Takaful Primer 2011 by The International Takaful Summit

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www.hannover-re.com

Contents 04

Welcome Message

Diamond Partners

4th International Takaful Summit Summary

Milliman: 1st Global Family Takaful Report

Platinum Partners

Retakaful Report

Islamic Asset Management: Trends and Strategies

Gold Partners

Islamic Business and Finance: Tackling Takaful Conundrums

Media Partners

Welcome Message W

e are very pleased to welcome you all to the Fifth International Takaful Summit. Afkar Consulting Limited and their events organiser partner, Istishar iQ, pioneered the International Takaful Summits in London in 2007. We are once more honoured to have the support and participation of Lord Sheikh in the Summit. Lord Sheikh, who is the Chairman of the Conservative Muslim Forum and an insurance professional himself, has taken a keen interest in the development of the Takaful industry in the UK. He has enthusiastically supported the event to facilitate its development in the UK and Europe. The Fifth International Takaful Summit builds on the four successful events held in November 2007, July 2008, July 2009 and July 2010. We are honoured to launch the inaugural Milliman Family Takaful Survey 2010 at this Summit. This survey, intended to be updated annually, fills a gap in the growing body of expert literature specifically addressing the Takaful market. Family Takaful provision is forecast to overtake general Takaful contributions in the next few years. Family Takaful provision is also more amenable to the underlying spirit of Takaful. As such specialist contributions to the sound development of Family Takaful provision are timely. The City of London has prided itself in being the premier Islamic finance hub in Europe. The City is host to a vast range of expertise which can deliver Islamic finance structures and instruments to meet its customersâ&#x20AC;&#x2122; requirements. To build upon this expertise and retain Londonâ&#x20AC;&#x2122;s premier status the UK government has been committed to creating a level playing field for Islamic finance and insurance in the country. This effort, which was pioneered by the Late Lord Edward George, has now borne fruit and there is a proactive facilitation in this direction. In addition, the crisis in conventional finance and insurance offers opportunities for building on the ethical features of Islamic Finance and Insurance and widen its appeal to the growing ethical and SRI market. The United Kingdom provides a premier location for developing Islamic Finance and Insurance opportunities and engaging with the ethical and SRI communities outside the Muslim World. In the International Takaful Summit we endeavour to enable market participants from all over the world to capture the potential for Islamic Finance and Insurance in the UK, Europe and beyond. At every Summit, we strive to offer robust thought leadership and the most informed platforms and opportunities for our participants to get maximum benefit from this interaction. We welcome you to the Fifth International Takaful Summit and hope that you will become one of our many regular participants and supporters.

M Iqbal Asaria, CBE, Convenor International Takaful Summit 2011

Sponsors D I A MO N D PA RT N E R S

P L AT I N U M PA R T N E R S

G O L D PA RT N E R S

PROCESS:

C 100 M 58 Y0 K 21

PANTONE:

C 100 M 50 Y0 K 70

PROCESS:

C 100 M 58 Y0 K 21

ISLAMIC ASSET MANAGEMENT

Pantone 294C

Pantone 539C

PANTONE:

C 100 M 50 Y0 K 70

Pantone 294C

Pantone 539C

Together ... we can! Beijing

Beirut

Dakar

Istanbul

Labuan/Kuala Lumpur

BEST RE GROUP Head Oﬃce: Lot 17, Jalan Kemajuan, 87018 F.T. Labuan, P.O. Box 80865 Labuan, Malaysia T: +60 874 551 600 F: +60 874 552 600 E: general@best-re.com BEST RE (L) Limited Marketing Oﬃce: Suite 3A, Level 8, Block 3A, Plaza Sentral, Jalan Stesen Sentral 5, 50470 Kuala Lumpur, Malaysia T: +60 322 723 007 F: +60 322 723 008 E: general.malaysia@best-re.com

BEST RE Family (L) Limited Marketing Oﬃce: Suite 3B-15-6, Level 15, Block 3B, Plaza Sentral, Jalan Stesen Sentral 5, 50470 Kuala Lumpur, Malaysia T: +60 322 743 007 F: +60 322 743 008 E: general.family@best-re.com

www.best-re.com

Manila

Port Louis

Tunis

Sponsors

Norton Rose Group is a leading international legal practice. We offer a full business law service from our offices across Europe, the Middle East and Asia Pacific. Knowing how our clients’ businesses work and understanding what drives their industries is fundamental to us. Our lawyers share industry knowledge and sector expertise across borders, enabling us to support our clients anywhere in the world. We are strong in financial institutions; energy; infrastructure and commodities; transport; and technology. We have over 1800 lawyers operating from 30 offices in Abu Dhabi, Amsterdam, Athens, Bahrain, Bangkok, Beijing, Brisbane, Brussels, Canberra, Dubai, Frankfurt, Hong Kong, London, Melbourne, Milan, Moscow, Munich, Paris, Perth, Piraeus, Prague, Rome, Shanghai, Singapore, Sydney, Tokyo and Warsaw and from associate offices in Ho Chi Minh City, Jakarta and Riyadh.

D I A MO N D PA RT N E R S

Norton Rose Group comprises Norton Rose LLP, Norton Rose Australia and their respective affiliates.

Aon Corporation (NYSE: AON) is the leading global provider of risk management services, insurance and reinsurance brokerage, and human capital consulting. Through its more than 36,000 colleagues worldwide, Aon delivers distinctive client value via innovative and effective risk management and workforce productivity solutions. Aon’s industry-leading global resources and technical expertise are delivered locally through more than 500 offices in more than 120 countries. Named the world’s best broker by Euromoney magazine’s 2008 and 2009 Insurance Survey, Aon also ranked highest on Business Insurance’s listing of the world’s largest insurance brokers based on commercial retail, wholesale, reinsurance and personal lines brokerage revenues in 2008 and 2009. A.M. Best deemed Aon the number one insurance broker based on brokerage revenues in 2007, 2008 and 2009, and Aon was voted best insurance intermediary, best reinsurance intermediary and best employee benefits consulting firm in 2007, 2008 and 2009 by the readers of Business Insurance. For more information on Aon, log onto www.aon.com Aon’s three key business units: Aon Risk Services Aon Risk Services provides multifaceted retail brokering and risk management services. Delivering personalized and innovative solutions from a broad compendium of products and services, Aon Risk Services enables clients to use their financial and human capital by anticipating the obstacles that may stand in the way of achieving their objectives. Aon Risk Services’ professionals apply a client-focused approach driven by the Aon Client Promise that leverages the company’s global network of resources, world-class technology and specialized expertise to address clients’ business issues. Aon’s Global Risk Insight Platform (GRIP) was awarded a 2010 Innovation Award by Business Insurance magazine. Aon Consulting Aon Consulting is among the top global human capital consulting firms, with 2009 revenues of $1.27 billion and 6,300 professionals in 117 offices worldwide. Aon Consulting is shaping the workplace of the future through benefits, talent management and rewards strategies and solutions. From 2006 to 2009, Aon Consulting has been named the best employee benefit consulting firm by the readers of Business Insurance magazine.

Sponsors Aon Benfield Aon Benfield is the world’s premier reinsurance intermediary and capital advisor, providing clients with integrated capital solutions and services. The company offers clients access to every traditional and alternative market in the world, through an international network of offices spanning over 50 countries and more than 4,000 professionals. Clients of all sizes and in all locations are able to access the broadest portfolio of integrated capital solutions and services, world-class talent, unparalleled global reach and local expertise to best meet their business objectives. Aon Benfield is the industry leader in treaty, facultative and capital markets transactions, and relevant analytics including actuarial, enterprise risk management, catastrophe management and rating agency advisory. Aon Benfield’s FAConnect was awarded a 2010 Innovation Award by Business Insurance magazine. www.aon.com

Capital The company was formally registered on 3 October 2006 in Bahrain. The company has an authorised capital of BHD 50 million (US $ 135 million) and a fully paid up capital of BHD 20 million (US $ 54 million). Security Hannover ReTakaful is a 100% subsidiary of Hannover Re Germany and therefore an integral part of the Group. The Hannover Re Group has a gross premium of around EUR 10.2 billion and is one of the leading reinsurance companies in the world. The Group has a Standard and Poor’s financial strength rating of AA- (Very Strong) and an A.M. Best rating of A (Excellent). Hannover ReTakaful independently has been assigned a rating by Standard & Poor’s of “A” with stable outlook. The establishment of a fully owned subsidiary for ReTakaful business shows the commitment of Hannover Re Group for this market and the importance it has given to Sharia based products. In recognition of its contributions to the Industry, Hannover ReTakaful received the Innovation Award 2007 in the International Re-Takaful category by Middle East Insurance Forum, the Best ReTakaful Company 2008 and 2009 Awards from the International Takaful Awards and the Best ReTakaful Operator 2008 and 2009 from the Islamic Business & Finance Awards. Sharia Board The Sharia Advisory Board of the company consists of eminent scholars from around the world namely, Dr. Mohammad Elgari, Mufti Abdunabi Hamidi and Mufti Hassan Kaleem. The Sharia Advisory Board supports and underpins the development of the company and its products offerings.

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Licensing and Registration Hannover ReTakaful B.S.C. (c) is licensed by the Central Bank of Bahrain to provide fully Sharia compliant Reinsurance (ReTakaful), and operate as a ReTakaful Company in Bahrain for both Family and General ReTakaful. The company provides Retakaful for Takaful companies around the globe.

The Global

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Symbol of

Financial Strength Financial Strength Rating

A M

BEST A Excellent

Founded in 1899, A.M. Best Company is the leading credit rating organisation dedicated to serving the global insurance industry. Policyholders, regulators, insurance executives and brokers worldwide refer to Best’s Credit Ratings as a means of assessing the financial strength and creditworthiness of insurers and reinsurers, as well as related risk-bearing entities and investment vehicles.

For more information about obtaining a Best’s Credit Rating, please contact Clive Thursby, Senior Director, Market Development: Tel: +44 (0)20 7397 0279 • clive.thursby@ambest.com

04019A

The Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The ratings are not assigned to specific insurance policies or contracts and do not address any other risk, including, but not limited to, an insurer’s claims-payment policies or procedures; the ability of the insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. In arriving at a rating decision, A.M. Best relies on third-party audited financial data and/or other information provided to it. While this information is believed to be reliable, A.M. Best does not independently verify the accuracy or reliability of the information. For additional details, see A.M. Best’s Terms of Use at www.ambest.com/terms.html.

Sponsors ReTakaful Business Hannover ReTakaful has already started providing General ReTakaful and Family ReTakaful business since its inception with great success. General Takaful Hannover ReTakaful provides financially sound Retakaful solutions on all classes of Property and Casualty Business, on a treaty and facultative basis. The capacity is offered on both proportional and non-proportional basis. Family Takaful We are providing Family Takaful Operators with Sharia Compliant Retakaful solutions for all their products and supplementary benefits. This includes both Individual and Group Family Takaful. Team We have a resident based dedicated team of professionals for both Family and General ReTakaful Operations that will provide clients with expert and efficient solutions for all their business needs. The team at Hannover ReTakaful will also enjoy the full technical support from the parent company, Hannover Re Germany. The Executive Team comprises of the following persons:

Establishment In cognizance with the burgeoning development of Islamic banking and finance worldwide and in particular in the UAE, the potential for takaful is tremendous. The UAE has the right environment to be a global centre for Islamic banking, finance and takaful and has indeed proven its credentials to that effect. Realizing this potential, Dar Al Takaful PJSC is established to write General Takaful business with an initial capital of AED100 million of which 55% of its shares are held by the public through listing with Dubai Financial Market. The head office is based in the Emirate of Dubai, UAE. Mawarid Finance PJSC, is one of the principal founder shareholders of the Company and has played an instrument al role in the Companyâ&#x20AC;&#x2122;s establishment. Beginning 1st September 2008, Dar Al Takaful opened its door to the public. Our Vision To be the leading Takaful provider in the Region. Our Mission To achieve a standard of excellence, with superior ser vice, quality product innovation and disciplined under writing standards that are unmatched in our competitive landscape.

D I A MO N D PA RT N E R S

Mr. Mahomed Akoob, Managing Director Mr. Tarik Aouad, General Manager

Reports 4TH INTERNATIONAL TAKAFUL SUMMIT SUMMARY MASTERCLASS AT NORTON ROSE DAY ONE – 13/07/2010 The day began with welcoming remarks from Susan Dingwall, a partner at Norton Rose Solicitors. Susan provided a preview of the day and conducted the proceedings as chairperson.

M IQBAL ASARIA (AFKAR CONSULTING LTD) The opening speech was made by M Iqbal Asaria, the Convener of the Summit, who gave a bird’s eye view of the takaful and re-takaful industry. He highlighted the key statistics showing the expansion of the industry together with huge growth potential for coming years. The rationale behind takaful in the historic context was also discussed and whether that essential spirit of risk pooling and sharing was still present in modern practices. The various evolving takaful models and their implications were considered in sufficient detail. He also talked of a ‘takaful affinity community’ which includes numerous like-minded participants be they Muslim, ethicallyoriented or even socially responsible investors. The implications for the so-called ‘unique selling point’ (USP) of takaful depending on geographical contiguity or dispersion were alluded to and several emerging issues such as the “sticky” qard al hasan were aired. Iqbal also set the tone for re-takaful discussion which was picked up by other speakers later in the day. He briefly pointed to some of the issues in re-takaful and the linkage with the reinsurance markets against the backdrop of present state and future directions of the industry. He further looked at gaps in takaful provision in particular in the area of micro takaful. Iqbal concluded his presentation with 5 issues and future directions: • • • • •

lessons from Principle Insurance, improving outreach so as to include captive structures, friendly societies and discretionary mutuals; creating a USP for takaful, asset management challenges and utilising institutions like Lloyds of London for re-takaful.

ZAINAL ABIDIN (MANAGING DIRECTOR, MERCER ZAINAL CONSULTING) Zainal deliberated on the evolution and future direction of takaful models. He compared takaful with cooperatives with reasons for demutualisation. He demonstrated the hybrid operational structure of takaful where participants bear certain risks. Zainal referred to the Malaysian experience through the example of Syarikat Takaful Malaysia (STMB), which used the mudarabah model, by highlighting the family and general takaful products. He discussed the strategy employed at the time whereby the model in question aligned the interests of both stakeholders and participants. He then went on to look at the modified mudarabah model as adopted by Takaful Nasional and its implications. Zainal also considered the current favourite model of Wakalah and its mechanics including the profit-sharing aspect and the associated shariah arguments. He argued that although the alignment of interests was not on par with the previous models, it was nonetheless a ‘business friendly’ model. He posed the question of whether takaful is faith-based or profit-driven, with citations of Christian Health Sharing Arrangements and Christian Associations.

Reports Zainal concluded with the following points: • personal lines were more ‘takaful friendly’, as opposed to commercial lines; • takaful products are initially more expensive than their conventional counterparts due to regulatory requirements, • the alignment of the interests of all stakeholders is critical for success, which is challenging in the Wakalah model; and • takaful potentially has a sparkling future as an ‘aggregator of savings’.

AJMAL BHATTY (CEO TAKAFUL & COO, TOKIO MARINE, MIDDLE EAST) Ajmal discussed the corporate governance issues in takaful. After outlining the definitions of corporate governance and providing an introduction to takaful, he approached the topic in eight logical steps. Ajmal looked at takaful as a composition of concept (of risk sharing) and product which requires connectivity with customers and creating a sense of belonging among the group involved and society at large. He ruminated over issues in shariah compliance in terms of wider responsibility and the inherent conflicts at play as well as the requirement for shariah audits to support the overall process. He referred to issues regarding participants’ expectations as they are the ultimate owners and thus should be the beneficiaries, and as such the treatment of surplus ought to be in this light. In addition he referred to issues regarding shareholders’ expectations due to the fiduciary nature of their responsibilities and the need for a commercial reality to the undertaking from their perspective. He raised questions with respect to the various models and funds with the hybrid model attending to some of the risks in the individual models and that the funds need not only be separated but also segregated into separate risk portfolios . He argued that asset and liability matching for individual pools is increasingly crucial for the solvency and durability of the funds. He also underlined the importance of recognising that numerous dispensations granted in takaful undertakings are only supposed to be for a limited period until the pretext is satisfied. He considered various practical and shariah arguments in this context. He mentioned the lack of disclosure, knowledge, expertise, overall corporate governance guidance as well as absence of board committees as being critical challenges for executive structures and corporate management. Ajmal finished off by seeking attention to the need for conformity to industry and international standards as well as capacity building for stakeholders.

FFION FLOCKHART (SENIOR ASSOCIATE, NORTON ROSE LLP) Ffion looked at the legal issues in takaful contracts where she highlighted the paramount significance of the contractual wording. She argued that due to a number of factors there is a drive for certainty in contracts. She focused on three key legal issues in the main, namely governing law clauses, validity of Wakalah contracts and arbitration clauses. With regards to the governing law issues, she advanced various permutations such as national law, shariah law or even both as governing laws and the implications where there is a conflict. She poignantly referred to the well-known case of Shamil Bank v. Beximco which in abstract terms decided that shariah principles only applied if there was compatibility. As for the validity of Wakalah contracts, once again another relevant case of TID v. Blom was invoked as reference which showed that English courts are taking an active role in such issues. She contended that such legal cases could potentially have huge ramifications for the Wakalah model.

Reports The arbitration clause issue as per the case of Jivraj v. Hashwani underscored the point that such clauses would be void should there be any contravention of discrimination laws. A noteworthy point of this case is that its application is retrospective as well. Ffion concluded by repeating the importance of regularly reviewing the wording in takaful and re-takaful contracts as part of good risk management practice.

SAFDER JAFFER (SENIOR CONSULTING ACTUARY, MILLIMAN) Safder focused on actuarial inputs in family takaful provision in a very comprehensive manner. His presentation was four-pronged which included the actuarial role, family takaful inputs, family re-takaful inputs and issues and challenges for actuaries. He began with the common actuarial cycle and the various functions played in the context of takaful. He outlined the balancing act of an actuary between the practical solutions and the shariah intricacies. Before discussing the family takaful inputs, Safder considered numerous statistics and factors vis-a-vis the growth potential of family takaful. He then listed three key areas for actuarial input, namely product design, surplus distribution and role of qard al hasan. With regards to product design, he argued that the key actuarial role is to provide tailor-made solutions for client needs. As for surplus distribution, he pointed out that the primary actuarial input is to provide a fair distribution mechanism that accounts for participants’ reasonable expectations. With respect to the role of qard al hasan, he stated that the key actuarial role is to ensure adequate capitalisation and the long-term sustainability of the operator. Safder then turned to the topic of family re-takaful inputs where he brought attention to contingency reserves and recapture / inforce block takeover. With regards to the former, he argued that the key actuarial role is to facilitate a process of standardisation within the industry for long-term sustainability of re-takaful operators. As for the latter, he stated that the key actuarial role is to facilitate a discussion on such issues that are still open to be resolved. Safder concluded with a list of issues and challenges including pricing, underwriting, limited data and a shortage of expertise.

JOHN GILBERT (CONSULTANT, HOGAN LOVELLS) John’s presentation revolved around the friendly society’s route as a possible route to life takaful provision. He began with the historical background to friendly societies, leading to modern-day functions which include insurance benefits, discretionary grants and other social and benevolent activities. He enumerated five peculiarities of such societies which include: • non-commercial activities, • voluntary contributions of members, • the democratic voting system and • tax treatment and opportunities for general insurance through subsidiaries. John then moved to highlight the shared ground between Islamic concepts and the ethical notion of friendly societies. After a brief mention of the foreseeable challenges for the industry, he concluded with talking about the common opportunities such as favourable tax regimes, flexible legal vehicle and pro-mutual stance of the new coalition government in the UK.

Reports AZMAN ISMAIL (PRESIDENT, IIFIN CONSULTING) Azman’s talk was the first of two such presentations on qard al hasan whereby he provided the Islamic jurisprudential perspective. He started with the contention that qard al hasan conceptually has no jurisprudential basis but nevertheless cannot be rejected because of only that reason owing to various legal maxims. He then set out the operational development as it evolved over time in Islamic banking. Azman looked closely at qard al hasan as part of the takaful undertaking, firstly in the Malaysian context and then from both the AAOIFI and IFSB perspectives. He then considered surplus sharing together with ways that deficit can arise and the benefits of prudent reserving as a shariah objective. He concluded with considerations for shariah advisors, namely the need to be informed of the impact and implication of deficit so that they can make informed decisions.

DR LUDWIG STIFTL (HEAD OF RETAKAFUL, MUNICH RE) Dr Stiftl also spoke about qard al hasan but predominantly focused on the theoretical considerations of risk and the related repercussions. He began with an alleged Malaysian saying which had the audience in a fit of laughter. The upshot of it was to the effect that if a loan is repaid then it is deemed ‘qard al hasan ’ but if it is not repaid then it is referred to as ‘qard al husain’. He went on to advance the permutations of surplus and deficit in the Wakalah model from the perspective of risk-bearing customers (homo Islamicus) and riskaverse customers (homo rationalis) with apt use of simple calculations and succinct graphical illustrations. He argued that such behaviour has to be anticipated and as such part of the qard al hasan is likely to be irrecoverable. This, he argued, needs to be part of risk modelling so that prospective pricing can replace tangible calculations and also avoid overbidding for Wakalah fees. After briefly discussing the applied shariah principles, Dr Stiftl sought to advocate a case for the soundness of the Wakalah model and its inherent advantages vis-a-vis qard al hasan . He argued that the model is practical, flexible and transparent as well as being best-suited for risk sharing. He concluded with a series of questions which went to the heart of the rationale of takaful.

BILAL KHAN (EXECUTIVE DIRECTOR, ISLAMIC FINANCE EDUCATION COUNCIL) Bilal presented on the salient features of family and general re-takaful. He began with an introduction to retakaful which covered the nature and extent of re-takaful; its need and benefits; the differentiating factors from reinsurance and some vital industry statistics. He then focused on family and general re-takaful fundamentals and considered the products, models and contracts involved in the two types of re-takaful together with respective advantages. Most notably, he argued that, for instance, through family re-takaful the takaful operator can cede the mortality and disability components. This would allow them to concentrate more on the savings and investment business. As for general re-takaful, one of the advantages he put forward was that through cession the operator has the ability to assume more short-term risks at the same level of capital. Bilal then proceeded to map the legal landscape in UK with regards to (re)takaful and considered the implications of the following (re)insurance law: • Law Commission’s 2010 Issue Paper The Third Parties (Rights against Insurers) Act 2010 has no implications for reinsurance nor for re-takaful • Gard Marine v (1) Lloyd Tunnicliffe (2) Glacier Reinsurance (3) Agnew Higgins (2009) • C vs. D (2007) • WASA vs. Lexington Insurance Co. (2009) • 2004 judicial outcome of the “Energy 77 Crisis of 1999”.

Reports Bilal also looked at the following Islamic jurisprudential issues in re-takaful: • Shariah basis of cession • Doctrine of necessity and reinsurance • Re-takaful commission and riba • Queries about non-proportional treaty • Cross-funding between heterogeneous categories of risks. Bilal concluded with comments about the following challenges facing re-takaful: • Asset management • Rating • Solvency II • Retrotakaful

ABID SHAKEEL (CEO, IJMA & QIYAS) Abid presented on one of the more neglected but crucial topics - marketing takaful and Islamic finance in the UK as a niche product. He began by setting out the historical context of insurance in the UK together with an overview of the Islamic finance market in terms of product range. Abid drew the audience’s attention to various statistics and demographical data which he pointed out was very much out of date and thus market analysis ought not to be based on these. He argued that prominent market research companies and their various studies have struggled to gain real insight and feedback from the wider Muslim communities owing to certain erroneous assumptions. Abid sought to highlight the importance of focusing on some of the most valued criteria by purchasers and the customer needs as seen by distributors. According to him, these are price and profitability; product and brand / trust. Against the backdrop of other recent statistics, he advocated a new strategy for takaful and Islamic finance whereby the mainstream market should be targeted as a whole and partnerships built with large conventional banks. Abid also alluded to other strategies and listed a number of challenges such as the scarcity of senior people with quality industry experience.

PROF. LUC VAN LIEDEKERKE (PROFESSOR, KUL) Prof. Liedekerke spoke about the unique selling point of ethical finance and insurance. He went back in time with the origins of insurance and then looked at the challenge of global markets which he argued equally apply to takaful. He suggested that through the uniqueness of being religious and community-based, takaful can retain its identity in the face of current and future challenges. He argued that this element should be at the core of product design, investment and the communicational role of shariah board. He emphasised the point that financial products are speech acts and thus education and training of relevant personnel is paramount. He also stressed that takaful already has its unique selling point (USP) and it is only a case of guarding and retaining it. Prof. Liedekerke concluded with reference to the causal link between insurance and economic development historically. However, he stated that takaful reverts to the roots of financial and insurance systems as its functional role is the growth of communities, and that this mutuality is the USP of takaful.

DATO’ MOHD FADZLI YUSOF (DIRECTOR, FIRST INTERNATIONAL CONSULTING) In the final speech of the day, Dato Fadzli presented passionately on the merits of the mudharabah model. He started off with reference to the 1983 Task Force commissioned to establish Islamic insurance in Malaysia wherein there was pertinent mention of mudharaba.

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FWU Group is A leader in international Bancatakaful, product innovation and quality customer service An Observer Member of the Islamic Financial Services Board (IFSB) www.fwugroup.com Dr. Manfred J. Dirrheimer, Chairman & CEO, FWU Group Boschetsrieder Straße 67 D-81379 Munich Tel: +49-(0)89-7485880 Fax: +49-(0)89-74858881

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‘Best Takaful Product World Takaful Summi 2008

Reports He then shed some light on the mechanics of the mudharabah model in takaful with specific reference to profit in both family and general takaful. He argued that profit in the former constituted returns on investment and surplus arising from actuarial valuation (mortality surplus) and in the latter it equated to returns on investment and underwriting surplus generally. With the aid of mudharabah model flowcharts for family and general takaful, Dato Fadzli looked meticulously at the model and argued its value proposition of strengthening the takaful fund as well as being transparent and equitable. He concluded by comparing the mudharabah and Wakalah account statements in general and family takaful, and thus endeavoured to substantiate the profitability and commercial viability of the model.

INTERNATIONAL TAKAFUL SUMMIT The two-day Summit was chaired by Dr. Alberto Brugnoni with opening remarks from Lord Mohamed Sheikh and Rt. Hon Alderman Nicholas Anstee, the Lord Mayor of the City of London.

DAY TWO – 14/07/2010 MOHD TARMIDZI BIN AHMAD NORDIN (ADVISOR, ACR RETAKAFUL) In his keynote address, “Reflections on Three Decades of Takaful Provision”, Mohd Tardmidzi spoke comprehensively and eloquently vis-a-vis the Malaysian experience. His speech covered the following points: • Before 1984 – special task force set up to study the viability of takaful in Malaysia • Phase 1 (1984-1992) – only one takaful provider and the enactment of the Takaful Act 1984 • Phase 2 (1993-2000) – second takaful provider and the incorporation of ARIL as re-takaful provider • Phase 3 (2001-2010) – 6 more direct takaful providers and 4 re-takaful providers excluding Labuan • Beyond 2010 – building the takaful brand with unique selling points and need for new takaful legislation

SOHAIL JAFFER (PARTNER, FWU) In the interest of time, Sohail did not deliver his presentation but the following are the key points in his slides which were made available to all delegates: • The concept of takaful for all through awareness, pricing, customer segmentation and profiling, and distribution and white labelling • Micro-insurance as corporate social responsibility initiative as opposed to the usual commercial approach • Benefits of Bijak Malaysia, the basic takaful product in Malaysia

DEBO AJAYI (MANAGING CONSULTANT) Debo spoke about “creating an inclusive takaful proposition” which covered the following aspects: • Inclusivity of takaful to include non-Muslim population • Engagement with target population for takaful penetration • Risk management solutions needing to be the focus of takaful proposition • Survival of takaful being based on realignment of motives of the players

AJMAL BHATTY (CEO TAKAFUL & COO, TOKIO MARINE, MIDDLE EAST) Ajmal presented on “Protecting the Forgotten through Micro-takaful” which is often disregarded by many in the industry. The salient points in his presentation were as follows: • Need for takaful to set forth schemes, services and products for people with lowest incomes

Reports • • • •

Micro-takaful being in line with the UN Millennium Development Goals Landscape of micro-insurance and micro-takaful Statistics showing the profitability potential of micro-takaful Micro-takaful requiring government subsidies, support from donor agencies and zakat funds

OSMAN EL HADI IBRAHIM (MANAGING DIRECTOR, SHIEKAN INSURANCE) Osman shared with the audience the “Shiekan’s Success Story” in Sudan and focused on the ensuing core elements: • Sudan is the founder of both insurance and takaful • Statistics about Shiekan and its successes • Offering agricultural takaful, medical takaful, life takaful, export credit takaful, micro-finance takaful, travel, hajj and umrah takaful and professional indemnity • Takaful provision beyond subscribers such as ambulances and blood banks

CLARA HUGHES (ASSOCIATE DIRECTOR, FITCH RATINGS) Clara gave an interesting presentation on “The Impact of Solvency II”, with particular focus on the following areas: • The road ahead for implementation and the various timelines • Capital ratios such as comparison of solvency ratios; internal models with calibration to 99.5% VaR over 1 year; and some outstanding issues such as equivalence and tax • Impact on the insurance industry such as shift from capital-intensive to capital-light products, asset reallocation and increased de-risking • Implications for ratings o Increased capital requirements mean leverage down; increased barriers to entry; improved risk-based assessment; increased transparency and comparability o Short-term implementation risk; threats to some product lines; technical issues such as coupon deferrals; decreased transparency and comparability

DAWOOD TAYLOR (SENIOR REGIONAL EXECUTIVE, PRUDENTIAL) Dawood presented on “Risk Management and Disclosure in Takaful Practices”. His speech revolved around the following points: • Shared risks across takaful and conventional life markets • Takaful can also leverage risk management best practices of the Islamic asset management sector • Additional operational risks such as reputational, governance and compliance with shariah rules bringing increased responsibilities • Feed “lessons learned” back into on-going risk management

NEIL GOSRANI (RATINGS ASSOCIATE, STANDARD & POOR’S) Neil spoke about “Capital Analysis of Takaful Companies” from the perspective of Standard & Poor’s where he referred to the following key issues: • S&P’s approach to capitalisation in the areas of capital adequacy, reinsurance and reserves through qualitative and quantitative assessments • Particular issues for takaful considered such as benevolent loan and concentrations with capital models and qualitative analysis being adjusted • Future capitalisation expected to remain a relative strength to ratings of existing takaful companies in the medium term

Reports AYMAN AL AJMI (CEO, DAR AL TAKAFUL) Ayman endeavoured to make a case for the Wakala Incentive Model and his presentation concentrated on the following areas: • Overview of current takaful models • Limitations of current models and the need for alternative solution • Overview of the Wakala incentive model • Scenario analysis (for best combination of Wakala fee rate and surplus distribution ratio) together with goals and framework of the incentive model • Results and findings across various permutations show the most aggregate value to be 80/20 surplus share ratio, the most favourable combination to be 80/20 at 5% Wakala fee rate and the fairest share of wealth between operator and participants to be either 70/30 or 60/40 at 10% Wakala fee rate

JUDITH BENSON (COO, Prime Rate Capital Management LLP) Judith spoke about “The Islamic Liquidity Fund: Liquidity Management in Takaful” and highlighted the following points: • Need for substantial liquidity in the growing takaful market • Shortage of products in the market and the use of commodity murabaha in Malaysia • Discussion of investment opportunities such as government securities, bank placements without interest, OTC commodity murabaha, sukuk, shariah-compliant funds, murabaha via exchange platforms and shariahcompliant CD issuance • Benefits of The Islamic Liquidity Fund such as security, instant access, competitive profit rate, convenience and shariah compliance • Key features of AAA rate platform for liquidity management • Benefits of commodity murabaha such as fund performs transactions instead of investor, suitable for those already using commodity murabaha and removes ad hoc documentation and negotiation, break costs and frees up counterparty credit lines • Fund credentials of Prime Rate Capital Management

NORIPAH KAMSO (CEO, CIMB-PRINCIPAL ISLAMIC ASSET MANAGEMENT) Noripah discussed the “Value Add of a Dedicated Asset Manager”. She canvassed the following: • A dedicated asset manager assists with pooling of funds, bigger investable amount, diversified and longer average duration; and better yields and returns • Benefits include economies of scale, addressing liquidity concerns and higher returns as a portfolio • Comparison between the annualised price returns of global and of speciality indices • Misconceptions and the truth about Islamic investment such as better than perceived track record of Islamic indices, positive move towards harmonisation of shariah interpretation and no inferiority to conventional performance due to comparable return, volatility and risk-return profile

SCOTT DAKERS (HEAD OF PRODUCT SOLUTION, SCOTTISH WIDOWS) Scott’s presentation on “Scottish Widows Investment Partnership (SWIP) Islamic Global Equity Fund” looked at the following aspects: • SWIP philosophy and approach such as identification of stocks trading below long term intrinsic value and research based on 5 year financial forecasts • Robust and repeatable four-stage investment process • Shariah fund guidelines including o Unlawful industries such as tobacco, pork, liquor, pornography, arms and gambling as well as non-Islamic structured banking, finance, investment or life insurance business; or any other interest-related activities o Interest revenue not exceeding 5% of total revenue; structured borrowing not exceeding 30% of company’s

Reports adjusted total assets and each company should have more than 51% non-liquid assets • Stocks need to meet both the industry screens and financial ratio screens to be eligible for Dow Jones Islamic Market Indexes • SWIP fund profile

SAMEE UL HAQ THANVI (GENERAL MANAGER, TTD, BANK AL JAZIRA) Samee ul Haq delivered his presentation on “Family Takaful in Saudi Arabia: The Bank Aljazira Takaful Ta’awuni Experience” with the following items on the agenda: • Distribution of Muslim population globally and in MENA • Global takaful presence with reference to Ernst & Young report • Evolving Saudi Insurance Regulations both pre and post 2004 and the overall market • Insurance statistics • Bank Aljazira Takaful Ta’awuni experience o Growth and development of takaful talent o Sustained leadership position in market share and profitability o Product offerings: individual and group o Assets under management • Future outlook and objectives o Complete regulatory licensing process o Complete operational readiness exercise o Strength leadership position o Strategic development on distribution, products and business lines

BRADLEY BRANDON-CROSS (CEO, PRINCIPLE INSURANCE HOLDINGS) Bradley gave first-hand account of the lessons learned from Salaam Halal Insurance venture and spoke about “A Future for Takaful in the UK” with particular focus on the following: • Salaam’s timeline o April 2008: FSA authorisation o July 2008: Motor takaful o April 2009: Home takaful o 2010 and beyond: Family takaful Non-Muslim takaful Commercial SME Europe • Lessons learned: o Always plan to build a multi-product and multi-channel business on the back of personal lines products and customers o Avoid present scenario whereby Salaam solvent run-off in October 2009 due to danger of breaching minimum solvency capital o Generating quotes not an issue through price comparison websites but sales conversion rates 8% ca which needs to be improved o Claims generated motor loss ratio in excess of 160% which needs to be better mitigated and managed o Avoid present scenario whereby actual capital always less than required and thereby leading to truncated plans and no follow-through o Over-ambitious plans drove speed and cost as opposed to capital preservation through trials and tests o Future is based on communication and incremental growth

THE FTSE I WANT SHARIAH COMPLIANT INVESTMENT INDEX FTSE. It’s how the world says index. Islamic investment is growing at a fast pace, with increasing demand for ways to invest solely in Shariah screened and compliant companies. To stay ahead, we understand that you need a comprehensive and Shariah compliant index solution. Based on the FTSE Global Equity Index Series, FTSE has created the FTSE Shariah Global Equity Index Series, a new series screened to compromise only Shariah compliant stocks, providing solutions that will always be in line with Islamic investors’ needs. www.ftse.com/shariah

© FTSE International Limited (“FTSE”) 2008. All rights reserved. FTSE © is a trade mark, jointly owned by the London Stock Exchange Plc and the Financial Times Limited and are used by FTSE under licence.

Reports AZMAN ISMAIL (PRESIDENT, IIFIN) Azman presented on “Dynamic Fiqh (Jurisprudence) Applications in Takaful”. He covered the following main points: • Dynamism of Fiqh from 800 AD to 2000 AD o Mutakillimun such as al-Basri, al-Juwaini, al-Ghazali, al-Amidi, al-Baidawi o Fuqaha such as al-Karkhi, al-Jassas, al-Dabusi, al-Bazdawi, al-Nasafi o Muta’akhirun such as al-Razi, al-Baghdadi, ibn al-Subki, ibn al-Hamam, al-Tufi o Maqasidiyun such as ibn Abdul Salam, al-Qarafi, ibn Taimiyah, ibn Qayyim, al-Shatibi o Khalafiyyun such as Shaukani, al-Mihlawi, Khudari Bek o Mu’asirun such as ibn Ashur, al-Qaradawi, al-Raisuni • Relationship between various types of jurisprudence • Ijtihad, the requirements of a Mujtahid and methodology of Usul al Fiqh • Role of takaful in meeting the Maqasid al Shariah with particular reference to micro-takaful • Application of jurisprudence to takaful with examples of products and issues

V.A. TOMMY (DIRECTOR, SUN REINSURANCE) Tommy spoke about “Promoting Takaful around the Globe: Role of Insurance intermediaries” with the main focus being on the following: • Relevance of takaful and re-takaful in current times • Role of brokers in takaful and re-takaful • Conceptualising takaful in different markets • Shariah-compliant product structuring and sourcing re-takaful capacity • Exploring investment opportunities in terms of innovation and diversification as well as training and workshops to bridge the gap of talent and expertise shortage

DAY THREE – 15/07/2010 TOBIAS GRIMM (SENIOR PROJECT MANAGER, MUNICH RE) LUDWIG STIFTL (HEAD OF RETAKAFUL, MUNICH RE) This idealised presentation was jointly delivered by Tobias and Ludwig. Munich Re in regards to their Desertec initiative (Dii GmbH), seeking to provide investment opportunities for reinsurance and re-takaful providers within the realm of climate change. The following were considered: • Climate change facts and figures and the causal link to global natural catastrophes with comparison of overall losses and insured losses between 1980 and 2009 • Climate strategy of Munich Re since 1970s in the form of risk transfer solutions for renewable energies with particular focus on: o Risk assessment through research of natural hazards, climate liability issues and prospective risk management o Business opportunities such as wind cover, exploration cover for geothermal drilling projects, hydro power plants cover, performance cover and all risk covers for biomass power plants o Asset management with integration of sustainability criteria • Munich Re investments in renewable energies such as in a solar plant on a traffic noise barrier in Bavaria • Dii GmbH technologies for concentrating solar power, wind power, photovoltaic power and high voltage direct current • Aims of Dii towards energy supply in the EUMENA region and comprehensive solution to global problems • Approach of Dii being consideration of existing and approved technologies with overall 400 billion euro

Reports investment needs • Goals of Munich Re o Medium term: Insurance solutions for renewable energies and investment o Long term: Climate protection and business opportunities • Munich Re strategy can potentially mean demand for solar energy sukuk market and development of a decentralised “under-storey” using Islamic mutuality approach

SUSAN DINGWALL (PARTNER, NORTON ROSE) Susan spoke on the interesting topic of opportunities for takaful at Lloyd’s of London, which covered the following areas: • Key historical facts about Lloyds • Lloyd’s total global business, basic operating structure and chain of security • Potential issues for takaful model o Segregation of funds (premium trust funds, members’ funds and central fund) o Surplus distribution and deficit funding (Lloyd’s accounting and benevolent loan) o Rating (market rating; A+ from S&P and Fitch Ratings; A from AM Best) • Lloyd’s strategy 2010-2012 o Diversity o Maintaining competitive advantage against other markets o Brand and reputation

MARCEL OMAR PAPP (DIRECTOR, SWISS RE) Marcel looked at how re-takaful can enhance family takaful provision and thus focused on the following points: • Being a strategic partner o Value proposition beyond capacity concerns o Management of various components of the value chain o Bringing innovative ideas such as Road to Health (RTH), a creative health risk management program, to enhance family takaful • Ensuring shariah compliance o Shariah compliance is integral to family (re)takaful solution o Development of new shariah-based products o Employing new solutions such as telemarketing where conventional approach may not work

TARIK AOUAD (MANAGING DIRECTOR, HANNOVER RE) Tarik discussed “Surplus Distribution Issues in Takaful and Re-takaful” with following key submissions: • Takaful in essence is risk sharing and an act of sincerely helping fellow humans without profit orientation • Surplus distribution is not an integral part of a takaful scheme • Absence of surplus distribution does not render takaful invalid vis-a-vis shariah compliance • Surplus distribution may be against the core value of takaful • Surplus distribution is not a technically sustainable measure for takaful and re-takaful operators due to volatility • Severe misunderstanding that takaful equals insurance plus surplus distribution and so both the market and the public need to be re-educated

ISMAIL BIN MAHBOOB (PRESIDENT & CEO, MNRB) Ismail presented on “Re-takaful Prospects and Challenges” under the following sub-headings: • Re-takaful put into perspective o The concept newly operationalised

Reports o Transformation stage from social to capitalistic mechanism and other evolutionary issues o Competitive advantage against conventional reinsurance • Industry landscape revisited o Conventional formula being used for contribution pricing o Conventional accounting approach o Conventional-inclined standard setting bodies o Outsourcing affects intellectual development o Conventional mind-set with product focus being elementary range as well as high value and sophisticated risks virtually non-existent • Prospects and challenges o Increasing accepting of Islamic finance in the leading economies o Alternative to conventional insurance and reinsurance through strengthening internal capabilities development of pooling concept for surplus distribution o Adapt to Lloyd’s of London structure o Captives being at developmental stage • Key objectives and strategic intent of sustainability, growth and profit requiring sound pricing, capacity building and VAS capabilities

SAFDER JAFFER (SENIOR CONSULTING ACTUARY, MILLIMAN) Safder began a series of talks on takaful and pensions. His presentation concentrated on the following elements: • Key pensions-related statistics • State provision being in dire straits coupled with global financial crisis • Pensions and takaful o Takaful evolution towards private pensions o Pension takaful models o Shariah compliant annuities o Managing longevity and other associated risks o Active asset management • Challenges ahead o Developing pension schemes for takaful providers o Shariah perspective on pension provision o Creating shariah compliant asset classes for provision of pensions and annuities

ZAINAL ABIDIN (MANAGING DIRECTOR, MERCER ZAINAL CONSULTING) Zainal continued the pension theme under the heading of “Annuities for takaful: Can we afford to retire” with particular focus on the following issues: • Inadequate provision for retirement due to o Ageing boomer population straining social security systems o Falling birth rates causing disproportionate ratio between working and retired population • Financial risks post-employment o Investment risk – not achieving expected rate of return on savings or even losing capital o Inflation risk – ever diminishing natural resources (supply side) and depreciating purchasing power (demand side) o Longevity risk – people living longer but not necessarily healthier or happier • Risk management in a shariah compliant manner (sukuk, savings in wadiah accounts, real estate and precious metals) • Shariah compliant annuity takaful pool and related issues • Abolishing retirement due to lack of resources and does not suit flexible world of work

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SOUTH ASIA • USA • MIDDLE EAST, AFRICA, RUSSIA & CIS • WESTERN EUROPE • APAC

Reports FAIZAL MANJOO (LECTURER, MARKFIELD INSTITUTE OF HIGHER EDUCATION) Maulana Manjoo looked at the “Shariah Perspectives on Pension Provisions” with following points: • Ageing population phenomenon and its impact on the pension industry • Muslim demographics and the need for pension consideration • Fiqhi problems in establishing an Islamic private pension fund o Whether purchasing an annuity for retirement is permissible in Islam due to riba and gharar o Whether inheritance law is an issue in testate succession since beneficial interest in pension receipts is not directly acceptable o Whether the accumulation of supporting funds such as zakah as investment poses a challenge to Islamic law o Whether alternative forms of decumulation, other than annuities, are also unacceptable in their current form o Whether appropriate and sufficient shariah compliant investments are available o Whether a shariah compliant approach to conventional actuarial assumptions is possible • A proposed model for private Islamic pension fund • Need for longevity sukuk both for aggregate and specific longevity risks

GEERT BOSSUYT (CEO, DAR AL ISTITHMAR) Geert spoke about “Investment Opportunities for Takaful Companies” and the following were the main highlights: • Takaful industry statistics • Takaful investment products: needs and requirements o Investment into high quality short-term instruments for liquidity management such as liquid sukuk for medium term or short-term repo facility or Islamic commercial paper o Medium-term investments for capital protection and growth with monthly contributions such as 3-5 years USD product with minimum guaranteed return and potential for upside with AAA credit risk o Takaful contribution receipts invested in low risk stable return assets with yearly contributions such as 10+ years USD annuity product with minimum AA credit risk • Takaful investment products: opportunities o Fully asset-backed shariah compliant products with medium to long term maturities o Developing strategic partnerships with niche asset managers in asset (based) classes such as aircrafts, containers, ships and green energy o Examples of long term transactions include photo-voltaic investment and shipping container leasing fund

FAISAL KHAN (DIRECTOR, 3I INFOTECH) Faisal’s presentation examined “The Pivotal Role of Technology in Takaful” with the following being the main features: • 3i Infotech’s involvement in takaful • Enabling the automated value-chain • Technologies for innovation • Solving the distribution challenge

KHAERUDDIN SUDHARMIN (MD & CEO, MOTORDATA RESEARCH CONSORTIUM) Khaeruddin lightened the atmosphere with an enjoyable presentation about “The Secret of Making Numbers Work for Takaful” which covered the following points from the Ernst & Young World Takaful Report together with humorous punch lines: • Economic growth forecasts state that emerging markets likely to experience comparatively strong economic

Reports growth • Global gross takaful contributions continue to post healthy growth • Comparatively high rates of real GDP growth paired with low insurance penetration rates suggest strong future growth across OIC countries

RIDWAN ABBAS (TAKAFUL CORRESPONDENT, ASIA REVIEW & MEIR) SIVAM SUBRAMANIAM (EDITOR IN CHIEF, ASIA REVIEW & MEIR) Ridwan and Sivam jointly presented on “Developing an International Voice for Takaful” and the following were the main points: • Current voice of takaful in the world • Figures on growth and development • Key players who shape the voice of takaful • Environmental scan of Islamic finance bodies such as AAOIFI, IFSB, GTG, ISRA, Hawkamah – The Institute of Corporate Governance • Problem areas in the market o Proper definition of an Islamic insurer o Surplus sharing o Treatment of benevolent loan o Greater harmonisation in shariah rulings o Identifying and communicating the value proposition of takaful o Building up brand and credibility of takaful • Learning from the traditional market especially key international (IIS, IAIS, Geneva Association), regional and national bodies • Recommendation for a dedicated think tank and representative body to provide thought leadership and be responsible for lobbying and communications • There are critical success factors such as more aggressive promotion campaigns, the USP of takaful that must be a value-add and more a committed role played by key players

REZA ZAIN JAUFEERALLY (CENTRE FOR ECONOMICS & ETHICS, KUL) Reza re-delivered Prof. Liedekerke’s previously mentioned Masterclass presentation. For further details please refer to the Masterclass section. ................................................................................................................................................... THE ABOVE REPORT WAS COMPILED BY BILAL KHAN Bilal is a traditionally trained Shariah Scholar of Islamic Studies known as Dars-e-Nizami. This includes all branches of Shariah law and numerous other related disciplines as well as the languages of Arabic, Persian and Urdu. He commenced his studies at Darul Uloom Al Arabiyya Al Islamiyya in Bury, UK and then proceeded to Darul Uloom Karachi in Pakistan where he benefited greatly from the scholars including Justice (R) Sheikh Mufti Taqi Usmani. He read law with LL.B (Hons) at the University of Leeds where he was awarded Student of the Year and completed his Legal Practice Course at BPP Law School, Leeds with specialisation in Public Takeovers & Equity Finance, Banking & Debt Finance and Mergers & Acquisitions. He has also completed an MA in Islamic Banking, Finance & Management with Distinction and published several articles on Islamic Finance. He will be commencing an MBA in Legal Services at BPP Business School, London (09/2011) and a Ph.D in Islamic Finance under Shariah Law and English Common Law at SOAS University of London (09/2011). He presently holds the position of Executive Director at Islamic Finance Education Council, UK. He has recently lectured on the undergraduate law programme at Leeds Metropolitan University and is currently co-authoring several texts on Islamic Finance and Takaful. He was recently presented with the 2011 Zaki Badawi Young Shariah Scholar of the Year Award at the 2011 London Sukuk Summit. From September 2012, he will be joining the international law firm, Simmons & Simmons LLP, as a lawyer with a view to practising in Islamic Finance and Takaful. He can be contacted by email at bilalakhan@hotmail.co.uk

Milliman Solutions

Takaful Solutions at Milliman

Milliman is one of the largest consulting and actuarial firms in the world serving the full spectrum of business, governmental, and financial organizations. Founded in 1947, the firm offers services from its 49 offices across United States, Europe, Middle East and Asia. For more than 60 years, Milliman has pioneered strategies, tools and solutions worldwide. Milliman insight reaches across global boundaries, offering specialized consulting services in life insurance & financial services, employee benefits & investment consulting, healthcare, and property & casualty insurance. With Shariah based and compliant financial products expected to grow in double digits over the coming years, creating commercially viable Shariah compliant solutions will be a challenge that must be addressed. Aligning the interests of participants and shareholders of Takaful operations is another issue that requires fundamental thoughts. At Milliman, we have the world’s best actuaries, business consultants, and financial analysts and are best placed to develop and assist you with new solutions or enhance existing business proposition. Plus, we have access to world-class Shariah advisors. Whether you are a Takaful or Re-Takaful operator, regulator, global player, conventional insurance player or investor, Milliman is here to provide you with a range of services right at the heart of Middle East. We can help you: • Create and review business plans or Re-Takaful companies

• Create and advise on funds, pools and underwriting procedures to meet shariah requirements • Assist with Shariah board and regulatory audits • Provide innovative solutions for shariah compliant investment policy that inject sound accountability into asset management including framework for Asset-Liability Management • Assess Joint Venture and other M&A plans and partnership with other Shariah-compliant organizations • Actuarial valuation and certification Re-Takaful portfolios

of Takaful and

• Carrying out due diligence activities for new and existing Takaful

• Create and design Shariah compliant and actuarially sound life and non-life product lines • Create innovative solutions for larger risks within the bounds of Shariah principles

• Determine optimal capital structure including Re-Takaful strategy to align shareholder and policyholder interests • Provide training for Takaful staff at all levels and in various functions i.e. actuarial, investments, underwriting, claims and administration

• Build tools for sound surplus distribution and allocation of wakalah fees • Ensure efficient management and monitoring tools for meeting shareholder, policyholder and Shariah board expectations • Provide modelling packages that are tailor made to meet Takaful requirements

Grosvenor Business Tower, Suite 2010 Sheikh Zayed Road P.O. Box 506784 Dubai United Arab Emirates

Main: Fax:

+971 (0)4 328 9828 +971 (0)4 328 9838

milliman.com/dubai-services

Reports 1ST GLOBAL FAMILY TAKAFUL REPORT

Milliman is proud to present the first ever Global Family Takaful Report to be launched at the International Takaful Summit in London in July 2011. This is the first such industry report of its kind, which provides a unique in depth analysis of Family Takaful alone, without the usual bias and influence from General Takaful, and in particular, one which focuses on the characteristics inherent within the Family Takaful market. Industry reports up till now have focused on Takaful without providing in depth insight into the variations between General Takaful and Family Takaful. The underlying drivers for Family Takaful and General Takaful are markedly different and a combined view point leads to distorted results. With bottom line profitability on the General Takaful front facing stiff competition from a relatively soft market, in comparison, Family Takaful is seen as a long term and sustainable proposition with strong bottom line expectations. Consequently, there is an increasing need for a pertinent reference source to facilitate industry leaders in navigating the evolving Family Takaful landscape. With the launch of the Milliman Global Family Takaful Report, industry participants will now have an invaluable reference source. This report summarizes the quantitative and qualitative analyses of the Family Takaful industry by key regions. It tackles the topical issues within the world of Family Takaful, and discusses the implications of the results of its survey conducted with key players of the global Takaful market. In our first edition of the report, we present an analysis of industry growth for Family Takaful by key regions, and the report takes an in-depth look at the financial highlights for Malaysia, where the market is well established and regulated. It also sets out a detailed regulatory update for each of the key regions, along with a summary of the key models used and key products marketed in those regions. We provided comparisons with UK mutuals, including two case studies, where there are parallels which may be applied to the Family Takaful market. The report then discusses the current hot topics in Family Takaful arising from the results of the global survey and concludes with a discussion on the issues and challenges the industry must overcome in order to fulfill its true growth potential. The Global Family Takaful Report by Milliman will be updated on a regular basis, covering key dimensions within the industry including market growth, financial highlights, regulatory updates and pertinent contemporary issues facing the world of Family Takaful. We believe that this report will contribute positively to the Takaful industry as it strives to promote a robust, well regulated, transparent global Family Takaful offering.

DUBAI OFFICE:

GROSVENOR BUSINESS TOWER SUITE 2010, SHEIKH ZAYED ROAD P.O. BOX 506784 DUBAI, UNITED ARAB EMIRATES TEL: FAX:

+971 (0)4 328 9828 +971 (0)4 328 9838

MILLIMAN.COM

LONDON OFFICE: 11 OLD JEWRY LONDON EC2R 8DU UNITED KINGDOM TEL: FAX:

+44 (0)20 7847 1500 +44 (0)20 7847 1501

UK.MILLIMAN.COM

Sponsors

Securing our Future. Together. SALAMA - Islamic Arab Insurance Company is a leading provider of Shari’ah compliant insurance solutions (Takaful) around the world. Right from our incorporation in 1979 in Dubai, UAE as pioneers in the Takaful industry, to our present day distinction as the world’s largest Takaful and Re-Takaful Group, we have always stayed true to our values and principles.

SALAMA is UAE’s specialised takaful company, offering comprehensive range of General, Family and Health takaful solutions to individual, families and companies. Our credibility, reputation for quality, high standards of services and access to the Takaful’s best practices mean that SALAMA is uniquely placed to provide access to quality and affordable takaful solutions. As SALAMA continues to expand its customer base of over 65,000 insured members and companies in the UAE, we are dedicated to become the Takaful operator of choice. Personalised service, customer dedication and development of Shari’ah compliant products that fulfil our customers’ needs are just some of the new promises that we are making. Our structure and products are designed around our customers. SALAMA with you, securing the future together.

25 years of successful operations as Retakaful operator Historically, BEST RE is the world’s first Shariah compliant/Reinsurance operator. It is fully owned by the Dubai-based Islamic Arab Insurance Co. (SALAMA) P.S.C., the largest and oldest Takaful group in the world. Originally incorporated in Tunis (Tunisia) in 1985, BEST RE has recently celebrated its 25 years of activity. This celebration coincided with the launching of the BEST RE Group of companies in Labuan (Malaysia), comprising of:

P L AT I N U M PA R T N E R S

SALAMA has a paid-up capital of USD 300 million (in excess of AED 1 billion) and is listed in the Dubai Financial Market. Our stability and success can be attributed to our strategy of focusing on core business areas. SALAMA has been rated “A-” by A.M. Best and “BBB+” by Standard & Poor’s. SALAMA serves both individual and institutional customers through its extensive global network. At present, we have 6 direct Takaful companies who provide Shari’ah compliant insurance solutions to customers in the UAE, Saudi Arabia, Egypt, Senegal, Algeria and Jordan. BEST-Re, our Tunis-based operation, is the world’s largest Re-Takaful company, serving customers in more than 60 countries. The commitment to raise the company to the top is further reinforced by the ISO 9000 Certification achieved in the shortest possible time along with the monitoring mechanism in place to assess and evaluate the effectiveness and efficiency of the systems.

SWIP is one of the UKâ&#x20AC;&#x2122;s largest asset management companies, with ÂŁ145.3* billion of funds under management.

Established Shariah infrastructure We are one of the first UK based investment houses to offer investors an active Shariah compliant solution. This consists of a disciplined and robust screening process designed to exclude non-compliant companies. Call us on 020 7203 333 Email us at investment.enquiries@swip.com Visit our website swip.com/advisers

swip.com *Source: SWIP as at 31/03/2011. The value of investments and the income from them can go down as well as up. Scottish Widows Investment Partnership Limited (SWIP) is registered in England and Wales, Company No. 794936. Registered Office is at 33 Old Broad Street, London, EC2N 1HZ. Tel: 0131 655 8500. SWIP is authorised and regulated by the Financial Services Authority and is entered on their register under number 193707 (www.fsa.gov.uk). FP3537 06/11

Sponsors • BEST RE Holding Limited • BEST RE (L) Limited • BEST RE Family (L) Limited Whereas the original BEST RE was a composite company BEST RE (L) Limited and BEST RE Family (L) Limited are dedicated to writing Property & Casualty and Family Retakaful respectively. The two legal entities have inherited the entire business of the original BEST RE in Tunis by way of portfolio transfer as from October 2010. The BEST RE Group of companies operates under Labuan Financial Services Authority (LFSA) regulations and enjoys an ‘A-’ (Excellent) rating from AM BEST. BEST RE is dedicated to developing a profitable reinsurance portfolio in the emerging markets of Asia and Africa. It currently covers more than 90 countries in this region. Headquarters are based in Labuan, but BEST RE companies benefit from a proximity network of local offices in Kuala Lumpur (Malaysia), Beijing (China), Manila (Philippines), Beirut (Lebanon), Istanbul (Turkey), Tunis (Tunisia), Dakar (Senegal) and Port Louis (Mauritius).

A.M. Best has offices located in the United States, the United Kingdom and Hong Kong. It is the largest and longest-established company devoted to issuing in-depth reports and financial strength ratings about insurance organizations. Its flagship publication and database, Best’s Insurance Reports, offers the largest coverage of insurers and reinsurers in the United States, Canada, the United Kingdom and worldwide of any interactive rating organization. Its ratings cover bonds, notes, securitization products and other financial instruments issued by insurers and reinsurers. Articles generated by A.M. Best’s news staff are published in Best’s Review magazine, BestWeek, through its real-time news channels and distributed via more than a dozen international information distributors.

NCB Capital is the investment banking arm of National Commercial Bank (NCB), Saudi Arabia and the Middle East’s largest bank. Launched in April 2007, it was the first subsidiary of a local bank to be licensed by the Saudi Capital Market Authority and in a short time has grown a strong reputation and profile as an important player in investment banking throughout the Middle East with institutional, corporate and individual clients, as well as growing its broader international presence. Founded on three decades of its parent’s pioneering work in developing mutual funds for the Saudi market, NCB Capital is today the largest investment bank in Saudi Arabia (the largest market in the GCC region), with over one million clients and some SAR50 billion ($13 billion) of assets under management. It has the strongest balance sheet of any investment bank in the region, carrying no debt whatsoever. It

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Founded in 1899, A.M. Best Company is a full-service credit rating organization dedicated to serving the insurance industry. Policyholders refer to Best’s ratings and analysis as a means of assessing the financial strength and creditworthiness of risk-bearing entities and investment vehicles.

Sponsors is a world leader in developing Islamic investment products, having launched the first Sharia-compliant real estate fund, has a market-leading 33 percent share of local Saudi mutual funds (Tadawul, March 09) and is increasingly being seen as a thought leader in addressing the region’s most significant economic and capital markets issues for its clients. The firm’s culture is founded on a judicious mix of traditional relationship management combined with best practice global investment banking principles and targeted products and services. In addition to its pre-eminent position in Saudi Arabia, the firm is building a strong regional presence selectively, working with its affiliates HC Securities in Egypt and HC Al-Futtaim Securities in Dubai, its subsidiary Eastgate Capital Group in Dubai, and with NCB’s subsidiary Turkiye Finans in Turkey. NCB Capital also has global distribution and access through The Capital Partnership (TCP), its London-based subsidiary, a leading specialist asset manager to both institutional and high net worth clients. Its global reach is also enhanced through an ongoing affiliation with Goldman Sachs. The firm organises its 360 employees into three main business groupings - Wealth and Asset Management, Brokerage and Investment Banking, supported by robust economics and equity research expertise. Recent accolades include the 2009 Failaka “Best Islamic European Equity Fund” award for its performance over one and three years, and the 2008 Failaka “Best Islamic Fund Manager in the GCC” award.

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Takaful Re is providing a complete range of Retakaful services and products to Takaful and Islamic companies in order to meet their business requirements.

The company is consistently ensuring that the products and services offered are in accordance with the principles of the Holy Quran and Sunnah as recommended by its Shari’a Supervisory Board. All contracts are based on Al-Wakala model managing the portfolio of Takaful operators and Islamic insurance companies for a pre- agreed fee. The investment operations are governed by the principles of Al-Mudaraba (profit and loss sharing financing technique). The Re-takaful fund is managed by experts within an interest-free or Shari’a compliant equity investment scheme.

FWU Group is a global leader in the fast expanding Takaful industry and has generated significant production in the various markets it has a presence in: Saudi Arabia, the UAE, Kuwait, Pakistan and Malaysia. Today, FWU Group is recognised as the largest global producer of Bancatakaful in those five markets combined. FWU Group specializes in white label Family Takaful unit-linked investments and offers the Takaful Operator a customised innovative product family, which includes savings, education, marriage and pension plans. A second generation of that product suite has recently been developed and approved by various Shari’ah Boards to meet with customers’ broader financial planning needs. FWU Group offers the banks an open investment architecture where they can incorporate their own Shari’ah-compliant funds

Sponsors into the investments universe as well as a dynamic principal-protected equity strategy, in conjunction with an international player. FWU Group is at the forefront of the efforts to raise the performance bar by innovating to respond to market conditions and by working closely with prominent Shariâ&#x20AC;&#x2122;ah scholars, national regulators, international actuaries, global reinsurers and international accounting firms. FWU Group has also created a proprietary web portal, which facilitates the customer sales process, policy administration and provides automated underwriting. FWU Group is an observer member of IFSB and an active member of their Takaful working group. In recognition of its global expertise in Takaful, FWU Group has won eight prestigious awards including Euromoney, Islamic Finance News, Islamic Business and Finance and World Finance.

FTSE indices are used extensively by investors world-wide for investment analysis, performance measurement, asset allocation, portfolio hedging and for creating a wide range of index tracking funds. FTSE is an independent company jointly owned by The Financial Times and London Stock Exchange Group. www.ftse.com

Yasaar Limited set up in the UK in 1998. It is the first Shariah compliances services company that is continually developing within the Islamic Finance sphere. In 2005 it became the first Shariah compliance services company to be registered in the Dubai International Financial Centre. The company is growing and developing in the Islamic finance sector. In 2006 it entered into partnership with FTSE, the Global index company to develop a series of Shariah compliant indexes. In 2008 it developed its Media division, Yasaar Media, which was launched in January 2009. The evolution has been in tandem with the growth of the Islamic finance sector and as opportunities were seen or created by us we have risen to the challenge all along. The areas now being contemplated and hence the development into a group of companies, include Islamic market intelligence capability, Shariah audit, Corporate services and others.

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FTSE Group (â&#x20AC;&#x153;FTSEâ&#x20AC;?) is a world-leader in the creation and management of indices. With offices in London, Beijing, Dubai, Frankfurt, Milan, Mumbai, Hong Kong, New York, Paris, San Francisco, Sydney, Shanghai and Tokyo, FTSE works with investors in 77 countries globally. It calculates and manages a comprehensive range of equity, fixed income, Shariah-compliant, real estate, currency, commodity and non market-cap indices, on both a standard and custom basis. The company has collaborative arrangements with a number of stock exchanges, trade bodies and asset class specialists around the world.

Sponsors Some of our clients have been with us since the outset and still continue to engage us on their Islamic finance initiatives, while we continually add clients from around the world and are engaged with some of the household names in finance. We value our clients continued trust in our services and endeavour to provide the best service possible as we have been doing for over a decade. We are proud of our record and reputation in the Islamic finance sector. We welcome your perusal of our website and all our subsidiaries and divisions. It is our pleasure and honour to assist with the Islamic finance initiatives of interested parties. Achievements:

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1998 2001 2004 2005 2006 2006 2007 2007 2008 2008 2008 2008 2008 2009 2010

First Shariah compliance services company Brings Morgan Stanley to the Islamic Finance space Deloittes Islamic Finance award for “Most Innovative Islamic Finance Product“ Caravan 1 Establishment of Dubai operations Launch of the Singapore Exchange (SGX) Shariah Asia 100 index Development of Islamic Banking software in conjunction with Systems Access (SunGard) Launch of the 96 FTSE Shariah Index series Voted “The Best Islamic Finance Advisory Firm” Launch of FTSE Shariah Japan 100 Daiwa launches first Islamic ETF First Islamic ETF listed on the SGX FTSE/JSE Shariah Index launched Voted “Best Islamic Finance Advisory Firm” for second year running Stock Exchange of Thailand announces plan to launch Shariah 50 index Partnership entered into with IdealRatings

IdealRatings is the market leader in Shariah Compliant fund management and Purification services for financial institutions to empower them to provide, manage and monitor Shariah investment products and Shariah compliant funds based on the specialized requirements defined by their supervising Shariah board with the ability to generate the highest alpha available. IdealRatings is headquartered in San Francisco, California. For more information go to www.idealratings.com

Overview CIMB-Principal Islamic Asset Management (CIMB-Principal Islamic) acts as a global partner to institutional global investors, providing a range of Islamic investment portfolios to suit differing needs. We offer separately managed portfolios for institutions and collective investments. The joint venture between CIMB Group Sdn. Bhd. and Principal Global Investors allows CIMBPrincipal Islamic to leverage on the strong global Islamic credentials of CIMB Group (via CIMB Islamic) while Principal Global Investor’s lends its expertise in global asset management. Headquartered in Kuala Lumpur, Malaysia, CIMB-Principal Islamic is strategically located in the world’s rst country with a complete Islamic nancial system operating in parallel to the conventional banking system. This allows the rm to leverage on Malaysia’s comprehensive Islamic nancial infrastructure and its adopted global regulatory, legal and Shariah best practices.

Contact Us Datuk Noripah Kamso Chief Executive Phone: +603 2084 2288 Email: noripah.kamso@cimb.com Zeid Ayer, Ph.D., CFA Chief Investment Ofcer Phone: +603 2084 2092 Email: zeid.ayer@cimb.com CIMB-Principal Islamic Asset Management Sdn Bhd (217841-M) Level 5 Menara Milenium 8 Jalan Damanlela Bukit Damansara 50490 Kuala Lumpur Malaysia Phone: +603 2084 2000 Fax: +603 2084 2004

The information in this document has been derived from sources believed to be accurate as of March 31, 2011 and is issued by CIMB-Principal Asset Management Berhad and CIMB-Principal Islamic Asset Management Sdn Bhd. This material does not constitute an offer or solicitation in any jurisdiction where or to any person to whom it would be unauthorized or unlawful to do so. Copyright © 2010 CIMB-Principal Islamic Asset Management Sdn Bhd. All rights reserved.

as of March 31, 2011

CIMB-Principal Islamic strives for superior consistent performance based on a disciplined investment process that adheres strictly and transparently to Shariah investment principles. This is achieved via: • Internationally renowned Shariah investment advisory: The panel comprises Islamic nance scholars from diverse backgrounds. The Shariah investment committee is strongly supported by experienced and capable Shariah secretariat and professionals with deep Islamic capital markets experience. • Disciplined investment process: The Company is closely aligned to the investment philosophy of Principal Global Investors, particularly in the Global Equity space, and benets from the established capability of CIMB-Principal Asset Management Berhad as a credible manager of Sukuk and Shariahcompliant equity portfolios in the Asia Pacic ex-Japan region. • Shariah-compliant portfolio - construction expertise: The Company is able to holistically advise and construct portfolios to meet institutional global investors’ objectives, with insight and knowledge gleaned from long-established relationships managing Takaful (Islamic insurance), Shariah-compliant unit trust funds and pension assets. • Islamic capital markets experience: CIMB-Principal Islamic won Best Asset Management Company 2011 by Global Finance, for the second year in a row, and was awarded Most Outstanding Islamic Fund Manager at the 7th KLIFF Islamic Finance Awards 2010. It also earned Best Asset Management House at the International Takaful Awards 2010 and the Best Islamic Fund Manager Award 2009 by Islamic Finance News. The Company also leverages on CIMB Islamic’s award-winning franchise and excellent international track record in Islamic capital markets. Recognised globally by renowned international publications, CIMB Islamic’s recent accolades by Global Finance include 2011 Best Sukuk Bank, Best Islamic Financial Institution in Asia, and Best Islamic Financial Institution in Malaysia. It was also awarded 2010 Malaysia Islamic Investment House of the Year (Asian Investor Awards), 2010 Best Islamic Finance Bank (Global Finance), 2010 Best Islamic Bank in Asia (Euromoney Islamic Finance Awards), and 2010 Best Islamic Fund Manager (Islamic Finance News Awards).

Investment Attributes

Competent Shariah-based Finance Professionals

Disciplined Investment Process

Islamic Capital Markets Experience

Broad Insights on Clients’ Needs

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Reports RETAKAFUL REPORT SOME BASIC APPROACHES REGARDING A STANDARDISATION OF RETAKAFUL BY LUDWIG STIFTL

The following is a summary of the general retakaful manual launched by Munich Re in Dubai on 11 April 2011 as part of a broad mobilisation effort towards standardisation in the industry, the need for which is felt widely and unanimously. The reality of the retakaful world and obstacles to its growth Most of the reinsurance taken out on takaful is still conventional, although there is formally no lack of capacity anymore. And where retakaful is considered, operators are under pressure to streamline their product towards conventional reinsurance. The most probable reasons for this are: a) Retakaful is aimed to replace reinsurance in most cases, and the demand for reinsurance is a demand for risk transfer. Retakaful, on the other hand, is meant to be cooperative and based on the concept of risk sharing. b) Conversion costs and a need for education and training due to new processes and techniques Two conclusions can be derived from this: a) As long as the dilemma of risk transfer and risk sharing is not solved, no standard can be established. b) A standard wording alone is not enough to break the market’s resistance. The standard has to be explained and retakaful has to fit in with the existing processes in the reinsurance markets without simply bowing to the forces that tend to render it a copycat version of conventional business. The idea was: better to have a manual without a wording than a wording without a manual. The three axes that define the retakaful mechanism Sharing is considered to be the core and differentiating idea of takaful, and the three facets of sharing: risk sharing, surplus sharing and loss sharing, are used quite interchangeably. In the following, technical and distinct definitions are suggested.

1. RISK TRANSFER VS. RISK SHARING The following definition of risk sharing is proposed in the Munich Re manual: “Risk sharing means that in the long run claims are paid by the community of participants, the company providing qard hasan for an intermediary period only”. In all insurance ventures that shall not go bankrupt, the insured have in the long run to pay enough premium to cover the claims. The decisive point is: if the participants can leave the fund in a deficit situation, the operator has to provide for irrecoverable qard hasan in his pricing. Otherwise the shareholders’ fund will bleed out. If there is an obligation – normally contractual - to pay qard back, the above definition applies. But, if qard is not an accidental but substantial feature and a main service in the treaty, it has to be regarded at least partly as a loss. And in this case, a mathematical test would prove that there is risk transfer. And if so, the irrecoverable qard hasan has to be priced in, probably into the wakala fee. There are various technical facets to this, but the mathematically simplest way of doing so is shown in an example: a portfolio has an average loss ratio of 80% and a historically minimum loss ratio of 65%. Since claims have to be paid, the operator can, with this loss ratio, never earn more than 20% to cover his costs and profit margin. But it can earn less, namely when it has to give out surplus in good years where no qard is outstanding. So, it strives to set the wakala fee in a way that no surplus redistribution occurs even in the best of years. In this case, the respective fee is 35% (100% - the lowest loss ratio observed).

Reports Thus, if risk transfer according to the above definition is given, the qard does economically not work as it is supposed to work and the wakala system does not lead to surplus sharing as it is supposed to do. It even tends to rule surplus redistribution out. Compare the two following charts: Case 1: Contractual obligations or negligible qard hasan (risk sharing)

Case 2: Risk transfer, but still wakala

2. POOLING: Pooling, on the other hand, can be defined as “Participants pay for losses another participant has sustained.” This can happen when the losses are directly deducted from the other participants’ surplus. But, in case the possible losses are higher than the available surpluses and even higher than the reserves in the participants’ fund (high volatility business), the pooling automatically takes place via the shareholders’ fund, as in conventional business. And more importantly, by balancing the results of different participants, gains through the use of the law of large numbers and of diversification effects come into effect. These smoothing effects are the very basis of the business model of reinsurers and the added value they offer. They are automatic mathematical effects depending on correlations and they happen independent of whether the pooling is done directly or indirectly and whether there is a spirit of solidarity behind it or not. Pooling as a mathematical method does not really differ from conventional business.

3. RISK MODELLING The method behind this is risk modelling, as opposed to tangible calculation. The relevance of risk modelling in Shari’a terms seems to be rarely taken into consideration. Tangible calculation is the method favoured by Shari’a wherever possible, due to its clarity and lack of possibility to hide undeserved earnings. It is ideally represented in historic schemes where contributions are collected as losses occur, without an advance contribution even being calculated. In most modern mass business transactions or in low-frequency and high-severity business, however, this is not possible. There must be a pre-calculation because losses are either too frequent to be paid through case-by-case collection or so high that reserves need to be built up over time. Now, when doing risk modelling, a retakaful operator (and reinsurer) builds segments of the portfolio (sub-funds,

Reports one may say), assesses their respective loss distributions and calculates the diversification gains by balancing the segments against each other. In one word, it pools and manages the pool. And it sets the contribution and makes sure it is sufficient to cover all the losses (e.g. by pricing future irrecoverable deficits into the Wakala fee in advance). And this way, it makes sure that the participants share the risk among themselves, although, like with the pooling, not directly. To summarise: what happens at the technical level in reinsurance and retakaful is not much different, in particular not in the market segments of large and rare risks, where reinsurance cover is needed most. The only difference is that for these segments tangible calculation is not feasible and other techniques need to be used to achieve the same result. The structure of the risk and the behaviour of participants largely defines whether there is risk sharing or not – not the model applied. It would in our opinion be worth considering to keep the importance of risk modelling in mind when striving to exclude excessive gharar and exploitative practices, the avoidance of which is still the intention of takaful and retakaful alike.

RETAKAFUL TYPOLOGY AND NEGLECTED TYPES OF RETAKAFUL While striving to analyse the risk transfer types of retakaful arrangements one finds that there are types of hardly ever applied risk sharing types (in the sense that there is a contractual or social obligation to repay qard hasan). These types, again, may not be unheard of in the conventional world, and appear there e.g. as financial reinsurance or mutual. But such patterns could be developed more, to make the spiritual side of the sharing approach work.

THE PROCEDURAL PART OF STANDARDISATION AND CONSISTENCY Not the least important obstacle to a rapid spread of retakaful lies in the procedural requirements of the reinsurance markets and probably in an insecurity about what makes a retakaful treaty Shari’a compliant. The placement of reinsurance is a highly optimised and automated process and at the same time customised in the sense that no two reinsurance (or retakaful) treaties are ever really identical. Procedural requirements for a standard comprise in our view: 1. Switching from conventional business only where necessary 2. Changing to a wakala treaty (a request by Shari’a scholars) 3. Defining the role of investment separately 4. Providing a clear definition of the type of treaty (pooled or independent) 5. Predictability of the treaty results irrespective of how the rest of the retakaful fund performs 6. Standards for halal risk screening 7. Fatwa with an exhaustive list of non-Shari’a-compliant clauses, so that underwriters can be sure that the treaty is compliant as long as the clauses on the list are not used. In sum, the suggested approach is modular. Shari’a compliance is to be assured by applying a limited number of wording elements or modules (such as preamble, legislation, interest bearing articles and – very important - pricing elements), which are approved by all the leading scholars. The other parts of the wording can be changed without any effect on compliance. The motto of the presentation at the launch of the manual was: “just by calling a horse a bird, it does not start to fly. This having been accepted, however, it may still be a good horse.” In technical terms, retakaful is not always as different from reinsurance as originally thought. But it is and ought to be different, and by defining more closely what needs to be kept apart and what is just an unnecessary complication to marketability, retakaful may be more successful and escape the streamlining forces that wanted to have it simply as a conventional copycat for quite some time. And having secured this, techniques can be developed to make also the spiritual side of sharing flourish economically.

Reports ISLAMIC ASSET MANAGEMENT TRENDS AND STRATEGIES Datuk Noripah Kamso, Chief Executive of CIMB-Principal Islamic Asset Management, looks at why Islamic asset management is taking off, the strategies adopted by takaful operators, and the issues they face. The Shariah-compliant investment industry is still developing, but growing very rapidly. In fact, it is one of the fastest-growing sectors within the worldwide financial system. Ernst & Young estimtes that there are US$52.3 billion in Shariah-compliant assets under management globally. Shariah-compliant investing is not just for investors of the Islamic faith. Investors of all stripes are drawn to suchvalues-based investing. Likewise, investments are not limitedto Islamic companies, but any company that engages inacceptable activities. Besides the socially-responsible motivation,reasons for conventional investors to invest according to Shariah principles include: • Comparable returns to conventional investments over longer periods (five to 10 years), although they may outperform or underperform conventional investments over shorter periods, as can be seen in Exhibit 1 below. In fact, over the last five years, the Dow Jones Islamic Market World Index (DJIM World) outperformed the Dow Jones World Index (DJ World) by an average of 1.88% per year, returning 10.22% compared with 0.45%. The same can be said for the period between October 2007 and March 2009, the worst bear market in decades, when the DJIM World reported -43.21% compared to -50.48% for the DJ World (Exhibit 2). • Greater stability of returns – Shariah-compliant equities are less volatile than their conventional counterparts, both in times of crisis as well as in times of stability. One reason for this is because excessive financial leverage is prohibited. This can be seen by comparing the volatility of the DJIM World with that of the DJ World, as illustrated in Exhibit 2. • Embedded risk management – To be considered Shariah-compliant, equities must pass a rigorous screening process, which ascertains, among other things, whether the underlying companies are sufficiently capitalised to weather difficult times and are liquid enough to meet short term obligations. This process sets strict limits for various financial ratios, such as debt to total market capitalisation or debt to total assets to limit leverage, and cash to market capitalisation or cash to total assets to ensure sufficient liquidity and productive use of cash. Because of such rigorous screening, the underlying companies are better capitalised and more liquid than many of their conventional peers. Therefore, they are less exposed to the deleveraging, extreme solvency, liquidity concerns and the consequent sharp price declines experienced by these peers during the global financial crisis. • Bonds backed by real assets – Sukuks (Islamic bonds) are asset-based or asset-backed, where there is an asset (or pool of assets) underlying every transaction and the ownership of that asset or pool is transferred to investors. Thus, investors enjoy all rights and obligations that accompany ownership. In asset-backed structures, sukuk holders have recourse to the underlying assets. • Greater transparency – Since transactions and contracts must be free of uncertainty, and terms and conditions clearly defined at the outset, Shariah-compliant investments may produce more predictable results. • Diversification – While they are highly correlated, Shariah- compliant investments limit the downside slightly better than conventional investments do. As shown in Exhibit 2, during the recent bear market, Islamic

Reports funds fared better period than conventional portfolios did, declining less, experiencing lower volatility and recovering nearly as much ground lost as the markets have recovered.

TRENDS AND INVESTMENT STRATEGIES BY TAKAFUL OPERATORS Like traditional insurance companies, takaful operators need to invest in assets that match their liabilities, according to the nature of those liabilities. However, this can be a potential problem in the Islamic space where there is a need for longer-dated assets. As a result, two asset management directions have emerged when it comes to the trends and strategies that takaful operators employ. In the Gulf Cooperation Council (GCC) region, the supply of long-duration assets is not sufficient, thus investment portfolios tend to be â&#x20AC;&#x153;barbelledâ&#x20AC;? in terms of risk. For example, they hold a large concentration in equities and a large concentration in Islamic cash deposits. The nature of the business is also considered. In the GCC region, family takaful accounts for 35% of the business while general takaful takes up the remaining 65%. In addition, shareholders of takaful operators in the GCC region tend to fund a large amount of capital. For example, in the Kingdom of Saudi Arabia (KSA), takaful operators are required to be listed on the stock exchange with a minimum capital requirement of SAR100 million. At the same time, the volume of overall takaful business transacted is low, given the relatively nascent development of the industry in the GCC. Accordingly, the investment trend of takaful operators in the GCC is to invest a larger portion of shareholder funds into the equity space to obtain higher returns in the long-term as there is less urgency for liquidity.

Reports Outside of GCC, in Malaysia specifically, there is sufficient supply of long-duration sukuk. The nature of the business is also a bit more balanced with the life business comprising 60% and the general takaful with 40%. The volume of business transacted is larger than in the GCC given that the industry has had more time to develop. Consequently, there is a need to have a higher level of liquidity in managing the tabarruâ&#x20AC;&#x2122; fund to honour claims. For this reason, Malaysian takaful operators have invested across sukuk, general investment accounts, and equities. Going forward, one of the key issues for takaful operators in the GCC region is the lack of supply of longduration sukuk. The ideal solution is to have higher number of sukuk issuances with longer duration, as currently most global issuance is in five-year maturities. Malaysian takaful operators are able to diversify their sukuk holdings to a certain degree as there are sukuk issues originated by foreign companies in addition to domestic issuers in the country.

THE CASE FOR OUTSOURCING THE MANAGEMENT OF ASSETS Another characteristic of the equity portfolio allocation of a takaful operatorâ&#x20AC;&#x2122;s assets is that it tends to be domestic in nature. For instance, Egypt takaful operators will tend to invest in Egyptian equities, Malaysian takaful operators will invest in Malaysian equities; and so on. There is a valid reason for this. Only a handful of takaful operators in the world have a large enough amount of assets to warrant setting up internal resources to successfully manage assets in an internationally diversified manner. Smaller takaful operators do not have the scale to invest their equity allocation in this manner and therefore do not set up internal resources accordingly. Unfortunately, this may result in overly concentrated portfolios that may limit returns, as opposed to a diversified portfolio which is able to optimise their assetsâ&#x20AC;&#x2122; potential yields and returns. A solution to this issue is to outsource the management of their assets to a dedicated asset manager. The pooling of these assets by smaller takaful operators will result in a larger investible amount that can be successfully diversified in either an Islamic equity or sukuk portfolio with a longer average duration for better potential yields and returns. A sukuk fund of this nature would be liquid, diversified across various durations, and take advantage of higher yields on longer dated Shariah-compliant instruments, which theoretically results in higher portfolio returns. An Islamic equity fund of this nature would have the scale needed to internationally diversify and a wider investment universe to select from. This will enable it to earn potential longterm returns similar to a conventionally invested portfolio. CIMB-Principal Islamic Asset Management is in the process of developing two such dedicated Shariah-compliant equity funds that will comply with Undertakings for Collective Investments in Transferable Securities (UCITS) III Directives and intends to launch these in 2011. The author can be contacted at noripah.kamso@cimb.com

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MNRB Retakaful Berhad (MRT) was incorporated in December 2006, as a wholly-owned subsidiary of MNRB Holdings Berhad (MNRB) and was registered as the first Retakaful operator in Malaysia by Bank Negara Malaysia on 1 August 2007. The setting-up of MRT is another effort by the MNRB Group to position itself as a significant player in the global takaful industry and to assist in promoting Malaysia as a leading centre for the development of the Islamic finance industry. Being a standalone entity without the burden of carrying heavy “conventional baggage”, MNRB Retakaful enjoys considerable operational independence and thus in a position to contribute effectively towards the orderly development of the sector. MNRB Retakaful is a component in the Shariah compliant supply chain of the takaful industry. Its principal activity is to manage a retakaful pool or fund made up of homogeneous group of takaful funds from both general (non-life) and family (life) classes of business. The main product types are treaty and facultative retakaful. MNRB Retakaful offers various value added services such as risk surveys, retakaful programming, market training and product development. The company was assigned and reaffirmed the financial strength rating of “BBB+” with stable outlook by Fitch Ratings which reflects the company’s healthy capitalisation and prudent management.

G O L D PA RT N E R S

In the Kuala Lumpur International Islamic Finance Forum (KLIFF 2008) held on 18 November 2008, MNRB Retakaful was awarded “The Most Outstanding Retakaful Company”. The award that was presented by Minister of Finance II of Malaysia represents the Company’s commitment in contributing towards the healthy development of the Islamic finance industry.

As one of the largest consulting and actuarial firms in the world, we are recognized leaders in the markets we serve including Middle East. For over 60 years, Milliman has pioneered strategies, tools and solutions worldwide. Milliman insight reaches across global boundaries, offering specialized consulting services in life insurance and financial services, employee benefits & Investment Consulting, healthcare, and property and casualty insurance At Milliman, we help clients make business sense of complex and technical situations, with practical intelligence that yield results. Our consultants in the Middle East have global credentials, international experience and local knowledge. With Shariah based and compliant financial products expected to grow in double digits over the coming years, creating commercially viable and Shariah compliant solutions will be a challenge that must be addressed. Aligning the interests of operators, participants and shareholders of Takaful operations is another challenge that requires fundamental thoughts. At Milliman, we have the world’s best actuaries, business consultants, and financial analysts and are best placed to develop and assist you with new solutions or enhance existing business proposition. Plus, we have access to world-class Shariah advisors. Whether you are a Takaful or Re-Takaful operator, regulator, global player, conventional insurance player or investor, Milliman is here to provide you with a range of services right at the heart of the Middle East.

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Headquartered in Kuala Lumpur, Malaysia, CIMB-Principal Islamic is strategically located in the world’s BLACK / WHITE BLACK first country with a complete Islamic financial system operating in parallel to the conventional banking system. This allows the firm to leverage on Malaysia’s comprehensive Islamic financial infrastructure K 50 K 100 and its adopted global regulatory, legal and Shariah best practices.

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Our firm is distinguishable from other actuarial firms in that we pride ourselves on combining toplevel strategic thinking and old-fashioned personal attention and sensibility to all of our clients for services such as: pension scheme valuation and design, pricing of insurance and Takaful products, determining appraisal values in mergers and acquisitions and the actuarial valuation of insurance and Takaful company liabilities. Our clients are spread across the globe; from Malaysia to the UK, with various countries in between like Singapore, Brunei, Indonesia, Thailand, Hong Kong, Sri Lanka, Mauritius, Saudi Arabia, Bahrain, Oman, Nigeria and Sudan. We are leaders in consulting to the growing Takaful (Islamic Insurance) industry. In Malaysia we are widely accepted as the industry expert on pensions and the actuarial aspects of Takaful.

G O L D PA RT N E R S

• Traditional Actuarial Consulting • Strategic Consulting • Risk Management

Islamic Financial Services Advisory

Is your team all rowing in sequence? At IFSG, we are helping executives develop new strategies and then implement them by working closely with their team. As the Islamic finance industry begins to mature, companies have to strive towards global benchmarks of revenue growth and cost optimisation. Our TOP Programme (Transforming Operating Performance) will help you get your team rowing in the same direction, in sequence and be amongst the best.

Shariâ&#x20AC;&#x2122;a & Corporate Governance Strategic Direction Finance & Performance Management Transaction Advisory Services People & Organisation Customer Risk & Operations IT Support & System Selection Tax Advisory Project Management

Contact us to see how we can support your vision Ashar Nazim â&#x20AC;&#x201C; Global Islamic Finance Leader ashar.nazim@bh.ey.com : +973 1751 2808

Sponsors 3i Infotech offers IT and business process solutions globally, helping its customers achieve greater operational efficiencies. Customers can focus on their core business, while the non-core pieces of their operations can be handled by specialists. In the process, 3i Infotech delivers integrated technology solutions that work with customers’ systems and across multiple lines of business. 3i Infotech provides IT Consulting for BI and Data Warehousing, Application Development & Maintenance, Managed Infrastructure and Testing Services. In the BPO arena, services include Payment Services, Document Imaging & Digitization, and Operations Outsourcing (BPO). As well as being a leading provider to Banking, Wealth Management, Insurance and wider Financial Services, the company has also developed many IPRs in Life Science/Healthcare, Manufacturing/Auto and Retail & Consumer Packaged Goods.

Scottish Widows Investment Partnership – SWIP – is one of the largest asset management companies in Europe. Our teams are recognised as high fliers within the industry. Our performance is based on their skills, backed by thorough research, and the ability to uncover and capitalise on opportunities as soon as they arise. These market-leading capabilities are further supported by a global presence that spans the UK, continental Europe, the US and Asia. We invest across all asset classes, including equities, property, bonds and cash. We also offer specialist expertise in multi-manager, multi-asset solutions and socially responsible investing. Our goal: to provide superior risk-adjusted returns and quality service for our clients, which include individuals, pension funds, charities and financial institutions from around the world. Whatever your investment requirements, our teams have the innovation, drive and skill to deliver investment solutions that perform.

The Spirit of Trust Tokio Marine Group is committed to the development of Takaful and offers wide range of takaful products and retakaful capacity in a number of countries around the world. With its commitment to Corporate Social Responsibility, it constantly strives to deliver the best to its customers, fully aligned with local values and beliefs. Tokio Marine Nichido is Japan’s oldest and largest non-life insurance company, an undisputed industry leader in commercial and personal underwriting and writes most classes of business in takaful and conventional insurance. Tokio Marine Middle East is the Takaful Centre of Excellence of the Group based in Dubai International Financial Centre. For more information contact info@tm-mena.com or visit www.tmmena.com Group websites: www.tokiomarine.eu and www.tokiomarinehd.com/en

G O L D PA RT N E R S

Scottish Widows Investment Partnership is part of the Lloyds Banking Group. As at 31 March 2011, we manage client funds worth £145.3 billion.

Sponsors

Headquartered in Bahrain within the Ernst & Young Global Centre of Excellence, the Islamic Financial Services Advisory team is a specialist team which caters to the specific needs of both Islamic and conventional financial institutions requiring Islamic financial advisory services. The team works across sectors and advises on banking, capital markets, insurance/takaful, asset management, regulatory and government matters. Ernst & Young was the first professional services firm to establish a dedicated team to service clients in this growing industry and is the only professional services firm to offer Shari’a auditing services. We have strong relationships with regulators in all centres of the Islamic financial services industry, and we have an unshakable belief in the future of Islamic Finance. Our clients range from start-up’s to some of the world’s best known and largest global financial institutions. As a reflection of the changing needs of the industry, we currently offer more services in more markets and more industry segments in the Islamic financial services industry than any other professional services firm. Our core offerings include: • • • • • •

G O L D PA RT N E R S

•

• • •

Risk & Governance – Corporate & Shari’a Governance, Risk Management and Internal Shari’a Audits Strategic Direction - Strategy Articulation, Concept Development and Industry Reports Finance & Performance Management – Business Planning and Performance Improvement Programmes Transaction Advisory Services – Structuring Advice, Business Modelling and Merger & Acquisition Support People & Organisation – Target Operating Models, Organization Structures, Competency Frameworks and Performance Management Systems Supply Chain & Operations – Process Mapping, Product Programs, Policies & Procedures and Operational Reviews Customer – Customer & Market Strategy, Customer Intelligence & Economics, Customer Service Management Information Systems – Core Banking System Selection & Design, System Implementation Support, MIS Design Tax Advisory – Shari’a Compliant Tax Advisory Services Project Management – PMO Setup & Running, Project Management, Workstream Management

Standard & Poor’s, a subsidiary of The McGraw-Hill Companies (NYSE:MHP), is the world’s foremost provider of independent credit ratings, indices, risk evaluation, investment research and data. With offices in 23 countries and markets, Standard & Poor’s is an essential part of the world’s financial infrastructure and has played a leading role for 150 years in providing investors with the independent benchmarks they need to feel more confident about their investment and financial decisions. For more information, visit http://www.standardandpoors.com

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A Spirit of Trust Since 1879

Tokio Marine Group Tokio Marine Middle East is the Takaful Centre of Excellence of the Group based in Dubai International Financial Centre, P. O. Box 506616, Dubai, United Arab Emirates. For more information contact info@tm-mena.com, Tel: +971 4 425 5678, Fax: +971 4 425 5600, www.tmmena.com Group websites: www.tokiomarine.eu and www.tokiomarinehd.com/en

THE AUTHORITATIVE VOICE OF ISLAMIC FINANCE Essential reading for an expanding industry - Islamic Business & Finance is the world’s most thought-provoking monthly magazine dedicated to the development of Islamic finance globally.

Islamic Business & Finance is a controlled circulation publication. You may apply to subscribe via our website or by emailing subscriptions@cpifinancial.net

CPI Financial FZ LLC • PO Box 502491 .Al Shatha Tower, Office 3306 Dubai Media City, Dubai, U.A.E Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 • www.cpifinancial.net

The marketing-driven approach to Takaful

Tackling Takaful conundrums

slamic Business & Finance is the only truly global magazine reporting on the growth and development of this exciting and dynamic industry. I was chatting the other day to an Islamic banker in Qatar. The gentleman in question had been instrumental in establishing SABB Takaful in Saudi Arabia five or so years ago. So a man familiar with the Islamic insurance scene, especially perhaps as it pertains directly to the banking sector. The world’s largest market for Takaful is currently Saudi Arabia, largely thanks to the rollout of compulsory medical insurance. In second place is Malaysia. However, in broad terms the GCC is dominated by general Takaful whereas Malaysia is mostly family Takaful. In fact, as the expansion of Takaful in Saudi Arabia evidences, growth within the GCC continues to be dominated by compulsory rather than voluntary insurance policies. The family Takaful market remains underpenetrated and is estimated to contribute only five per cent of gross contributions in the MENA region.

he importance of marketing increases, all the more, when your product is new and unprecedented. Similar is the case with Islamic financial institutions. It’s a conceptual product, with an ideology behind it. Most importantly, it has a unique selling point (USP) which is its being Halal and Shari’ah-compliant. Every time a financial institution introduces a new product or service it becomes the responsibility of their marketing department to ‘explain’ the product to the masses. Marketing of financial products, thus, becomes challenging because your team has to be well versed in the field of finance as well as in marketing; additionally, in the case of Islamic financial products the skill set increases as it requires grounding in the principles of Shari’ah. It is difficult to find such people who possess knowledge in all three fields: an essential combination for a successful and articulate marketing strategy.

AGENCIES

This battle for minds may be a long one but there is a second conundrum also to be addressed. Assume that the concept of Takaful is fully embraced, what then? Then, of course, the liquidity issue that the industry faces becomes even more acute. Takaful operators need to match their long-term liabilities with long-term assets. This is already problematic for some. Imagine an even faster rate of growth in terms of policies and policyholders!

Another challenge is to liaise with ad agencies that have people willing to distinguish between conventional and Islamic financial products. Agencies also have to work with constraints when it comes to Islamic financial institutions such as not using human faces in any marketing collateral as it is against Shari’ah. Agencies fall into pitfall of ‘islamicising’ marketing campaigns to an extent which is more than necessary. Their concepts begin from using mosques in collateral and end on Quranic Ayahs. It becomes a responsibility of marketing departments to have to ensure that they are selling products and services and not Islam. A stark difference between marketing Islamic financial products and conventional financial products is that in the case of conventional products consumers are not interested in knowing back-end functionality. However, many Islamic financial institutions’ clients want to know how things work, showing interest in the details of the legal contracts involved in financial products. Conventional financial institutions do not have to promote anything beyond their product or service. While in the case of Islamic financial products the added USP of it being Shari’ahcompliant needs to be communicated. Consider the case of McDonald’s or KFC: a simple logo reading Halal on its packaging and billboards will suffice. However, in the case of financial products a simple logo, often, does not suffice. It requires a much more comprehensive effort.

My banker friend in Qatar, speaking for his bank, also bemoaned a lack of investible instruments for the bank’s deposits. If the banks are muttering darkly, how much more of a problem might this be for Takaful companies?

Syed Adnan Hasan Head of Marketing & Communications Pak-Qatar Family & General Takaful

Or, as my banker friend in Qatar put it, “Takaful still has some way to go. There is still a body of opinion within the Islamic world that sees insurance as in some way Haram and unacceptable. I think any provider of insurance needs to bring to the discussion an educative piece about how insurance is acceptable in an Islamic context. One can argue that the obligation to make appropriate provision for one’s dependents is an Islamic obligation: what better way to do that than through structured Shari’ah-compliant insurance? But there is some way to go at the market level.” According to Ernst & Young’s recent analysis the key issues facing Takaful are competition for growth, diversification and specialisation and the cultural and religious acceptability of insurance. Of these, clearly the latter is by far the most important. Unless Takaful companies can fully persuade their target market audiences that the products on offer are acceptable under Shari’ah then everything else is irrelevant!

Robin Amlôt

CPI Financial FZ LLC • PO Box 502491 .Al Shatha Tower, Office 3306 Dubai Media City, Dubai, U.A.E Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 • www.cpifinancial.net

Revisiting ReTakaful

akaful operators who have long been under pressure to reinsure without breaking their faith may enjoy this heartening news: the void in ReTakaful services which has pushed them towards conventional insurers is being addressed. According to KFH Research, the industry is not yet able to fully accommodate Takaful operators, often compelling them to resort to conventional reinsurers to manage their risk profile. However, things look set to change. The lack of rated ReTakaful operations is highlighted year after year by Ernst & Young in its annual World Takaful Report. However, the concern always takes a backseat to risks such as a lack of expertise and limited investment opportunities. Recently there seem to have been more murmurings about how a lack of ReTakaful services is a serious concern for the industry. So much so, that jurisdictions keen to crack Islamic finance are showing willing to launch themselves into the space. The Caribbean island of Bermuda, for example, has recently been bidding to become the global leader of the ReTakaful industry. This intention was voiced Cheryl Packwood, Chief Executive Officer of Business Bermuda, a government agency created to promote Bermuda as a regional financial and business hub. She said, “Bermuda is the world's number one reinsurance domicile, and it is only natural for us to layer Takaful and ReTakaful on top of this.” “At the moment many Takaful companies have to reinsure with conventional insurers," said Mohammed Khan, Head of Islamic finance for PricewaterhouseCoopers. “There are very few well-rated Islamic reinsurers, but with its leading position in reinsurance, and a regulatory structure friendly to Shari'ah compliance, Bermuda makes an obvious centre for global ReTakaful.” Bermuda’s contribution would certainly be welcomed, as demand will only grow with the young Takaful industry. Global Takaful contributions are expected to touch $12 billion this year, and accordingly there is a great potential demand for ReTakaful capacity. In contrast, the ReTakaful market, whilst having grown rapidly in recent years, is still only worth a fraction of this. This raises the question, how long can the Takaful industry continue to use conventional reinsurance?

MANAGING RISK According to Clyde & Co, conventional insurance and reinsurance are based on the concept of risk transfer from the original insured to the insurance company and then from the insurance company to the reinsurer. In contrast, Takaful is concerned with risk sharing whereby a Takaful company manages a Takaful fund for and on behalf of the participants. It is fundamental to this structure that the contributions of the participants are pooled and that the participants retain an undivided ownership of the Takaful fund. In conventional insurance, an insurer will typically have liability to pay a claim assuming that none of the relevant exclusions available in that policy apply. This liability is normally the trigger for the reinsurer's liability under the terms of the reinsurance. In the absence of any express language in the reinsurance to the contrary, the reinsurer will not be liable to the insurance company in the event that the insurance company cannot prove that it was, in turn, liable to the original insured. In Takaful, the application of the doctrine of donation, or Tabbarru, means that there is never a liability on the Takaful operator to pay a claim to a participant. All claims payments are made to the participant by way of gift. Accordingly, an unscrupulous reinsurer might seek to deny coverage for such a claim. It is possible to make appropriate provisions in the Reinsurance Agreement with a Takaful operator so that this type of technical argument cannot be made. In particular, language provided coverage for ex gratia settlements would be beneficial in this regard. But the point illustrates potential lack of fit between the conventional reinsurance and Takaful. Takaful and ReTakaful are co-dependent: Takaful's success is dependent on the ReTakaful industry continuing to grow, in order to provide the rated capacity to the Takaful market so that it can expand into additional lines of business. While an encouraging number of ReTakaful operators have been established, there is a way still to go if the Takaful market is to achieve its potential. The ReTakaful industry has challenges ahead and needs the support of the Takaful operators. The question is can the Takaful operators be seen not to provide this support?

CPI Financial FZ LLC • PO Box 502491 .Al Shatha Tower, Office 3306 Dubai Media City, Dubai, U.A.E Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 • www.cpifinancial.net

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DESIGNMPIRE 58

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Local knowledge – global capability Norton Rose Group, a leading international legal practice, offers a dedicated team which has the expertise and experience to advise takaful and re-takaful operators in this vibrant and growing sector. We offer a comprehensive service including advice upon: • Takaful and re-takaful structuring • Regulation • Policy and contract wordings • Authorisations and passporting • Investment management agreements • Distribution • Outsourcing • Dispute resolution For further information on takaful and re-takaful at Norton Rose Group, please see our website nortonrose.com

To speak to someone directly please contact:

London

Susan Dingwall Norton Rose LLP Tel +44 (0)20 7444 2349 susan.dingwall@nortonrose.com

Middle East

Mohammed Paracha Norton Rose (Middle East) LLP Tel +973 16 500 210 mohammed.paracha@ nortonrose.com

Asia Pacific

Davide Barzilai Norton Rose Hong Kong Tel +852 3405 2543 davide.barzilai@nortonrose.com

Winner of “Best Takaful Law Firm” at the International Takaful Summit in 2008, 2009 and 2010 NR10622