Takaful - Why Window-Based Retakaful Can Be More Profitable Than Full-Fledged Retakaful

• In the Retakaful industry, many full-fledged standalone Retakaful operators have struggled to survive.
• By contrast, many stronger Retakaful operations today operate as Retakaful windows within larger insurance or reinsurance groups.
• One important reason is that a window can remain viable with a much smaller volume of Retakaful business than a standalone company.

1. What Is a Full-Fledged Retakaful Operator?

• A full-fledged Retakaful operator is a separate company established specifically to conduct Retakaful business.
• Its main source of business comes from:
• Retakaful contributions
• Investment income
• Other income related to Retakaful operations
• It must maintain its own:
• Capital
• Staff
• Office
• IT systems
• Shari’ah governance
• Underwriting team
• Claims department
• Accounting
• Risk management
• Regulatory compliance

Simple Idea

Full-fledged Retakaful = Separate company that must support all its own costs

2. What Is a Retakaful Window?

• A Retakaful window is a Shari’ah-compliant Retakaful operation within a larger conventional reinsurer or insurance group.
• The Retakaful business is operated separately in accordance with Shari’ah requirements.
• However, the window may benefit from the parent company’s existing:
• Employees
• Technology
• Offices
• Claims expertise
• Underwriting systems
• Global network
• Administrative infrastructure

Simple Idea

Retakaful Window = Retakaful business using the infrastructure of a larger existing company

3. Why Windows Need Less Business to Be Profitable

• A standalone Retakaful company has many fixed costs.
• These costs must be paid even if the company receives only a small amount of business.

Example – Full-Fledged Operator

Suppose a standalone Retakaful company has annual fixed expenses of:

RM50 million

Its Retakaful contributions are only:

RM150 million

The RM50 million cost represents:

33% of its contribution income

This creates pressure on profitability.

Window Example

Suppose a large conventional reinsurer already has:

• Offices
• IT systems
• Claims staff
• Underwriters
• Accounting systems
• Global distribution network

It opens a Retakaful window.

The additional annual cost of operating the window may only be:

RM10 million

If the window receives the same:

RM150 million of Retakaful contributions

its fixed operating cost represents only:

6.7% of contribution income

Simple Idea

Same amount of Retakaful business + Lower operating cost = Better chance of profitability

4. Shared Infrastructure

• Retakaful windows can use the parent company’s existing infrastructure.
• This significantly reduces the cost of establishing and operating the business.

Shared Resources May Include

• Office buildings
• Technology
• Human resources
• Finance department
• Legal department
• Risk-management systems
• Claims systems
• Underwriting expertise
• Investment-management systems

Example

A standalone Retakaful company may need to spend:

RM20 million

to develop a new claims and IT system.

A Retakaful window may already have access to the parent reinsurer’s existing system.

Therefore, it may only need minor modifications.

Simple Idea

Shared infrastructure → Lower costs

5. Economies of Scale

• Large reinsurance groups already operate at a significant scale.
• Adding Retakaful business allows them to spread their fixed costs across:
• Conventional reinsurance business
• Retakaful business
• This creates economies of scale.

Example

A global reinsurance company spends:

RM100 million

on technology and administration.

If it only had Retakaful business worth RM200 million, the cost would be very high relative to the business volume.

But if it already handles:

RM10 billion of conventional reinsurance

and adds:

RM200 million of Retakaful

the additional Retakaful business can use much of the existing infrastructure.

Simple Idea

Large parent company → Costs spread across more business → Lower average cost

6. Access to Existing Expertise

• Retakaful requires specialised knowledge in:
• Underwriting
• Catastrophe modelling
• Actuarial analysis
• Claims
• Investment
• A large conventional reinsurer may already employ these specialists.
• A Retakaful window can therefore access this expertise without creating an entirely new team.

Example

A parent reinsurer already has:

• Aviation underwriters
• Marine specialists
• Catastrophe-modelling experts

When it opens a Retakaful window, these specialists may also support Shari’ah-compliant Retakaful business.

Simple Idea

Existing expertise → Lower recruitment and training cost

7. Access to a Larger Global Network

• Large conventional reinsurance companies often already have relationships with:
• Insurance companies
• Takaful operators
• Brokers
• Governments
• Large corporations
• A Retakaful window can use this network to obtain business.

Example

A global reinsurer already operates in:

• Malaysia
• Saudi Arabia
• UAE
• Indonesia
• Europe

Its Retakaful window can access Takaful operators in these markets without establishing a completely new distribution network.

Simple Idea

Existing client network → Easier access to Retakaful business

8. Full-Fledged Operators Need Critical Mass

• Standalone Retakaful operators need a sufficiently large amount of business to cover their fixed costs.
• This minimum business volume is sometimes referred to as critical mass.

Example

Suppose a standalone Retakaful operator needs:

RM500 million annual contributions

to operate efficiently.

But the market only provides:

RM200 million

The company may struggle to:

• Cover expenses
• Build reserves
• Earn acceptable returns
• Maintain sufficient capital

A window may be able to survive with the same RM200 million because its operating costs are lower.

Simple Idea

Standalone operator → Needs high business volume

Window → Can survive with lower business volume

9. Rating Advantage

• Retakaful clients often prefer providers with a strong financial strength rating.
• Ratings are important because Takaful operators want confidence that the Retakaful provider will be able to pay large claims.
• A Retakaful window within a large international reinsurance group may benefit from:
• Stronger capital
• Larger asset base
• Established reputation
• Stronger financial rating

Example

A Takaful operator has two choices:

• Small standalone Retakaful company with weak financial rating
• Retakaful window of a major global reinsurer with a strong rating

The Takaful operator may prefer the window because it appears financially stronger.

Simple Idea

Stronger parent company → Greater confidence in claim-paying ability

10. Why Many Standalone Retakaful Operators Struggled

• Standalone Retakaful operators have faced several challenges:
• Small global Takaful market
• Low Retakaful business volume
• High fixed operating costs
• Need for substantial capital
• Large and volatile claims
• Limited diversification
• Difficulty achieving economies of scale

Simple Relationship

Low business volume + High costs + Large volatile risks = Sustainability problem

11. Example Comparing Both Models

Suppose both businesses receive:

RM200 million Retakaful contributions

Full-Fledged Retakaful

Annual expenses:

• Staff = RM20m
• Technology = RM15m
• Office and administration = RM10m
• Compliance and governance = RM5m

Total expenses:

RM50 million

Expense ratio:

RM50m ÷ RM200m = 25%

Retakaful Window

Because the parent company already provides infrastructure:

• Additional staff = RM5m
• Technology = RM2m
• Shari’ah governance = RM2m
• Additional administration = RM1m

Total additional cost:

RM10 million

Expense ratio:

RM10m ÷ RM200m = 5%

Result

The window has much lower operating expenses relative to its business volume.

Simple Idea

Same business volume → Window has lower cost → Greater chance of profit

Easy Way to Remember

Full-Fledged Retakaful

• Separate company
• Own capital
• Own employees
• Own technology
• Own offices
• Own administrative systems
• Needs large business volume
• Higher fixed costs

Simple Idea

High fixed cost → Needs critical mass

Retakaful Window

• Operates within a larger existing company
• Shares infrastructure
• Shares expertise
• Uses existing distribution network
• Lower additional operating cost
• Can operate with smaller business volume

Simple Idea

Shared resources → Lower cost → Lower volume needed for profitability

Main Reason

The main advantage of a Retakaful window is:

It does not need to build an entire reinsurance company from the beginning.

Therefore:

Existing Parent Infrastructure + Lower Additional Costs + Existing Expertise + Stronger Financial Capacity = Greater Chance of Retakaful Window Profitability