Current model penalises reinsurers and exacerbates the poor profitability amongst many retakaful operators, says Mr Zainudin Ishak, President & CEO of Malaysian Re.
There is a “compelling need” to revamp the current retakaful operational model to achieve a more equitable outcome for retakaful operators and cedants.
Mr Zainudin Ishak, President & CEO of Malaysian Reinsurance (Malaysian Re) told Middle East Insurance Review that the sustainability of a complete takaful supply chain rests on reviewing the current retakaful operational model which has threatened the viability of so many retakaful operators (RTOs).
“It is hardly surprising that all retakaful operators found their underwriting financial health deteriorating year on year to the extent that the call for Qard has become a norm in operations instead of the exception,” he said.
He explained the fact that RTOs have to distribute a portion of the surplus in the risk fund to its cedants as part of risk sharing in takaful while also having to get a repayable loan (Qard) from shareholders when the fund is in deficit, is highly detrimental to an RTO.
“A cedant enters into a retakaful contract with the intention to transfer its risk, with the retakaful operator able to help smoothen the volatility in the takaful operator’s books.
“But the current retakaful contract is one of risk sharing, so even as the retakaful operator provides 100% of the capital it can’t take 100% of the surplus as it needs to share it with the cedant. This despite the fact that the intention of the cedant was to do a risk transfer,” he said.
Change is in the offing
To address this issue, several takaful stakeholders in Malaysia – led by Malaysian Re – is in advanced discussions with its regulator, Bank Negara Malaysia (BNM), to review the retakaful model in order to make it more viable while staying true to Shariah principles, said Mr Zainudin.
“Events giving rise to a retakaful claim are usually large and occasional. This means that any ‘surplus’ arising in the year is transitional in nature, it should thus not be distributed but rather put into reserve.”
Alternatively, he added some RTOs are of the view that even if surplus distribution were to be retained, then RTOs should be able to take a much bigger portion of it – compared to the current maximum of 50%.
Takaful prospects remains bright
Despite some of the above-mentioned challenges, Malaysian Re believes the prospects in takaful remains “intact” – with the firm estimating global gross takaful contribution to reach US$16 billion with a 7-year CAGR of 12.9%.
In April this year, Malaysian Re received its retakaful licence from BNM which enables it to offer Shariah-compliant capacity through its newly-established retakaful division. The division was set up after its parent company – MNRB Holdings (MNRB)– restructured its retakaful subsidiary, MNRB Retakaful, and transferred the latter’s books to Malaysian Re.
Offering retakaful to the world
Commenting on the move, Mr Zainudin said the new retakaful division will benefit from utilising Malaysian Re’s financial strength rating of ‘A-‘, by both Fitch and A.M. Best, to access new business.
He also added the presence of MNRB’s subsidiary in Dubai, Malaysian Re Dubai, will immediately allow its retakaful business to have a wider geographical reach, and gain access to opportunities to underwrite Shariah-compliant business in the Middle East.
“We see a good synergy as the retakaful division can capitalise on our proven technical expertise, IT systems and operations to achieve economies of scale,” said Mr Zainudin.