Hybrid Structures – why? Mutual Insurance and Takaful in Changing World Istanbul November12 and 13, 2012 Rodney Lester

Hybrid: ‘Composite; formed or composed of heterogeneous elements’ For our purpose: Combined mutual risk sharing and profit making activity

Hybrids are not uncommon US Reciprocals – 25% members USAA Group, US Physicians US Mutual Holding Companies – Pacific Life Segregated and statutory funds – British Commonwealth insurers Friendly Societies – Europe and ex colonies Takaful –mutual guarantee

Why do they exist – 6 vectors Mutual but with capacity to raise capital Prudential controls enhanced Client base – self selected group Taxation differentiation Principal/ agent concerns – better control of conflicts. Nature of client relationship to institution – exchange, commuting, utmost good faith, transparency,ability to assign etc?

Mutual holding companies Shareholder insurer Shareholder holding company Mutual HC > 50% Policyholder/ member Investors < 50% Voting rights Policy

VectorMHC Attributes Client baseUnrestricted TaxationCorporate tax. Tax free internal roll up for life. PrudentialIn line with commercial insurance Principal / AgentGovernance – MHC board, insurer boards – question over conflicts of interest. A transition vehicle? Client relationshipRisk transfer Capital raisingEquity, surplus notes etc

Reciprocals Unincorporated association Subscribers Attorney – usually operates on combined cost recovery/ partnership basis. Individual Subscribers’ Savings Accounts Paid in surplus account Subscriber’s Advisory C’tee

VectorReciprocal Attributes Client baseCommon interest group –with liability exposures if risk retention group tax status. TaxationFees to Attorney and dividends to SSAs are tax deductible to exchange. PrudentialNormally in line with commercial insurance. Surplus through two member accounts. Principal / AgentGovernance through subscriber appointed committee that appoints attorney. Client relationshipMutual guarantee through subscriber / attorney agreement and joint subscriber agreement; insurable interest is intrinsic. Capital raisingCapital contribution at entry.

Family Takaful Savings Fund – individual accounts Risk sharing fund Fluctuation provisions Operator – partnership or agency or combined Participants Sharia Board Board

VectorReciprocal Attributes Client baseUnrestricted TaxationTax incentives in Malaysia – otherwise tax neutrality. PrudentialStill evolving but normally in line with commercial insurance – an issue because of Qard.. Principal / AgentGovernance still being resolved – but contributors typically not represented. Client relationshipIdeally a non commuting joint guarantee, no assignment w.o. genuine exposure Capital raisingQard from operator, surplus accumulation

The key challenge for Takaful Trading off the attributes of an efficient risk sharing mechanism with the design limitations imposed by the relevant market – Risk pricing Reinsurance Asset risk Capital management Treatment of surplus Governance

Prophet Muhammad asked a Bedouin who had left his camel untied, “Why do you not tie your camel?” The Bedouin answered “ I put my trust in God”. The prophet then said, “Tie up your camel first and then put your trust in God”.