ReTakaful - Surfing Through A Mosaic Of Factors
Looking at the prospects, challenges and future of the nascent ReTakaful field, we will find more questions than answers, even though its business potential is real.
There are, nonetheless, significant strengths such as fully dedicated ReTakaful players and serious efforts at setting standards, but the situation is much more complex.
First, if the estimation of the global reinsurance premium size is hardly available, the estimation of the global ReTakaful market is even more delicate. No official estimates of global ReTakaful contributions are available compared to an estimated USD 245 billion in 20141
premiums in the global reinsurance market.
The Islamic Financial Services Board is a great institution and brings credibility to ReTakaful. In April 2016, the Islamic Financial Services Board published the Guiding Principles for Retakaful - Islamic Reinsurance under the title IFSB-18.
The standard defines this business as risk-sharing instead of transfer, which will have serious repercussions on the model.
Similar to Takaful, there will be two separate accounts for shareholders and policyholders. The models that can be used are Wakala, Wakala-Mudarabah, Wakalah-Waqf, and Cooperative. Premiums are paid under the concept of Tabarru’ (donation) and the idea of mutual assistance, while investments should be Riba-free (free of interest rates). The standard also addresses ReTakaful windows, and tackles Sharia-compliance of risks.
At first sight, ReTakaful aims at capitalizing on the emerging growth of Takaful by addressing an answered need for Shariah-compliant reinsurance;
Its development was a corollary of Takaful development. Primary Takaful business has been promising; It removed cultural barriers to insurance in MENA markets and beyond, achieved double digit growth, and created a lot of enthusiasm in the business community and among Islamic finance scholars. Gross Written Contributions in the Takaful industry will reach USD 20 billion globally by 2017, according to the projections of Ernst & Young relayed by the business community. But despite sustained double digit growth for more than a decade, the general serious challenges of the Takaful industry, especially in the GCC, remain high operating expenses, competition with conventional players, lack of product innovation, non-compliant transactions and investments, shortage of talent, and the deceleration of business growth as most of it was previously linked to the growth of compulsory health insurance in the GCC. Hence, ReTakful has to indirectly deal with these underlying risks and opportunities.
Furthermore, the MENA ReTakaful and Reinsurance sectors are closely interrelated, and the border between both sectors is not completely clear. On whether ReTakaful players are viable and can set their own strategies, we might explore the larger picture and look back at the conventional, but relatively older Arab reinsurance industry. It is clear that conventional Arab reinsurers have been late and not well-equipped for setting their own underwriting wording and rules as the general practice was to follow international leaders and write similar terms with occasional slight modifications. As a consequence,
we would imagine a more difficult challenge for ReTakaful players in setting their particular wording and underwriting rules.
Therefore, both the MENA reinsurers and ReTakaful players will need additional time to monitor results of their models and practices and keep improving.
Additionally, still in this larger reinsurance picture dimension, the business outlook is currently very difficult for MENA reinsurance, global reinsurers, and local Takaful players. The global reinsurance market, as well as the MENA reinsurance market, is extremely difficult with declining prices below acceptable technical rates that almost broke the reinsurance cycle as well as an unprecedented flood of capacity.
ReTakaful ventures are being launched and are aimed to expand within this difficult environment.
Competing in the health and motor insurance lines, which represent the largest share of GCC of business, will be difficult with typically high loss ratios and unhealthy competition. Moreover, MENA reinsurance players, themselves, have been excluded from some regional markets as GCC regulators require international ratings, which are usually governed by sovereign credit rating. Consequently, ReTakaful players will be challenged to prove their credit rating credibility.
The worst phenomenon, however , for the MENA reinsurers, remains the bad business they receive while better risks are being generally ceded to the international players.
The regional and global reinsurance outlook is almost hopeless, even though reinsurers are still managing to achieve profits. To make things worse, the global market witnessed significant consolidation where the Top 5 Global reinsurers increased their market share
from 23% in year 1990 to 55% in year 2014. This represents a dangerous competitive challenge for small and middle sized reinsurers worldwide, including ReTakaful players. In addition, there is an overflow of capacity into the MENA region including Lloyd’s and a range of international players. It is also worth noting that
Global commercial reinsurance companies are aggressively addressing the ReTakaful line of business, which brings additional competition to the limited business ceded.
Dedicated ReTakaful players have to deal and cope with different markets including Asia, the GCC, the African and other markets, of which ultimately, the natures of risks ceded will be very different, so they will need physical presence and advanced underwriting knowledge.
ReTakaful players will have to deal with the opacity of Shariah-compliance across the different risks insured, co-insured, reinsured and retroceded.
A controlled Shariah-compliant niche will be a solution but businesses, unfortunately, cannot afford this solution.
Scholars and Sharia boards nowadays are pushing Takaful players to use ReTakaful capacity. Noting that since creation of the first Takaful firm in Sudan in 1979, the sector has struggled with a lack of sharia-compliant reinsurance capacity to help manage excess risk. So takaful firms cede business to conventional reinsurance players; A practice allowed under the concept of darura, or necessity2
. Morover, ReTakaful players reinsure a large number of conventional cedant players for commercial considerations.
The leakage of Takaful cessions to conventional reinsurance companies is still very important, although ReTakaful capacity is increasingly powerful.
Takaful management can insist on long-established relations with commercial reinsurers. Bank Negara Malaysia, the Malyasian regulator, has issued a circular forcing Takaful players to utilize ReTakaful capacity, when available. On the issue of mega risks, which are too large to be reinsured by a single retakaful operator including aviation and energy, one suggestion was to create a combined retakaful pool to support the risk3
Furthermore, beyond the business dynamics in underlying Takaful as well as the regional and international commercial reinsurance, the previously addressed novelty of ReTakaful has unquestionably existential, structural, technical and practical problems.
Naturally, compared to professional reinsurers who have already been setting their business rules for few hundred years, ReTakaful players have been in existence for less than a decade.
This means they have less experience and will be overwhelmed by practices relevant to the well-established commercial reinsurance. Inevitably, addressing the structure of ReTakaful risks will lead us to the debate on whether Takaful is more adaptable to personal lines rather than non-personal lines in order to serve the mutuality, which is at the heart of Takaful. Moreover, large risks will not be met by ReTakaful capacity despite the capital entries, so ReTakaful capacity is still not a complete panacea for Islamic reinsurance.
If direct Takaful suffers from multiple interpretations and contract wording, ReTakaful suffers also from different versions in contract wording. For this reason, the Malaysian Takaful Association adopted a unified wording for general ReTakaful4
A number of structural issues need to be taken into account;
How will the loan to the Retakful pool, in case of deficit, be repaid if cedants have the freedom to leave the ReTakaful player when retakaful is considered a risk-Transfer rather than a risk sharing by cedants? Additionally, retakaful rates are participating, i.e. with a profit participation, whereas reinsurance rates are nonparticipating, therefore commercial rates will be more competitive than ReTakaful rates5
Finally, the withdrawal of a dedicated ReTakaful player and the failure of an established second one in the market, given low profitability, is a negative signal for the ReTakaful industry
given the relative strong reputation they once both enjoyed. However, a few number of fully dedicated ReTakaful players, as well as a few global professional reinsurers, still believe in the future of this field.
Major cities, such as Abu Dhabi and London, are trying to establish Islamic finance centers, which will surely contribute to the development of ReTakaful. Generally, Islamic banking and asset management have gathered drastically more strength based on assets under management than the Takaful industry, but the future will be different.
ReTakaful was meant to answer long awaited needs, but today, the retakaful spectrum looks rather like a mosaic instead of an industry, as numerous questions remain unanswered.
Shariah-Compliance is good news, but long term financial sustainability of the business model will be key to the success of this industry.
Le marché de la reassurance en 2014, FFSA & APREF (France) – juillet 2015
Retakaful continues to prove its worth, Source: Middle East Insurance Review | Apr 2013
Takaful: Working towards greater retakaful contract certainty - Source: eDaily | 17 Nov 2014
The Malaysian Actuary, February 2013 Issue, Let There Be Light… Struggles of a Takaful Actuary, Tobias Frenz, Chief Executive Officer, Munich Re Retakaful