BALANCED WAKALA MODEL IN GENERAL TAKAFUL TAKAFUL NETWORK SEMINAR Takaful– Beyond the hype 5th May 2009

INTRODUCTION “The GCC Takaful market is currently growing at 40% year on year -----” (AME INFO 2006) “Research from Moody’s rating agency has indicated that there are currently over 250 takaful companies in existence globally and projections show that takaful premiums are likely to reach US$ 7Bn by 2015 ….” (Susan Dingwall, Norton Rose, 2007) “Propelling takaful to become US$ 11Bn industry by 2015 …..” (McKinsey research for the WIBC competitive report – 08/09)

INTRODUCTION How valid are these statements? Is it all hype? What will sustain this growth? Will it be social consciousness or profitability? Will it be Shareholder’s profitability or Policyholder’s profitability? Or both?

WAKALA FEE STRUCTURE Wakala fee is defined as the fee Operator gets for developing and managing Policyholder’s funds. This fee can be a fixed percentage of the gross premium charged upfront and declared to the policyholder at the beginning of each financial year. This fee can also be a function of actual operating expenses which can include the element of Performance Fee based on certain agreed criteria for performance

BALANCING WAKALA MODEL Assumptions:  Business type – General  Wakala is the most appropriate business model  All hybrids including Waqf are considered as variations of Wakala model  Sharing of surplus by way of performance fee is permissible within the Wakala model

BALANCING WAKALA MODEL Assumptions:  Scenario 1 – Flat Wakala fee  Scenario 2 – Variable Wakala fee (charged on Net Revenue where outward Fac exceeds say 70%)  Scenario 3 – Variable Wakala fee with Wakala fee as function of actual expense plus performance fee based on technical surplus after charging of wakala fee

Scenario I - Flat Wakala ABC GROSS CONTRIBUTION100 FAC OUTWARD TREATY OUTWARD NET CONTRIBUTION NET COMMISSION INCOME NET REVENUE INCURRED OF NET CONTRIB TECHNICAL SURPLUS WAKALA FEE30.0 PHF SURPLUS/ (DEFICIT) ACTUAL EXPENSE20.0 SHAREHOLDERS PROFIT10.0 BALANCING WAKALA MODEL

Scenario II - Variable Wakala ABC GROSS CONTRIBUTION100 FAC OUTWARD TREATY OUTWARD NET CONTRIBUTION NET COMMISSION INCOME NET REVENUE INCURRED OF NET CONTRIB TECHNICAL SURPLUS WAKALA FEE PHF SURPLUS/ (DEFICIT) ACTUAL EXPENSE20.0 SHAREHOLDERS PROFIT BALANCING WAKALA MODEL

Scenario III - Variable Wakala with wakala as a function of expenses (120% of actual expenses) ABC GROSS CONTRIBUTION FAC OUTWARD TREATY OUTWARD NET CONTRIBUTION NET COMMISSION INCOME NET REVENUE INCURRED 50% OF NET CONTRIB TECHNICAL SURPLUS WAKALA FEE (WF) PHF SURPLUS/ (DEFICIT) PERFORMANCE FEE (PF) SHAREHOLDERS INCOME (WF + PF) ACTUAL EXPENSE20.00 SHAREHOLDER PROFIT BALANCING WAKALA MODEL

Variable Wakala model coupled with performance fee based structure is more equitable for Policyholders Portfolio mix with higher component of retained income (Net Contribution) provides an equitable balance between Policyholder and Shareholder profitability Critical success factors for sustaining growth:  Balanced Wakala fee structure  Right portfolio mix  Cost efficient operation  Contribution through Retakaful surplus BALANCING WAKALA MODEL Observations:

CONCLUSION “We are kind of halfway up the mountain… when we look down we see how far we have come and when we look up we see how much we have to do to get to the top of the mountain…” Iqbal Khan (former CEO of HSBC Amanah) THANK YOU