The IFSB, World Bank and Turkish Treasury Organise a Joint Conference on Value Proposition of Takaful Industry in Istanbul

Kuala Lumpur, 27 June 2016

The Islamic Financial Services Board (IFSB), The World Bank Group (WBG) and the Undersecretariat of Treasury of the Republic of Turkey have successfully organised a joint conference focusing on the takaful sector. The conference was sponsored by Insurance Association of Turkey and Association of Participation Insurance, Turkey. This conference, themed "Realising the Value Proposition of Takaful Industry for a Stable and Inclusive Financial System" was held in Istanbul, Turkey on May 30-31, 2016.

This Conference aimed to provide a platform for global practitioners and stakeholders in the takaful (Islamic insurance) industry - including senior representatives of multilateral development institutions, insurance supervisors, takaful and retakaful undertakings and academics - to discuss selected emerging issues faced by this sector.

The Keynote Address was delivered by Mr. Ramazan Ulger, President, Insurance Association of Turkey and Mr. Ozgur Koc, President, Association of Participation Insurance, Turkey. Mr. Ulger introduced Turkey's insurance market to the floor by highlighting that there are 60 insurance companies and one reinsurance company operating in Turkey, where life and non-life insurances sector operate separately. He highlighted that the majority of these companies are internationally active and are established companies, making the Turkish insurance market well-integrated with the global insurance sector. He hoped that with the issuance of new participation banking licenses and its resultant increase in participation banking market share would spur the growth in the takaful sector in Turkey. This is as these banks serve as one of the most important distribution channels of the takaful sector. While observing that new laws and regulations in the country have increased transparency and eliminated uncertainties for international investors and policy holders, he suggested for the takaful industry to develop a wider range of products to address the needs of individuals and enhance coverage to all segments of the society.

Mr. Ozgur Koc also shared with the audience various advancements made in Islamic finance in Turkey since 2004, which have facilitated the progress of the country's takaful sector. While the growth in participation banking sector has paved the way for takaful operators to hold funds in interest-free instruments, regulatory changes in 2007 and 2015 have helped the takaful undertakings to show the 'surplus rebate' in their accounts and make its payment in cash to the takaful participants. He reiterated the country's vision to establish Istanbul as an Islamic financial centre for banking, capital market and takaful industry.

Dr. Zamir Iqbal, Head of the World Bank Global Islamic Finance Development Center, Istanbul, delivered the Welcoming Remarks in the Conference. He talked about the World Bank's involvement in the takaful sector, which is primarily from two perspectives: Firstly, the contribution of the takaful sector to the development and completeness of the financial sector. Given that Islamic banking and Islamic capital market are gaining ground in many jurisdictions, he reiterated that takaful has to become an integral part of the financial sector and therefore, its development is critical in developing the ecosystem of Islamic finance. Secondly, the reason for the World Bank's involvement in the takaful sector is to promote financial inclusion. However, in order to offer an alternative to the conventional financial system, he suggested that more innovative products should be developed to tap the segment of the society currently outside the financial system. Considering growing significance of Islamic financial services and products in the financial sectors of several OIC countries, the World Bank and IMF jointly prepared a G20 note that outlines key issues for the attention of policy makers to strengthen the Islamic finance sector in their economies and to integrate it better with global financial system.

Dr. Ahmet Genc, Deputy Undersecretary, Undersecretariat of the Treasury, The Republic of Turkey, in his Welcoming Remarks emphasised the importance of takaful in the development of Islamic finance in Turkey. He observed that Islamic finance has grown commendably in Turkey in recent years, which has been supported by a number of developments in the legal and regulatory framework. Mr. Genc reiterated that takaful could play an important role in enhancing financial inclusion and providing risk protection to those individuals who do not want to use the services of conventional insurance system due to their faith. Further development is expected to include specific provisions on the takaful sector in Turkey's insurance law to provide clear legal framework and promote the expansion of the takaful sector in the country.

In his opening remarks, Mr. Jaseem Ahmed, Secretary-General of the IFSB highlighted the factors affecting the growth, development and resilience of the global takaful industry. He observed that despite rapid growth in the takaful sector recently, the industry remains small and concentrated in a few jurisdictions. Similarly, in an era of low interest rates and volatile financial markets, there are significant downside implications on the returns generated by the life/family products offered by the operators. He also reiterated the importance of developing the retakaful sector where capital shortage and lack of competitiveness of retakaful coverage could trigger leakage to the conventional reinsurance market, putting constraints on the growth of retakaful. These issues can be addressed by developing specialised human capital and undertaking more research into the development of products that meet the needs of households and corporates. Taking note of the regulatory developments in the insurance industry, he shared with the audience the details of IFSB's work programme on the takaful sector whereby a comprehensive range of standards and guiding principles having been issued since 2009. He mentioned that the new Strategic Performance Plan 2016-18 of the IFSB has identified a series of new standards and studies on various aspects of the takaful sector regulation, including the development of Core Principles.

The first session of the Conference, themed, Global Overview of the Takaful Sector: Trends and Policy Developments was chaired by Mr. Mohd Zabidi Md. Nor, Director, Islamic Banking and Takaful Department, Bank Negara Malaysia (BNM). The speaker for the session was Ms. Serap Gonulal, Lead Insurance Specialist, The World Bank and discussants were Mr. Sohail Jaffer, Deputy Chief Executive Officer, FWU Global Takaful Solutions, United Arab Emirates as well as Dr. Hatim El Tahir, Director, Islamic Finance Group, Deloitte and Touche, Bahrain. The panelists deliberated on the prospects of the takaful industry where new untapped regions such as Europe and Africa have shown initiatives in developing the sector. The role played by the international standard setters for Islamic finance in harmonising the regulatory frameworks between various jurisdictions was seen as positive contributor to the stable growth of the industry. The panelists expressed their view that there is ample room for the industry's growth and made specific recommendations to effectively address the five key challenges: harnessing governance and regulatory framework, improving risk management and internal controls, revisiting business models, transparency in surplus distribution and well as developing the human talent. Moving forward, to further drive the industry, rebranding should be considered with the purpose to inspire trust and integrity as well as offer more customer-centric products. The panelists also suggested that the industry create greater awareness using social media to reach a wider audience. In addressing the query of a participant on the lack of awareness, the panel suggested institutionalising awareness programmes by the regulators and takaful operators in each jurisdiction.

The second session, themed Regulatory Developments and Implications for the Industry: Contrasting the Various Approaches to Regulating Takaful was also chaired by Mr. Mohd Zabidi Md. Nor of BNM. Mr. James A. Smith, Executive Director, Financial Services, Ernst & Young LLP, United Kingdom presented the key points of his paper, which were commented by Mr. Zainal Abidin Mohd Kassim, Senior Partner and Managing Director, Actuarial Partners Consulting, Malaysia and Mr. Ozgur Koc, President, Association of Participation Insurance, Turkey. The speaker and discussants elaborated on the regulatory challenges for the global insurance and takaful industry. With the push from the global financial crisis, takaful operators have to apply a whole set of risk-sensitive capital requirements, governance and risk management principles as well as other prudential requirements. One proposition made was that for takaful to implement pure risk-sharing, conducive regulations should be stipulated so that it is not notionally practiced.

The Role of Microtakaful in Financial Inclusion was the third session of the Conference. The chairperson for this session was Mr. Peter Casey, Consultant to the IFSB with speaker Dr. Alberto Brugnoni, Founder and Managing Partner, ASSAIF, Italy. Dr. Ludwig Stiftl, Consultant, The World Bank and Ms. Serap Gonulal, Lead Insurance Specialist, The World Bank were discussants for this session. The panelists highlighted the role of various stakeholders - market players, regulators and international organisations - in promoting financial inclusion through microtakaful. It is recognised that although financial inclusion is currently being promoted by the majority of insurers and other stakeholders, there is still a segment of the society who is not susceptible to the idea of insurance simply due to religious reasons. The ability of microtakaful to penetrate the segment of society which has voluntarily excluded themselves from the insurance sector has resulted in the low-income population slowly opening up to the prospect of being protected both from family and general takaful. The speakers also noted that insurance penetration has a strong correlation with the respective country's culture and attitude about risk protection. Therefore, local adaptations are necessary to offer products that are suitable to the specific needs of community. The panelists also outlined the need for governmental support in advancing the microtakaful sector. Besides profitability remains a key challenge in the success and sustainability of the microtakaful operators.

The fourth session of the Conference, themed, Risk Management and Governance in Takaful was chaired by Mr. James A. Smith from Ernst & Young LLP, United Kingdom. The speaker for this session was Mr. Zainal Abidin Mohd Kassim of Actuarial Partners Consulting, Malaysia while discussants were Dr. Zamir Iqbal of The World Bank and Professor Habib Ahmed, Sharjah Chair in Islamic Law and Finance in the Business School, Durham University, United Kingdom. The session provided an insight into the pricing mechanism of takaful products, in which the speaker asserted that takaful operators who compete with insurance companies on the basis of pricing are likely to fail. This is due to the fundamental difference in the business models of these institutions where takaful business is conducted on a risk-sharing basis, where the principal driver is service rather than underwriting profits. Hence, managing risks for takaful should begin even before the first product is sold as different approaches to takaful results in different inherent risks. To achieve the true potential of this market, proper analysis should be undertaken in screening appropriate investors as well as determining the right takaful model that benefits the key stakeholders, which are the participants. Similarly, takaful-specific regulation should be promulgated in various jurisdictions covering aspects such as solvency, risk management and governance rather than applying insurance regulation indiscriminately. In addition, new jurisdictions should come up with suitable set of takaful regulation tailored to the needs and product offerings in the relevant jurisdictions rather than replicating takaful regulations from other jurisdictions. The panelists reiterated that increasing financial literacy could greatly contribute to the promotion of this sector.

The fifth session, themed Challenges in Developing the Retakaful Sector was chaired by Professor Habib Ahmed of Durham University, United Kingdom and the speaker was Dr. Ludwig Stiftl, Consultant to the World Bank. Discussants for this session were Mr. Sohail Jaffer, FWU Global Takaful Solutions, United Arab Emirates and IFSB Consultant, Mr. Peter Casey. The presentation began with the uncovering of various problems faced by the retakaful industry, which included the lack of clarity in contractual agreements, the involvement of profit commission, the uncertainty on the impact of wakalah fee, and the fear of good cedants being pooled with bad cedants which leads to the possible non-payment of surplus. A proposal was made for the risk-sharing definition to be measured mathematically from the perspective of pricing and profitability level. The discussion was further complemented with concerns coming from the perspective of regulation, in which the areas focused by the guiding principles of IFSB-18 were briefly mentioned. The panellists agreed collectively that the retakaful models currently in use need further refinement which would require more research and interactive dialogue between the takaful and retakaful undertaking, their regulators and other stakeholders.

The final session of the Conference, a Panel Discussion on Taking Takaful to the Next Level, was chaired by Professor Habib Ahmed and the speakers were Mr. Gokhan Karasu, Acting Director General, Undersecretariat of the Treasury, The Republic of Turkey, Dr. Alberto Brugnoni, ASSAIF, Italy and Mr. Ayhan Sincek, General Manager, Katilim Emeklilik ve Hayat Company. In this session, the chairperson envisioned the takaful industry to have reached a level of maturity in the next two decades where there would be a public policy towards risk allocation and management at the state level, there would be legal infrastructure to mitigate risks and protection for health. It was further envisioned that not only health related coverage would be provided by non-profits, market players and the government, it would be expected that the industry will develop balanced solutions for tackling longevity and intergenerational risks. The industry is also expected to have filled the gap of financial inclusion through microtakaful products, with the integration of zakah and waqf as risk mitigating instruments. It is hoped that fintechs and technology-based delivery systems would play a major role in achieving these objectives. On another spectrum, the panelists highlighted that while a few jurisdictions have reached relatively advanced level in takaful sector, most jurisdictions are still be at a nascent stage where development of basic infrastructure has just started. Therefore, concerted efforts are needed by all the stakeholders to realise the potential the takaful industry has to offer for the benefit of individuals, corporates and governments. The session concluded with the agreement that the introduction of appropriate regulation for the takaful sector could play a key role in the expansion of the industry on a sound footing while keeping the true ethos of Islamic finance.

Over 100 delegates from among the IFSB member and non-member organisations, including representatives of market players, regulatory bodies, international agencies as well as Shariah scholars, academia and other interested parties from the public attended this Conference. The papers of the Conference are planned to be published in a joint IFSB-World Bank publication in due course.

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About the Islamic Financial Services Board (IFSB)
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players. The members of the IFSB comprise regulatory and supervisory authorities, international inter-governmental organisations and market players, professional firms and industry associations.

For more information about the IFSB, please visit www.ifsb.org.

About the World Bank
The World Bank (the Bank) offers loans, advice, and an array of customized resources to more than 100 developing countries and countries in transition. The Bank helps poorer countries as they become involved in the world economy. The Bank is the world's largest provider of development assistance, committing about $20 billion in new loans each year. The Bank also plays a vital role in coordinating with other organizations--private, government, multilateral, and non-government--to ensure that resources effectively support a country's development agenda.

The World Bank's mission is to fight poverty with passion and professionalism. The Bank's main focus is to help the poorest people and the poorest countries. It emphasizes the need for investing in people, particularly through basic health and education. The Bank also emphasizes protecting the environment, supporting and encouraging private-sector development, strengthening the ability of governments to deliver quality services efficiently and transparently, and promoting reforms to create a stable macroeconomic environment conducive to investment and long-term planning.

© Press Release 2016