Takaful - Challenges and Development of the Retakaful Industry

• The current Retakaful industry is still not large enough to fully meet the needs of Takaful operators.
• As the Takaful industry grows, demand for Retakaful protection also increases.
• Therefore, more Retakaful operators with strong financial capacity are needed to support the industry.

1. Inadequate Retakaful Capacity

• Existing Retakaful providers may not have enough capacity to absorb all the risks transferred by Takaful operators.
• This becomes a problem especially for:
• Large industrial risks
• Infrastructure projects
• Aviation risks
• Marine risks
• Catastrophe risks
• If Retakaful capacity is insufficient, Takaful operators may have difficulty protecting themselves against very large claims.

Example

• A Takaful operator covers a factory worth RM1 billion.
• The operator does not want the Participants’ Risk Fund to bear the entire risk.
• It wants to transfer RM700 million of the exposure to Retakaful operators.
• However, existing Retakaful companies can only accept RM400 million.

This creates a:

RM300 million Retakaful capacity gap

Simple Idea

Growing Takaful risks → Greater need for Retakaful → Existing capacity may be insufficient

2. Need for More Retakaful Operators

• More Retakaful companies should be established.
• These operators need sufficient capital and financial resources.
• Stronger Retakaful capacity can:
• Support more Takaful operators
• Absorb larger risks
• Reduce dependence on conventional reinsurance
• Strengthen the Islamic insurance industry

Example

• If several new well-capitalised Retakaful companies enter the market, Takaful operators will have more options for sharing large risks.
• This improves the overall stability of the Takaful industry.

Simple Idea

More Retakaful operators + More capital = Greater risk-sharing capacity

3. Need for National Support and Commitment

• The development of Retakaful may require national-level effort and support.
• Governments, regulators and industry participants may need to work together.
• Support may include:
• Appropriate regulation
• Encouraging investment
• Developing Islamic financial markets
• Promoting professional education
• Supporting new Retakaful institutions

Simple Idea

Strong Retakaful industry requires cooperation between government, regulators and industry players.

4. Shortage of Skilled Professionals

• Another major challenge is the lack of experienced and qualified staff in the Retakaful industry.
• Weaknesses may exist in areas such as:
• Asset management
• Underwriting
• Accounting
• Marketing
• Retakaful is a specialised business, so staff need both:
• Technical insurance knowledge
• Understanding of Shari’ah-compliant operations

5. Weakness in Asset Management

• Retakaful operators receive and manage significant amounts of funds.
• These funds need to be invested carefully in Shari’ah-compliant assets.
• Poor asset management can:
• Reduce investment returns
• Increase financial risk
• Create liquidity problems
• Weaken the operator’s ability to meet obligations

Example

• A Retakaful operator receives large contributions but invests too much in illiquid assets.
• A major catastrophe occurs and several Takaful operators make claims.
• The Retakaful company may struggle to quickly convert investments into cash.

Simple Idea

Good asset management = sufficient return + safety + liquidity

6. Weakness in Underwriting

• Underwriting is the process of:
• Evaluating risks
• Estimating possible losses
• Deciding how much risk to accept
• Determining appropriate pricing and terms
• Poor underwriting can cause the Retakaful operator to accept too much risk for too little contribution.

Example

• A Retakaful operator accepts RM500 million of flood risk.
• It underestimates the probability of flooding.
• It charges only RM2 million for the protection.
• A severe flood causes RM100 million in claims.
• Poor pricing may result in a major underwriting loss.

Simple Idea

Weak underwriting → Poor risk selection → Higher possibility of losses

7. Weakness in Accounting

• Retakaful operators need accurate accounting systems to monitor:
• Contributions
• Claims
• Reserves
• Investments
• Expenses
• Surplus or deficit
• Poor accounting may make it difficult to determine the true financial condition of the operator.

Example

• A Retakaful company fails to properly estimate future claim obligations.
• It appears profitable today, but later discovers that large outstanding claims must still be paid.

Simple Idea

Good accounting helps show the real financial position of the Retakaful operator.

8. Weakness in Marketing

• Retakaful operators also need effective marketing and relationship-management skills.
• They must explain their services to:
• Takaful operators
• Brokers
• Regulators
• Institutional clients
• Weak marketing can prevent a Retakaful operator from attracting sufficient business even if it has strong technical capabilities.

Simple Idea

Good products are not enough; operators must also reach and convince potential clients.

9. Need for Education and Continuous Staff Training

• Retakaful providers should develop proper educational and professional training programmes.
• Staff training should be continuous because risks, regulations and technology are always changing.

Training Areas May Include

• Underwriting
• Risk management
• Shari’ah principles
• Actuarial analysis
• Investment management
• Accounting
• Claims management
• Marketing
• Technology and data analytics

Example

• A Retakaful operator regularly trains its underwriters in:
• Climate-risk modelling
• Catastrophe analysis
• Shari’ah-compliant contract structures

This improves the quality of risk assessment.

Simple Idea

Better training → Better staff → Better Retakaful operations

10. Strengthening Financial Condition

• Retakaful operators need a strong financial position.
• This includes:
• Adequate capital
• Sufficient reserves
• Strong liquidity
• Sound investments
• Effective risk management
• Strong financial capacity allows the operator to absorb large unexpected claims.

Example

Two Retakaful companies each face a RM100 million catastrophe claim.

• Company A has strong capital and reserves.
• Company B has weak capital and limited liquidity.

Company A is more capable of paying the claim without threatening its survival.

Simple Idea

Strong capital + reserves + liquidity = Greater ability to pay claims

11. Improving Underwriting Practices

• Retakaful operators should improve the quality of their underwriting.
• Better underwriting helps ensure that:
• Risks are properly understood
• Contributions are priced correctly
• Excessive risks are avoided
• Portfolios are properly diversified

Example

Before accepting earthquake risk, the operator may examine:

• Location
• Building quality
• Historical earthquake data
• Maximum possible loss
• Concentration of similar risks

This allows the operator to decide:

Accept the risk? → How much? → At what price?

12. Improving Competitive Advantage

• Better financial strength and underwriting practices can improve a Retakaful operator’s competitive advantage.
• A strong Retakaful operator may attract more Takaful companies because it can offer:
• Greater financial security
• Better pricing
• Higher claim-paying ability
• Strong technical expertise
• Reliable Shari’ah-compliant services

Simple Idea

Strong finances + Skilled staff + Good underwriting = Stronger competitive position

Overall Challenges and Solutions

Main Challenges

• Insufficient Retakaful capacity
• Too few well-capitalised Retakaful operators
• Shortage of skilled professionals
• Weak asset management
• Weak underwriting
• Weak accounting
• Weak marketing
• Limited financial strength

Main Solutions

• Establish more Retakaful operators
• Increase financial and capital capacity
• Improve underwriting practices
• Develop stronger asset management
• Improve accounting and reporting
• Strengthen marketing capabilities
• Provide continuous education and professional training

Easy Way to Remember

More Capacity + More Capital + Better Staff + Better Underwriting + Stronger Financial Management = Stronger Retakaful Industry