Identifying Causes for the Failure
of Salaam Halal Insurance
Dr Aqsa Aziz
Lecturer in Finance
Background
Salaam was the first Motor Takaful provider in the UK and
received FSA authorisation in May 2008 raising >60 million
of capital.
Its aim was to provide British Muslims with insurance that
was compliant with their faith.
Former CEO of Salaam, Bradley Brandon-Cross stated that:
........conventional UK insurance options are in conflict with
Islam and this creates a dilemma for British Muslims. We
are planning to create a British insurer that operates in a
way that removes this dilemma and creates an exciting new
sector in the British insurance market.
Marketing Strategy
Product was launched using an extensive marketing
campaign
Salaam employed a number of marketing strategies:
Direct mail
TV advertising
Radio advertising
Online advertising
Outdoor campaign in target areas
Community outreach programmes
Salaam advertisement.....
Source: Brandon - Cross, B. 2008
Model used by Salaam to illustrate how Takaful operates
Source: Sherzod, 2009
Salaam ran into
problems......
In November, 2009 Salaam closed to new
business with the CEO stating that:
we are in a period of solvent run-off, which means
that while we continue to offer existing policyholders
our full support, we are not providing any further
policies to new or existing customers at this time.
Reasons provided for the closure were that the
company had failed to raise sufficient capital to
continue trading
Was the reason for Salaams failure due
to insufficient capital as claimed or were
there other underlying factors that
contributed to their failure?
Literature Review
Anderson and Formisano (1988) found causes for insurance insolvency included:
rapid growth and expansion, inadequate pricing, under-reserving, poor
underwriting, re-insurance failures and general management weakness
Rappaport (1989) found under pricing, fraud and failure of state supervision
Report on Failed Promises: Insurance Company Insolvencies by US House of
Representatives Energy and Commerce Subcommittee found:
excessive delegation of management, under-pricing, under-reserving, rapid
growth, over reliance on re-insurance and incompetent management
Standard & Poors (2013) found poor liquidity management, under-pricing & under
reserving, high tolerance for investment risk, management issues and difficulties
related to rapid growth.
Literature Review
A.M. Best (1999) looked out 640 US Companies who failed, and for 426
cases identified the primary cause of failure as shown below:
Primary Causes
Number of
Companies
% of Total
Identified
Insufficient Reserves
145
34%
Rapid growth
86
20%
Alleged Fraud
44
10%
Overstated Assets
39
9%
Catastrophe Losses
36
8%
Significant change in Business
28
7%
Impaired Affiliate
26
6%
Reinsurance Failure
22
5%
Research Methodology
CASE STUDY APPROACH
Primary Data Questionnaires:
1. Shariah Scholars SSB of Salaam
2. Former employees of Salaam
3. Former clients of Salaam
Secondary Data:
1. Directors Report and Financial Statements of Salaam
2. ABI Reports
3. Various websites
Response from the Shariah
Supervisory Board (SSB) of Salaam
Sheikh Nizam Yaquby
Dr Mohammad Elgari
Mufti Barkatullah
Response from Former Employees
8 out of 20 former
employees
(40%)
Marketing
Management
Information Technology
Legal & Compliance
All respondents had >6 yrs
prior relevant experience
Duration for which employed at
Salaam
Underwriting
No. of Respondents
0 6 months
13 18 months
19 24 months
Data from Clients
Three former clients completed the questionnaire
(Muslim, male professionals aged between 31 50)
Blog several comments left by clients
Findings
INTERNAL FACTORS
1.
Pricing
2.
Underwriting procedure and
risk assessment
3.
Poor management and
handling of administration
expenses
4.
Marketing strategy
5.
Absence of re-takaful
6.
Capital adequacy
EXTERNAL FACTORS
1. Incorrect time to enter the
insurance industry
2. Digital transformation
Pricing
Shariah Scholar:
Salaams initial pricing was not competitive, but at a re-run of pricing
model they eventually got it right.
Former Client:
Their prices for the first year of operation were extremely high. When
they understood that they were not getting the mass required for
insurance operation, they reduced their price significantly and became
the cheapest in the UK. By that time, it was too late to recover as they
had spent most of their capital
Senior Management:
The key factor was the balance between price sensitivity and faith based
product choice. Whilst market research and focus groups indicated a
market for an Islamic insurance product in the UK, potential customers
were very price sensitive and would choose the lowest cost insurance
rather than a faith based product
Underwriting and Risk Assessment
10,000,000
9,000,000
8,000,000
7,000,000
6,000,000
2009
5,000,000
2008
4,000,000
3,000,000
2,000,000
1,000,000
0
Gross Takaful Contributions
Net earned Takaful Contributions
Salaams Comprehensive Income and Claims Expenses
Claims & Claims expenses
Source: PIHL Report (2009)
Poor Management and Handling of
Administration Expenses
25,000,000
20,000,000
15,000,000
2008
2009
10,000,000
5,000,000
0
Gross Takaful Contributions
Takaful Deficit
Administrative Expenses
Salaams Gross Takaful Contributions in relation to the takaful deficit and administrative expenses.
Source: PIHL Report (2009)
Former Employee: Salaam mismatched its relationship with Capita having opted for a 100%
outsourced model to get to the market quickly.
Marketing Strategy
75% of the Employees stated that the target market was
Muslims
Salaams financial statements showed that the gross
written takaful contributions increased from 563,955 to
3.64 million in one year
Former Employee:
the theory driving the business was that Muslim people would
select a Halal product; in fact the key factor was price in the
market. Given the target demographic risk and the availability of
Haram products that Muslims were selecting based on price, the
business was pressured from the outset
Absence of Re-takaful
35.00%
30.00%
Proportion of contribution allocated
to re-insurance
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2008
2009
Proportion of Takaful Contribution allocated to re-insurance
Source: PIHL Report (2009)
Salaam could have opted for re-takaful (E.g. Hannover Re-takaful).
Re-takaful provider could have provided them with a benevolent loan
Capital Adequacy
Former CEO of Salaam company had failed to raise
sufficient capital to continue trading
Shariah Scholar 1 - Salaam Insurance ran into capital
adequacy risk, therefore voluntary winding up due to
failure of raising additional capital during a downturn
time.
Shariah Scholar 2 - For any insurance company to
succeed, it needs to be well capitalised and must have
a long term vision....anything less than 6 8 years to
cover initial costs would not succeed
External Factors
1.
Incorrect time to enter the insurance industry coinciding with the
financial crisis
38% employees felt it was incorrect time to enter the insurance
industry
Statistics from the ABI reports indicate that for 2008 and 2009; the
worldwide motor revenue accounts demonstrated an underwriting
loss of 207 million and 1,467 million respectively
2.
Digital Transformation
Salaams launch on a price comparison website was delayed by 6
months.
Senior Mgt : slow technology enablement meant the company spent
more at the outset that it needed to and when it needed to raise
extra fund, the financial markets freeze meant it was unable to raise
more capital
Recommendations for Takaful
Operators
1.
Takaful operators should not restrict themselves to the Muslim
market
2.
Risks must be appropriately calculated
3.
Pricing should be carried out correctly
4.
Costs must be carefully managed
5.
Employees should be fully informed about all aspects of their
takaful products
6.
Takaful Operators should opt for re-takaful instead of reinsurance
Thank you
