1. Operational and Actuarial Aspects of Takaful
Takaful Products and Development Issues

2. Sub Topics Classes of Takaful General Takaful Products
Family Takaful Products
Product Development
Regulation on Products Development
Takaful Performance by Products
Product Development Issues

3. Class of Takaful Biz
Two main types of takaful business - General Takaful and Family Takaful.
General Takaful provides protection on a short-term basis, normally covering a period of one year.
Family Takaful offers a combination of protection and long-term savings, usually covering a period of more than one year.

4. General Takaful - Characteristics
Usually short-term contracts
Premiums charged may vary
Contracts of indemnity
Payment of a claim does not terminate a contract
The risk to be insured does not necessarily increase over time

5. General Takaful
Motor
Fire
Engineering
Marine
Bonds
Misc Accidents

6. Motor Takaful Comprehensive (Primarily for own damage) Third Party
Bodily injury
Property damage
Personal Accident

7. Fire Takaful
Fire Takaful (fire and lightning) – usually for properties in general not for dwelling
Houseowners (plus other perils) – usually for private dwellings and bundle with home financing
Consequential Loss
Home content

8. Engineering Takaful Usually refered to Plant and Machinery- Boliers
Engine Plant
Electrical/mechanical
Lifting machinery

9. Marine Takaful Hull – structural framework of vessel Marine Cargo
Goods in Transit

10. Miscellaneous Bonds- Advance Payment and Perfomance Personal Accident
Burglary
Workman Compensation
Employer Liability
Fidelity Guarantee
Money in Transit
Public Liability

11. Family Takaful - Characteristics
Long term contracts
Premium rate is usually fixed
Payment of a claim usually terminates a life insurable contract
Insurable interest must be present
The risk to be insured increases with time

12. Family Takaful Individual (endowment) Investment Linked Group Family
Group Credit
Health
Critical Illness
Annuities

13. Individual Regular contribution Provides for protection and savings
Upon maturity to receive the amount accumulated in the investment account ( some with surplus sharing)
PIA on mudarabah
Upon death to receive amount covered

14. Investment Linked Regular or Single contribution
Provides for protection and savings
Participant have choice of investments
Can vary sum to be covered
Include Capital Protection and Structured Products

15. Group Family Annual basis
Employers, association affinity groups, cooperatives.
Usually protection only
Sum covered usually fixed or a multiple of salary
Simplified underwriting
Contribution rates are preferred

16. Group Credit Bundle with bank financial products
Single Contribution* (sometimes financed by the financier)
Usually for protection
Benefits assigned to financier
Return of PIA amount on earlier redemption

17. Health Takaful Hospitalization Benefits Daily Room and Board
Surgical Procedures
Post and Pre Hospitalization Costs
Group or Individual plans
Annual basis
Supplementary Spouse and Family benefits

18. Critical Illness Takaful
For Major Illnesses e.g. cancer, stroke, heart and kidney failure
36 related illnesses
Usually individual plans

19. Product Development
Management Committee will evaluate product proposals.
The Shariah Advisory committee will endorse the product from the Shariah perspective.
The Risk Management Committee of the Board will evaluate the level of risk for the product for endorsement
External Appointed Actuary will attest the pricing and certify the product.
Ratification by the company’s Board of Directors and final approval of the product.
Submission to Regulatory Authority ( e.g. Bank Negara Malaysia) for their endorsement and approval.

20. BNM Guidelines – JPIT 9 Guideline on Family Takaful Products
Actuarial Cert to include profit testing
Assumptions must be realistic and prudent
Section 3 - Assumptions
Section 4 - Discloser requirements

21. BNM Guidelines – JPIT 9 Assumptions: ME Ave certificate size
Level of new business
Expected contingencies- short term v long term
Investments
Taxes
Withdrawal rates

22. BNM GUIDELINES – JPIT 16 Guideline on Medical and Health Business
Section 8 - Require clear underwriting policies
Section 10 - Such policies properly documented and communicated to staff concerned
Section 11- Repudiation of claim during underwriting period

23. BNM Guidelines – JPIT 16
Section 19 - Consistency of definitions amongst insurers
Section 21– Appropriate product design
Section 23 - Appropriate pricing policy

24. BNM GUIDELINES – JPIT 33 Guideline on Investment Link Business
Section 2 – Definition of IL Policies
Section 4 – Scope of the Guidelines
Section 10,11,- Fund objectives must be clear and Fund managed by its objectives
Section 14- Funds must be separated
Section – Calculation of NAV and unit price; company is responsible for any mistake.
Section 24 – Minimum Death Benefits
Section 30 – Cooling off period of 15 days

25. BNM GUIDELINES – JPIT 33 Section 34 – Allowable Charges to the Fund
Section 37 – Maximum Fund Management Fee
Section 40 – Commissions for Single and Annual premium policies ; Max 160% over 6 years
Section 50 – sales illustration must meet the minimum requirement with respect to content and disclosures
Section 54 – Must provide at least an annual report
Section 57 to 59 – Must invest as illustrated, any rebalancing must be done in 60 days
Section 75 – Only agents with CEILI can market IL

26. BNM GUIDELINES – JPIT 33

27. Capital Protected (Structured) IL
100% capital protection at maturity of 3 years
Takaful Protection up to 125% of Investment amount
Unique & Diversified twin exposure to High Demand Commodities (Oil, Copper & Zinc) and Real Estate Assets from Japan and Europe
Guaranteed highest return from the best portfolio (which offers investors a chance to earn as high as 15% p.a.)

28. Capital Protected IL Initial Charges
Max of 3.00% of Single Contribution
Commission Structure (Wakalah Fee to Distributor)
Max of 1.25% of Single Contribution
(Inclusive in the above 3.00% Initial Charges)
Surrender /Premature Withdrawal Charges
None
Tabarru’ Charges
Max 0.5% of Single Contribution (inclusive in the 3.00% Initial Charges)
Wakalah Fee on Investment Return in Participant’s Inv. Account
10% of the investment return generated from the Participant’s Investment Account will be distributed to the Operator.

29. Takaful v Insurance in Malaysia
29.9%
15.8%
74.6%
20.2%
18.1%
CAGR 31.7%
Data Source: BNM & ISM
Family Takaful
603.7
725.5
1,266.6
1,467.2
1,905.4
32.1%
0.5%
8.9%
6.1%
-6.0%
CAGR 8.3%
Data Source: LIAM
Life Insurance
6,533.3
6,563.5
7,150.3
7,584.7
7,127.0

30. Takaful v Insurance in Malaysia
Market Share
2004
2005
2006
2007
2008
Family Takaful
8.5%
10.0%
15.0%
16.2%
21.1%
Life Insurance
91.5%
90.0%
85.0%
83.8%
78.9%

31. Takaful v Insurance in Malaysia
CAGR 16.6%
22.2%
12.1%
28.5%
-1.9%
22.0%
Data Source: ISM
Takaful
491.9
551.4
708.8
695.2
848.1
CAGR 6.4%
10.0%
-10.0%
7.2%
20.5%
Data Source: PIAM
4.3%
Insurance
8,520.4
9,369.6
8,431.8
9,041.0
10,895.6

32. Takaful v Insurance in Malaysia
2004
2005
2006
2007
2008
Takaful
5.5%
5.6%
7.8%
7.1%
7.2%
Insurance
94.5%
94.4%
92.2%
92.9%
92.8%
100.0%

33. Takaful v Insurance in Malaysia
32.0%
6.7%
1.5%
18.3%
0.4%
3.8%
RM 40,000
RM 70,000
RM 900
RM 1,400
60,197
(7,525)*
113,653
(2706)*
2,411 (301)
20,825 (496)
Growth Rate (Last 3yrs)
Asset size % GNI
Cont/Prem % GNI
Ave Life Policy Size
Ave Life Cont/Prem
Agents (per Co.)
Employees (per Co.)
*Life – 5528:4680

34. ISSUES Choice of Takaful Model
The key to product development and pricing is understanding what the expected outgoes are, where income is from and what risks are being taken.
Product Choice as a strategy?
Pru Bsn – Family Biz and IL
CIMB – Motor and Fire

35. ISSUES (…contd) Pricing of Products must provide for:-
Cost of marketing
Administration cost
Claim cost
Financing cost
Profit (expected return on capital employed)

36. ISSUES (…contd) Different marketing channels have different costs
Costs can include:-
Advertising
Printing and brochures
Commission
Training cost

37. ISSUES (…contd) Agency force (dedicated channel)
High training cost
High commission cost
Financial intermediaries (shared channel)
Sales through banks
Conflict with other banking products

38. ISSUES (…contd) Financial Intermediaries Agency force
Little underwriting
Simple products
Agency force
More sophisticated products requiring more “selling”
Important: sophistication of products must have cognizance of administration support available

39. ISSUES (…contd) Syariah Council Technical Committee Actuary
Takaful Product

40. Shariah Issues Lifetime suicide clause…? Who can participate?
Which businesses can be covered?
Can operator co takaful with conventional?

41. Legal Issues Except for some countries e.g. KSA Common Law is applied
Current Takaful contracts reflects appropriately relationship of operator and participants?
Will the courts view takaful contracts as insurance contracts?
Who does the Tabarru’ Fund belongs to?

42. Agency Force Takes time to built up
May be difficult for certain cultures to accept
Expensive to train and maintain
Tested and proven intermediary source
Very competitive
Open to misrepresentation/misselling risks (reputation risk)
Best option with ‘complicated products’

43. Financial Intermediaries
Distribution channel already in place
Bank privy to customers financial standing
Packaging of products, e.g. motor insurance, MRTA policies
Less price sensitive
Subject to internal competition
Best suited for ‘simple’ products

44. Administration Cost IT Cost Underwriting cost/policy insurance
General management cost
Marketing/advertising cost

45. Claim Cost Actual claims (claim distribution)
Claims handling cost/legal cost
Reinsurance/Retakaful cost

46. Financing Costs Insurance is a ‘money first’ business
Trust is paramount
Capital intensive business (upfront expenses meeting statutory solvency margin)
All this capital requires financing

47. Product Success - KPIs Total sum covered Number of certificates
Total amount of contribution generated
Profits realized
Increase in the number of new clients
Demographic characteristics of customers who purchased the product
Lapse rates, surrenders and claims experience

48. End