WHAT, ACTUALLY, IS RETAKAFUL?

SOME BASIC QUESTIONS

Istanbul, November 2012

Ludwig Stiftl

1. Who is the ceding party? Shareholders or participants?

2. What is the basic service provided?

3. What level of pooling is appropriate?

4. Challenges ahead

Agenda

Who is the ceding party?

Those who take the risk are the ones to cede it.

So, everything is returning to the same central question:

Are we in risk transfer?

11/19/2012 3 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

Participants

If (re)takaful is not transferring the risk, the participants

would be liable for deficits

4

Shareholders Fund

Qard

Hasan

Participants Fund

Qard Hasan repayment

Underwriting Profit

100% of surplus: Wakala

Surplus

Claims

Participants Fund

Contribution

Wakala Fee (p.ex. 20%)

11/19/2012 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

If the participants were directly liable for deficits, losses

would directly affect all retained portfolios

5

Shareholders fund

Participants

Fund

Participants

Shareholders fund

Participants

Fund

Participants

Shareholders fund

Participants

Fund Participants

Shareholders fund

Participants

Fund

Participants

Retakaful SHF

Retakaful Fund

10% 10%

60% 40%

11/19/2012 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

Agenda

1. Who is the ceding party? Shareholders or participants?

2. What is the basic service provided?

3. What level of pooling is appropriate?

4. Challenges ahead

Basic Claims

Claims volatility

Expenses

What is the service provided in retakaful and

reinsurance respectively?

Contribution margin

Reinsurer’s service Retakaful Operator’s service

Proportional payments

XL payments

Reinsurance commission

UW-Service/Training

Capacity management

Proportional claims

compensation

XL claims compensation

Retakaful “commission”

UW-Service/Training

Capacity management

Without risk transfer, the service of a retakaful operator

were less than that of a reinsurer

11/19/2012 7 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

Agenda

1. Who is the ceding party? Shareholders or participants?

2. What is the basic service provided?

3. What level of pooling is appropriate?

4. Challenges ahead

Risk capital and diversification gains

11/19/2012 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl 9

Modelling and pooling risks in a portfolio

Munich Re

(Group)

Credit Non-life

ERGO

Life

RI

Basic loss Large loss Accumulation loss

BLS 1 BLS 150 ALS 1 ALS 50

EQ USA

(Midwest)

… … Fire treaty

Non-proportional

North America

… …

TS 1 TS 100 Country

Mutual

Stop loss

XYZ

Insurance fire

risk XL

… … TS 1 TS 55 UVW Mutual

Stop loss … …

Market

Cost of capital Loading

11/19/2012 10 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

Diversification effect through pooling

Risk Capital 2005 AAA

0

200

400

600

800

1000

1200

1400

AAA only NL only

Ris

k C

ap (

mio

€)

Risk Capital for

NatCat Scenarios

Basic and Large Losses

Operational Risks

Cumulative Losses

11/19/2012 11 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

Agenda

1. Who is the ceding party? Shareholders or participants?

2. What is the basic service provided?

3. What level of pooling is appropriate?

4. Challenges ahead

Challenges

Retakaful

Clarification of business

model to distributors

Clarification of value

proposition (mutuality)

Differentiation from

conventional

Standardisation

11/19/2012 13 What, actually, is retakaful? Some Basic questions / Ludwig Stiftl

THANK YOU VERY MUCH

FOR YOUR ATTENTION

Ludwig Stiftl

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