Farid BenbouzidDamas 01& The success of Retakaful Arab Insurance, outlook and actual new economical situation

Damas 01& Overview Introduction Achievements Challenges ahead Strategy Conclusion

Damas 01& Introduction Conventional insurance Takaful Concept Retakaful concept

Damas 01& Insurance not permissible Uncertainty (Gharar) Gambling (Maisir) Interest (Riba)

Damas 01& Takaful concept 1985 Grand Council of scholars approved Takaful Method and means left to scholars and practitioners Must have : Permanent Sharia Advisory Board Sharia compliant investment strategy Operating model based on Shariaa concepts

Damas 01& Operating models Pure mudharabah (Sudan) Modified mudharabah (Malaysia) Wakala (Bahrain) Family takaful General Takaful

Damas 01& Re-Takaful concept Preferred reinsurance is proportional (quota share or surplus) Non proportional permissible If Re-takaful is unavailable, then it is permissible to use a conventional reinsurer

Damas 01& Overview Introduction Achievements Challenges ahead Strategy Conclusion

Damas 01& Achievements Takaful industry Retakaful industry Best Re’s position

Damas 01& Takaful Industry in the World World Premiums 2003 USD 2.6 trillions Takaful contributions 2002 USD 2.1billions Number of companies  59 Number of countries 23

Damas 01& Takaful Industry in the World

Damas 01& Takaful industry in EM EM Takaful contributions 2002 USD 2 billions EM/WW Takaful contributions 99% EM Total Premiums USD 217 billions Number of Companies >45

Damas 01& Main EM Takaful Markets GCC Malaysia Other Arab countries Other South & East Asia

Damas 01& Retakaful cessions drivers Heavy exposure to cat events > No exposure to cat events Small local players > Larger international insurers Specific line or customer Group focused > Multiline insurers Commercial lines (Aviation) > Personal lines (Motor)

Damas 01& Retakaful cessions drivers Life protection lines > Life saving Expansion into new products Or regions Exit from markets Run off market Regulatory and rating considerations Solvency ratio and claims payment ability

Damas 01& High demand for Retakaful Many of Takafuls are local players Many of them are also newly set up Small takaful market In number In size Rely heavily on Retakaful support Demand expected to grow with industry

Damas 01& Unsufficient supply Very few Professionnal Retakafuls 2 (Best Re, ARIL) Takafuls accept a small part of Retakaful business from each other

Damas 01& Takaful dilemma Participants opt for the product because it is islamic Takafuls forced to cede business to conventional reinsurance Otherwise disappear !

Damas 01& Retakaful dilemma Retakafuls are Takafuls focused Retakafuls forced to accept business from conventional market Retakafuls forced to retrocede business to conventional market Otherwise disappear !

Damas 01& Best Re Modified Mudharaba model Permanent Shariaa Board Avoids “Ribaa” Interest on deposits are offset Investments are compliant with “Shariaa” requirements Manages separate accounts Ceding companies account (Technical operations) Shareholders’ account (Shareholders’ operations)

Damas 01& Best Re Niche market player set up in 1985 Internationally recognized as Retakaful Strong capital basis and claims-paying ability Well rated by well reputed agencies Standard & Poor’s: BBB (Stable Outlook) AM Best: B++ (Very Good)

Damas 01& Best Re Accepted contributions from Takafuls (2003) USD 8 millions In % of whole portfolio 13% Markets 16 Number of Ceding Takafuls 28 Number of Contracts 319

Damas 01& Overview Introduction Achievements Challenges ahead Strategy Conclusion

Damas 01& Challenges ahead Mission statement Takaful growth perspectives Learn from conventionals Retakafuls’ duties

Damas 01& Mission statement Pave the way for takafuls to achieve their growth potential and build a strong and sound industry

Damas 01& Takaful growth perspectives Non life insurance demand in EM Life insurance demand in EM Outlook

Damas 01& Non-life insurance demand Low Premium as % of GDP Min = 0.2% (Bangladesh) Max=2.9% (Jamaïca, South Africa) Low per-capita Spending Min = USD 8 (Africa) Max = USD 54 (Latin America)

Damas 01& Life insurance demand Very low Premium as % of GDP Min = 0% (Saudi Arabia) Max = 3.8% (Trinidad & Tobago) Very low per-capita Spending Min = USD 14 (Middle East) Max = USD 30 (South & East Asia)

Damas 01& Outlook Largely untapped potential to be captured Takaful is a specific answer to an unfulfilled demand Takaful could capture a large part of the population which would not, otherwise, insure.

Damas 01& Takaful Growth Perspectives New markets likely to introduce Takaful in the near future Philippines, Bangladesh, Former Soviet Union States, South Africa etc. Takaful windows set up by conventional insurers Good indicators of brand success

Damas 01& Takaful Growth Perspectives Strong growth trend in South & East Asia +30% p.a. in Malaysia likely to continue Sustained average growth in double digits in the coming years +15% p.a. reasonable to assume

Damas 01& Learn from conventionals 250 professional reinsurers 2003 ceded premiums : USD 176 billion  Non life reinsurance : USD 146 billion (13.7% insurance premiums)  Life reinsurance : USD 30 billion (1.9% insurance premiums)

Damas 01& Learn from conventionals Top ten reinsurers market share : 54% Shareholders equity of top 40 : USD 249 billion Of top ten, 6 have a financial strength rating: At least “AA-” by S&P (very strong financial security) Stable and sound capital base for reinsurance industry : Negligeable bankrupties between

Damas 01& Reinsurance cessions drivers Reduced uw results volatility Escape from insolvency in case of cat event Capital relief and flexible financing Accept more business with the same capital Access to reinsurers’ expertise and services Product development Pricing Underwriting Claims management

Damas 01& Reinsurers have to be financially secure InsurerReinsurer Part of underwriting risk Counterparty credit risk

Damas 01& Reinsurers’ risk management Scope : Long term survival of the reinsurance company Underwriting and investment risks are aligned with capital available (R.B.C) Capital management Asset management Underwriting Risk Management

Damas 01& Risk modelling Operational risk Insurance riskCredit riskMarket risk Earthquakes Influenza epidemic Tsunami Exchange rates Stock markets Interest rates Inflation Credit risks Tropical cyclones

Damas 01& Diversification across time Better diversification Lower capital need or Lower Cost given the exposure Higher level of Protection _ given the level of capital Less expensive reinsurance cover

Damas 01& Retakafuls’ duties Providers of secure covers Strong capital base Focus on Risk Management models Diversification across time Expertise providers Product development Pricing Underwriting Claims management

Damas 01& Overview Introduction Achievements Challenges ahead Strategy Conclusion

Damas 01& Strategy – 1st step - Establish an annual meeting of ArabTakafuls and Retakafuls Networking benefits Set up a « Takaful Association » Practitioners’ intelligence networks Best practices’ exchange Reinsurance placing facilities Set up an informative Takaful & Retakaful website Wise information exchange among members

Damas 01& Strategy – 2nd step - More and more cooperation between Takafuls Web site becomes transactional « Takaful Association » is efficient Improved structures Successful Annual Meeting New well rated Retakafuls are set up 2 to 3

Damas 01& Strategy – 3rd step - Design a framework of cooperation with conventional reinsurers Associate members’ status Interested in the Takaful market development Set up a brokerage company focused on Retakaful placing By the Association

Damas 01& Specific position of Middle East Homogenious religious status Oil producer countries generating financial surplus Eligible to play a major role in this strategy Strategy could benefit from the financial synergy existing in Dubai & Bahrain

Damas 01& Overview Introduction Achievements Challenges ahead Strategy Conclusion

Damas 01& Conclusion To be or not to be? Is no longer the question Other questions prevail now How many? How much strong? Capital, rating? How much knowledgeable? Successful answers to those questions will involve a virtuous business cycle Takaful & Retakaful development Benefits for overall economy and society

Damas 01& Retakaful &Takaful’s virtuous cycle Retakaful Less expensive takaful products Higher profitability Lower cost of capital Stronger growth Enhanced insurability Secure industry Takaful Company Overall economy

Farid BenbouzidDamas 01& Thank you Sources Islamic Insurance Conference, London, Sept , 2003 Swiss Re, Understanding reinsurance, 2004 Swiss Re, sigma N°6/ 2002.