report

Transforming Operating Performance

The World Takaful Report 2011

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 6th Annual

10 & 11 April 2011, Dusit Thani Dubai, UAE

Dear Insurance Industry Leader,

It is with great pleasure that we present to you the 4th annual edition of the World Takaful Report, a ground-breaking original research project developed in collaboration with leading global professional
services organization, Ernst & Young. The insights provided in this year’s Report will be all the more critical as leading industry players in the global Takaful industry are seeking to re-tune their business
strategies in order to fast-track growth in the industry as the global economy enters a stronger recovery phase.

The World Takaful Report is exclusively launched onsite annually at the World Takaful Conference (WTC), during a special plenary session and now in its 4th annual edition has established itself as an
indispensable reference resource for the key decision-makers in the global Shari’ah compliant insurance industry who are in a continuous pursuit of improving their competitive performance and operational
efficiencies. With a principal focus on ‘Transforming Operating Performance’, the World Takaful Report 2011, will analyze the key trends shaping the industry, map out the strategic direction of the
market leaders and probe the emerging landscape of opportunities.

We would like to express our sincere gratitude to Ernst & Young and their Islamic Financial Services Group for investing their considerable talent and resources in developing the World Takaful Report.

We hope that the analysis in this year’s Report will provide practical, constructive and valuable insights which will be useful in your own strategic planning activities and will assist your organisation in its
quest for success as the global Takaful industry enters the next phase of growth. To know more on how your organization can play a part in this initiative in the future, please email sophie@megaevents.net

Yours sincerely,

David McLean
Managing Director
The World Takaful Conference
A MEGA Brand

MEGA Brands: Shaping the Future of the Global Islamic Finance Industry Since 1993
P.O. Box 72045, Dubai, UAE | t. +9714 343 1200 | f+971 4 343 6003
MEGA Brands. MEGA Clients. Market Leaders.
www.megaevents.net

THE WORLD TAKAFUL REPORT 2011: TRANSFORMING OPERATING PERFORMANCE

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 The World Takaful Report 2011

Transforming Operating Performance

April 2011

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 Disclaimer

The contents of the World Takaful Report 2011 are based on a combination of quantitative data and qualitative comments and hence provide a
subjective assessment of the current market. All quantitative comments are based on published information wherever possible. Where published
reliable data was not available, qualitative comments were made which may or may not reflect the true state of affairs. Information has been
assimilated from secondary sources, including published country, industry and institutional information, and primary sources, in the form of
interviews with industry executives.
We are not expressing any assurance on the accuracy or completeness of the information obtained. Although this report has been documented
based on our understanding of Islamic financing activities to include only such activities that are deemed Shari’a compliant, no Shari’a opinion
whatsoever has been taken on this report. Hence, the contents of this report, in terms of the activities to be carried out, might not necessarily be
consistent with Shari’a in all cases, and the opinion of a Shari’a scholar(s) should be taken before any further steps are made to implement
suggestions made in the report.
Whilst every care has been taken in the preparation of this report, no responsibility is taken by Ernst & Young as to the accuracy or completeness
of the data used or consequent conclusions based on that data, due to the respective uncertainties associated with any assumptions that have
been made.
This report is documented for the World Takaful Conference. No part of this document may be republished, distributed, retransmitted, cited or
quoted to anyone without prior written permission from MEGA Events and Ernst & Young.

2 THE WORLD TAKAFUL REPORT 2011: TRANSFORMING OPERATING PERFORMANCE

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 Contents

► Executive brief
► Key features of takaful

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 Executive Brief

Dear Takaful Executive,

On behalf of Ernst & Young, I take this opportunity to introduce to you the 4th annual edition of Ernst & Young’s World Takaful Report (WTR11). We believe that
the tremendous market response to WTR makes it a benchmark for the takaful industry and an essential global reference source for decision makers in Islamic
finance.

The takaful industry and its core markets have experienced another challenging year, where positive signs of economic recovery and improved business sentiment
were shaken by the socio-political uncertainty witnessed across the MENA region in Q1 of 2011. In terms of reported industry growth, 2009 was a comparatively
slow year for the takaful industry, where global contributions grew 31% to reach US$ 6.9 billion, and remain on course to surpass US$11.9 billion by 2011. The
industry is not without risks, but its potential remains an important feature of Muslim emerging markets for many indigenous and global insurance players.

Based on our assessment of published company financials, 2010 was a better year for takaful growth, although poor profitability and an overreliance on investment
income remain key challenges. Most industry CEOs we interviewed agree that it is no longer business as usual. Over 70% of respondents identified competition
as a key risk going forward. Also, the takaful industry is yet to witness the much talked about consolidation, and organic growth still appears to be the preferred
route for many operators.

The majority of industry leaders we spoke to are clearly focused on Transforming Operating Performance of their businesses over coming months. The primary
focus of this transformation is increasing customer acquisition, albeit selectively, while maintaining a more flexible cost structure. The cost-effective availability of
operational expertise across underwriting, claims, actuarial, finance and investments will determine the success of this strategy. This expertise is scarce and
comes at a premium.

To help address the above, we have drawn upon the results of our global research programs which suggests that high performers, i.e. those with top quartile
growth and profitability, are significantly ahead in driving improvement in four critical areas:

►Customer reach - The markets and customer segments you are in determine your opportunity.
►Operational agility - Your growth is determined by your ability to adapt and respond to changes in regulations and market conditions.
►Cost competitiveness - Your profitability is determined by appropriate pricing and the competitiveness of your cost base.
►Stakeholder confidence - Your value, and ability to fund growth, is determined by the confidence of your stakeholders.

We believe that competitiveness is best achieved through real market insights. I hope that you will find this report informative and useful for your business.

Ashar Nazim Justin Balcombe

Executive Director & Islamic Financial Services Leader Executive Director & MENA Insurance Leader
Ernst & Young Ernst & Young

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 Introduction to Takaful
Takaful can be considered a Shari’a compliant form of conventional cooperative insurance

The company accepts premiums from the insured at a level which it anticipates will cover claims and result in a profit.
This process of anticipation is akin to Maysir (speculation).

Conventional
The insured pays premiums to the company in exchange for indemnity against risks that may not occur.
Insurance
This process of ambiguity is akin to Gharar (uncertainty).
(non-mutual)
The company engages in investments that derive their income from interest and/or prohibited industries.
This process is akin to Riba (usury) and/or relates to Haram (prohibited) activities.

Takaful is based on principles of Ta-awun (mutual assistance) that is Tabarru (voluntarily) provided. Takaful is similar to
Takaful
conventional cooperative insurance whereby participants pool their funds together to insure one another.

Mutual Guarantee - The basic objective of Takaful is to pay a defined loss from a defined fund. The loss is covered by a fund
created by the donations of policyholders. Liability is spread amongst the policyholders and all losses divided between them. In
effect, the policyholders are both the insurer and the insured.

Ownership of the Fund - Donating their contributions to the Takaful fund, policyholders are owners of the fund and entitled to its
profits (this varies slightly between the adopted models which are described later).

Five Key
Elimination of Uncertainty - Donations, causing transfer of ownership to the fund, are voluntary to mutually help in the case of
Elements
a policyholder’s loss without any pre-determined monetary benefit.

Management of the Takaful Fund - Management is by the operator who, depending on the adopted model, utilises either (or a
combination) of two Shari'a compliant contracts, namely Mudaraba or Wakala.

Investment Conditions - All investments must be Shari’a compliant, which prohibits investment in Haram industries and
requires the use of instruments that are free of Riba.

Source: Ernst & Young analysis

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 Introduction to Takaful
Conventional forms of insurance are prohibited under Islamic law as they contain elements
of Maysir, Gharar and Riba

Takaful Cooperative Insurance Proprietary Insurance

Contracts
Donation and mutual contract. Mutual contract. Exchange contract.
Utilised

Pay claims with underwriting fund

Company Pay claims from underwriting fund
and an interest free loans in case of Pay claims with underwriting fund.
Responsibility and shareholders’ equity.
shortfall (Qard Al-Hasan).

Participants’
Pay contributions. Pay contributions. Pay premiums.
Responsibility

Capital Utilised Participants’ funds. Participating capital. Share capital.

Investment
Shari’a compliant. No restrictions except prudential. No restrictions except prudential.
Considerations

Source: Ernst & Young analysis

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 Contents

► Global takaful contributions

grew by 31% in 2009, to
US$7b
► Opportunities in core
markets suggest a US$12b
industry by 2011
► Most GCC markets have
witnessed a slowdown in
takaful growth, with only
Saudi’s cooperative
insurance market remaining
strong on the back of
compulsory medical.

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 Summary of Key Events
March 2010 - September 2010

Al Hilal Takaful Tokio Marine Holding

Teamed up with Alinma Bank Bank Negara Malaysia

Signed a MOU with in Saudi Arabia, along with 4 (BNM),
various ministries in Abu other partners to establish a
Dhabi to provide Methaq Takaful
joint venture for Family and Awarded four licenses to
medical Takaful non-life Takaful business joint venture companies
services and solutions. Al Yah Satellite for operating Family
Communications has Takaful in the country.
secured the first ever Noor Takaful General
takaful space policy which Prudential BSN Takaful - Malaysia
HSBC Amanah covers the launch and in-
(Malaysia) Signed an agreement
orbit operations of Y1A Launched three new insurance plans —
with the Dubai Taxi
and Y1B. PruBSN Protect, PruBSN Protect Plus
Corporation and the
Launched a new regular and PruBSN Crisis Cover.
Roads & Transport
premium retirement plan. Agency to provide
Takaful coverage

The Securities and Exchange Commission of

Metropolitan Life Pakistan T’azur Company
T’azur Company - Insurance -Ghana
Bahrain Set a formula which directs every Takaful and Signed an Islamic re-
insurance company to deposit a share of insurance agreement
Launched a life
Signed an agreement to collected premiums to the Insurance with Hannover
insurance and
form a strategic Ombudsman Secretariat. Retakaful - Bahrain.
investment scheme,
partnership with NAS ‘Labaika’
Administration Services.

Cornerstone A
African Reinsurance Corporation Insurance (BNM), p
Amana Takaful - Maldives Bank AlJazira Saudi D
Established a new subsidiary Set up a Takaful division p
Amana Takaful (Maldives) has known as African Takaful to offer Shari'a compliant th
received regulatory approval to Received the p
Reinsurance Company (Africa insurance products and
carry out Takaful business in the government’s approval to
Retakaful) in Egypt services
archipelago. The firm is a form a Takaful company
subsidiary of Amana Global which with a capital of US$93
is a fully owned unit of Sri Lanka- million.
based Amana Takaful.

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 Summary of Key Events
October 2010 - February 2011

Pak-Qatar Family Alinma Bank

Takaful& FWU Etiq Takaful Wataniya Takaful
Cornerstone Insurance Issued a stock exchange
Signed an Completed its announcement saying that it has
Announces plans to raise USD 22.5m, or
agreement with merger with Launched its Islamic insurance signed a deal with partners to form an
55 percent of its capital, through an IPO.
Dawood Islamic Mayban Life Alliance Bank arm, Halal Takaful Nigeria to insurance firm. The Joint Venture will
Bank to distribute Assurance. Malaysia introduce Shariah compliant have a paid-up capital of SAR 200m
bancaTakaful insurance products in the (USD 53m).
Signed an country.
products
agreement with
Gulf Takaful Company- AIA and Alliance Bank Pak-Qatar Family
American
Kenya Malaysia AMMB Holdings Takaful
International Takaful Insurance of
GulfCap Investments, the Assurance to set Africa-Kenya Launched their new joint venture, Announced the Signs an agreement with
principle shareholder of Gulf up a joint venture AIA AFG Takaful with the first three incorporation of a Habib Bank to provide
Family Takaful Granted an operating of four Family Takaful products new subsidiary,
African Bank, launches the takaful coverage to Al-
First takaful operator in company, called license by the Insurance named A-Mas, A-Prima and AmFamily Takaful. Ziarat Hajj account holders
AIA AFG Takaful. Regulator Authority of Mortgage Reducing Term Takaful.
Kenya. (Hajj and Umrah savings
Kenya
plan).

Oman
Fitch Ratings Takaful Insurance Allianz Takaful
Dar Al Takaful Company UAE
International
Prudential BSN - (Tameen)
Updated its Takaful Bahrain-based fully owned
Tied up with Al Zaabi Bahrain based
Takaful Rating subsidiary of Allianz Group
Insurance Brokers to Takaful International Announces its
Methodology, a Launched a Family and HSBC Amanah have
extend its Shariah announces its plans interest in setting up
sub-sector criteria Takaful plan named entered into
compliant services to the to open its first office a takaful operator in
report within its PruBSN Ummah,. Bancassurance
emirate of Umm Al abroad in Qatar the UAE. The insurer
insurance group partnership to promote
Allianz Takaful - Quwain. has appointed an
Islamic insurance products
Qatar advisory firm to carry
The Malaysia Deposit Takaful International in the State of Qatar.
out the due diligence
Insurance Corporation Bill
Allianz Takaful has 2010 Italian Assicurazioni Allianz Utama
partnered with Generali has signed an Bank Kerjasama
Doha Bank to Tabled in parliament to agreement to appoint Rakyat Malaysia German based Allianz
promote and sell provide for the Takaful International Utama Indonesia
the insurer’s Hong Leong Tokio Launched three new announces plans to spin
establishment of an operator as Generali’s
products in Qatar Marine Takaful representative in Bahrain. Takaful products in off its Takaful
Takaful IBB and Takaful explicit national Takaful
collaboration with unit, Allianz Indonesia
BIBD and insurance benefits Launched a Family Etiqa Takaful. Sharia in 2014, in light of
protection system. Takaful scheme
Merged their Takaful operations and the country’s potential in
named HLTMT
the Islamic finance
rebranded as Takaful Brunei Ehsan,
Darussalam. industry

Page 9 The World Takaful Report 2011 9

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 Global Takaful Contributions
Global gross takaful contributions reached US$ 7 billion in 2009, and continue to boast
healthy growth, although below that seen in 2005-2008
Global Gross Takaful Contributions (US$m)

6,975
CAGR 2009
CAGR (2005 - 2008) = 39% 2005-2008 growth
Growth (2009) = 31% 5,323

Levant 18% 40%

4,122
Indian
3,068 Sub- 135% 85%
continent
1,988
Africa 18% 26%
1,384

South 29%
28%
East Asia

GCC 45% 31%

(e)

Iran - Gross Contributions by Year (US$m)

2,164 2,561 2,896 3,644 4,128 4,144 13% 0.4%

Notes: Iran’s financial services sector is entirely Islamic and as such, has been shown separately from the global analysis. Saudi Arabia requires that all insurance companies operate under a cooperative
business model, which is a key feature of takaful. As such, Saudi Arabia has been included in the global analysis. However, not all cooperatives in Saudi Arabia operate fully as takaful companies.
Data from the World Islamic Insurance Directory has been cross referenced with published national statistics for takaful where available. Numbers may not total correctly due to rounding.

Source: World Islamic Insurance Directory 2011 (Reproduced with permission from Takaful Re Limited), Ernst & Young analysis

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 GCC Takaful Contributions
Most GCC markets have witnessed a slowdown in takaful growth, with only Saudi’s
cooperative insurance market remaining strong on the back of compulsory medical
Gross Takaful Contributions in the GCC (US$m)

CAGR 2009
CAGR (2005 - 2008) = 45% 4,887 2005-2008 growth
Growth (2009) = 31%

3,754
Bahrain 68% 22%
2,847
Qatar 56% 6%
2,089

UAE 135% 18%

1,239

Kuwait 7% 27%

Saudi 40% 34%

Arabia

Bahrain Qatar UAE Kuwait Saudi Arabia

Penetration

2008 2009 2008 2009 2008 2009 2008 2009 2008 2009
2009

Takaful 0.33% 0.45% 0.12% 0.14% 0.21% 0.31% 0.07% 0.12% 0.62% 1.05%
Insurance 1.82% 2.59% 2.26% 0.79% 1.97% 2.19% 0.62% 0.61% 0.65% 1.04%

Note: Takaful penetration is gross contributions as a percentage of nominal GDP in respective year. Numbers may not total correctly due to rounding.
Source: World Islamic Insurance Directory 2011, Ernst & Young analysis; Global Insight; Swiss RE - Sigma No. 3 (2010)

11

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 South East Asian Takaful Contributions
Unlike the GCC, the South East Asian markets have continued their strong takaful growth.
Indonesia is rapidly emerging as an important takaful market
Gross Takaful Contributions in South East Asia (US$m)

CAGR 2009
CAGR (2005 - 2008) = 27% 2005-2008 growth
Growth (2009) = 33%

Brunei 6% 0%

Thailand 8% 0%

Indonesia 26% 67%

Malaysia 29% 30%

Brunei Thailand Indonesia Malaysia

Penetration

2008 2009 2008 2009 2008 2009 2008 2009

2009

Takaful 0.23% 0.23% 0.01% 0.01% 0.03% 0.05% 0.40% 0.60%

Insurance N/A N/A 3.34% 4.07% 1.35% 1.33% 4.22% 4.84%

Note: Takaful penetration is gross contributions as a percentage of nominal GDP in respective year. Numbers may not total correctly due to rounding.
Source: World Islamic Insurance Directory 2011, Ernst & Young analysis; Global Insight; Swiss RE - Sigma No. 3 (2010)

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 Other Markets Takaful Contributions
Sudan is the most significant market outside of the GCC and South East Asia, while Egypt,
Bangladesh and Pakistan are experiencing rapid growth
Gross Takaful Contributions in Other Markets (US$m)

CAGR 2009
CAGR (2005 - 2008) = 28% 2005-2008 growth
Growth (2009) = 41%

Others 29% 55%

Bangladesh 191% 58%

Sudan 18% 21%

Bangladesh Sudan Others

Penetration

2008 2009 2008 2009 2008 2009

2009

Takaful 0.13% 0.19% 0.48% 0.63% N/A 0.05%

Insurance 0.9% 0.94 N/A N/A N/A N/A
Note: Takaful penetration is gross contributions as a percentage of nominal GDP in respective year. Numbers may not total correctly due to rounding. The others category are
countries with less than US$40m contributions including: Singapore, Senegal, Egypt, Mauritania, Jordan, Lebanon, Yemen, Palestine, Pakistan and Sri Lanka.
Source: World Islamic Insurance Directory 2011, Ernst & Young analysis; Global Insight; Swiss RE - Sigma No. 3 (2010)

13

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 Global Takaful Contributions
Continued strong growth in the takaful industry suggest that global contributions could
reach US$ 12 billion by 2011
WTR10 Forecasts WTR11 Forecasts for Global Gross Takaful Contributions (US$m)

Growth in 2009 = 31%

Growth 2009
11,999

9,148 Indian Sub- 85%

Continent
6,975
Levant 40%

► The World Takaful Report

Africa 26%
2010 forecasted total
contributions to reach US$6.8b
in 2009. South-East
29%
Asia
► The results have been slightly
better despite the economic
slowdown in key markets. GCC 31%
Takaful growth has continued
2009 (e) (f)
to remain strong in 2009 and
current growth trends would
suggest US$12b in gross
contributions by 2011.

Note: Forecasted growth for 2010-2011 is based on respective growth rates in 2009, which we feel are more representative of true growth potential.
Source: World Islamic Insurance Directory 2010, Ernst & Young analysis

14 THE WORLD TAKAFUL REPORT 2011: TRANSFORMING OPERATING PERFORMANCE

Page 14 The World Takaful Report 2011

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 Key Lines of Business
Family and medical takaful continue to grow strongly in the MENA region, primarily fueled
by Saudi Arabia’s introduction of compulsory medical insurance policy
Takaful Contributions by Business

MENA South East Asia

► Compulsory medical insurance requirements in Saudi Arabia ► Family takaful in Malaysia is highly penetrated and is
have contributed to growth in Family & Medical. estimated to contribute 77% of net takaful contributions in
► Family takaful remains underpenetrated and is estimated to 2010.
contribute only 5% of gross contributions in the MENA region. ► By comparison, in 2009, life insurance contributed 58% of
Conventional Life accounts for approximately 15% market gross global insurance premiums.
share
Source: World Islamic Insurance Directory 2011, Ernst & Young Analysis, Note: MENA includes the GCC, Africa and Levant. The consolidated split between
Sigma Swiss Re Report, March 2010 family and medical is not available.

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 Current Contribution Concentrations
The takaful industry is concentrated in the MENA and South East Asia

Global Takaful Operators (2008) and Contributions (2009)

1
1

1 11 16
1 3 12 4
2008 Gross 1 2 4 9 Malaysia
5 10
Contributions 1 32
1
6
US$1.2b
2
(US$m) 15 2
3
1 1 Indonesia
3000+ 1 1 US$252m
15

1000 - 3000 Sudan 2 3

3
US$340m
100 - 1000
KSA Kuwait
10 - 100 US$3.9b US$127m

Under 1 – 10 Qatar UAE

US$136m US$640m
Takaful operators
present but no record
of contributions

3 Note: Indonesia has three fully fledge takaful operators and 36 takaful windows.
The number of takaful operators shown on this slide are updated as of 2008. 2009 data was not
Source: World Islamic Insurance Directory 2010; Ernst & Young analysis available at the time of print.

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 Current Contribution Concentrations
Despite having a large number of operators, Malaysia has a relatively high ratio of gross
written contributions per operator
Levant GCC East Indian Sub-Continent Africa
Contributions per operator Contributions per operator Contributions per operator Contributions per operator
US$4m US$64m US$16m US$12m

Malaysia
Contributions per operator
► On average, takaful operators in the GCC and other
US$116m emerging takaful markets write less business than
their counterparts in the more mature market of
Malaysia.
► This volume of contribution reflects the relative
stages of development across global takaful markets
and supports the argument that takaful needs to build
scale if it is to successfully compete in many
emerging markets.
► The relatively high levels of premium per operator in
Malaysia would seem to support the need for further
competition.

Source: World Islamic Insurance Directory 2011; Ernst & Young analysis

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 Muslim Population Centers
Large Muslim population centers can be found throughout the emerging markets of MENA
and Asia
Global Estimated Muslim Populations in 2010

Turkey Iran
~74m ~74m

Egypt
~80m

Estimated Algeria Morocco

Muslim ~34m ~32m
Populations
in 2009
Indonesia
100m + ~204m

50 - 100m
Nigeria
10 – 50m ~75m
Pakistan India
5 – 10m ~178m ~177m

1 – 5m Bangladesh
~148m
Under 1m

Source: Pew Research Center, Ernst & Young analysis

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 Economic Growth Forecasts – GCC and MENA
The ongoing political turmoil in the MENA region may result in a slow down of economic
growth
The current turmoil threatens the reputations of many of the
countries in the MENA region. The longer the heightened political
and financial system risks last, the longer and more significant the
economic impact. The degree to which this political unrest will
spill over into the economy and become a longer term issue is still
evolving.
A.M. Best Company

Credit Agricole has said that it is revising its GDP forecast for
Egypt to 3.7%, down from 5.3%, with tourism being particularly
badly affected.
Credit Agricole

Saudi Arabia's economy is seen expanding by 3.9 percent in 2011

and will remain one of the Middle East's prime areas for
Sudan is heading for an acrimonious split but while southern investment. However, a shadow has been cast over Saudi
leaders want political independence from the north, economic Arabia’s political profile, with the recent social unrest in North
realities may keep them uncomfortably dependent on their former Africa increasing risk aversion towards the entire region.
foes. South Sudan's economy is likely to be vulnerable after the Business Monitor International
split.
Reuters Africa
While some global equity markets, especially in emerging
markets, have suffered from the escalation of political chaos in
The ratings on Bahrain have been lowered by an aggregate three
Egypt, most of the effect has been focused on other MENA
notches since the onset of political tensions and remains on credit
markets, exacerbated by the spread of protests elsewhere in the
watch with negative implications. Indications are that the ratings
region. Oil prices have shown volatility. The reduction in Libyan
will be lowered if political tensions continue.
output and fears that the developments could spread to Saudi
Standard & Poor’s
Arabia has added to fears about oil supply.
Moody’s Investors Service
Source: Onesource, Global Insight

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 Economic Growth Forecasts – SEA
The South East Asian economies are expected to grow steadily, with the unrest in MENA
and earthquake in Japan not expected to have significant impact
The Asia-Pacific economies are poised to post solid growth in
2011.GDP growth rates in 12 of the 14 major regional economies
are expected to be moderate compared to 2010 growth rates,
given that US economic conditions remain soft and doubts remain
over the sustainability of the euro zone recovery.
Within Southeast Asia, Malaysia is expected to grow by 4.8-5.3
per cent and Indonesia could see an expansion of 5.9-6.4 per cent
in 2011.
Standard and Poor’s

Kenanga Research maintains Malaysia’s GDP growth at 5.7 per

cent for this year, barring unforeseen events and worsening of
Japan’s nuclear crisis as well as escalation of the Middle East and
Libya’s political conflicts. If there was any impact on the massive
earthquake and disastrous tsunami, it would likely be neutral for
Indonesia, Southeast Asia’s largest economy, which fared better the Malaysian economy this year.
than its neighbors during the 2009 global recession as it is less BERNAMA, Malaysian National News Agency
reliant on exports, expanded at the fastest pace in more than a
year. The country’s sovereign debt rating was raised to the
highest level in 12 years. The outlook is positive.
Standard and Poor’s
Malaysia’s 2011 GDP growth forecast has been raised to 5.5 per
Indonesia’s credit rating was raised to BB+, one level below cent from 5.2 per cent previously, driven by robust domestic
investment grade, citing the economy’s resilience to the global demand. The country’s consumer price index forecast has also
crisis and improved finances. increased to 3.6 per cent from 3.4 per cent previously. The growth
Fitch Ratings target this year should be easily met, while inflationary pressures
continue to build.
Goldman Sachs

Source: Onesource, Global Insight

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 Insurance Penetration Rates
Key takaful markets are characterized by low insurance penetration rates and
comparatively high rates of economic growth
Insurance Penetration and Real GDP Growth for Select Countries
18%

16%
Acceptability of insurance and takaful in key
UK Muslim markets remain a key challenge for growth
premiums/Nominal GDP in 2010)

14% of the takaful industry.

Insurance Penetration (Gross

12%

France
10%

Italy USA Organisation of the Islamic

8% Singapore
World Conference (OIC) member states
Canada (2010)
Germany
6%
Malaysia
Thailand India
4%
Pakistan
Russia
UAE Jordan Morocco
2% Tunisia
Turkey Egypt
Kuwait Oman Bangladesh
KSA Indonesia Nigeria Qatar
0%
-2% 0% 2% 4% 6% 8% 10% 12% 14%
Algeria

Estimated Real GDP Growth (2010-2012)

Source: Swiss RE - Sigma No. 2 (2010), Global Insight, Ernst & Young analysis

21

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 Key Strategic Issues
Key challenges to future growth include increasing competition, lack of diversification and
cultural and religious implications

Key Strategic Issues

Diversification and Cultural and religious

1 Competing for growth 2 specialization
3 acceptability of insurance

► Increasing number of takaful ► Over concentration in certain ► Social systems of protection and
players in key markets. business lines. Takaful growth reliance on family ties have
► Small local players competing primarily driven by personal lines. traditionally been dominant in
against established conventional ► In the GCC, this growth has also Middle Eastern and South Asian
players. been driven by general lines. countries.
► Competing for commercial ► Shortage/absence of capacity in ► Awareness of risks, implications
business requires further capacity, various commercial lines. and Shari’a permissible takaful
underwriting expertise and ► Limited uptake of family takaful in solutions is still limited.
enhance broker relationships. the GCC. ► Growth in the GCC primarily
► High political instability in many ► Takaful is focused on Muslim driven by compulsory insurance
takaful markets. countries, many of which have rather than voluntary policies.
► Markets reaching saturation under recently experienced political
current demand (when Islamic turmoil. Investor risk appetite
banking market share of assets is must be aligned to these markets.
used as a benchmark).
► Recent growth primarily driven by
compulsory medical in KSA.

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 Contents

► Takaful companies saw

their ROE recover in 2010
but they remain below their
conventional counterparts.
► Expense ratios in the GCC
remain higher than
Malaysia, while within these
regions, there is little
difference between takaful
and insurance.
► Investment returns for GCC
takaful companies were
positive for the first time
since 2007.

23

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 Breakdown of Financial Performance
Insurance companies and takaful operators generate shareholder returns through a
number of key drivers

Company
RoE

Combined Operating Risk Underwriting

Investment Results
Ratio Retention Leverage

Commission Investment
Claims Ratio Expense Ratio Yields
Ratio composition

Insurance Investments

Note: Data used for the analysis is based on the annual reports of a sample of takaful operators and insurance companies covering both the GCC and Malaysia, including public
companies and non-public companies (wherever possible), and reports from regulators. Reports from regulators in Bahrain and Malaysia are specific to takaful industry whereas, in
Saudi Arabia and UAE reports are specific to the insurance industry. Annual reports for some of the companies for the year 2010 were not available at the time of publishing.
Numbers may differ from previous reports as the sample size has been enhanced. Refer to appendix for a full list of operators included in our sample.

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 Return on Equity
Company
RoE

Conventional insurers have maintained better ROEs than takaful

Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

operators, especially through the financial crisis Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Average Return on Equity for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information:12 in 2006, 12 in 2007, 22 in 2008, 27 in 2009, and 21 in 2010. In Malaysia: 4 in 2006, 5 in 2007, 6 in 2008, 6 in 2009 and 3 in 2010.
GCC Insurance companies publishing their information: 20 in 2006, 24 in 2007, 26 in 2008, 27 in 2009 and 11 in 2010. In Malaysia: 7 in 2006, 7 in 2007, 6 in 2008, 6 in 2009 and 6 in 2010.
RoE = Net profit / Shareholders’ equity

Source: Company Annual Reports, Ernst & Young Analysis

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 Combined Operating Ratio
Company
RoE

Malaysian takaful operators have better combined ratios than conventional

Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

counterparts while the reverse is true for GCC companies Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

COR for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information:10 in 2006, 10 in 2007, 12 in 2008, 22 in 2009, and 21 in 2010. In Malaysia: 3 in 2006, 5 in 2007, 5 in 2008, 3 in 2009 and 3 in 2010.
GCC Insurance companies publishing their information: 19 in 2006, 23 in 2007, 24 in 2008, 26 in 2009 and 13 in 2010. In Malaysia: 7 in 2006, 7 in 2007, 7 in 2008, 7 in 2009 and 5 in 2010.
Combined Operating Ratio = Net Claim Ratio+ Net Commission Ratio+ Net Expenses Ratio

Source: Company Annual Reports, Ernst & Young Analysis

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 Claims Ratios
Company
RoE

Claims ratios in the GCC remain higher than Malaysia, due largely to the
Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

prominence of life assurance in that market Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Claims Ratios for Different Jurisdictions

Malaysia’s boasts
significantly lower claims
ratios than it’s GCC
counterpart. However, this is
largely due to the difference
in dominant business lines in
the two jurisdictions. The
GCC is largely dominated by
general takaful whereas
Malaysia is mostly family
takaful.
Saudi Arabia Net Claims Ratio UAE Life Claims Ratio Bahrain Claims Ratio
Malaysia Claims Ratio UAE Non Life Claims Ratio

Note: Data of claims ratios for Bahrain and Malaysia are specific to the Takaful industry, while data for Saudi Arabia and UAE covers the insurance industry as a whole. Data was
unavailable prior to 2006 for Bahrain and 2005 for Saudi Arabia.
SAMA has modified its method of reporting claims ratios. In past years its reporting was based on gross claims, but it has now begun using net claims instead. Consequently, figures
reported above for Saudi Arabia will differ from the last years report.
Claims Ratio = Claims incurred / Earned contribution
Source: CBB Insurance Market Review (Bahrain), Annual Takaful Statistics issued by Bank Negara Malaysia (Malaysia), Annual Insurance Statistics issued by Insurance Authority (UAE), SAMA Insurance
Review (Saudi Arabia)

Page 1 The World Takaful Report 2011

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 Average Commission Ratio
Company
RoE

Takaful operators in the GCC appear to be paying more in commissions

Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

for their business, and receiving less in reinsurance commission Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Average Net Commission Ratio for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information: 8 in 2006, 7 in 2007, 13 in 2008, 22 in 2009, and 17 in 2010. In Malaysia: 2 in 2006, 3 in 2007, 4 in 2008, 5 in 2009 and 3 in 2010.
GCC Insurance companies publishing their information: 14 in 2006, 17 in 2007, 19 in 2008, 21 in 2009 and 10 in 2010. In Malaysia: 4 in 2006, 6 in 2007, 5 in 2008, 6 in 2009 and 4 in 2010.
Average Commission Ratio = Net Commission /Net Earned Premium

Source: Company Annual Reports, Ernst & Young Analysis

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 Average Expenses Ratio
Company
RoE

Expense ratios in the GCC remain higher then Malaysia, while within
Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

these regions, there is little difference between takaful and insurance Claims
Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Average Expenses Ratio for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information: 7 in 2006, 8 in 2007, 8 in 2008, 9 in 2009, and 8 in 2010. In Malaysia : 2 in 2006, 3 in 2007, 4 in 2008 and 2009 and 3 in 2010.
GCC Insurance companies publishing their information : 19 in 2006 , 23 in 2007, 24 in 2008, 26 in 2009 and 13 in 2010. In Malaysia : 7 in 2006, 2007, 2008 and 2009 and 4 in 2010.
Average Expense Ratio = General and Administrative Expenses /Net Earned Premium

Source: Company Annual Reports, Ernst & Young Analysis

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 Reinsurance Ratio
Company
RoE

Takaful operators generally retain more business, which reflects a focus

Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

on less complex lines and extra capacity Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Reinsurance Ratio for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information:10 in 2006, 10 in 2007, in 2008, 27 in 2009, and 21 in 2010. In Malaysia: 4 in 2006, 5 in 2007, 6 in 2008, 6 in 2009 and 3 in 2010.
GCC Insurance companies publishing their information: 20 in 2006 , 24 in 2007, 26 in 2008, 27 in 2009 and 11 in 2010. In Malaysia: 7 in 2006, 7 in 2007, 6 in 2008, 6 in 2009 and 6 in 2010.
RoE = Net profit / Shareholders’ equity

Source: Company Annual Reports, Ernst & Young Analysis

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 Underwriting Leverage
Company
RoE

Takaful operators have higher U/W leverage, a result of less equity when
Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

compared to established insurers and limited solvency requirements Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Underwriting Leverage for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information: 10 in 2006, 11 in 2007, 13 in 2008, 20 in 2009, and 14 in 2010. In Malaysia : 3 in 2006, 5 in 2007, 5 in 2008 , 5 in 2009 and 3 in 2010.
GCC Insurance companies publishing their information : 19 in 2006, 23 in 2007, 24 in 2008,25 in 2009 and 11 in 2010. In Malaysia : 7 in 2006 , 7 in 2007, 6 in 2008, 7 in 2009 and 5 in 2010.
Risk Retention Ratio = Gross Premium/Shareholder's Equity

Source: Company Annual Reports, Ernst & Young Analysis

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 Investment Composition
Company
RoE

Investment strategies have remained largely unchanged in 2010, while

Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

GCC operators continue to adopt a more relatively aggressive strategy Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Average Investment Portfolio Composition for a Sample of Takaful Operators

GCC Malaysia

Real Estate Equity Sukuks Deposits

Note: Where possible, publicly available corporate information has been used. In the GCC, 6 companies published information in 2007, 9 in 2008 and 6 in 2009. In Malaysia, 3
companies published information in 2007, 4 in 2008 and 2 in 2009. Data for 2010 was not available at the time of print. Figures for 2010 are based upon discussions with
industry leaders.
Deposits and placements with financial institutions in GCC are mostly less than three months. In Malaysia, deposits and placements with financial institutions vary from short
term to long term.
Source: Company Annual Reports, Ernst & Young analysis

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 Investment Returns
Company
RoE

Takaful operators in the GCC have witnessed high volatility, which reflects
Combined Risk Underwriting Investment
Operating Ratio Retention Leverage Results

their aggressive investment strategies Claims

Ratio
Commission
Ratio
Expense
Ratio
Investment
composition
Yields

Average Return on Investments for Sample of Takaful Operators and Insurance Companies

GCC Sample Malaysian Sample

Takaful Operators Insurance Companies

Note: Where possible, publicly available corporate information has been used.
GCC Takaful operators publishing their information:10 in 2006, 11 in 2007,11 in 2008, 12 in 2009, and 4 in 2010. In Malaysia : 3 in 2006, 4 in 2007, 5 in 2008 , 4 in 2009 and 4 in 2010.
GCC Insurance companies publishing their information: 14 in 2006 , 14 in 2007, 16 in 2008, 16 in 2009 and 6 in 2010. In Malaysia: 7 in 2006, 7 in 2007, 7 in 2008, 7 in 2009 and 4 in 2010.
Average Yield on Investments=Total Investment Returns /Total Investment

Source: Company Annual Reports, Ernst & Young Analysis

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 Financial Performance - Summary
Financial performance has varied significantly between key takaful markets

Drivers GCC Malaysia

Return on ► Takaful operators have returned better results than their ► Conventional insurers have produced far better results than their
Equity Malaysian counterparts. However, they have suffered through the takaful counterparts, based significantly on their investment
crisis from having aggressive investment strategies. returns.
► Returns have again picked up in 2010 after a significant fall ► Takaful returns have recovered after a slight fall during the
during 2008 and 2009. financial crisis.

Risk ► Takaful operators retain more business than conventional ► On average, operators cede between 5-15% of gross premiums
Retention insurers due to focus on less complex business classes and to retakaful entities, retaining a larger proportion of business on
potentially excess capacity. their books and converting this into better technical results.
► On a whole, the GCC industry cedes more to reinsurers than ► This strategy requires greater underwriting competence and track
Malaysian players. This broking approach causes excessive record (using historical data) to build a quality book.
reliance on investment returns to generate profitability.

Underwriting ► Average combined ratios have continued to improve over 2010 to ► Takaful operators have better combined ratios than their
Results reach 80%, coming closer to the operating performance of conventional counterparts.
conventional players. ► Claims ratios have remained largely stable up to 2009 following
► Younger takaful players with predominantly general takaful based which they have risen sharply by 6%.
business, have higher claims ratios than the Malaysian market. ► Expense ratios have remained stable for takaful operators but
► Expense ratios have risen for both takaful and conventional improved for conventional players.
players in 2010.

Investment ► There was a small recovery in takaful investment income in 2010, ► Average yield on investments have remained stable for takaful
Results following two years of losses. Conventional players continued to operators and fallen slightly in 2009-2010 for conventional
post healthy returns. players.
► Significant volatility owing to large allocation to high-risk asset ► Large allocation to fixed income securities results in limited
classes. Flight to safety witnessed in 2009, with lower allocations volatility.
to equity and higher allocation to deposits.

Source: Ernst & Young analysis

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 Key Strategic Issues
Financial performance remains a challenge for Takaful Operators in many markets

Key Strategic Issues

Quality of underwritten
1 Efficiency in operation 2 business
3 Ensuring investment discipline

► Most takaful operators are yet to ► Most takaful operators are ► Dearth of Shari’a compliant
achieve critical business volume, startups or small players, limiting capital market instruments
despite incurring substantial their access to quality customers exerting pressure on returns
establishment costs over the which negatively impacts their ► High direct exposure to equity
years loss ratios markets to maximize returns
► Expense ratio remains larger ► Access to potentially lucrative ► Ad-hoc approach to portfolio
higher than conventional peers, commercial lines is limited due to management
although improvements have underdeveloped broker ► More stringent regulations being
been made relationships applied in several countries will
► Service quality remains sub- ► Complex risks are not well restrict current practices
optimal for many operators understood and potentially
mispriced
► Business mix is sub-optimal for
many operators

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 Contents

► There are four takaful

models currently in use
► Revenue drivers for each
differ significantly
► Shari’a and regulatory
requirements are evolving
and vary across
geographies
► Thorough feasibility
analysis and strong
governance are key to
profitable growth

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 Business Models - Mudaraba and Wakala
Both the Mudaraba and Wakala models are based on single management contracts

1 Mudaraba Model 2 Wakala Model

A principal-manager agreement is used between the policyholders (Rab al
A principal-agent arrangement (wakala) is used between the policyholders
Mal - capital providers) and the takaful operator (Mudarib - entrepreneur)
and the takaful operator for both underwriting and investment activities.
for both underwriting and investment activities.

Contributions, claims Contributions, claims

Policyholders
Policyholders and distributions Policyholders
Policyholders and distributions Technical
Technical
(Participants)
(Participants) (Participants)
(Participants) Result
Result

Wakala fee is a percentage of upfront

contributions - this can sometimes
Policyholders’
Policyholders’ include a performance element to
Qard Al-Hasan Fund
Fund encourage efficient management
Policyholders’
Policyholders’
Wakala Fund
Fund
Fee

Underwriting
Underwriting Result
Result
Shareholders’
Shareholders’ Fund
Fund Investment
Investment
(technical
(technical and
and
(Takaful
(Takaful Operator)
Operator) Combined Shareholders’
Shareholders’ Fund
Fund Result
Result
investment)
investment)
Fee (Takaful
(Takaful Operator)
Operator) Qard Al-Hasan

Combined fee is a percentage share of the

underwriting result - a combination of the Retakaful
Retakaful or
or Retakaful
Retakaful or
or
technical result and investment returns Reinsurance
Reinsurance Reinsurance
Reinsurance

Notes: Critics of the mudaraba model argue that, in the cooperative framework, the technical result is not considered a profit and the takaful operator does not therefore have any
right to it. The mudaraba contract also entitles the takaful operator to a share in the underwriting result, but not to a share in any deficit.
The Qard Al-Hasan is an interest-free loan provided by the Shareholders to the policyholders’ fund in the event of deficit.
All takaful fees are preapproved as limits by the Shari'a board and vary between general and family offerings. The actual fees charged to participants is at the discretion of
management. For example, if the Shari'a board approves a wakala fee of up to 40% the operator is permitted to charge anything equal to or below that number.

Source: Ernst & Young analysis

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 Business Models - Combined and Waqf
The combined and Wakala waqf model are both based on a combination of Wakala and
Mudaraba

3 Combined Model (Hybrid Model) 4 Wakala Waqf Model

A combination of the principal-agent (wakala) and principal-manager A Waqf fund is established via a donation by shareholders. This Waqf
(mudaraba) arrangement is used with wakala is used for underwriting cannot be used to settle claims. The combined model is used to manage
activities and mudaraba is used for investment activities. participant contributions with a Qard facility provided by shareholders.

Contributions, claims Contributions and

and distributions claims
Policyholders
Policyholders Technical
Technical Policyholders
Policyholders Technical
Technical
(Participants)
(Participants) Result
Result (Participants)
(Participants) Result
Result

Policyholders’
Policyholders’ Policyholder’s
Policyholder’s
Fund
Fund Wakala fee is contributions
contributions
a percentage
Qard of upfront
Wakala fee is a percentage of contributions Investment

Takaful fund
Al-Hasan upfront contributions Initial returns
Donation

Shareholders’ Waqf
Waqf Fund
Fund
Shareholders’
Shareholders’ Fund
Fund Investment
Investment Shareholders’ Fund
Fund
(Takaful (Takaful
(Takaful Operator)
Operator)
(Takaful Operator)
Operator) Result
Result

Mudaraba fee is a percentage of

Retakaful
Retakaful or
or returns from investments Retakaful
Retakaful or
or Mudaraba fee is a
Investment
Investment
Reinsurance
Reinsurance Reinsurance
Reinsurance percentage of returns Result
Result
from investments

Notes: There is growing consensus that the combined model be considered leading practice. It is now mandatory in a number of markets including Bahrain and Malaysia. However,
critics of the combined model claim that there is a conflict of interest between the operator which seeks to maximize shareholder profits and the participants which seek to
collectively and sustainably indemnify themselves from risk and benefit from any surplus that is created. Furthermore, the Shari'a board is tasked with representing the rights of
participants, but this feature of Islamic corporate governance does not provide input at the executive decision making level.
The wakala waqf model has proved popular in Pakistan and relies upon an initial donation from the shareholders to establish a waqf fund for the participants. Only the investment
returns from this fund, (and not the waqf amount itself), may be used to pay claims. Contributions are managed through the combined model with shortfalls in the participant fund
being met through a qard facility from shareholders. Pakistani Shari’a scholars do not allow surplus distribution amongst participants . Source: Ernst & Young analysis

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 Business Model Features
The four takaful business models share many of the same features with some differences

Mudaraba Wakala Combined Wakala Waqf

Share of technical results None Percentage of upfront contribution (no share in result)
Share of investment result None Agreed profit sharing ratio
Share of surplus (technical
Percentage of surplus None
and investment results)
Loss on investments Borne solely by policyholders
Operating expenses Borne solely by shareholders’ fund
Investment instruments Acceptable Shari’a compliant instruments
Deficit in the
Qard Al-Hasan provided to policyholders’ fund
policyholders’ fund
Policyholders’
Creation of takaful fund Policyholders’ contributions contributions and initial
waqf by shareholders
Waqf amount must go to
another existing Waqf
Liquidation of
Accrue to policyholders only fund and cannot be
policyholders’ fund
disbursed amongst
participants.
Partially in Malaysia Bahrain, Malaysia
Prevalent countries United Kingdom Pakistan
and Saudi Arabia* and Sudan

Source: Ernst & Young analysis * Note: See subsequent page on regional characteristics.

39

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 Strengths and Constraints
Each model has inherent strengths and constraints

Mudaraba Wakala Combined Wakala Waqf

Strengths ► Comparatively simple model. ► Comparatively simple ► Two sources of revenues - ► Two sources of revenues -
► Enhanced profitability as the model. Wakala from contributions Wakala from contributions and
operator shares in the ► No sharing in the technical and mudaraba from mudaraba from investments.
surplus. result. investments. ► No sharing in the technical
► Operator is incentivized to ► Excessive risk taking in ► No sharing in the technical result.
achieve strong technical investments is fully result. ► The provision of the Qard Al-
results as it shares in the mitigated as no upside ► The provision of the Qard Al- Hasan partially limits excessive
surplus. exists for the operator. Hasan partially limits risk taking by operators.
► The provision of the Qard Al- excessive risk taking by ► No surplus distribution to
Hasan partially limits operators. policy holders, potentially
excessive risk taking by resulting in a positive effect on
operators. the operators financial strength
over time.

Constraints ► Shareholders are permitted to ► Profitability is reduced as ► The operator has incentive to ► The operator has incentive to
share in the technical results, there is no investment take on excessive risk in take on excessive risk in
which, under the cooperative upside from the investments (partially investments (partially mitigated
model, should be fully policyholders’ fund. mitigated through Qard). through Qard).
attributed to the policyholders ► Direct financial incentives to ► Direct financial incentives to ► Direct financial incentives to
through distribution. improve technical results improve technical results are improve technical results are
► The operator has incentive to are limited (indirect benefits limited (indirect benefits are limited (indirect benefits are
take on excessive risk in are realized through realized through distributions realized through distributions to
investments (partially distributions to participants to participants and through participants and through
mitigated through Qard). and through increased fund increased fund size). increased fund size).
size).

► No system of corporate governance that effectively addresses and represents the rights of participants.
► No accounting policy which addresses issues of equitable distribution of surplus over time given varied entry and exit by participants.

Source: Ernst & Young analysis

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 Regional Characteristics
The business execution of takaful varies significantly between key markets

Saudi Arabia - Cooperative Model Malaysia - Combined Takaful Model*

 Insurance companies are required to operate under the  All takaful operators operate under the combined model. The
cooperative model by the regulator (Saudi Arabian Monetary first two licenses issued by the regulator (Bank Negara) were
Agency). They are required to have a 90-10 split of profits under the Mudaraba model but these have now switched to the
between the shareholders and policyholders respectively and combined model for all new business. The segregation of funds
the corresponding segregation of funds (similar to the between shareholders and policyholders is required and in
mudaraba model described in this report). However, any deficit case of a deficit in the policyholders’ fund, the operator is
in the policyholders’ fund is borne solely by the shareholders. required to provide a Qard Al-Hasan.
 A number of cooperatives operate as sole takaful operators.  Operators also charge an additional nominal Surplus
These companies have appointed Shari'a boards to supervise Administration Charge (SAC) when surplus targets are met in
business operations, including investments and ensure the participants’ fund to encourage efficient management.
compliance with Islamic law. There are 4 such operators at  Surplus distributions to policyholders is allowed by regulators.
present that account for 5% of the overall market.  New guidelines have been issued by Bank Negara Malaysia,
 A number of other cooperatives in the Kingdom also offer covering the valuation of liabilities, financial reporting and the
takaful products along with their main business lines. These operational framework.
operators have also established Shari’a boards to overlook
their takaful operations.

Bahrain - Combined Takaful Model UAE – Wakala or Combined model

 All takaful operators are required by the regulator (Central  Takaful operators may operate under the Combined Model or
Bank of Bahrain) to operate under the combined model, the Wakala Model.
disclose corresponding fees to policyholders, use AAOIFI’s  The segregation of funds between shareholders and
accounting standards and segregate policyholders’ funds from policyholders is required and in case of a deficit in the
that of the shareholders. policyholders’ fund, the operator is required to provide a Qard
 In case of a deficit in the policyholders’ fund, the operator is Al-Hasan. For family takaful, segregation is also required for
required to provide a Qard Al-Hasan. the participants’ investment fund.
 The insurance will require all composite operators (and
insurers) to separate family and general business operations.
 The regulation also requires the operators to be supervised by
a central Shari’a board established by the regulator.
Source: Local Regulatory Rule Books, Ernst & Young Subject Matter Experts

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 Regional Characteristics
Takaful is expanding into new markets. The preferred model appears to be the combined
model with variations in certain aspects

Indonesia – Wakala or Combined* Kenya – Combined model

 Conventional insurers are allowed to write takaful business  Kenya has recently been introduced to the Takaful proposition
through licensed takaful windows. However the regulators have with the launch of one full-fledged takaful operator in 2011 and
indicated that these windows will be phased out in time. another conventional insurer launching takaful products in late
 Takaful operators and windows may operate using Wakala or 2010.
Mudaraba arrangements. Takaful contracts with participants  These operators are currently allowed to offer only general
must be based on the principle of Tabarru (donation). takaful products.
 Segregation is required between the Tabarru funds (participant  Takaful operators are regulated by the Insurance Act of 2009
contributions), shareholders’ funds and participants’ investment and there is no formal framework specifically recognizing the
funds (in case of family takaful). unique dimensions of takaful.
 A Qard al Hassan facility must be provided by the  Takaful operators have adopted the combined business model.
shareholders to meet deficiency in the takaful fund. They have segregation of funds between policyholders
 Underwriting surplus can be retained in the takaful fund, or contributions and shareholders equity. Underwriting surplus is
partly retained and the remainder either distributed to allowed to be distributed amongst participants or donated to
participants or distributed between participants and charity.
shareholders as per an agreed percentage. Sharing of surplus  The operators have also appointed Shari’a Boards to advise
is allowed by a Fatwa by the National Shari’a Council of them on their compliance with Shari’a.
Indonesia. No distribution is permitted until Qard has been  The operators are leveraging the distribution channels of the 2
repaid, or if it would cause the fund to breach solvency Islamic banks operating in Kenya along with the channels of
requirements. various Islamic windows.

Source: Local Regulatory Rule Books Ernst & Young Subject Matter Experts, Middle East Insurance Review, March 2010

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 Key Strategic Issues
Each takaful model offers a different set of opportunities that need to be understood to
drive sustainable growth

Key Strategic Issues

Revenue drivers for each Shari’a and regulatory Building customer trust /
1 model vary significantly
2 requirements vary
3 brand loyalty

► Differing fee structures mean that ► Takaful regulations remain specific ► Industry is yet to implement
profitability of models can vary to jurisdictions, with direct impact governance standards to
substantially on feasibilities and go to market effectively address the balance
► Resilience of each model is strategies between mutual insurance and
impacted by the timing, process ► There is some convergence in profit orientation
and obligations attached to each preferred model with the combined ► Policyholders are sole providers
set of revenue streams model commonly adopted in UAE, of risk capital but
Bahrain, Malaysia and Indonesia. acknowledgment is missing
► Shari’a framework is yet to be
convincingly applied as a business
advantage
► Significant differences exist in
Shari’a rulings between
jurisdictions.

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 Contents

► Competition ranked as the

highest risk by senior
executives as downward price
pressures continue.
► Evolving regulations likely to
result in larger capital
requirements.
► Sociopolitical uncertainty in
MENA, the largest market for
takaful poses considerable
growth risks.
► Achieving technical profits
remains a challenge but more
engagement with actuaries
being seen.

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 Takaful Business Risks
Competition, shortage of expertise and socio-political uncertainty are key business risks for
takaful in 2011
How the Business Risks Match up - Results from 2011 and 2010

Shortage of Socio-political Inability to achieve

Competition Evolving Regulation Misaligned Cost
Category
Risk and

Expertise Uncertainty underwriting profit

Strategic Risk Operational Risk Financial Risk Compliance Risk Operational Risk Operational Risk

2011 1st 2nd 3rd 4th 5th 6th

2010 2nd 1st not ranked 6th not ranked 4th

► Low barriers to ► Lack of skilled HR ► Current political ► Varying regulatory ► Challenges with ► Limited technical
entry (minimum and increasing unrest has requirements, also effectively aligning underwriting
capital competition for destabilized the specific to business cost base with capabilities.
Contributing Factors

requirements). resources. economy in many models. current market ► Potential increase

► Increasing ► Lack of retention markets across ► Young and conditions. in claims ratios.
competition and of skilled MENA. developing ► Large cost base, ► Aggressive pricing
aggressive pricing. professionals. ► High growth regulatory regimes. not matched by strategies and
► Competitive ► Limited pool of markets may ► Evolving capital anticipated growth limited safety
pressures reducing scholars with the experience slower requirements (risk in business margins.
safety margin in requisite premium growth as based capital). volumes. ► Investment
premiums. knowledge. a result of reduced volatility.
► Market share being ► Lack of operational
economic activity,
eroded by new expertise in certain FDI and tourism.
competitors. lines of business.

Source: Ernst & Young analysis

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 Takaful Business Risks
Alongside the top three risks, evolving regulations, misaligned cost base and achieving an
underwriting profit are all key risks
Takaful Global Business Risks
Key Business Risks 2010 Key Business Risks 2011
Financial Compliance
Shortage of
1 1 Rising Competition
Expertise

Evolving Shortage of
2 Competition Regulation 2
Expertise

High-risk investment Sociopolitical ▲ 3

Sociopolitical
3
portfolios Uncertainty Uncertainty

Inability to Achieve Evolving

4 4
Underwriting Profit Regulations
Misaligned
5
Limited Financial
Flexibility
▲ Costs 5 Misaligned Costs

Competition ▼
Regulatory Inability to Achieve
6 6
Compliance Shortage of Underwriting Profit
Expertise
Inability to Tap Pent- Limited Financial
7 7
Up Demand Flexibility
Inability to Achieve
8
Enterprise Risk
▼ Underwriting Profit 8
Inability to Tap Pent-
Management Up Demand

9
Global Economic Strategic Operational 9
Global Economic
Downturn Downturn

Lack of Rated High-risk investment

10 Key to Symbols 10
Retakaful portfolios

Down from New

▲ Up from ▼ 2010 entry
2010
Source: Corporate Interviews, Ernst & Young analysis

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 Takaful Business Risks
Shortage of qualified talent pool and rising competition have consistently been identified
as key risks in both the GCC and SEA
Takaful in the Gulf Cooperation Council (GCC) Takaful in South East Asia (SEA)
Financial Compliance Compliance Financial

Evolving
Sociopolitical Regulations
Evolving Sociopolitical
Uncertainty Uncertainty
Regulations 6
5
3 4

Misaligned
1 Costs 1 Misaligned
4 Costs
Competition 2 5 Competition 2
3
Shortage of
Expertise Shortage of
Limited Expertise
6 Financial Flexibility

Strategic Inability to Achieve Operational Strategic Operational

Underwriting Profit

Business Risks in the GCC Business Risks in SEA

► Competition and human resources remain key business ► New licenses in Malaysia are pushing up competitive risks,
risks for takaful operators. while financial constraints have also become more
► Recent sociopolitical events across the MENA region have prominent.
also been identified as a key area of concern.

Source: Corporate Interviews, Ernst & Young analysis

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 Rising Competition
A further increase in the number of operators in the GCC and additional licences in
Malaysia have pushed competition to the top of the risks agenda
Commentary and Contributing Factors
New operators are aggressively acquiring market share: “ Insurance generally is
► Newly established operators continue to capture market share through aggressive pricing strategies oversupplied, takaful
that were described by a number of interviewees as “unsustainable”. Interviewees, particularly in the operators are more criticized
GCC, argued that this trend was especially evident in pricing for group and commercial risks. because they are younger -
► However, there are some signs that the situation in the GCC is improving. Interviewees also argued 15% of the market cannot
that pricing pressures are not attributable only to takaful operators. drive down prices alone.”
► Entry of four new family takaful operators in Malaysia will further enhance competition in that market. - GCC ratings exec

“ I have seen some stability in

The argument for consolidation:
pricing…we refuse to get into
► Regulatory authorities across the GCC have indicated that there would be no further licenses issued
a price war.”
until market conditions stabilize. There were also suggestions that consolidation was needed in the - GCC takaful exec
insurance and takaful industries to help build scale.
► However, this stance appears flexible given that a small number of new operators have been “ Takaful should focus on
announced and rights issues have been approved for companies which could have become targets for Islamic customers, that’s
M&A. Consolidation that has taken place in the GCC has been driven by international insurers and has where is can differentiate.”
not impacted takaful. - GCC takaful exec

Family takaful still seen as an opportunity: “ Other competitors are not

► Family takaful in the GCC remains an underpenetrated segment of the market, where critical mass has bombarding my clients.”
not been achieved and effective distribution remains a challenge. - GCC family takaful exec

Key Considerations
The customer is king - engagement and understanding is critical:
► Takaful needs to focus on customer segments that are attracted by an Islamic proposition. A clear understanding of customers and their
preferences is key.
► Personal lines and family takaful should be priorities. Access to more lucrative commercial lines requires further differentiation around service
quality, broker propositions and technical underwriting capabilities.
Source: Corporate interviews, Ernst & Young analysis

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 Shortage of Expertise
Availability of a qualified talent pool remains a key risk for takaful executives

Commentary and Contributing Factors

Human resources risks are high on the executive agenda: “ …many professionals move
► Takaful continues to suffer from a shortage of human resources with requisite expertise. This risk was in and out of the business,
considered equally important in both the GCC and South East Asia. According to interviewees, human few are willing to commit for
resource risk is particularly acute in specialist fields, including life insurance, risk management and the long-term.”
Shari’a compliance. - GCC takaful exec
► Retention was identified as a key element of this risk, where significant competition for resources has
led to aggressive recruitment strategies backed by attractive remuneration. “ The challenge is to build
► Key-person-risk was also identified by a number of interviewees as a key concern. Institutionalization of strong institutions which are
knowledge and expertise was a priority for these companies as they tried to mitigate these risks. not reliant upon a small
number of individuals for
Misalignment of resources: technical knowhow.”
- GCC takaful exec
► A number of interviewees argued that aggressive recruitment campaigns and unrealistic business
growth targets, paired with the economic slowdown, had resulted in significant cost overhangs.
► Certain operators also pointed out that recruitment of specialists to assist with particular issues, such as “ We have outsourced our
regulatory licensing, had resulted in a misalignment of resource and business needs. investment activities to our
► Operators in Malaysia appear more willing to outsource key functions of their business to experts. This
holdings company to
is largely due to the group structure of many operators in this market. leverage on the system and
expertise of the Group.”
- Malaysian takaful exec

Key Considerations
Focus on retention and selective outsourcing:
► Long-term incentive schemes are key to enhancing retention and reducing key-person-risk. Identifying and recognizing internal talent is key.
► Partnerships and outsourcing should remain considerations, particularly in the short and medium term, to help gain cost-effective access to
specialist expertise.

Source: Corporate interviews, Ernst & Young analysis

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 Sociopolitical Uncertainty
The current socio-political turmoil in several key markets will impact growth, but
opportunities may also arise
Commentary and Contributing Factors
Short-term impact of sociopolitical instability in the MENA region: “ Takaful is highly sensitive to
► The political turmoil in the MENA region may potentially lead to reduced economic growth in some the current unrest as most
markets. Prolonged instability will impact foreign direct investment, real estate development, tourism companies are young. They
and in turn impact the insurance and takaful growth. are also focused primarily on
► Operators and insurers that derived significant business from these markets have also been impacted the affected markets.”
by sovereign and corporate ratings downgrades. - GCC Executive
► Current uncertainty has also forced a number of insurance and takaful companies to revisit growth
strategies, including potential transactions. “ The political unrest has
definitely impacted expansion
Opportunities may appear in the medium to long-term: plans of a number of growing
players.”
► Many interviewees were keen to highlight potential opportunities from the current situation.
- Malaysia Exec
► Stimulus packages announced by governments in the GCC, should lead to increased consumption,
while increased risk aversion from customers was identified as a driver for protection products such as
“ The recent turmoil in Egypt
term life. Other interviewees also suggested that reforms could potentially lead to greater private sector
and parts of the Middle East
participation in welfare and result in increased use of compulsory insurance schemes.
has affected the takaful
industry, but long-term
opportunity remains strong.”
- GCC Exec

Key Considerations
Maintaining stakeholder confidence is key:
► During challenging times, it is essential that confidence is maintained with all stakeholders. Executive management should be identifying and
explain business risks, enhancing reporting lines and actively engaging with internal talent and regulators.

Source: Corporate interviews, Ernst & Young analysis

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 Evolving Regulations
Recent economic events have resulted in continued regulatory intervention and evolution

Commentary and Contributing Factors

Regulations vary significantly and continue to evolve: “ Regulatory change is very
► Further regulatory changes are impacting key takaful markets. difficult to anticipate”
► Noticeable examples include stricter solvency requirements taking effect in Saudi Arabia after an initial - GCC takaful executive
grace period. The UAE has issued regulations specific to the takaful industry, including the appointment
of a central Shari'a committee similar to that seen in Malaysia. This is in addition to the 2007 insurance “ Restrictive regulations make
law and recently issues insurance regulations covering solvency, investment and technical reserves. it very difficult to
Bahrain meanwhile has issued bancassurance regulations restricting the number of banks that differentiate…products are
insurance and takaful operators can distribute through. homogenous”
► Interviewees agreed that new regulations were a positive development. However, there were some - GCC takaful executive
reservations, particularly over product approvals and the restrictions this placed on innovation.
► Meanwhile in Malaysia, Bank Negara is in the process of implementing risk-based capital (RBC)
“ If the regulator wants
requirements for takaful operators and has issued new guidelines covering the valuation of liabilities,
consolidation, then why are
financial reporting and operational framework. FRS 101 covering presentation of financial statements
they still authorizing rights
on a combined basis has also been introduced.
issues?”
- GCC takaful executive
Consolidation in the GCC:
► Regulatory authorities across the GCC have advocated consolidation in the insurance industry, “ The problem is that many of
although this stance is yet to result in significant M&A activity beyond that seen with international these companies are better
insurance companies. off going into runoff”
► A number of interviewees also pointed out that many operators were not attractive targets for M&A. - GCC takaful executive

Key Considerations
Anticipate regulatory change:
► A consultative approach will be key to directing and anticipating regulatory change across markets.

Source: Corporate interviews, Ernst & Young analysis

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 Misaligned Costs
Challenging market conditions have exposed inflexible and misaligned cost bases

Commentary and Contributing Factors

Unrealistic targets for business growth: “ We have had to right-size
► The business case of many takaful operators was developed in the context of bullish market conditions. operations…we probably
Operators that have been launched in the last two years have instead been faced with soft markets and overload ourselves with
comparatively modest rates of growth. expertise not needed.”
► For many interviewees, this shift in business environment exposed a significant cost overhang and has - GCC Takaful Executive
proved problematic for operators trying to build market share in very competitive markets.
“ The success of takaful lies
Effectively managing the cost base: strictly in its cost
► The fee based nature of a takaful operators’ revenues makes active cost management key to ensuring management…Earning
sustainable growth in the policyholders fund. Interviewees acknowledged difficulties in aligning costs to operating revenue via fees, it
wakalah fees in deteriorating market. is pertinent to spend within
► The majority of takaful operators are not large enough to support expertise and competence across the allocated percentage.”
locations. In order to compete against more established insurers, interviewees acknowledged the need - Malaysian Takaful Executive
to centralize functions, particularly within country. Claims (excluding first notification of loss - FNOL),
low-touch underwriting, actuarial and some areas of finance all have the potential to be centralized if “ We have tried to bring
appropriately supported by processes and technology. together functions where
appropriate, to reduce cost.”
- GCC Takaful Executive

Key Considerations
Be more cost competitive then your peers:
► Soft market conditions and intense competition place great strain on the operations of insurance and takaful operators. In order to right size, it
is key to develop a clear understanding of the composition of your cost base and its drivers. It is then possible to identify, through
benchmarking costs and efficiency across functions, possible areas for improvement.

Source: Corporate interviews, Ernst & Young analysis

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 Limited Financial Flexibility
Financial flexibility has fallen down the risk agenda, but new regulations and increased
socio-political risks will impact capital needs
Commentary and Contributing Factors
Market downturn has created financial constraints:
► Solid returns are key to ensuring financial flexibility. Takaful operators in the GCC have been more “ Recent solvency and
adversely impacted by the downturn then their conventional and Malaysian counterparts. investment regulations will
► Poor results have been further compounded by increased sovereign risk and recent socio-political have a significant impact on
uncertainty across the MENA region. Such circumstances could make further capital raising existing businesses”
challenging. - GCC Takaful Executive

Recent developments will impact future capital raising: “ The recent IPO has show that
► Interviewees acknowledged that more stringent solvency requirements, particularly in Saudi Arabia and there are still pockets of
UAE, will force some insurance and takaful operators to revisit current capital. capital willing to invest in
► A recent successful IPO and capital raise was however identified as a positive trend. takaful”
- GCC Ratings Executive

Prudent use of retakaful:

► Retakaful is a key source of financing for takaful, especially for GCC-based operators. Its prudent use
“ Our loss ratios are good, so
requires standard review and acceptance of all providers, thorough creditworthiness and the use of we have carefully revisited
brokers with a solid track record. our reinsurance program and
providers”
- GCC Takaful Executive

Key Considerations
Review and enhance capital planning process:
► Careful consideration of new regulations and effective capital planning is key to ensuring future business expansion can be met.
► Boards to actively direct strategic initiatives including mergers and consolidation and ensure financing is readily available.
► Prudent usage of retakaful.

Source: Corporate interviews, Ernst & Young analysis

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 Key Strategic Issues
Key business risks can be mitigated through proper planning and effective strategy
execution. Role of Boards and senior leadership team will be instrumental
Mitigating Key Strategic Business Risks

Managing socio-political
1 Managing competition 2 Developing talent pools 3 uncertainty

► Takaful needs to focus on customer ► Long-term incentive schemes are ► During challenging times, it is
segments that are attracted by an key to enhancing retention and essential that confidence is
Islamic proposition. Personal lines reducing key-person-risk. Identifying maintained with all stakeholders.
and family takaful are priorities. and recognizing internal talent is ► Executive management should be
► Access to more lucrative key. identifying and explain business
commercial lines requires further ► Partnerships and outsourcing should risks, enhancing reporting lines and
differentiation around service remain considerations, particularly in actively engaging with internal talent
quality, broker propositions and the short and medium term, to help and regulators.
technical underwriting capabilities. gain cost-effective access to
specialist expertise.

Responding to
4 regulatory change 5 Achieve Cost Competitiveness 6 Creating financial flexibility

► If unanticipated, regulatory change ► Soft market conditions and intense ► Careful consideration of new
can be a significant risk to existing competition place great strain on regulations and effective capital
businesses. A consultative operations. planning is key to ensuring future
approach is key to directing and ► It is key to develop a clear business expansion can be met.
anticipating these changes across understanding of your cost base and ► Boards to actively direct strategic
markets. then identify, through benchmarking initiatives and ensure financing is
► Understanding the practical costs and efficiency across readily available.
implementation of regulations is functions, possible areas for ► Prudent usage of retakaful.
another important consideration. improvement.

Source: Ernst & Young analysis

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 Contents

► Takaful operators face a

highly competitive market
place with significant
business risks
► The need to transform
operating performance is
crucial for survival
► The four key drivers of
customer reach, operational
agility, cost competitiveness
and stakeholder confidence
will help operators compete
for growth

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 Competing for growth
Takaful operators and insurance companies face a highly competitive market place with
significant business risks

“ Almost 70% of all respondents believe competition is “ Over 75% of respondents believe the political
the biggest threat to their company’s performance with instability and social unrest being seen in the MENA
new entrants, more distribution channels and restrictions on region will have some form of impact on the takaful industry
working capital available to them ” over the coming 12 months ”

Our findings have shown that takaful

“ 70% are operators are under intense competitive “70% of
concerned pressure, which is augmented by other respondents believe
about the lack of key business risks. they have
profit contribution misaligned
coming from the Holistic solutions are required to address costs which are
underwriting impacting their
performance “
these multiple challenges. The end game efficiency ”
will be to effectively engage with
customers in the most cost efficient way.

“ Regulators are evolving and repositioning their

requirements at a faster pace then ever before. Takaful 60% believe a shortage of operational
“ Over
operators will need to adapt quickly to ensure they can meet the expertise across underwriting, claims, actuarial and
new regulation and reporting requirements being set investments will prevent the company from performing to its full
in each country ” potential ”

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 How are high performers responding?
Our research has identified four key drivers which we use as a framework to help you
compete for growth
For the past two years, EY has been engaged in a program of research and work with clients as they seek to survive
and respond to the downturn. This has led to many thousands of client meetings around the world through our
‘Opportunities in Adversity’ and ‘Lessons from Change’ programs.

Between September and October 2010, we interviewed some 1,400 companies from around the world and across all
sectors. We have identified the “high performers” in terms of both profit and revenue growth and tracked their
responses to see if a pattern of successful management action can be found.

Our research indicates that high performers – top quartile growth and profit - are significantly ahead in driving
improvement in four critical areas:

The markets you are in determine your opportunity

Your profitability is
Your growth is determined by your
determined by your pricing and the
ability to respond competitiveness of your
cost base

Your value – and ability to fund growth is determined

by the confidence of your stakeholders
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 Achieving the right balance
High performers are ahead on seeking to finding the right balance between the four growth
drivers
The markets you operate in play a central role in
determining the opportunity you have …

Growth requires … but profit comes

focus, tailoring, from delivering the
speed, agility and winning outcome at
effective pricing … an appropriate cost

… but also determines the risk, regulatory and reporting

landscape in which you operate

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 Where do you sit?
We have observed a range of positions ranging from widespread practice, to best in class -
these can be used to benchmark your organisation

Widespread practice Best in class

Customer Reach  Broad go-to-market approach  Clear segmentation and buyer focus
 Narrow product/service range broadly  Broadening of product/service range around
targeted existing buyers (e.g. products per customer)
 Broad but shallow market footprint  Prioritised and deep market foot print
 Primary competition through price  Reinforced brand and clear unique selling
proposition (USP)

Operational agility  Centralised decision-making and control  Accelerated speed of decision making and
differential control
 Fixed working platform and practices
 Focus on flexible working platform and practices
 Focus on the organisation
 Focus across the supply chain (e.g. claims)
 Adhoc innovation process
 Advanced innovation management strategy

Cost  Standardised pricing  Fully informed pricing

competitiveness  Still focused on cost reduction –  Seeking a sustainable cost base through
especially discretionary spend strategic change
 Focus on directly controllable costs  Seeking to adopt a holistic cost approach across
the supply chain (e.g. claims)
 Having a siloed approach to funding
and capital allocation  Having a clear strategy to optimise capital

Stakeholder  Fragmented risk functions with  Leading on identifying and explaining risk
confidence compliance mindset
 Anticipating and seeking to influence regulatory
 Reactive approach to regulatory change change
 Comply with reporting requirements  Enhancing frequency and depth of reporting
 Assumed workforce engagement  Proactive internal engagement strategy

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 Recommendations
Key issues captured in the report can be addressed by focusing on your customer,
operating model and maintaining stakeholder confidence

Addressing Key Strategic Issues

Operational Agility and

1 Customer Reach 2 Cost Competitiveness
3 Stakeholder Confidence

► Identifykey customer ► Undertake a full review of ► Plan ahead and engage

segments your expense base with regulators on
► Develop innovative ► Benchmark your costs forthcoming regulatory
products and propositions against peers requirements
► Diversify your product ► Identify functions that could ► Ensure capital is
range across multiple lines be cost-effectively effectively deployed
► Evolve distribution managed through ► Develop technical
capabilities to engage with outsourcing and/or capability to maximize
customers when and how centralization underwriting profit and
they want ► Develop new distribution retain rather than cede to
channels and evolve retakaful companies
operating model

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 Contents

► Contacts
► Interview methodology
► Sample of insurance
companies and takaful
operators
► References and
acknowledgements

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 Ernst & Young’s
Islamic Financial Services Group
EMEIA Sameer Abdi +973 1751 2801 sameer.abdi@bh.ey.com

MENA Ashar Nazim +973 1751 2808 ashar.nazim@bh.ey.com

Bahrain Abid Shakeel +973 1751 2916 abid.shakeel@bh.ey.com

Middle East & North

Kuwait Walid Al Osaimi +96650000938 al-osaimi.waleed@aw.ey.com

Africa

Qatar Robert Abboud +974 4573 444 robert.abboud@qa.ey.com

Saudi Arabia Abdulaziz Al Sowailim +966 1215 9438 abdulaziz.al-sowailim@sa.ey.com

UAE Michael Hasbani + 971 505515628 michael.hasbani@ae.ey.com

China Dong Xiang Bo +86 10 5815 2289 xiang-bo.dong@cn.ey.com

Asia Pacific

Hong Kong James A. Smith +852 2846 9888 james.smith@hk.ey.com

Indonesia Roy Iman Wirahardja +622152894315 roy.i.wirahardja@id.ey.com

Malaysia Brandon Bruce +603 7495 8762 brandon.bruce@my.ey.com

France Jean-Paul Farah +33 1 46 93 64 15 jean-paul.farah@fr.ey.com

Luxembourg Pierre Weimerskirch +352 42 124 8312 pierre.weimerskirch@lu.ey.com

Europe

Russia Jahangir Juraev +7 727 259 7206 jahangir.juraev@kz.ey.com

United Kingdom Ken Eglinton +44 20 7951 2061 keglinton@uk.ey.com

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 Report methodology and our interviews

Survey Methodology Business Risks Radar

► Our survey sought to identify key trends and business risks for the ► The Ernst & Young risk radar is a simple device that allows us to
global Takaful industry through in-depth interviews with executives present the top 6 business risks in the Takaful industry.
and industry observers. ► The risks at the center of the radar are those that the individuals
► These discussions were used to gauge business sentiment and we interviewed thought would pose the greatest challenge to the
identify key areas for inquiry. industry in 2011.
► Interviews were conducted in February and March of 2011 A total
of 14 interviews were conducted in five different countries by Ernst Business Risk Categories
& Young staff. ► The radar is divided into four sections that correspond to the Ernst
► Interviews centered on three main topics of discussion, namely; & Young Risk Universe™ model.
► Business confidence, demand and supply ► Compliance threats originate in politics, law, regulation or
► Mega trends corporate governance;
► Business risks ► Financial threats stem from volatility in markets and the real
economy;
Business Risk Ratings ► Strategic threats are related to customers, competitors and
investors; and
► Ernst & Young subject matter experts from the Middle East, Asia
and Europe developed a list of Takaful business risks and ► Operational threats impact the processes, systems, people and
contributing factors. overall value chain of a business.
► All interviewees were provided with a list of business risks and
requested to rate each to reflect its severity to their respective Anonymity and Quotes
business over the coming 12 months. Interviewees were also ► All interviewees were assured of anonymity and minutes
asked to add any additional risks they felt were important. documented during our discussions
► The results of this rating process were tabulated and a relative ► Quotations have been used to support arguments made in the
ranking assigned to each. This rank formed the basis for our report.
comparative study with 2010 results.

63

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 Sample of takaful and insurance operators
Takaful operators that contributed data to our sample: Insurance companies that contributed data to our sample:

Saudi Arabia Kuwait

►Allied Cooperative Insurance Group E C ►Al
Ahleia Insurance Company
►Sanad for Cooperative Insurance and Reinsurance ►GulfInsurance Company
►Alahli Takaful Company ►Warba Insurance Company
►Arabia Insurance Cooperative Company
►Company for Cooperative Insurance-Tawuniya Qatar
►SABB Takaful
►Qatar Insurance Company
►Gulf Union Cooperative Insurance Company
►Doha Insurance Company
►Saudi Indian Company for Cooperative Insurance
►Saudi IAIC Cooperative Insurance Company
Bahrain
►Saudi Fransi Cooperative Insurance Company
►AlAhlia Insurance
►Saudi Arabian Cooperative Insurance Company
►Bahrain Kuwait Insurance Company
►AXA Cooperative Insurance Company
►Bahrain National Insurance
►Al Sagr Company for Cooperative Insurance
►Amana for Cooperative Insurance Company
►Arabian Shield Cooperative Insurance Company
►BUPA Arabia for Cooperative Insurance
►Gulf General Cooperative Insurance Company
►Saudi Insurance Company
►Trade Union Cooperative Insurance Company

Qatar
►Qatar Islamic Insurance Company

Bahrain
►Takaful International Company
►Solidarity

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 Sample of takaful and insurance operators
Takaful operators that contributed data to our sample: Insurance companies that contributed data to our sample:
Malaysia
►CIMB Aviva Takaful Berhad Malaysia
►Etiqa Takaful Berhad ► Lonpac Insurance Bhd
►Hong Leong Tokio Marine Takaful Berhad ► Allianz Malaysia Berhad
►HSBC Amanah Takaful (Malaysia) Sdn Bhd ► PacificMas Berhad

►Allied Cooperative Insurance Group E C ► Manulife Malaysia

►MAA Takaful Berhad ► MNRB Holdings Berhad

►Prudential BSN Takaful Berhad ► Jerneh Asia Berhad

►Takaful Ikhlas Sdn. Bhd. ► Kurnia Asia Berhad

► MAA Holdings Berhad
UAE ► Pacific & Orient Berhad
►Abu Dhabi National Takaful Company PSC
►Dar Al Takaful UAE
►Methaq Takaful Insurance Company ►Abu Dhabi National Insurance Company
►Islamic Arab Insurance Company (Salama) ►Al Ain Ahlia Insurance Company
►Takaful Al Emarat – Insurance ►Al Buhaira National Insurance Company
►Al Dhafra Insurance Company
►Al Fujairah National Insurance Company
►Al Khazna Insurance Company
►Al Sagr National Insurance Company
►Al Wathba National Insurance Company
►Arab Orient Insurance Company
►Arabian Scandinavian Insurance Company
►Dubai Insurance Company
►Emirates Insurance Company
►Green Crescent Insurance Company
►National General Insurance
►Oman Insurance Company
►Sharjah Insurance Company
►Union Insurance Company

65
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 References and Acknowledgments

Sources
► Global Insight - Comparative World Overview Tables
► Middle East Insurance Review
► World Islamic Insurance Directory (WIID) 2008 - 2011 [Author: Takaful Re]
► Zawya
► Saudi Arabian Monetary Agency (SAMA) Insurance Review
► Annual Insurance Statistics - Insurance Authority (UAE)
► CBB Insurance Annual Reviews
► Annual Insurance Statistics 2009 - Bank Negara Malaysia
► Financial Stability and Payments Systems Report 2009 - Bank Negara Malaysia
► Company Annual Reports (published information for takaful operators)

Ernst & Young’s Project Team

Sameer Abdi Ashar Nazim
Justin Balcombe Abid Shakeel
Mark Stanley Noman Mubashir
Saad Quershi Danish Iqbal
Rahma Hersi Krishna Venugopal
Libin Kuruvilla Prem Shankar
Sana Mirza

For questions or comments, please contact :

Noman Mubashir: noman.mubashir@bh.ey.com

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 Ernst & Young

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