Family Takaful Challenges & Opportunities
Introduction
This article provides an overview of (a) the practical challenges that a Family Takaful investment linked product must overcome if it is to achieve sustained credibility in today’s financial services market and (b) how the FWU Group is able to assist banks, life Takaful companies and financial intermediaries to overcome such challenges and transform them into a real competitive advantage.
The Dilemma for Muslim Savers
1985 saw Mecca-based Islamic scholars pronounce the concept of Takaful as being Shari’ah compliant. This view has continued to be upheld over the years by eminent Islamic jurisprudents, in particular FWU Group’s Shari’ah Board Chairman, Sheikh Dr. Mohamed Ali Elgari, a PhD in Economics from the University of California and a professor of Islamic Economics in King Abdul Aziz University, Jeddah, Saudi Arabia. There has since been an abundance of literature produced by Islamic bankers and financial institutions alike on Takaful products and in particular, their actual mechanics.
The Takaful industry continues to face a number of challenges, which, if not confronted, may limit the pace, development and consumer appeal of Takaful. These challenges are not however, confined solely to the financial services sector – the global Muslim community continues to grapple with socio-economic issues such as how best to finance education and marriage, meeting the demands of a family as well as how to provide adequate funds for retirement, prolonged illness or tragic misfortune. All of these needs are easily addressed by conventional life insurance related long-term savings plans. However, it is also widely acknowledged that these plans commonly contain elements in their design and/or operation that are not permissible for Muslims. FWU Group recognises this unique dilemma faced by Muslim savers and has designed a portfolio of Islamic Shari’ah compliant life Takaful and Quant model Wealth management solutions to be offered in conjunction with participating banks and life Takaful companies to both Muslim and non Muslim savers.
Removing The Cost Deterrent : The FWU Group’s Role
Currently, there are some 100 insurance companies in the GCC - about 8 of these are licensed for composite Takaful business i.e. general and Family Takaful. However, out of these 8, only 5 companies are marketing a Family Takaful line of products.
To date, insurance companies offering Family Takaful have not delivered the product range and/or the sales volumes initially envisaged by their distribution partners. This is primarily due to either the distinct lack of knowledge of and/or suboptimal investment in the requisite IT systems. It is well known that setting up a Family Takaful investment linked business is capital intensive. To underwrite a policy, both front and back office support are required, as well as a special purpose designed IT system. This further entails the establishment of underwriting, accounts, administration, claims, sales and marketing departments. The significant initial upfront investment comprising headcount and IT is the main reason why many insurance companies have not become Family Takaful operators.
To assist the Family Takaful industry, the FWU Group has devised a concept of ‘Strategic Partnership Cooperation’ which facilitates Takaful companies and their bank distribution partners to enter into this sector without having to incur significant upfront initial costs.
FWU Group utilises a “private label” or “white label” approach to Family Takaful designed to increase product acceptance together with a variable fee partnership which provides a risk free income stream for participating banks. This approach coupled with an online sales fulfilment and transaction monitoring capability, and the FWU Group’s Internet Training Academy serves to provide banks with a convenient bankable Family Takaful product and customer service support network.
Family Takaful : A Forum For Healthy Competition
For the West, the Takaful business is no longer a curious novelty. Many big players such as Standard Chartered and HSBC have already launched Family Takaful and Sharia’h compliant investment products. This interest is due to the fact that Family Takaful - despite in its relative infancy – offers greater opportunity and potential for niche players. Naturally, global banks and financial service providers enjoy financial strength, technology, human resources and a well-established presence in many countries across the world. Their presence will provide many local Takaful companies with a source of healthy (yet tough) competition and only those companies with a real willingness to change will survive.
Family Takaful: How The FWU Group Adds Value
The results from various studies on customer loyalty, carried out by the financial services industry in the USA and Europe, reveal that the retention of customers varies across different types of financial products. Customers with deposit and current accounts remain, on average, with the same financial institution for 1 to 3 years. This period increases with regard to mutual funds which display a retention period of 3 to 5 years. However, the longest retention period is seen in life insurance, long term savings and pension products where the average stay period exceeds 10 years. The initial acquisition cost of a new customer is a significant overhead for any financial institution and therefore, the longer a customer stays with the institution, the more profitable that institution’s business is likely to become. A growing number of banking groups in the West are successfully entering into the long term savings market segment partly for this reason.
As with any concept in its embryonic phase, Family Takaful has not been without its challenges – mostly in the form of pre-existing notions and prejudices surrounding its competitiveness compared to conventional insurance. Yet these challenges have only spurred the FWU Group with the opportunities to formulate and implement both workable and customer – friendly bankable solutions.
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Challenges |
FWU Group’s Solutions |
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a) Life Takaful products are more expensive than traditional products and therefore economically |
Our Wakala Takaful structure eliminates the structural inefficiencies of traditional Mudarba Takaful programmes. Within the Wakala structure, cost efficiency is like any other life product – the pure result of management skills and applied systems. |
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b) Existing Takaful products regarded as a mere blend of traditional western product ingredients with pure Takaful related product ingredients. The major issue in this respect was the non-existence of Retakaful arrangements in the market. |
We had been convinced right from the start that for a pure Shari’ah compliant Takaful product, a Shari’ah compliant Retakaful arrangement is an absolute must. Therefore, we have negotiated with an “AA rated” major international reinsurance company a Retakaful arrangement with, • an unlimited ‘Quard Hasna’ in the Retakaful Fund for any deficit; and ‘Riba’ – free investment for the assets of the Retakaful fund. |
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c) Lack of product flexibility in the terms and conditions. |
Apart from achieving a high degree of flexibility, we have also incorporated some unique features in our savings programme : • no client will be declined, irrespective of his or her health condition. Minimum insurance coverage of $25,000 will be offered to anyone who applies; • various risk/reward investment strategies are offered; • every working day after the first programme year can be treated as programme maturity date. Considering no surrender penalty is payable after the payment of the first four months premiums, the programme offers attractive early surrender values; • costs and charges remain the same throughout the term of the programme, which is a unique feature of the programme; and • there is no bid and offer spread. This allows for 100% of the savings portion to be invested. |
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d) Hidden agenda – Items such as the forbidden elements of ‘Gharar’ (uncertainty) – in the terms and conditions. |
Our product range is fully transparent, as compared to other Takaful products. For example, suicide, newly discovered diseases, including HIV, and changes in occupation will not affect the Family Takaful benefits. |
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e) Unattractive investment programmes of Family Takaful |
We offer innovative Shari’ah compliant Quant Investment Portfolios seeking to achieve superior risk-adjusted absolute returns in the different market environments. |
Bankable Life Takaful
The Perfect strategic Partner: FWU GROUP
a) State of the art on-line sales and underwriting systems that offers sales and after sales service as well as product changes. All customer communications are processed on-line via an internet-based sales and underwriting system at the bank counter. The whole process takes 12 to 18 minutes (including the transfer of first the premium and printing of the policy document). An on-line underwriting module generates individual risk assessment and allows professional sales management and the monitoring of sales staff.
Added Value: Minimal staff required. On-line underwriting system performs the risk assessment in a timely and efficient manner.
b) Our Quant investments portfolios, which invest directly in Shari’ah compliant global stocks and in Murabaha, are dynamically reviewed on a regular basis. The portfolio is rebalanced regularly to benefit as soon as possible from changing market trends. We also apply technical risk control parameters. Sample risk measures include controlling volatility within a pre-defined target and applying strict stop-loss limits.
Added Value: Quantitative, mathematical investment approach is adopted depending on objective parameters as opposed to a qualitative, emotional approach depending on individual judgments.
c) Open investment architecture allows the bank distribution partner to invest funds in their inhouse mutual funds or choose quality third party Sharia’h compliant funds. The bank distribution partner remains custodian of the customer funds at all times.
Added Value: Consumer choice to invest in 3 to 4 portfolios offers attractive risk/reward potential.
d) Securitization of Family Takaful portfolio: Rapidly increasing embedded values generated through the stream of regular contributions can be securitized i.e. the portfolio can be sold to the ReTakaful company at any given time.
Added Value: A Wealth Management Group is required to add to the bottom line of the bank. Securitization helps manage assets, liabilities and cash flows.
e) Hands-on training on all aspects of sales such as product knowledge, customer risk profiling, as well as on-line point of sales and underwriting system, is provided by experienced professionals operating from FWU’s regional office in the Dubai Internet City (DIC). The FWU Group has established an internet Training Academy. The banks sales staff will be encouraged to visit the online Training Academy to enhance their skills.
Added Value: Customer complaints are symptoms of training needs. FWU Group’s local presence ensures timely assistance.
Overview of the FWU Group
The FWU Group is a Munich-based financial services group founded in 1989 by Dr. Manfred J. Dirrheimer. The FWU Group specialises in asset management, customised product design and, in particular, the private label distribution of Family Takaful and unit-linked investment products via internet-based point-of-sale and underwriting systems. FWU Group’s subsidiaries include a life insurance company, an asset management company and a mutual fund company, which are all based and regulated in Luxembourg.
The FWU Group has also attracted minority corporate shareholders such as GE Frankona Re. AG, an international reinsurer and other European banks and insurance companies. The FWU Group has set up strategic cooperation partnerships with Dubai Islamic and Reinsurance Company (AMAN) and EFU Insurance Company in Pakistan. In the Kingdom of Saudi Arabia, a Takaful company is currently being established in partnership with the National Commercial Bank (NCB).
If you would like more information on the FWU Group or its Family Takaful products and services please contact:
Dr. Manfred J. Dirrheimer
CEO, FWU Group, Boschetsrieder Straße 67, D-81379 Munich
Tel: +49-(0)89-7485880
Fax: +49-(0)89-74858881
m.dirrheimer@fwugroup.com
Web: fwugroup.com
Mr. Sohail Jaffer
Partner / CIO FWU Group, 2 rue Sainte Zithe, L-2763 Luxembourg
Tel. +352-26197700
Fax. +352-26197800
s.jaffer@fwugroup.com
Web: fwugroup.com
Entry Filed under: Alternative Investment, Insurance, Islamic Finance