It has been in the news recently that Kenya will be unveiling Islamic insurance regulations. Whilst the details of the regulations have not been released, it is worthwhile to consider the potential market segments the regulations might be catering for and how to maximize insurance penetration through the new regulations.
Takaful is not a class of business such as motor or unit linked but rather a way of doing business. The form of the regulations can either encourage product designs and structures similar to conventional insurance plans or conversely product designs unique to Takaful. Ideally regulations would be flexible enough to encourage both types of product designs and markets. By doing this the regulations would maximize the potential market and thus insurance penetration of the country.
Looking at the experience of Malaysia, regulations which encourage consistency with conventional insurance products is great for certain types of products, which Malaysia has certainly excelled at:
- Mortgage reducing term Takaful, used with Islamic loans. The largest segment is the housing loan market, but it would also include motor vehicle loans and personal loans. As Islamic banking grows this market will correspondingly grow. The beneficiary of the Takaful coverage is the Islamic bank who requires the benefits to be guaranteed and terms and conditions identical to conventional insurance plans.
- Medical coverage, either standalone or sold as riders attached to unit linked plans.
- Motor and fire coverage
- Group term and group medical coverage
With the possible exception of the medical coverage this represents coverage which could be considered compulsory or low hanging fruits when designing Takaful regulations.
Other types of coverage have not significantly taken off in Malaysia, namely:
- Savings products, though there are some group savings as well as individual savings. Within individual savings education savings plans have been relatively more popular than other types of savings plans. It is unclear whether the relative lack of success has been due to other savings options available to Muslims, a lack of disposable income to purchase savings Takaful plans or the lack of investment guarantees in current Takaful plans. Group savings plans have met with mixed success, with a few Takaful operators being successful but others not venturing into this market segment. In Malaysia we have a reasonable level of provident fund savings which reduces the immediate need of such coverage.
- Pure protection products such as term coverage and more specialized coverage. Critical illness coverage is one exception, where there has been success in selling as riders in particular.
- Micro coverage for the mass market. Some Takaful operators have tried to venture into this market, but sales have been slow to say the least.
When designing Takaful regulations, it is vital to consider Takaful particular regulations in relation to other regulations such as valuation and risk-based capital (RBC) rules. The level of reserves and solvency requirements (RBC) affects the profitability and return on capital of Takaful. Thus, if the Takaful model being used (or mandated by regulations) changes the relative risks of the shareholders, i.e., participants are combining to share the risks themselves rather than give the risks to shareholders, then the reserving and RBC must also change accordingly. This is not giving special exceptions to Takaful but rather ensuring fairness for Takaful to allow Takaful to grow. Any shareholder will look at the viability of a product in terms of its return on capital. Thus, if the capital (RBC) requirements are low for Takaful due to the product design then the profit levels can also be low to achieve a reasonable return on capital. This means that premiums can be very competitive and allow segments of the market to flourish that would not flourish under conventional insurance. In Malaysia this is the interaction between the Takaful Operational Framework (TOF), valuation and RBC regulations. Any decisions made with respect to Takaful product design must not be considered in isolation but rather together with valuation and RBC.