Can a Pure (Local) Retakaful Operator Survive in Today’s Market?

One question we are asked as consultants is: can retakaful survive in today’s market, in particular local players? In the early days of Takaful, there were very few retakaful operators. The operators that existed were local players with fairly small capacity to assist the Takaful operators. Over time, the major global reinsurers have joined the retakaful market with subsidiaries and affiliates dedicated to retakaful. This has included Munich Re, Swiss Re, Hannover Re amongst many others. These large players bring their global expertise to Takaful at much lower costs than the local retakaful operators as they spread their costs over both conventional and Takaful business. So, where does that leave local retakaful operators?

There have been retakaful operators who started out as local and have grown to be regional players, but for every success story there are more stories of retakaful operators who have tried to go regional but have failed. To answer the question of whether pure retakaful operators can survive, we need to look at the unique selling proposition of these operators.

Whilst it is tempting to compete based on price, we have seen this to be a recipe for failure. The global players have huge size advantages as well as the advantage of significant data from conventional experience. Takaful operators are no different than any other insurer, in that they need support from their retakaful operator in such things as the difference in cost due to simplified or no underwriting, changes due to changes in the pre-existing conditions clause and venturing into new and interesting products. A global player can draw on its experience elsewhere to add value at a reasonable cost.

Does this mean the death of local retakaful? Not necessarily! We firmly believe service remains a key aspect of success in the retakaful market, understanding the client (direct Takaful operator) and building strong relationships with a few key clients. A pure retakaful operator might not be able to compete on technical expertise and product development capabilities of the global players, but they can focus their research on Takaful specific issues and experience as it relates to Takaful. A Takaful operator might seem to be in exactly the same market as conventional insurers, but there are differences. A local retakaful operator will need to understand the nuances of Takaful specific experience to help Takaful operators understand how to adjust pricing when drawing on the experience of its sister conventional operations worldwide.

Stating this differently, providing an Islamic product to mimic conventional products for the needs of Muslims is great, but understanding the nuances of the differences in the Takaful market and experience of that market will help the Takaful operator succeed long term.

Going beyond building strong relationships and understanding the nuances of the experience of the Takaful market is research in Takaful products and models. Thus far, Takaful has succeeded in compulsory general Takaful products as well as credit family products and Takaful equivalent of conventional products such as unit linked plans. This represents the low hanging fruits and is great. In the longer term, we will need innovation in Takaful model and product design, which should be the focus and strength of local retakaful players. This could easily be extended to providing Takaful specific training, both Technical as well as Shariah training.

Behind all of these success factors is the need for support from actuaries who understand the beauty and uniqueness of Takaful and can connect technical and shariah issues.

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