Regulatory changes will give fresh impetus to the actuarial profession in the MENA region as companies race to comply with the IFRS17 mandate, says Actuarial Partners’ Mr Zainal Kassim.
Having been closely associated with the MENA region, Actuarial Partners senior partner Zainal Kassim believes that there are more actuaries working here than there were 10 years ago, but not many internationally qualified actuaries can call the region ‘home’.
As an actuary and senior partner of the 40-year-old Malaysian firm with significant presence in the region, Mr Kassim feels that this can be a hindrance to the development of home-grown talent as expatriate actuaries tend not to stay long in the region, and being a good actuary is not just about passing actuarial exams.
Additionally, very few locally owned insurers in the region have their own in-house actuaries and engage external consultants to do the actuarial work. “Young actuaries need to hone their skills under the guidance of an experienced actuary and recognising the importance of developing the local actuarial profession, some regulators in the region have made it compulsory for insurers operating in their jurisdiction to establish an actuarial department and take in local actuarial graduates,” said Mr Kassim.
Working with the insurance industry
Speaking about his experiences in the region, he said that much of the insurance business in MENA is non-life compulsory motor and medical insurance. “Non-life insurance easily makes up over 90% of the total gross insurance written premium. This is partly a result of the low level of financial literacy in the region and partly because of religious conviction; insurance (particularly life insurance) penetration is low,” he said.
The problem with motor and medical insurance is that these products are commoditised, and insurers compete on price rather than on service or features. Life insurance is primarily employer sponsored group business while individual life business is very small.
In such a market, the role of the actuary is limited, primarily to preparing the statutory annual actuarial valuation report and occasionally providing assistance in pricing products.
“Given this limited role of actuaries, insurers tend to see actuarial services as a cost centre rather than a resource that can assist in their business development. Generally, as well, regulators in the region do not have sufficient actuarial expertise properly to regulate an overcrowded market of many small insurers where, whatever technical skills are available in the country, are spread very thin,” he said.
IFRS17 to be a game changer for actuaries
Mr Kassim believes that businesses must be guided by the right key performance indicators (KPIs). Insurance is a very technically driven business with many risk factors to consider.
“The introduction of risk-based capital and IFRS17 is expected to change the landscape of insurance in the region. Both standards require significant actuarial input, but I am more excited about IFRS17 bringing to insurance something which has so far been missing – transparent accounting,” he said.
He feels that one reason why the insurance industry has faltered financially in the region is because the board of directors does not generally understand how to read the financial accounts, and IFRS17 will change that.
“Under IFRS17, this will now be made very clear, and governance is expected to improve significantly and the role of actuaries in the region will expand beyond simple valuation and pricing,” he said.
Understanding takaful concepts is critical
Mr Kassim is of the opinion that the many parties who profess to understand takaful only have a superficial understanding of the concept.
“Indeed, at one extreme of the spectrum you have takaful operations that are effectively only insurance operations branded as takaful. These operations were perhaps approved by shariah scholars as shariah-compliant due to the lack of understanding of how the operating model actually works,” he said.
According to him, when takaful is established only as another product rather than through a different approach to insurance, it is the start of the slippery slope to failure. He believes that regulators also have an important role to play in ensuring that takaful develops beyond just a shariah-compliant insurance product.
“We have the unfortunate experience in Islamic finance where interest free financing is sometimes considered as just a name change, the ultimate consumer outcome being the same as riba (interest)-based financing,” he said.
Takaful, he said, can provide a different outcome to the consumer than insurance, if it is properly implemented. The success of takaful is also very dependent on how it is marketed and this is considered to be the hardest part of implementing takaful.
“I see great opportunities in the MENA region for takaful but initially I see greater risks as it takes but one failure in takaful to turn the public against the model,” he said.
He believes that governments should provide the strategic direction as to how takaful fits into the development of the insurance industry and from that guidance, regulations should be accordingly set.
The role of the regulator
Mr Kassim believes that insurance regulators have a major role in developing the actuarial profession in the region. He highlighted the role of Bank Negara Malaysia (BNM) in developing the actuarial profession in the country since the mid 80s, when only a handful of qualified actuaries existed in the market.
“Over 30 years, BNM invested in the future of the profession by providing scholarships to suitable graduates to pursue the actuarial examinations overseas and at the same time established KPIs with insurers in the country to encourage the development of the actuarial profession,” he said.
In addition, the country’s education system assisted by providing a slew of actuarial-related degrees which became the steppingstone for Malaysians eventually to qualify as actuaries. There are currently over 300 internationally qualified Malaysian actuaries working in the country with another 300 working overseas.
It must also be understood that for the same cover, takaful cannot compete with insurance on price. Insurance has the insurer taking speculative risk. Effectively, the insurer is gambling that it can collect more premiums than required to pay claims and expenses.
Insurance is about risk transfer, the insurer profiting from the information asymmetry surrounding insurance and the belief that the market is the great enabler, allowing consumers to get the best ‘price’ for a given insured risk.
Takaful, however, is about the sharing of risks and helping fellow participants in need. It is not an accident that the terminology ‘policies’ and ‘premiums’ are absent in takaful – instead we have takaful certificates and takaful contributions respectively.
Takaful contributions are donations that the takaful participants make to those in the takaful pool who are in need of assistance.