© Allianz MENA Holding 2008 Key Corporate Governance Issues for Takaful Operators Dr. A.Rahman Tolefat, CEO of Allianz Takaful ICMIF Takaful Network “Takaful-Beyond the Hype” 5 and 6 May 2009 Manama

© Allianz MENA Holding 2008 Agenda Outline Takaful Structure Corporate Governance Issues Overview about Takaful marketSolvency Margin and Capital Adequacy Issues Allianz Takaful

© Allianz MENA Holding Structure of General Takaful Two segregated funds, one for shareholders and the other for policyholders. Takaful company manages the takaful fund on behalf of participants on an agency basis. The investment of takaful fund is conducted by the takaful company on a profit sharing basis or an Agency. Funds Underwriting Investment

© Allianz MENA Holding Contributions (premiums) Participants Fund Investment Profit Retakaful Claims Operating Expenses Surplus Reserves Dividends Shareholders Fund Wakalah (Agency) Fee Investment Profit Share Surplus Share Shareholders fund investment Operating Expenses Profit

© Allianz MENA Holding Structure of Family Takaful The investment fund for participants (Saving Fund). It is similar to assets management fund. The risk protection fund which covers the mortality risks. It is similar to general fund. Shareholders assets and liabilities. Participant’s Fund Shareholder’s Fund Participant’s Special Fund

© Allianz MENA Holding Contributions (premiums) Participants Special Fund (Protection Fund) Investment Profit Retakaful Claims Operating Expenses Surplus Reserves Dividends Shareholders Fund Wakalah(Agency)+o ther Fees Investment Profit Share Shareholders fund investment Operating Expenses Profit Surplus Share Participants fund (Saving Fund) Investment Profit Distribute profit for each participant

© Allianz MENA Holding 2008 Shareholders fund Participants fund Insurance operation Deficit Option(2): Interset free loan Investment Participants (Policyholders) Option (1):Pay additional premiums

© Allianz MENA Holding 2008 Agenda Outline Takaful Structure Corporate Governance Issues Overview about Takaful marketSolvency Margin and Capital Adequacy Issues Allianz Takaful

© Allianz MENA Holding 2008 Who is protecting the interests of Participants? Currently There are two parties: –Regulator- thought the current regulations & supervision. (Corporate Governance and Business Conduct) –Shari’ah Board- from the ethical prospective Is this enough ?! Regulator: _ The regulation need to be adopted to cater for unique characteristics of takaful. Shari’ah Board: _ The shari’ah Board has not the right competencies to perform this job. –It is not stated in the Shari’ah Board Mandate. Corporate Governance

© Allianz MENA Holding 2008 Elements of conflict of Interests (1/2) Wakalah Fee The shareholders are in preference to charge higher fee. Reserves Distribute profit to participants before take reserves. Charge incentive fee before take reserves or distribute anything to participants Investment The company may place shareholders fund in better investment opportunities vis-à-vis takaful funds Competition The competition could lead the operator to pas the risk to takaful pool without proper pricing.

© Allianz MENA Holding 2008 Deficit The deficit incurs in takaful fund could be resulted from mismanagement or misconduct by the operator. Family takaful The amount that goes to risk pool and the remaining amount which goes to saving pool. Elements of conflict of Interests (2/2)

© Allianz MENA Holding 2008 Deficit Unaffordable Deficit Mismanagement & Misconduct Qarad Hassan from shareholders fund Independent Parties Liable to cover deficit Qarad Hassan Deficit Debate

© Allianz MENA Holding 2008 Reserves Distribute profit to participants before take reserves. Charge incentive fee before take reserves or distribute anything to participants Takaful Fund Surplus Incentive Fee Distributed 50% Reserves

© Allianz MENA Holding 2008 Premiums Competition Takaful Conventional Contributions Shareholders Fund Participants Fund Insurance Fund Wakalah fee 300,000 (30%) 700,000 1,000,000

© Allianz MENA Holding 2008 Related Parties Related parties Group RB: -Less than 10% -10% -50% -Over 51% Difference between actual and desired Both are confirmed the control of related parties Effect on Individual basis Statistical

© Allianz MENA Holding 2008

Overview About Takaful Market Agenda Outline Takaful Structure Corporate Governance Issues Overview about Takaful marketSolvency Margin and Capital Adequacy Issues

© Allianz MENA Holding 2008 Solvency Margin and Shareholders Fund Shareholders Fund Takaful Fund Deficit How the regulators satisfy that all the times there are liquid assets to support takaful fund? There are two views regarding capital of takaful companies: Lender of Last resort Just to meet the Legal Requirements

© Allianz MENA Holding 2008 Shareholders Fund Takaful Fund Deficit Actual Solvency Takaful Fund Shareholders Fund Physical Transfer?!

© Allianz MENA Holding 2008 Shareholders Fund Yes with the same policyholders limits No 20% 72% Regulation of Shareholders Fund Does the shareholders fund need to be regulated ? Yes with fixable limits 8% Reponses Detail Yes with same policyholders limits Yes with flexiable limits No need to regulate fund Source:PHD study form the presenter

© Allianz MENA Holding 2008 Thank you