamic institutions such as IBFIM.  This program will assist the incumbent to have a better idea on takaful and prepare their mindset to manage takaful business differently from insurance approach. This includes the concept of tabarru’at against sales and purchase contract, no marketing approach using surplus distribution, risk sharing against risk transfer, etc.

In takaful company, currently, we can easily find professionally qualified actuaries and accountants as they are stipulated in the regulation.  A question arise whether we need other core functions of takaful operation to be supervised by relevant qualified professionals.  Core functions of takaful operation commonly comprise of Underwriting, Claims, Servicing and perhaps Marketing. If we, for instance, conduct a random surveys pertaining the so-called Underwriters of takaful companies, we will generally discover that they have been appointed as Underwriters mainly due to their involvement in underwriting functions for significant number of years.  Nevertheless, we may also come across several incumbents who have been working in underwriting department for significant number of years but yet to be “conferred” as an Underwriter status.  There is no absolute barometer to gauge their level of professionalism as to their readiness to assume the responsibility as an Underwriter which is one of the core activities of a takaful company and highly correlated to the end result or bottomline.  Therefore, there is a strong demand and urgency to develop a Takaful Professional certification for core functions of the business which is unique, different and world-class standard and most importantly guided by Shariah principles.  Authority may, in near future, impose a requirement to have at least one professionally qualified personnel for each core activities in takaful company. Currently, there are few professional bodies such CII, MII, LOMA/LIMRA which provide such relevant certifications however the learning objectives are not fulfilling the aspiration of takaful business and shariah principles.  As a talent development agency specialized in Islamic Finance, IBFIM shall take the responsibility to innovate such certification and support the takaful industry in generating more qualified professionals to supervise core functions of the business.

In the last two years, IBFIM had embarked on a specially designed coaching program for leaders of takaful industry.  It is similar to a ‘Mentor – Mentee’ program and the mentors are mainly senior personnel of takaful industry with extensive relevant working experience and knowledge.  Such program can be adopted as one of the pre-requisite criteria prior to the appointment of CEO and CEO-1 team as mentioned under item (3) above.  Based on the individual background and experience, the coaching program can be carefully crafted to ensure that the gap is minimize and relevant technical know-how is properly transferred from Mentor to Mentee.

Upon implementation of the above initiatives, I strongly believe that takaful industry is ready to transform itself towards a new generation known as Takaful 2.0 and significantly differentiate itself from insurance operation.

Lesson from MH370 Tragedy from Takaful perspectives

1. The missing of MH370 and the search and rescue operation are making headlines in almost all major media be it the print media, electronic media and new age media.   It is no longer a domestic controversy  debated exclusively in  Malaysia but all over the world.  Numerous speculations and theories were suggested, mainly by netizens, nevertheless we can only confirm which one is correct once the black box is found and recovered from the now mystery location.  I am not interested to add more to the speculations and theories which I personally feel are already aplenty. Instead, I wish to put forth some lessons for all to ponder upon from Takaful perspectives.

2. Who are the stakeholders of MH370 or any other plane which ferry passengers as well as aircrews from one location to its final destination?  Obviously, first layer stakeholders  are the airline owner i.e. Malaysia Airlines for MH370, the air crews and the passengers themselves. The next layer would be the relevant regulators, families of the aircrews and that of the passengers.  My discussion will only focus on the first layer of stakeholders.

3. The airline owner owns the plane and shall ensure that the plane is fit as prescribed by the aviation authorities to provide the required services for the designated passengers.  Despite of having world class Standard Operating Procedures (SOPs) and the best resources to execute the SOPs, nobody can refute that the probability of loss due to exposure to various kind of risk still exists.  In simple words, we cannot  guarantee 100% that there will never be any misfortune or accident during the course of the flight.  Potential risks like engine malfunction, system  software  errors,  bad weather, human errors or hostile action, etc might still occur.

4. Thus, in the event of an accident or misfortune, there would be potential significant losses to the asset or plane as well as injuries or losses of lives of those people travelling on board.  In terms of monetary values, we are looking at hundreds of millions (US$) worth of potential losses, whether to the hull (body) of the plane or liabilities to the lives on board.

5. The airlines, therefore, should ensure that adequate Takaful coverage for the hull and liabilities are  obtained from a suitable Takaful operator or consortium of operators.  In this respect, engaging services from a professional Takaful broker is advisable as the broker is able to advise on the appropriate coverage to be taken, as well as the sum to be covered.  Besides, the broker may also negotiate the best terms and conditions with the lead takaful operator to ensure that the client, i.e. the airline, can obtain the most reasonable protection at a competitive pricing.

6. Today, none of the Takaful operators are ready to offer a complete and comprehensive Takaful coverage to the aviation industry due to its limited capacity in terms of coverage as well as lack of technical expertise about the industry itself. However, they should form a consortium to share the risk among themselves and slowly build the necessary expertise internally.  Active and aggressive participation by  retakaful companies will definitely speed up the learning and growth process of the takaful industry in this sector.

7. Individually, each passenger as well as  crew should obtain adequate Takaful coverage for their travelling.  Should the covered risk happens, this coverage is usually settled much earlier as compared to liabilities compensated via the airline certificate which takes longer to settle due to legal processes.  As in the case of MH370, the search and rescue operation still continues until now (time of this article written) and even after more than a month there is still   no significant lead.  Thus, the families of the victims may encounter difficulties or hardship to meet monthly dues if they do not have any other income as compensation from the airline has yet to be received.

8. The fact is, travel takaful coverage is very affordable for everyone as the duration of coverage is strictly coincide with the travelling period.  During my one week trip to Europe recently, I had obtained the most comprehensive travelling takaful coverage which cost me for only RM14.  It covers death and total permanent disability, in-patient and out-patient medical, repatriation cost, loss of baggage, delay of flight, etc. Despite of the very affordable coverage, I believe  most travellers are ignorant about the availability of such takaful coverage or the importance of having a coverage while you are travelling.

9. For those who require higher coverage for death and disability, they may add personal accidental Takaful coverage which usually span for a minimum period of 12 months.  This protection is also very affordable where a RM100,000 sum of coverage for a period of 12 months will usually cost about RM100.

10. It is strongly recommended that employers  obtain the necessary and adequate Takaful coverage for all their employees who are required to travel for business reasons.

11. Besides having adequate Takaful coverage, another lesson to be learnt is pertaining to good risk management practices. In order to minimize the potential of sudden loss of several key executives,  many multinational corporations have practiced the unspoken rule to disallow  their key executives to travel together in the same transport.  This measure is  taken to minimise the potential loss of several key executives should any unforeseen misfortune happen if they were to travel together.  Losing several key executives would mean  significant interruption to the business operation and ultimately impact their bottomline.

12. Due to the same reason,  I was told  that a few corporate figures hardly travel together with their families in the same transportation.  Instead, they will schedule a different transportations, like a different flight  going to the same destination, for the family members to take.

13. In conclusion, we shall always ensure that our travel is a pleasant and enjoyable journey with minimum difficulties encountered during the trip or in the event of any misfortune.

Remembering and pray for the best for MH370

Misconception on Takaful

1.            I was asked by a friend recently about the motor Takaful product which according to him is less superior in terms of pricing, flexibility and meeting with the customers need as compared to the conventional product.  Accoding to this friend, a Takaful operator offered him a motor Takaful coverage for a total sum cover of about RM290,000 for a cost of approximately RM4,000, while another conventional insurer was willing to offer a total cover of only RM160,000 which would cost him about RM2,300.  After an intense discussion, the Takaful operator  was willing to reduce the sum of coverage to RM160,000, provided that he signs an undertaking letter with respect to the  average clause as provided in the certificate.  This situation is not uncommon in the insurance/takaful industry and some consumers might have already faced the same experience.  It may also happen among the conventional insurance companies.

2.            At a glance, we might be tempted to conclude that Takaful is not fair and expensive.  The additional contribution (premium) of  RM1,700 (RM4,000-RM2,300) was definately more than double the cost charged by the conventional insurer.  This contradicts the concept of fairness and equitable as promoted by Takaful operators as well as any other Islamic Financial Institutions (IFI) nowadays.

3.            Ok, let me clarify the above situation based on two perspectives, namely Shariah and technical.  As Shariah justification may not be appealed to non-Moslem, they may consider the technical explaination.  Nevertheless, I will try to explain the Shariah concept in the universal context as well.

4.            What is the major different between Takaful and conventional insurance?  Takaful is based on the concept of helping one another where all participants (policyholders) contribute a certain amount of money to a pool, with the main objective to help those who might meet with defined misfortunes as outlined in the contract.  This is indeed a righteous act and commendable act strongly encourage by all religions.  In the Quran (2:261), Allah says “The parable of those who spend their substance in the way of God is that of a grain of corn: it growth seven ears, and each ear hath a hundred grains.  God giveth manifold increase to who He pleaseth: and God careth for all and He knoweth all things.”

5.            Thus, Allah promises at least 700 times of reward for those who contribute their wealth for the sake of Allah.  The more you give, the more return you will reap from Allah swt.  Based on the Takaful practices, most of the contributions are pooled into a fund under the concept of Tabarru’at which literally means donation.    Under the concept of Tabarru’at (donation), paying RM4,000 would yield more reward as compared to RM2,300, as the quantum going into the way of Allah is significantly higher.  Based on the multiplying effect, don’t we want to invest for our hereafter as much as possible? The richest of the rich, just to name a few, like Bill Gates and Warren Buffett were reported to have given away a large chunk of their wealth to charity, with Gates donating money amounting to US60 billion to help those in need and Buffett giving shares worth nearly US20 million to eight unnamed charities. And they are still among the richest men in the world bestowed with more wealth.

6.            Now, let’s look at from technical point of view.  Ask yourself, why would you purchase an insurance policy or participant in a Takaful plan?  Obviously, for protection against any unexpected misfortunes,  in the event of which, our asset (insured under the general insurance/takaful) is exposed to the maximum probable loss which is equivalent to the cost of replacing the asset based on the current market value. 

7.            Back to my friend's story, when a takaful operator offers to cover his vehicle for a total coverage of RM290,000, it is based on the current market value of the vehicle.  Meaning that, in the event of a misfortune which may lead to the total loss of the vehicle, the takaful operator will compensate him, as  participant, with an amount of RM290,000 to enable him to purchase a vehicle of similar condition as a replacement. On the other hand, the conventional insurer would only compensate him with the maximum amount up to RM160,000 which will definitely upset him and put him at the disadvantaged as he won’t be able to purchase another vehicle of similar condition as replacement.  He might be able to save RM1,700 at the inception of the business transaction but he exposed himself to a maximum total shortfall of RM130,000 compensation should misfortune befalls him. 

8.            Some may say that their chances of total loss is very slim or insignificant thus making them reluctant to seek a coverage for their asset equivalent to  the market value.  The lower probability of total loss has been factored into the pricing where he is only charged approximately RM4,000 for a potential benefits of RM290,000.

9.            In summary, Takaful business is the most fairness and equitable as the fundamental objective is to help each other to protect against unexpected misfortunes.