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Acknowledgement

I am heartily thankful to Mr. Malcolm C. Fonseca, my father and the Technical Manager, of

Trust-Re, Bahrain (2008) who encouraged, guided and supported me from the initial to the final

stage of this research and who contributed in making this research possible.

My deepest thanks to Mr. Ludger Morais (Technical Manager, AXA Bahrain 2008) for

guiding me and helping me conduct the interviews which form an essential part of this research

My deep sense of gratitude to,

Mr. Gautam Datta (General Manager, Solidarity General, Bahrain 2008)

Mr. Essam M. Al Ansari (General Manager, Takaful International, Bahrain 2008)

Mr. Mahomed Akoob (Managing Director, Hannover-Re, Bahrain 2008)

Mr. Sai Gopal (Deputy General Manager, BKIC, Bahrain 2008)

Mr. Philippe Dominique (General Manager, RSA, Bahrain 2008)

Thanks and appreciation to the helpful people for their support and time in making the subject

matter of this research easier to understand.

I would also thank my University, The University of ottingham, U.K. and my facultymembers without whom this project would have been a distant reality. I also extend my heartfelt

thanks to my family and well wishers.


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Table of Contents

Page o.

1. Introduction 11.1 Objectives 3

1.2 Motivation 3

1.3 Plan 4

2. Literature Review 52.1 Insurance Review 7

2.1.1Insurance Overview 72.1.2Takaful Insurance Overview 9

i. History and evolution of takaful insurance 10

ii. Basic concepts of takaful insurance 14

iii. Sources affecting takaful insurance 14

iv. Current Statistics of takaful 17

2.1.3Mutual Insurance Overview 18

2.1.4Stock Insurance Company Overview 21

2.2 Market Study 22

2.2.1Population 23

2.2.2Gulf Cooperation Council (G.C.C) 23

2.2.3Economic Performance 24

2.2.4Bahrain Insurance Market 26

2.2.5Regulatory Authority 31

2.2.6Distribution Channels 32

i. E-commerce 32

ii. Other Direct Marketing 33

iii. Bancassurance 33

2.2.7Bahrain takaful Market 34

3. Hypothesis 36

4. Methodology 394.1 Questionnaire 40


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5. Data 415.1 Interviews 41

5.1.1Solidarity General 425.1.2Takaful International 46

5.1.3Hannover re 49

5.1.4BKIC 53

5.1.5RSA 56

6. Analysis 596.1 Capital and Fund Management 59

6.2 Marketing Strategies 60

6.3 Risk Management 61

6.4 Life and on-Life Markets 63

6.5 Limitations 64

7. Conclusions 65

7.1 Conceptual Differences 65

7.2 Marketing differences 66

7.3 Growth 67

7.4 Alternatives 67

7.5 Core Competency 68

7.6 The Kingdom of Bahrain and its Market 69

7.7 Future strategy 69

8. References 71

9. Appendix 75


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1. Introduction

Insurance is a growing market and the realization of its importance grows as the awareness of

risk increases. Insurance is no longer a luxury; it is now become a necessity. In life, we posses

certain belongings which are very valuable to us, and would be difficult to it replace if any

misfortune were to occur. Our actions in life depend on the risks involved in doing it. Some risks

are certain and some risks are uncertain. The certain risks are generally avoided e.g. Risk ofgetting hurt jumping from the first floor of a building, risk of getting hurt when not wearing a

seat belt. The un-certain risks cannot be predicted and sometimes come in as a surprise. The only

way to avoid the damage caused by such risks is to take a certain protection.

This protection could be in the form of an Insurance cover. Insurance provides protection against

uncertainty. There exists a contract (policy) between the insurance company and the

policyholder. The policyholder pays a specified amount of money (premium) to the insurance

company. In return the Insurer shall give him economic compensation if a specified event that

brings him economic loss, occurs. At the time when the contract is made, neither the

policyholder nor the company knows whether the loss will occur, if it does, when it will occur

and how or to what extent will it occur.

The insurance industry is booming with the establishment of new companies, new products

covering a wider market than before. The industry is well established across the globe with

different countries possessing different set of rules and regulations that govern the working of the

insurance market. The phenomenon of global warming in the recent past causing climatic

changes has increased the damages caused due to natural perils and has therefore increased the

concern for protection against such threats. This increased concern has caused people to be more

risk aware and to take more protection than before. This realization of the future losses caused by

a risk that cannot be predicted is the sole reason for the survival of the insurance industry.


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In the recent years we have seen the development of a new form or practice of Insurance

management or products from the Islamic societies. This new form or methodology to provide

insurance in all risk types except a few is called has been named as Takaful Insurance. The

main area of research would be to analyze the reasons, importance and effects of the

developments of the takaful insurance companies globally as well as focusing on the Kingdom of

Bahrain.

The takaful insurance, which takes under considerations the Shariah principles of cooperation

and solidarity according to Islamic beliefs, is part of an upcoming industry trend in the Islamic

region. Practicing business on Islamic beliefs is becoming important in such regions and many

believe it is necessary. The takaful insurance has been in The Kingdom of Bahrain since 1983

with the establishment of the Sarikat Takaful Al-Islamiyah. Ever since there have been just 9

takaful companies till now. Therefore, this research would help us identify the areas of

development and how the market could help establish new takaful companies in the future. The

research would also take a look at the management of both, the conventional and the takaful

insurance companies and how they differ. This research would also take a look at how the

takaful insurance companies sustain competition with the conventional insurance companies and

what it does to increase its market share of customers.

This research would provide some insight into the takaful industry in The Kingdom of Bahrain,

and its analysis would give us a snapshot of the current market scenario which has not been done

earlier and prove to be beneficial for further studies in this region. It would also provide some in-

depth information and discuss the working of the takaful companies in Bahrain. The available

literature would give us an idea of the basic concepts of the takaful industry and its relation to the

Shariah law. Annual reports of Insurance companies and regulatory authority would give us the

performance of takaful and conventional companies in Bahrain and help us understand the

market scenario of the insurance industry. There is little information available about the

competition, marketing strategies and the pricing strategies of both the types of companies in

Bahrain hence the analysis would compare the management of both the conventional and the

takaful insurance companies as well as the above mentioned factors in detail and how both, the

takaful insurance company and the conventional insurance company compete with each other to

gain market share.


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1.1 Objectives

In the recent past, there has been an emergence of a new Islamic insurance market, called the

Takaful Insurance. The takaful insurance is based on the same concept of the conventional

insurance market; it also provides insurance and a transfer of risk from future losses. The

difference lies in how both these types of insurance companies, that is the takaful insurance

company and the conventional insurance company practice their business. Takaful insurance

abides by the laws and regulations of Islam; it is based on the Shariah law. The principles of

takaful insurance will be explained in detail in the later part of the report. The objective of this

report is to analyze the differences in the management of conventional insurance companies and

takaful insurance companies.

1.2 Motivation

The expected growth in the takaful market in the Middle east region as stated by Islamic

insurance experts at the end of the World Takaful Conference on the 12 th April 2007 in U.A.E

with a current growth of 40% annually and the potential to become a $4 billion market has

developed my interest of looking in depth into the takaful industry and what are the factors that

drive the probabilities of such a exponential growth in the future. In 2006 GCC contributions

exceeded $1bn compared to global contributions of $2bn (arabianBusiness.com). The growing

difference between the conventional insurance companies and the takaful industries and why the

takaful companies attract the Muslim population to buy its products and make use of its services

is to be found out. Questions such as what uniqueness does takaful insurance companies have

that is different from that of the conventional companies and how they survive against severe

competition from the well established conventional insurance market, are to be answered.


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1.3 Plan

The plan is to do the following;

Formulate a Hypothesis (e.g. stating the differences that could be between the takaful

operating insurer and the conventional operating insurer.)

Develop a methodology (Interview personnels both from takaful insurance companies

and the conventional insurance companies.)

Set up a questionnaire based on the hypothesis developed.

Analyze the results.

Interpret the results.

Conclude based on the results achieved.


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2. Literature Review

Bahrain is a developing country, which is proved by upcoming projects such as The Financial

Harbor and the Bahrain Bay. The decision taken by the government to finance such projects

makes it clear that Bahrain is focusing on becoming the hub of financial markets in the Gulf.

Bahrain's insurance industry consists of conventional and Islamic (takaful) companies which

serve both the onshore and offshore insurance markets, primarily Saudi Arabia. The conventional

onshore segment consists of 10 locally-incorporated firms, 8 full branches and 6 representative

offices of foreign insurance companies. The takaful segment has 2 companies, as of 2008. In

addition, there are a substantial number of firms with licenses limiting their business to the off-

shore market, including 39 conventional firms and 9 takaful companies. These companies serve

other regional markets in the Gulf, capitalizing on Bahrain's leadership role as a regional

financial centre. The insurance industry is well served by a number of ancillary service providers

such as brokers (33), actuaries (10), insurance consultants and loss adjusters. These figures are

based on C.B.B publications. Bahrain is trying to develop its insurance market and make it theregional insurance center for the gulf. The Central Bank of Bahrain (CBB) is the soul regulatory

authority in the country which controls the activities and policy developments of the insurance

industries.

The industry has been growing steadily in recent years. A notable development in recent years

has been international insurers developing their regional operations, many of whom have chosen

Bahrain as their regional base. Industry growth has also been fostered by the presence of a robust

framework for regulation and supervision of insurance. The Central Bank of Bahrain'spredecessor organization, the Bahrain Monetary Agency, undertook a major project during 2003-

04 to develop a comprehensive insurance rulebook, in line with IAIS (International Association

of Insurance Supervisors) core principles, following the BMA's assumption of responsibility for

regulating and supervising the insurance sector. This rulebook was launched in April 2005, and

put in place the most comprehensive regulatory framework in the region for insurance activities.


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There are quite a few articles written about the working and governance of the takaful industry

and its companies. There are a few that explain how and on what principles do the takaful

insurance companies work, but there are a few that compare both the takaful and the

conventional companies and analyze the differences. The article of Mayers & Smith (1994)

discusses the differences in the ownership structures of stock companies which are mutually

owned and individually owned. The article of Mayers and Smith (1994) could provide some

relevant information as it is similar to this research of comparing a takaful insurance company

and a conventional insurance company. A takaful insurance company works on the same

principles as that of a mutual insurance company but with some differences which will be

addressed in the later chapters of this dissertation.

The article How does Takaful Differ from Insurance written by Liaquat Ali Khan, namely

discusses how insurance is against the principles of Sharia and how conventional companies use

factor such as:-

Gharar (uncertainty)

Maisir (gambling)

Riba (interest)

These factors are considered to be unlawful in Islam, and how some modification is needed to

bring it in line with Islamic teachings. The author also argues in favor of conventional insurance,

suggesting that the three factors mentioned above do exist in conventional insurance, but are

essential for the policy holder. He discusses each factor in detail to explain the necessity of

interest and the need of uncertainty in insurance transaction and how gambling is not involved in

insurance. The term gambling is used in the context that, in a gambling game, the player expects

more than what money he has put in the game, but in an insurance contract, the policyholder

does not expect more than what premium he has paid for the contract other than benefit policies.

The policyholders just expect peace of mind and security after taking an insurance contract. How

can Takaful be an alternative for a conventional insurance and how it takes into consideration the

concept of social solidarity, cooperation and mutual indemnification will also be dealt with in

detail later.


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Other models such as Wakalah (agency) and Mudarabah models are also discussed with their

importance and how the development of takaful insurance companies in Muslim and Non-

Muslim countries is essential.

Some of the works from Yon Bahiah Wan Aris talk about the establishment of takaful industry

namely in Malaysia and its comparison with the conventional insurance companies. The paper

also discusses the challenges and opportunities of the takaful business and highlights some

empirical evidences supporting the performance of takaful business. Discussions of some basic

concepts of the incorporation of Shariah law in takaful insurance and the models that govern it

can be found. The paper also talks about the operational system of Family Takaful and General

Takaful Insurance Company.

As such there are very few articles which discuss the takaful industry and its working in the

Bahrain market. Therefore, there is very little insight on the takaful industry and its working in

this researches subject country of discussion, The Kingdom of Bahrain.

2.1 Insurance Review

2.1.1 Insurance Overview

Insurance is a contract under which a transfer of risk takes place from the policyholder

(individual who buys the contract) to the insurance company. The Insurance contract provides a

financial compensation if any loss occurs to the subject covered under the contract of the

insurance. The capital for most of the conventional insurance companies is achieved from

shareholders. The capital along with the premium collected from the policyholders is

accumulated in a single fund known as the Shareholders fund. General expenses like

administration expenses, staff costs, operational expenses and further investments are all done

using the shareholders fund. The resulting profit or loss from the operations of the business


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directly affects the wealth of the shareholders. If there is profit, it is distributed among the

shareholders. The flow chart of the working of a conventional insurance company is well

illustrated below.

(Source: Takaful International, Bahrain)

A Conventional Insurance

Company`s Fund Management

Ca ital

ShareholdersInsured

Premium

Operation

Expenses

(Claims, R.I)

Investment

General

Expenses

(Admin)

Shareholders

Fund

Profit/Loss


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2.1.2 Takaful Insurance Overview

In a takaful system, the funds management is different as to that of a conventional insurance

company. Takaful works on the principles of the Sharia law, which will be discussed in detail in

the following subsequent parts. The major difference is on how the takaful insurance companies

differ in their funds management and how they use it. In a takaful system, there exist two major

categories of funds. The first is the participant fund, wherein the premiums of the policyholders

(participants) are deposited.

This fund is used for expenses such as claims etc. Some of the money is used for investment

purposes and some used as Mudarib fee (fee given to the shareholders as a managing fee). The

surplus from this fund is used either as Qarad al Hassa (Loan extended without Interest) or is put

into the Participants general reserve which is used for any future deficit. If any brokers or agents

are used by the takaful company then the brokerage or the agency fee is given from the

participant fund in the form of Wakala fee (Wakala is a contract of an agency or broker). Then

there is the second fund, which is called as the shareholders fund. This fund is used for

administrative and general expenses like staff cost. The shareholders fund is also used for

investment purposes and the profit is shared or distributed to the shareholders. An illustrative

flow chart of the takaful system is represented next.


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(Source: Takaful International, Bahrain)

I. History and evolution of Takaful Insurance

The first ever thought given to commercial insurance was by a Hanafi Jurist Syed Ibn Abdin

(dead 1252 H corresponding to 1836 A.D.) at the request of some Muslim Merchants who had

his own opinion about the validity of Marine Insurance under Islamic laws.

Operation

Expenses

(Claims,

R.I)

Participan

Contribution

Surplus

Participants

General

Reserve

Wakala

Fee

Participants

Fund

Shareholders

Qarad

(QH) Al

Hassa

Invest.

Investment

Capital

Profit/

Loss

General

Expenses

(Admin)

Shareholders

Fund

Deficit

MudaribFee

A Takaful Insurance Company`s

Fund Management


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He discussed the essence of Marine insurance and concluded I see that it is not permitted to any

merchant to get indemnity for his damaged property against the payment of a certain sum of

money known as insurance premium; because this is a commitment for what should not be

committed to. The attitude towards illegality of insurance from Islamic point of view continued

for full century after Ibn Abdin. However the increasing need and importance of insurance for

modern commercial activities has given rise for indebt studies and discussion amongst the

Islamic Jurisprudents during the past several decades. In 1396 H (1976) the First International

Conference on Islamic Economics was held in Makkah, which was attended by more than

200 Islamic Jurists and Economists. They reached at the following decision on it: -

The Conference sees that the commercial insurance which is practiced by the commercial

insurance companies in this era does not conform to the Shariah principle of cooperation and

solidarity because it does not fulfill the Shariah conditions which would make it valid and

acceptable.

This Conference also suggested that a committee comprising of Shariah Experts & Muslim

Economists should be constituted in order to suggest a system of insurance that will be free of,

Riba

Usury (The practice of lending money and charging the borrower interest, especially at

an exorbitant or illegally high rate)

Gharar

The meaning of which will be explained later.

The matter continued to receive the attention of numerous groups of Islamic Jurisprudents in

cooperation with economists and insurance experts who came up with different conclusions,

views and opinions. Some of them approved all forms of insurance subject to certain conditions,

limitations and qualifications; others totally disapproved all of them. However an overwhelming

majority of the Islamic Jurisprudents is now of the opinion that the modern western oriented

insurance contract does not in its present form conform to the Islamic Shariah.


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The objection is against the existence of the weaknesses in the insurance contract namely:

Gharar: - This refers to unknown or uncertainty factors in a conventional insurance contract.

In conventional insurance, it is not made known to the policyholders on how profits are

distributed and in what the funds are invested in. In a takaful operating system which is based

on the mudharabah concept, the distribution of profits to the operators and the participants in

the contract are clearly stated.

Maisir: - This is the gambling element and is said to derive from the ghara element. In

conventional insurance, the policyholders stands to lose all the premiums paid if the riskdoes not occur. On the other hand, he stands to get more should a misfortune happens whilst

paying small amount or premium. In takaful, even though the risk does not occur, the

participant is entitled to get back the contributions that he has paid. Should the risk occur, he

will be paid from his amount of premium fund plus the pool of funds from the donation of

other participants.

Riba: - This refers to the interest factor present in the investment activities of conventional

insurance companies. The policy loan in conventional life insurance is in fact a riba based

transaction. Islam prohibits any investment activities which is interest based, in alcoholic

beverages and non-halal products.

The resolution #55 of Saudi Arabias Majlis-e-Hayat-i-Kibar-ul-Ulama (The Constituent

Assembly of Most Eminent Religious Scholars) passed in its 10 thSession at Riyadh held on 4-4-

1397 A.H. declaring all kinds of commercial insurance as unlawful in Islam.

Similarly the Council of Islamic Ideology of Pakistan gave a decision in December 1983 that the

well-known and current forms of insurance are in conflict with the Islamic injunctions.


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Takaful business must fulfill the conditions described below.

It must be based on co-operative principles. Contributions (premiums) are treated as

donations to a fund for mutual benefit, and risk or reward is shared on a collective basis.

The participants (insured) must have the right to share in any profits and understand that

profits may have to be foregone in order to cover losses to the fund. Profits from

insurance operations may be shared with the shareholders in the company on a

predetermined basis: the shareholders in the company essentially manage the takaful fund

and provide the necessary insurance expertise in return for a fee.

The investment of funds must avoid all areas considered harmful or forbidden under the

sharia and fall into two categories, namely ethical/ecological (products involving animal

testing, human rights abuses, the production of armaments, nuclear power) and social

(tobacco, alcohol, pork, gambling, pornography, usury).

Contributions, benefits, expenses and profit sharing must be clearly defined from the

beginning.

Participants have the right to examine the fund's transactions or, as an alternative, there

can be

Supervision by the religious committee, the sharia board.

Under the takaful system, surpluses are to be returned to the policyholders who produced

them. The takaful company must therefore keep track of all policyholders in a certain

year and then make contact with them when the final results are known. This is done by

placing advertisements in the press requesting corresponding clients to contact the

company to claim their shares. Many non-Muslims compare takaful to a mutual system,

but this is not a correct comparison, as a takaful company does have shareholders (the

board). A takaful company has two bodies to which it must report, namely the insurance

supervisor and the sharia board. The share capital and the policyholders' funds are kept

strictly separate. The directors may lend finance from the share capital to the


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policyholders' funds to assist in times of deficit, this loan being repaid, without interest,

when the fund is back in surplus. The directors may take an amount, determined at the

beginning of the year, to cover management fees.

II. Basic Concepts of Takaful

Al-Mudharabah :- Which literally means profit sharing. The takaful operator accepts and

invests the takaful contributions (premiums) received from the takaful participants. The contract

will specify how the profit will be shared between the participants and the takaful operator.

Al-Takaful :- This means joint guarantee whereby the participants jointly guarantee amongst

themselves. Any member faced with a calamity will be financially compensated from funds

contributed by the participants.

Tabarru: - This refers to the element of donation. Each participant agrees to relinquish a portion

of the takaful contribution to a common fund that is used to pay a member that suffers a loss.

III. Sources affecting Takaful

The general sources of Islamic law begin with the holy Quranand the Sunnahor the Traditions

of the Holy Prophet. These two are regarded as the principal sources of Islamic law. Other

secondary sources of Islamic law should strictly be based on these two primary sources.

The Holy Quran

There are five hundred verses in the Holy Quran, which deal with legal sanctions. There are a

number of Divine injunctions in the Holy Quran, which justify the validity of an insurance

contract. The contract of insurance contains the elements of mutual co-operation. It is a binding

promise, which binds both the insurer and the insured, based on the general principle of contract.


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All these elements of a contract of insurance are justified by the Quranprinciples. Thus, the Holy

Quran is the principal guidance for the application of insurance contract.

The Sunnah

The Sunnah or Traditions of the Holy Prophet is a second source of Islamic law immediately

after the Holy Quran. It regards the justification of an insurance contract and practice, there are

indeed numerous traditions justifying the validity of an insurance contract. An insurance policy

embodies the concept of Tawakkul whereby one should strive hard in overcoming onesunexpected future risk or peril before leaving ones fate and destiny in the hands ofAllah.

Moreover, an insurance policy aims at protecting the insured from future material constraints

upon the occurrence of a particular unexpected future risk.

Practices of the Companions

Insurance originated from the doctrine ofal - Aqilah. During the later stage of the period of the

second caliph, Sayyidina Umar, the Caliph, directed that in the various districts of the State, lists

of Muslim brothers-in- arms should be drawn up. The people whose names were contained in

those lists owed each other mutual assistance or co-operation and had to contribute to the

payment ofdiyat(blood wit) for manslaughter committed by one of their members of their own

tribe.

Rules of the Shariah Supervisory Board

Behind every Shariahbased insurance company, there is a Council or Board called the Shariah

Supervisory Board. This Supervisory Board functions as the supervisor of the Islamic Insurance

activities run by that particular company to ensure that all these insurance activities operate in

accordance with the Divine Principles. For instance, the Malaysian Takaful Operation is


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supervised by a Shariah Supervisory Councilby virtue of Section 8 (5) (b) of The Takaful Act

1984. In Sudan, moreover, there is a Shariah Supervisory Board which supervises, inter alia,

insurance business in the country and it also passed the Rules of the Shariah Supervisory Board

published by the Faisal Islamic Bank of Sudan.

Precedents

Precedents could also play a role as one of the sources of insurance law and practice. Some

Islamic scholars have given particular decisions on several issues of insurance policy andpractice. These may be useful to regulate Islamic insurance practices. Besides the precedents set

by the independent Islamic scholars, there is also another type of precedent set by the

contemporary courts relevant to insurance practices. Such precedents could also be considered as

a valid source of insurance law.

Unanimous Decision of the Islamic Scholars

There have been numerous conferences on Islamic insurance held worldwide in which Muslim

scholars have unanimously agreed on the validity of insurance practices. Some of those

conferences are listed as follows:

The Islamic Fiqh Weekheld in Damascus from 1st - 6 th April in 1961;

The Seminarheld in Morocco on 6th May 1972 which upheld the validity of insurance

business with the exception of life insurance business;

The Second Conference on Muslim Scholars held in Cairo in 1965; The Symposium on

Islamic Jurisprudence held inLibya from 6th - 11th May, 1972;

The First International Conference on Islamic Economics held in Makkah from 21st -

26th February, 1976;

The Islamic Conference held in Mecca in October, 1976;


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The First International Summit on Islamic Insurance held in Dubai on 11th Nov, 1996,

and

The Labuan International Summit on Takaful (Islamic insurance) held in Labuan,

Malaysia, on 19 - 20 June, 1997.

IV. Current Statistics of Takaful

2008 World Takaful Premium: 1.7 billion to 2.5 billions

Middle East = 47%

Africa = 7%

Asia = 46 %

Europe & USA = 1%

$1.7 billion = 60 Takaful companies in 30 countries worldwide

GCC63%

Malaysia27%

Asia / Pacific9%

Europe / USA1%

Total estimated Takaful premiums of US$ 1.7 billion (growing at 15 to 20% p.a)

Source: Salama Arabic Islamic Insurance Company

2006Total Takaful Premiums


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Estimated Growth in the Takaful Market

World Muslim Population 1.6 Billions 70% are 35 years old Takaful Growth of 15% to 20%

60% of Islamic Sukuk are being invested by non-muslims

25 to 30 regulated islamic finance companies in the UK market

Survey by E&Y resulted in:-

12% to 25% of muslims knows about the Existance of Takaful

Up to 60% of muslims knows about Islamic Banking

KSA - 20 licensed takaful companies

92% of takaful operations are in the middle east (36%) and south east Asia (56%)

Muslims in india 138 million and expected to grow to 300 million in the year 2020

2.1.3 Mutual Insurance overview

A Mutual insurance is a conventional form of a Takaful Insurance because it shares the same

principles as that of a Takaful Insurance by working on the concept of mutual cooperation and

sharing of risk but without abiding to the Sharia law. It is a type of insurance where those

protected by the insurance (policyholders) also have certain "ownership" rights in the

organization. These "ownership" rights typically consist of the ability to elect the management of

the organization and to participate in a distribution of any net assets or surplus should the

organization cease doing business. Historically, insurance began in the USA through a mutual

(or cooperative) structure. Recently, some insurance companies have gone through

demutualization and have become public companies in an effort, among other things, to improve

their ability to acquire capital


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It is quite common for insurance to be carried on a mutual basis. There is a mutual element in all

insurance, in that most of the funds contributed by policyholders are returned to them as claims

payments. One of the purest form of mutual insurance is found in the P & I Clubs (Protection

and Indemnity Clubs), which consist of groups of ship owners who agree that they will meet

each others losses from storm damage and other causes.

Each year the members of the club contribute (in proportion to the size of their fleets) whatever

amount is needed to meet the losses insured by the club. This is usually in the form of an initial

contribution followed by later calls if these are found to be needed after the year end.

If a mutual insurance company generates profits then it is the policyholders who are entitled to

share in those profits. In practice this entitlement is unlikely to produce any visible benefit for

the members of most mutual general insurers, as accumulated profits tend to be re- invested in

the business, but this does not mean that the companies are not operating on a mutual basis. It is

the entitlement to share in profits that matters, even if there are no actual distributions of profits

for many years.

The question of mutuality does not depend on the size of the insurance company or the numberof its policyholders. Some very large insurance companies carry on their business on a mutual

basis - even though many of their policyholders are probably quite oblivious of the fact.

Some insurers deny policyholders a right to participate in surplus until they have been members

of the company for a qualifying period. As policyholders, the contributors rights will be

governed solely by their contract (or policy) with the company, whilst any surplus will belong

firstly to the company, and will normally be distributable in accordance with the companys

constitution to the members by those who are in control of the company. Normally, in the case of

insurance company that purports to be carrying on mutual business policyholders will need to

become voting members of the company in order to secure their entitlement to participate in

surplus.


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The global cooperative union for the industry, the International Cooperative and Mutual

Insurance Federation, claims 142 members in 70 countries, in turn representing 400 insurers. The

International Cooperative and Mutual Insurance Federation (ICMIF) is a long established and

unique global organization representing cooperative and mutual insurers from around the world.

With 200 members (in turn making up more than 400 distinct organizations) in 72 countries it is

the voice of the sector. Through the delivery of a distinct range of dedicated member services the

Federation aims to be actively involved with members and key external influencers, thereby

creating a sustainable environment for the cooperative and mutual insurance industry ensuring its

growth and prosperity.

In recent years ICMIF has seen a constantly increasing membership, rising from 75 members in

1993 to 200 in 2008 and helping it to become a unique global organization representing

cooperative and mutual insurers from around the world.

ICMIF provides training for members at every level. The Federation has a commitment to its

members to assist in training for not only cooperative and mutual principles but also global

management practices. Therefore, it is noticeable other than investing the profits, a Mutual

Insurance company works on a similar principle as that of a Takaful Insurance Company.


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2.1.4 Stock Insurance Company Overview

A Stock insurance company is insurance company that is owned by its stock holders, as

distinguished from a mutual company that is owned by its policyholders . Even in a stock

insurance company, however, policyholders interests are ahead of shareholder's dividends.

Many major life insurers are mutual companies whereas some leading property/casualty and

multilineinsurers are stock insurance companies. In this type of a company the earnings are paid

in the form of shareholder dividends.

Similarities between a Stock Insurance Company and a Takaful Insurance Company are still

fewer as compared to that of a Mutual Insurance Company. But the idea of discussing the above

two types of Insurance companies indicates that although Takaful and a Conventional Insurance

company come from varying origins, similarities of concepts and principles of Takaful can also

be found in some types of Conventional Insurance companies


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Bancassurance is not yet a significant feature of the market. The catastrophe exposure is modest,

although a number of severe storms accompanied by flooding have been experienced in recent

years. Obligatory classes are motor third party liability and professional liability for insurance

brokers and consultants.

2.2.1 Population

The last census was held in 2001 and showed a total population figure (including expatriates) of

650,604, of whom 62.4% (405,700) were Bahraini nationals and 244,904 were expatriates. The

expatriate population is mainly from the Indian subcontinent and the Philippines. Expatriates are

employed in all sectors of the economy except government service, but predominate in

construction, catering and domestic service. The ethnic mix is Bahraini 63%, Asian 19%, other

Arab 10% and Iranian 8%.

2.2.2 Gulf Cooperation Council (GCC)

Bahrain is a member of the Gulf Cooperation Council (GCC), formed in 1981 by the six states

bordering the Arabian Gulf - the other five are Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

The aim of the GCC was to establish a framework of close co-operation between member states

in terms of the economy, finance, trade, customs, tourism, legislation and administration.

Regulations and supervision of the banking sector are being generalized in the G.C.C countries

gradually, and banks are now allowed to open branches in member countries. Nationals have

been permitted to own real estate and invest in the stock markets of all GCC member states.

Imports originating from GCC countries are exempt from duties if 40% of their value-added is

from the region. Differences in regulations on foreign investment, capital markets and integration

with the global banking system remain, however, and have hampered the development of an


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enlarged regional common market. The planned monetary union of GCC countries will reinforce

the beneficial efforts of ongoing structural reforms and related macroeconomic policies.

The monetary union is likely to promote policy co-ordination, reduce transaction costs and

increase price transparency, resulting in a more stable environment for investment. In particular,

the introduction of a common currency is likely to enhance growth prospects by contributing to

the unification and development of the region's capital markets and improving the efficiency of

financial services. The economic and monetary integration under way among GCC countries is

also likely to help these countries face the external challenges imposed by the rapid pace of

globalization. In addition to addressing external challenges, integration should also help the GCCcountries to face their internal challenges, in particular increasing strains in the labor market and

still-high oil dependence.

2.2.3 Economic Performance

The surge in oil prices in 2005 caused the country's trade surplus to widen, increasing oil export

earnings to BHD 2.9bn (USD 7.7bn). Local retail is continuing to profit from the sizeable

expatriate population as well as the large number of Saudi visitors who drive over the causeway

for shopping and leisure activities. This has resulted in a sharp increase in retail spending with

several large outlets being built over the last 10 years.


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The actual GDP figures for the five years to 2005 are shown below. These are in two forms, local

currency and converted to US dollars at the average annual rate of exchange.

Bahrain's development as a major financial center has been the most widely heralded aspect of

its diversification effort. Bahrain is a regional financial and business center; international

financial institutions operate in Bahrain, both offshore and onshore, without impediments, and

the financial sector is currently the largest contributor to GDP at 27.6%. Bahrain's attraction as a

financial centre is based on its established offshore facilities, free foreign exchange movement,

tax-free status, stable exchange rate, established insurance sector, modern telecommunications

systems and prime geographical location among the GCC countries. The Central Bank of

Bahrain (CBB) is responsible for licensing, supervising and regulating all banks and financial

institutions, including information technology operations and insurance. The CBB's regulatory

regime adheres to international standards. Bahrain considers itself to be Beirut's successor as the

banking and finance hub of the Middle East, although it must compete for this position with

Dubai.


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2.2.4 Bahrain Insurance Market

History

1950 The first insurance agency in Bahrain (and within the Arabian Gulf) was established by the

Norwich Union Fire Insurance Society Ltd. A number of other mainly British agency operations

followed.

1969 to 1990 A further seven national insurance companies were established.

1961 to 1986 Some 10 foreign companies were registered during this period.

1977Ministerial Order o 25 outlined the regulations for exempt insurance companies.

1979 The first exempt company was established and the number of such companies grew to

around 80 by 2003, but fell to 60 by 2005.

1980Emiri Decree o 14 was passed allowing Arab Insurance Group (ARIG) to be established.

1990Emiri Decree o 17 of 1987, which forms the basis of Bahrain's current insurance

legislation, came into effect.

1994Emiri Decree o 8 of 1994 was passed permitting the establishment of the Arab War Risks

Insurance Syndicate.

1995 Gulf Union was admitted as a new national insurer, having agreed to handle the run-off of

the Vehicles Insurance Fund, which was wound up in this year.

1999 Bahrain Insurance and National Insurance merged to form the largest company, Bahrain

National.


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2002 Supervisory control passed from the Ministry of Commerce to the Bahrain Monetary

Agency (BMA). Royal & Sun Alliance acquired the portfolio of Northern Assurance Company.

2004 The BMA lifted a key restriction on foreign insurance brokers and loss adjusters operating

in Bahrain, permitting such companies to be 100% foreign-owned.

2005 Volume 3 of the Central Bank of Bahrain (CBB)'s rulebook, relating to insurance, was

published in April.

2006 The CBB was established as an autonomous financial organization with a paid up capital of

BHD 500,000. It took over all of the responsibilities of the previous BMA. The first fully

foreign-owned takaful insurance company and the first fully foreign-owned reinsurance company

operating on Sharia principles were established in Bahrain.

2007 Gross market premium income in Bahrain grew by 22% in 2006, compared to 2005, the

strongest ever growth in recent years. Gross premiums generated in the domestic market

amounted to BHD 115.9mn (USD 307.4mn) in 2006, up from BHD 94.9mn in 2005, according

to data released by CBB (Axco report).

Bahrain's insurance industry consists of conventional and Islamic (takaful) companies which

serve both the onshore and offshore insurance markets, primarily Saudi Arabia. The conventional

onshore segment consists of 10 locally-incorporated firms, 8 full branches and 6 representative

offices of foreign insurance companies (C.B.B). The takaful segment has 2 companies. In

addition, there are a substantial number of firms with licenses limiting their business to the off-

shore market, including 39 conventional firms and 9 takaful companies. These companies serve

other regional markets in the Gulf, capitalizing on Bahrain`s leadership role as a regional

financial centre.


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The insurance industry is well served by a number of ancillary service providers such as brokers

(33), actuaries (10), insurance consultants and loss adjusters, whose presence in the industry

further supports Bahrain's position as a regional insurance centre.

The industry has been growing steadily in recent years, mirroring the growth of Bahrain's

financial sector - the increased access to financial services and products has led to demand for

insurance services. A notable development in recent years has been international insurers

developing their regional operations, many of whom have chosen Bahrain as their regional base.

Industry growth has also been fostered by the presence of a robust framework for regulation and

supervision of insurance. The Central Bank of Bahrain's predecessor organization, the Bahrain

Monetary Agency, undertook a major project during 2003-04 to develop a comprehensive

insurance rulebook, in line with IAIS core principles, following the BMA's assumption of

responsibility for regulating and supervising the insurance sector. This rulebook was launched in

April 2005, and put in place the most comprehensive regulatory framework in the region for

insurance activities.

Market Analysis

Bahrain Market - Class Wise Gross Premium

Motor

42%

Property

21%

Accident

25%

Marine

8%

Life

4%

(Source MedGulf 2008)


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The pie chart above shows that, the non-life portfolio constitutes to 96% of the total insurancemarket in Bahrain where as the life portfolio constitutes to only 4% of the total insurance market

in Bahrain.

Bahrain Market -Gross Premium Per Capita

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

2004 2005 2006

Year

USD

Per Capita

(Source MedGulf 2008)


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Upon closer analysis of the above graphical representations, it is clear that there is a gradual and

systematic growth in the net premiums of the conventional insurance companies in Bahrain. It is

also evident that MEDGULF is performing better than the other conventional insurance

companies, which is evident from Tables 5, 6 and 7 in the Appendix. MEDGULF seems to be

performing substantially well from 2004 to 2006. The growth in the market premiums is an

indication that, the Bahrain market has potential which can be tapped by new and already present

takaful insurance companies as well.

2.2.5 Regulatory authority

The Central Bank of Bahrain ('CBB') is a public corporate entity established by the Central

Bank of Bahrain and Financial Institutions Law 2006. It was created on 7th September 2006.

The CBB is responsible for maintaining monetary and financial stability in the Kingdom of

Bahrain. It succeeded the Bahrain Monetary Agency, which had previously carried out

central banking and regulatory functions since its establishment in 1973 (shortly after Bahrainsecured full independence from Great Britain).

To carry out its responsibilities in relation to the insurance sector, the CBB has four supervisory

objectives, namely to:

Promote the stability and soundness in the insurance system;

Provide an appropriate degree of protection to insurance company policyholders ;

Promote transparency and market discipline; and Reduce the likelihood of insurance licensees being used for financial crime (including

money laundering activities).


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The Shura Council has approved a proposal in respect of a compulsory health insurance scheme

for expatriates resident in the country. It is anticipated that this scheme will be similar to that

currently applicable in Saudi Arabia, but as yet, no specific details are available. The scheme is

likely to produce relatively large volumes of new premium for the local private insurance sector.

2.2.6 Distribution Channels

There were no brokers operating in the domestic market until Decree o 17 of 1987became

effective in September 1990. Until that date all companies dealt directly with their clients and

despite the inroads being made into the market by brokers, much business continues to be

transacted in this way, although the brokers' share is steadily increasing. Until March 2004

foreign brokers had to be at least 51% locally owned, but the BMA lifted this key restriction (on

foreign insurance brokers and loss adjusters), permitting such companies to be 100% foreign-

owned. As might be expected, brokers are particularly involved with the major industrial risks,

where they often also handle reinsurance placements above and beyond local treaty capacities. In

some cases they act as consultants while clients place the business direct, but their main role is in

placing the reinsurance of the large government and semi-government risks. It is not unusual for

a large programme to have one broker placing the business and another acting in a consultancy

capacity. Direct marketing via the internet appears to have limited potential although

bancassurance is becoming a feature of the market, especially in relation to takaful companies

which are forging relationships with the Islamic banking and financial sector.

I. E-Commerce

Information technology is widely used in the insurance and banking sectors, and internet

penetration amongst the wealthier sections of society is high. The latest available information is

that in 2003 there were an estimated 195,000 internet users in Bahrain, (a significant number of

which were users by proxy, based in Saudi Arabia), but the concept of internet selling has had

minimal impact so far, and it is felt that this is unlikely to change in the near future. A number of


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the national companies have websites providing product information and, in some cases,

enabling quotation requests or claims to be submitted. Al Ahlia, for example, offers discounts to

individuals effecting homeowners, motor or medical insurance via its website. E-commerce

legislation has been recently passed which permits the use of digital signatures.

In January 2004 Norwich Union Middle East (now Axa Gulf) launched its new Net Cargo

service, which enables brokers and open cover clients to effect cargo insurance over the internet,

and the system is said to be the first fully integrated electronic cargo insurance system to be

introduced in the Middle East.

II.Other Direct Marketing

Direct marketing through telesales has not been a feature of the market, and nor have direct mail

shots. Some of the larger companies advertise from time to time. Bahrain National is particularly

active in this field, although this partly reflects the company's position as the national insurance

company. It also organizes community campaigns and activities.

III.Bancassurance

Bancassurance has not been particularly developed in both the life and non-life markets but is

beginning to grow, especially in the takaful sector, where there is a community of interest

between takaful companies and Islamic banks and finance houses. Solidarity aims to become a

market leader in this respect and it has strong distribution links in Bahrain with Shamil Bank of

Bahrain, QIB and Faisal Islamic Bank. Takaful Insurance Company also has distribution

arrangements with Bahrain Islamic Bank, in respect of motor, householder's and life products.

Bahrain Kuwait Insurance Company (BKIC) until now remains the only commercial insurance

company to have launched insurance products (in 2000) that are exclusively sold via a bank, the

Bank of Bahrain and Kuwait, which is one of BKIC's shareholders. The BKIC's Secura product

range comprises householders' and motor products, with the latter being the predominant

product.


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More recently, BKIC has entered into an arrangement with the postal authorities whereby motor

third party policies can be renewed at post offices in the kingdom. Bahrain National has entered

into arrangements to sell its products through bank branches but by its own staff rather than the

bank staff. Banks in Bahrain insist on an insurance policy to protect loan collateral and this is

most usually seen with the purchase of motor vehicles or real estate. The bank's client is

normally responsible for buying the insurance cover but on occasions the bank will buy it on the

client's behalf and debit the cost from the borrower. The CBB has included the development of

bancassurance as one of its core strategies, although it is not known precisely what action is

anticipated in this regard. Some insurers have arrangements with local vehicle dealers whereby

insurance can be purchased via the dealer. With this exception, there do not appear to be anydistribution alliances outside of those traditionally used.

2.2.7 Bahrain Takaful Market

The takaful industry still remains in early stages regardless of the fact that the commencement

was in the 1970s. At present there are more than 95 takaful insurance companies which

mostly write only general takaful business. There is a need for development of the industry

and this need is created through three different forces:-

A significantly under-developed life assurance and insurance industry in the region.

A lack of structured long-term savings products with protection benefits in the region.

The growing inability of institutions and corporations to provide adequate pensions on

retirement to employees in the region.

The increase in economic growth coupled with increasing public awareness and acceptance

about the need for insurance have contributed to the expansion of the insurance sector in

Bahrain. The insurance industry in Bahrain continues to attract a number of insurance players


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from around the globe. Several new insurance licenses were granted in 2006 and 2007,

expanding the scope of insurance activities, particularly in the takaful and re-takaful areas.

Among major international players to establish operations in Bahrain is Germanys Allianz

Group, which launched a wholly owned subsidiary, Allianz Takaful (Bahrain), to serve as the

Groups global hub for Islamic insurance (takaful).

Hannover Re has also opened a branch in Bahrain that will provide conventional reinsurance

services throughout the region and beyond. The move followed the establishment in Bahrain of

Hannover ReTakaful, the principal underwriter of Hannover Res global re-takaful business.

Bahrain continues to play a leading role in developing the regional insurance opportunity and isalso the most attractive in the region. Bahrain intends to become the insurance hub of the

region, and is taking necessary steps to achieve the goal. To further enhance Bahrains

attractiveness for international insurance firms, the CBB has amended capital requirements for

branches of overseas insurance firms by recognizing the support provided to the branches from

their overseas parent company.

At present, life and general insurance are segregated activities which must be undertaken by

separate entities. The existing regulation requiring segregation of general and long term

insurance was first introduced in 2005.

The insurance industry in Bahrain has been growing steadily in recent years. Public perception of

life insurance, in particular, has changed considerably with the introduction of takaful and now

represents a huge, fairly untapped opportunity. However, insurance penetration in Bahrain

continued to be low by world standards and hence offers significant room for growth. There is a

need to raise awareness about insurance among the public in Bahrain, in order to further grow

the insurance market. In addition, the quality of human resources in the insurance sector needs to

be improved and the CBB is trying to ensure the provision of quality training.

Companies or corporate are the major purchasers of insurance in Bahrain. The personal lines

market, other than motor, is very small, and shows only limited signs of growth, with expatriates

and wealthier Bahrainis being the main buyers of this kind of business.


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3. Hypothesis

Based on the above information provided in the literature review about the workings of a

conventional insurance company and a takaful insurance company, it is clear that the takaful

insurance companies have a different technique of carrying out their business as to that of a

conventional insurance company. Now that we have established the conceptual differences

that lie between a Takaful and a Conventional method of providing insurance, we shall now

identify the managerial differences between the above mentioned Insurance providers. We

have also provided a short insight on the managerial aspect earlier in the literature review but

have not been elaborated; hence we shall now scrutinize this area further.

The task now would be to identify the managerial differences by dividing the whole

management process into three main categories to find out how these both types of companies

differentiate most and in which category or section.

The literature provided about the takaful system makes it clear that the major differences lie in

the management of the funds and capital. The task would be to know, how different they

actually are when it comes to funds management compared to that of a conventional insurance

company and what are other factors that differentiate a takaful insurance company from a

conventional insurance company and why is takaful attracting most of the Arab population in

the gulf. Hence the hypothesis to be developed would be that, there exists certain core

differences between the management of a takaful insurance company and a conventional

insurance company which are visible from the literature provided and there are somedifferences not observable from the literature provided, hence finding out those differences is

essential by developing a hypothesis as below;


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The differences between a takaful insurance company and a conventional insurance

company would exist in the management of capital and funds, and the methodology

used in deciding the required capital and forecasting techniques.

The marketing strategies used would be different for a conventional insurance

company and that for a takaful insurance company. How they target the audience and

how they attract and approach them would be different. The takaful insurance

companies would be more inclined in targeting individuals and SME`s due to the

individualistic beliefs of ethics an transparency in a insurance company that abides to

the Sharia Law. Whereas a conventional insurance company would target large firms,

where individual decision making is not done and an individuals value and thinking is

given less importance than a decision taken by a group with different beliefs.

The risk management system would be different for both the conventional and the

takaful, and the decision making process that undergoes when it comes to managing

profits would have some differences since both these types of companies have a

different set of morals and goals to be achieved. The takaful insurance company would

manage its risk by taking into considerations the well being of its policyholders as the

policyholders wellbeing is a priority in a takaful insurance company and then comes

the shareholders wealth maximization. In a conventional insurance company risk

management would be a little modest as to that of a takaful insurance company since,

in a conventional insurance company, the shareholders wealth is at stake, but theshareholders are more diversified and can take more risks as compared to a

policyholder. Hence, a takaful insurance company would be more careful in its risk

management decisions as that compared to a conventional insurance company.


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There could be certain minor differences in the modeling techniques used when it

comes to future claims forecasting etc. The takaful insurance company would have a

more sophisticated modeling techniques as to that of a conventional insurance

company due to the fact that, a takaful insurance company has less experience in the

market and a different target audience as to that of a conventional insurance company.

The takaful insurance company would concentrate more on the non-life risk portfolio

since the market for life insurance would be not attractive due to the Islamic beliefs of

not valuing life. This belief would restrict an individual from taking a life insurance

contract, hence making the market for life insurance very small for a takaful insurance

company. Even though a takaful insurance company would have products that deal

with life, it would mainly involve health insurance etc. which again is not quite

popular and cannot be considered as life insurance.

Hence, the next task would be to find whether the above developed hypothesis is right or just

mere assumptions with no real significance. For providing the validation of the hypothesis, we

have to select an appropriate methodology that will carry out the task of generating sufficient

information based on the hypothesis so that the results can be analyzed and a conclusion can

be drawn.


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4. Methodology

The methodology used, should be helpful in proving the hypothesis right or wrong. The

approach will be a more qualitative approach since the market is small as shown above in the

literature review; hence getting sufficient quantitative information to support our hypothesis is

very difficult. Therefore, the methodology we use should provide us qualitative information

sufficient enough to prove our hypothesis right.

Hence, we use a qualitative in-depth interview approach to carry out the research. A

questionnaire will be developed and an in-depth interview will be carried out with high level

management personnel in 2 conventional insurance companies, 2 takaful companies and one

doing a business of both, takaful and conventional re-insurance. After reviewing the interview

transcripts, an analysis will be drawn upon based on which, relevant conclusions will be

developed.

The interview questions will be divided into three major sections.

Capitalization

Marketing and Distribution

Risk Management

Questions will be based on the above mentioned three broad areas which will relate to how a

company manages its capital and funds, how it markets and distributes its products and

services and what system does it have for future risk management. These questions will help

us in collecting sufficient qualitative information based on the hypothesis developed. The

questionnaire used is given below.


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3.1 Questionnaire

Capitalization

1. What factors affect your premium pricing decisions?

2. How do you decide how much capital is needed to fulfill future claims? Do you use any

modeling, time-period analysis or actuaries?

3. How far do your financial projections go? (years)

4. Does Central Bank of Bahrain (C.B.B) set any capital regulations? If so, what are they?5. How do you forecast future claims? Do you use certain types of modeling such as

probability distribution? Or do you use scenario testing?

Marketing and Distribution

6. What kind of marketing strategy do you have for normal customers as well as business

customers?7. Being a Takaful/Conventional insurance company, how do you segment your market and

what kind of target audience do you have?

8. How do you distribute your product?

9. Do you use brokers?

10.What is your pricing strategy based on?

Risk Management

11.Who is responsible for risk management in the company?

12.How do you decide when and how much re-insurance is to be taken?

13.How do you manage profits? (share or distribute)

14.Do you plan any future diversifications?


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5.1.1Solidarity General, The Kingdom of Bahrain.

Solidarity General is one of the major Takaful Insurance companies in Bahrain. The Solidarity

Group is a member of the Ithmaar Banking group which is one of the largest companies in the

world (Bahrain Tribune). The Solidarity group also consists of the Solidarity Family Takaful

which offers medical insurance products and services, all with compliance of the Sharia law.

Solidarity recently signed a agreement with Batelco which is Bahrain`s leading

telecommunications company to provide health insurance coverage for the Batelco`s staff.

Solidarity has established a subsidiary in Egypt. Solidarity Family Takaful - Egypt SAE has a

subscribed capital of Egyptian Pounds 60 million. Operating from its headquarters in Cairo,

Solidarity Egypt is set to play a key role in launching innovative insurance solutions to Egypt's

growing population .Solidarity's new subsidiary in Egypt will offer a wide range of family

Takaful products and services in that vibrant market. Solidarity was also granted a license to

bring its takaful products and services in the Malaysian market. Solidarity is growing and

diversifying geographically into new markets.

Solidarity`s vision is to be a leading international Islamic-oriented financial services group

generating superior returns to shareholders and their mission is to provide a range of Sharia

compliant protection, savings and investment products with quality customer services.

The Islamic Finance News Awards 2007, which honor outstanding achievements in the Islamic

financial industry, sets the benchmark for excellence in the industry.


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The interview was conducted with Mr. Gautam Datta (General Manager, Solidarity General,

Bahrain 2008)

Q1. Mr. Gautam Dutta said, the major factors affecting the premium pricing decisions would be

the related to the market conditions. The pricing has to be competitive and the same time has to

provide the policyholders with the same features offered by other insurance providers. Market

conditions are given great importance when it comes to price determination.

For Solidarity Family (Life), the Bahrain market is not very attractive. Even being an Islamic

country, and Family Takaful offering products in complaints to Sharia law, the market is still

smaller compared to other G.C.C countries.

Q2. The capital is generated by pooling policy holders funds as well as Shareholders funds. The

minimum required capital is controlled by the regulatory authority which is the C.B.B (Central

Bank of Bahrain). Modeling is also use to determine future claims and accordingly determine the

capital requirement.

Q3. Financial projections differ from Solidarity General and Solidarity Family, for general theprojections vary from 3 to 5 years, and for family, the projections are usually 10 years.

Q4. Yes, C.B.B does set a capital requirement of BD 5 million.

Q5. Again, forecasting differs from Solidarity Family to Solidarity General. In Solidarity Family,

tables such as mortality table are used and in Solidarity General, models such as probability

analysis (5 year statistics ) , catastrophe models etc. There is no such prohibition from the

Shariah Law to use any such modeling methods.

Q6. The first focus was on the Muslim population, but then there was a realization that the

targeted Muslim population is not enough to bring in much business. Therefore, solidarity then

positioned itself as the insurer of choice, but doing it the Takaful way. This meant, people

would get the same benefits that of conventional insurance products but in a more ethical

approach and more transparency in their practices.


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Q7. Solidarity mainly targets S.M.Es and individuals since takaful in itself is driven by

individuals. Solidarity being a late entrant, it tries to penetrate the market and compete on the

basis of price. Hence, staying away from large firms is the wise thing to do.

Q8. Distribution of the products is done both by direct marketing as well as brokers. A mass

marketing model is used which also reduces distribution cost. When it comes to brokers,

companies such as Jawad Group and financial institutions along with mortgage companies are

used to pool in more customers.

Q9. The pricing strategy is mainly based on competitive market approach. The distribution

strategy also influences the pricing strategy. Factors such as whether the distributors can sharethe cost and the distribution capability also have a great influence on the pricing strategy.

Q10. The company has a risk management framework. The risk management committee has a

designated person who understands the market and the business and proposes action plans. The

committee also manages human resource risk. The underwriters also form an essential part of the

risk management system of the firm as the risk of loss to the firm depends on the quality of

business the underwriters write.

Q11. When and how much reinsurance is to be taken depends on the risk taking capability of the

company. The risk exposure the company is willing to take determines how much re-insurance is

to be taken. Normally, 1% to 2% of the total capital should be the exposure; the current exposure

is 1.25% which is very good. The risk profile or the type of risk also influences the decision

making process of how much re-insurance is to be taken.

Q12. Solidarity being a Takaful oriented company; it still doesnt distribute its profits to the

policyholders. Whatever profits are made, they are used for future investments or further

diversification plans.

Q13. At present, Solidarity is still focusing on the retail industry, but it is trying to find and

conquer the niche market. Solidarity is looking at diversifying in the form of territorial

diversifications. Solidarity is planning to do this by trying to enter the Saudi Arabian market

along with expanding outside the G.C.C regions.


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Hence, on analyzing the information provided above, it is clear that although Solidarity General

is a takaful oriented insurance company, factors such as premium pricing are yet dependable on

market conditions and the competition present. Solidarity Family Takaful is suffering with a

small market size and is looking to diversify geographically into other territories. As such there

is no prohibition by the Sharia law on the types of models to be used for forecasting purposes;

hence this is one similarity between a takaful insurance company and a conventional insurance

company. Solidarity General feels, targeting only the Muslim population is not sufficient for

future growth, hence it has to design its products and position it the same way as the

conventional insurance products, the only difference it proposes is the ethical practices it makes

use of and how the products are designed in relation with Sharia practices.

The distribution of Solidarity`s products is done the conventional way and so is the pricing of

the products. The re-insurance decision making process of Solidarity General is done in the

same fashion as that of a conventional insurance company by taking factors into

considerations such as the risk taking capability of the firm. The only difference between

Solidarity General and other takaful insurance companies is that the profits are not always

distributed to the policyholders, its mostly used for investment purposes. On the whole,

Solidarity General and Solidarity Family Takaful is a takaful insurance company and works in

compliance with the Sharia law, but does some activities the conventional way just to survive

the competition present in the market.


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5.1.2 Takaful International, The Kingdom of Bahrain.

Takaful International is another major takaful insurance company in Bahrain. It is the largest

dedicated takaful insurer in Bahrain, although other companies have recently entered the market,

as mentioned earlier. The company was originally known as Bahrain Islamic, and was formed in

1989 by the Ministry of Justice and Islamic Affairs together with the Bahrain Islamic Bank and

the Bahrain Islamic Investment Company. In 1998 the company changed its name to Takaful

International and was re-launched with the International Investment Group of Kuwait taking a

controlling interest. The name was changed in order to emphasize its takaful principles and the

fact that the company intends to offer takaful insurance not only in Bahrain but to expand

abroad, offering a similar philosophy in other GCC states and then further afield in the Arab

world. Eventually, the company expects to operate throughout Europe, the US and other markets.

On the event of International women`s day, and marking the strategic partnership between

Takaful International and Tasheelat Insurance, a joint insurance product dedicated to females

"Heya" meaning She was announced On 17th march 2008. This product will cover chronic

diseases pertaining only to women in addition to personal accidents, various medical

examinations provided by preferred hospitals and Second Medical Opinion provided by

specialists from the United States.

The interview was conducted with Mr. Essam M. Al Ansari (General Manager, Takaful

International, Bahrain 2008)

Q1. The premium pricing decisions of a company are mainly influenced by the financial

strength of the firm and the solvency of the firm as well. The capacity of an insurance firm to

take risk and how much it needs to share the risk with others also greatly influences the

premium pricing. Basically the factors that affect premium pricing for a Takaful Insurance

company are very similar to the factors that influence a conventional Insurance company.


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Q2. Yes, Takaful International does use modeling for the capital requirement decision making

as we know capital is very essential for a companies survival as it is needed for operation and

investments purposes as well. In a Takaful insurance company, investment is done by the

retained funds e.g. Net claims retained etc.

Q4. Yes, Central Bank of Bahrain (C.B.B) is the sole regulator in Bahrain which sets a

minimum capital requirement. Inspections by C.B.B are done on a regular basis every

monthly, quarterly and yearly. The Bahrain market does not give rise for a need of more

capital; hence Takaful International has a capital of 20 million and a paid-up capital of 5

million.

Q5. Future claims requirement is calculated from standard modeling techniques which are no

different from conventional insurance companies. Sharia Law doesnt insist on using any

specific techniques of modeling when it comes to Takaful Insurance companies.

Q7. Segmentation is done on the same principles for a takaful company as that for a

conventional company. Takaful International segments it market on three main categories;

Major line (Major projects, power plants etc.)

Commercial line (regular businesses)

Personal line (home insurance, Individual)

Q8. Distribution of products for Takaful International is done by direct marketing, brokers and

agents. Again, distribution methods are the same as that for a conventional insurance

company.

Q9. Yes, brokers are used for takaful insurance companies and they are the same brokers who

are used by the conventional insurance companies. The Sharia law doesnt prohibit a takaful

insurance company from using any agents or brokers.

Q10. Pricing strategy is mainly used for the Motor Insurance risk portfolio. The assessment

for risk and future claims is done in the same way as that for a conventional insurance

company.


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Q11. For Takaful International, there is a engineer employed who is responsible for the firm`s

risk management. He decides and tackles the pricing issues.

Q13. The surplus is distributed in the form of dividends.

Q14. Takaful International plans for geographical expansion to other G.C.C regions e.g.

Kuwait etc.

After the completion and reviewing of the above interview we have been successful ongathering some important information about how Takaful International manages its products

and clients and how it is different from other conventional companies. It is clear that when it

comes to pricing decisions, Takaful International is no different from a conventional insurance

company. The factors taken into consideration are the same e.g. the capacity to take risk and

the solvency required. The modeling used for forecasting is again the same as used in a

conventional insurance company with no prohibition from the Sharia law. When it comes to

capital regulation, even though regulated by C.B.B, the Bahrain market doesnt require much

capital as it is smaller compared to other regions especially when concentrated to the takaful

clients. Market segmentation is done on a little different basis as that compared to other

insurance companies, by focusing on the Islamic aspect. Distribution of its products again is

done the same way as a conventional insurance company would do, that is using agents and

brokers.

The risk management in Takaful International company is done by an engineer, which is not

been noticed in other insurance companies interviewed in Bahrain. The profit management isdone as shown in the flow charts presented in the literature review. Hence, it is noticeable that

the overall working of Takaful International is quite similar to that of a conventional

insurance company. The major differences lie in the core principles of the company, which is

the compliance with the Sharia law and conducting its business in an ethical way.


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5.1.3Hannover-re, The Kingdom of Bahrain.

Hannover Re is a major conventional and takaful re-insurer in Bahrain, with a gross premium of

around 8 billion euro and is one of the leading reinsurance groups in the world.

It transacts all lines of non-life and life and health reinsurance and maintains business relations

with more than 5,000 insurance companies in about 150 countries. Its worldwide network

consists of more than 100 subsidiaries, branch and representative offices in around 20 countries

with a total staff of roughly 1,800.

The rating agencies most relevant to the insurance industry have awarded Hannover Re very

strong insurer financial strength ratings (Standard & Poor's AA- "Very Strong" and A.M. Best A

"Excellent").

Hannover Re has established Hannover ReTakaful B.S.C. (c) in Manama, Bahrain, a wholly-

owned subsidiary for the underwriting of worldwide reinsurance in conformity with Islamic law.

The company had already received an appropriate license from the Central Bank of Bahrain

(CBB).

Hannover Re is thus the first of the major western reinsurance groups to serve this emerging

market with its own exclusively dedicated subsidiary. "Bearing in mind that a quarter of the

world's population are adherents to the Islamic faith, 70% thereof are under the age of 35 and the

global Islamic insurance market is scarcely developed as yet, we see extremely attractive growth

prospects and scope for innovative product design in this area", noted Hannover Re's Chief

Executive Officer, Wilhelm Zeller.

As things currently stand, only a few Sharia-compliant reinsurers with relatively modest

underwriting capacity offer professional protection to the more than 80 takaful insurers active in

20 countries. Takaful insurers are obliged to obtain reinsurance from a Sharia-compliant re-

takaful company and may only resort to conventional reinsurance if sufficient re-takaful capacity

is lacking. This opens up a unique potential for Hannover ReTakaful.


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Hannover Re has appointed Mr. Mahomed Akoob as CEO to head the new company. Until

recently he served as CFO of Hannover Re's subsidiary in South Africa. Having worked in the

industry for many years, Mr. Akoob has extensive experience in reinsurance business.

The interview was conducted with Mr. Mahomed Akoob (Managing Director, Hannover-Re,

Bahrain 2008)

Q1. The premium pricing decisions are mainly influenced by the market environment the firm

is operating in. The cost of transaction sometimes varies from region to region, and hence

does the premium pricing too. The cost of compliance does play an important role when it

com

Documents

Conceptual on Between Takaful and Conventional