The World Bank is currently assisting Bangladesh in improving its insurance industry. This puts Takaful at a crossroad: will Takaful continue to look very similar to traditional (non-Takaful) products or will Takaful look different and unique? In my mind this is where we need to show the beauty of not only Takaful, but Bangladeshi Takaful.
There are many markets and product types for Takaful worldwide. Takaful is used for motor, fire, medical and personal accident coverage in addition to many other types of general coverage. Takaful is also used to cover Islamic loans and savings products in addition to other types of family coverage. Where Takaful is weak globally is in the mass (micro) market. Unfortunately this is precisely where we need Takaful the most in Bangladesh.
Micro-Takaful has yet to truly take off worldwide. There are several key reasons for this:
- Takaful product structure has tended to look and operate very similar to traditional insurance. This is fine for some types of Takaful products, but less so for the micro market.
- Agency force has been the main distribution channel for Takaful in many markets. With agents focused on earning commissions, there is very little incentive for the agent to venture into the micro market.
- Regulations have not been friendly to micro-Takaful. Succeeding in the micro market requires innovation and creativity which regulations need to allow for.
- The public has not been very aware of their risk management needs. As awareness of risk management grows, insurance (and Takaful) penetration will naturally grow.
The whole goal of insurance in general and Takaful in particular is to help the people with their risk management needs. In Takaful this can be fine-tuned to be people helping people. In Bangladesh this concept is already well established. In the field of micro finance Bangladesh is known globally for its innovative methods which truly work to ensure people are helping people. For instance micro loans in Grameen Bank are not simply given out to an individual, but rather groups of individuals bond together to guarantee each other. If one does not pay then the others chip in to pay. This is a Bangladeshi solution which can work world-wide. There is absolutely no reason Takaful in Bangladesh cannot have the same reputation, with a unique Bangladeshi solution being used worldwide.
Takaful product structures need to have the same look and feel of micro-finance in Bangladesh, namely people grouping together to help and guarantee each other. One structure which is being used in markets such as the UK, Australia and the United States is a discretionary mutual. With such a structure, groups of participants get together to form risk pools. These participants would not be strangers, but rather be connected in some way, such as residents of a community, cancer survivors, workers in a particular group of factories or whatnot. Since the participants are connected in some way the Takaful coverage can be packaged with other services and benefits, thus turning the discussion around from the purchase of Takaful on its own to being involved in these other services and using Takaful as risk management. This will not only change the perception of Takaful (“since I purchased Takaful I should try hard to make a claim so I don’t lose my money”) but also teach risk management, a vital skill needed in this market segment.
As the agency force is not well suited to sell this type of product, other distribution channels will need to be nourished. For instance, the members of a community might get together to form a pool to help each other if there is a death. The pool might arrange for the funeral rites at the masjid, arrange for the burial services and quickly spreading the news of the death of the participant for attending the funeral prayers, and also provide some amount to the family of the deceased to assist in the immediate costs and arrangements. This community would not require high commissions to form this pool as the community itself is the one who will benefit. The Takaful operator will charge a fee for managing the pool and the remaining amount would completely belong to the community. If there is any balance (surplus) at the end of the year then this would go back to the community.
This type of structure will require regulations to allow it to exist and grow, and also public service programs to spread awareness of the need for risk management in our lives. Thus Bangladesh is at a crossroads for Takaful and has the unique opportunity to take the lead globally in micro-Takaful. Growing this market segment will also greatly increase insurance penetration, an indicator of the risk management capabilities of a nation.