Protection Versus Savings

Insurance is one of those necessary expenses that none of us want to have. Unlike any other bill or debt payments where we get immediate value in the form of a product or service, insurance payments are obligations that you "ideally" would receive nothing in return for your hard-earned cash... other than peace of mind. To use insurance requires you to lose something, and some things (such as your life) are too valuable to lose. But the reality is, we can't predict the future-- even seconds ahead, so we buy insurance to indemnify us or our families in the event of a financial loss.

That last sentence is what I want us to focus on today. When most people think of life insurance, they think of burial expenses and a few debt obligations left behind by their loved ones. A few think of insurance as a way to safely save for college or retirement (very bad idea). I think the first problem is the fact that it's called "life insurance" instead of what it really is... income protection.

Income protection is the basic purpose of life insurance. If you earn income and have ANYONE that requires your financial support, you need income protection, because when you're gone, who's going to keep paying your loved ones your income? Unfortunately, many of you have learned this the hard way-- after experiencing a financial tragedy due to the death of a supporting family member. Sadly, because of lack of knowledge, people today are still buying life insurance without consideration of their actual financial needs.

So how do you determine how much and what kind of insurance is needed? There's a simple formula called the D.I.M.E. that can help you calculate your approximate need. The acronym D.I.M.E. stands for "Debt & Death; Income; Mortgage; Education--" these are the four basic factors you should consider when purchasing life insurance.

Typically, I find that most families need about $500,000 of insurance coverage on each bread-winner in the home. Unfortunately, the average person only has between $25,000-$50,000 of coverage--that's a tragedy waiting to happen.

Malaysia: Takaful Insurance

Preliminary data released by Bank Negara Malaysia, the central bank, confirm that Malaysia's Takaful market is making similarly impressive growth progress as the Islamic banking and capital market sectors. While the Islamic banking market share of the total banking market has reached over 22 percent in terms of deposits, assets and financing, and the size of the Islamic capital market surpassed the 1 trillion ringgit mark at the end of 2010, the Takaful market is relatively much smaller compared to the conventional insurance market and hence its base is much lower.

According to the Bank Negara Malaysia 2010 Financial Stability Report, which is published with the central bank's annual report and was recently released, total income for family Takaful increased from 3,381.6 million ringgit in fiscal year ending Dec. 31, 2009 to 4,030.2 million ringgit for the same period in 2010. This included net contributions for family Takaful which increased from 2,719.8 million ringgit to 3,326.9 million ringgit; net investment income which similarly increased from 354.8 million ringgit to 451.6 million ringgit for the same period; and profit on sale of assets which decreased from 307.1 million ringgit in 2009 to 251.8 million ringgit in 2010.

The net outgo for family Takaful increased from 1,718.5 ringgit to 2,640.1 million ringgit, the excess income over outgo decreased from 1,663.2 million ringgit to 1,390.2 million ringgit in the same period respectively.

For General Takaful at the same time, the underwriting profit declined from 170.1 million ringgit to 145.8 million ringgit, although the operating profit of Takaful providers in Malaysia increased from 247.5 million ringgit to 272.4 million ringgit for the same period. Investment income for General Takaful also increased from 57.7 million ringgit to 67.9 million ringgit respectively.

According to Bank Negara, the insurance and Takaful sectors in Malaysia sustained domestic demand for savings and protection products and the improved performance of the equity market supported stronger results for the year. Business growth was primarily driven by a strong recovery in demand for investment-linked products, and higher demand for ordinary life protections as well as motor and fire insurance. Payout of benefits and claims as a percentage of premiums increased slightly to 58.1 percent for the life business and 62.3 percent for the general business.

For the year as a whole, aggregate excess income over outgo for the life and family Takaful industry improved to 14.1 billion ringgit (an increase of 12.1 percent on the year) whilst the general sector recorded operating profits of 2.2 billion ringgit (up by 3.5 percent). Capitalization of the insurance industry remained strong with a capital adequacy ratio (CAR) of 224.6 percent in 2010 compared with 225.7 percent in 2009.

According to Bank Negara, the industry experienced a compound average growth rate of 27 percent in terms of net contributions between 2005-2010 with family Takaful driving the growth at 28 percent for the same period to dominate more than 80 percent of the total Takaful market in 2010. This strong growth momentum is expected to continue, underpinned by the rising affluence of Malaysians amidst strong economic fundamentals. Given the large untapped market that still exists with only 54 percent of the population having a life insurance or Family Takaful policy, the Takaful industry in Malaysia is poised to benefit in the years ahead on the back of steady demand.

The encouraging preliminary Takaful results for 2010 coincided with the launch in April 2011 of the latest Takaful company in Malaysia, namely ING Public Takaful Ehsan, which is a joint venture between the Malaysian subsidiary of ING, the Dutch financial services group, ING Management Holdings (M) Sdn Bhd, and the local Public Bank Bhd and Public Islamic Bank Berhad.

Bank Negara Malaysia (BNM) Deputy Gov. Mohd Razif bin Abd Kadir, speaking at the launch of ING Public Takaful Ehsan in Kuala Lumpur, stressed that the venture signifies yet another milestone in Malaysia's continuous endeavor to provide a sufficient financial safety net for the general population and to promote the development of a progressive and flexible Takaful industry in an increasingly challenging global environment.

"With this strategic alliance between two financial groups of such caliber," added the deputy governor, "Bank Negara Malaysia looks forward to strong management stewardship, innovative product offerings, wide distribution channels, operational and service excellence as well as breakthrough business strategies that are well-matched by robust risk management capabilities."

Takaful Players
In fact, another international-local Takaful joint venture is scheduled to come to enter the market in 2011 following the approval last year by Malaysian Finance Minister Mohd Najib Abdul Razak, who is also the prime minister, of the four new joint venture family Takaful licenses under the Takaful Act 1984. This was part of Malaysia's ongoing financial liberalization of its Islamic finance sector, which was announced by Prime Minister Najib in April 2009.

Thus far, three of the four have launched operations including AIA AFG Takaful Berhad, a joint venture between American International Assurance Berhad and Alliance Bank Malaysia Berhad; ING Public Takaful Ehsan; and the joint venture between AMMB Holdings Berhad and Friends Provident Group plc, UK; just leaving the joint venture between The Great Eastern Life Assurance Company Limited and Koperasi Angkatan Tentera Malaysia Berhad the only one to start operations.

This brings the number of Takaful operators in Malaysia to 12. The other Takaful operators include CIMB Aviva Takaful Berhad, Etiqa Takaful Berhad, Hong Leong Tokio Marine Takaful Berhad, HSBC Amanah Takaful (Malaysia) Sdn Bhd, MAA Takaful Berhad, Prudential BSN Takaful Berhad, Syarikat Takaful Malaysia Berhad and Takaful Ikhlas Sdn. Bhd. Further international interest in Malaysia's Takaful market is the 35 percent equity stake being finalised by Japan's Mitsui Sumitomo in Hong Leong Tokio Marine Takaful Berhad.

In addition, Malaysia also has four Retakaful Operators, namely ACR Retakaful SEA Berhad, MNRB Retakaful Berhad, Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) and Swiss Reinsurance Company Ltd. (Swiss Re Retakaful); and one International Takaful Operator in AIA Takaful International Bhd. In addition, there is also strong presence of the Takaful industry in the Labuan International Business and Financial Centre, where there are 14 Retakaful operators incorporated.

Malaysia has the single largest Takaful market in the world with an estimated 26 percent of global Takaful assets, which according to Bank Negara Malaysia totaled 12,445.4 million ringgit in 2009.

Opportunity
Deputy Gov. Mohd Razif identified three dimensions from which strong opportunities for growth can be harnessed in the Takaful industry. The first one is the opportunity to penetrate the remaining underserved areas in family Takaful, especially medical and health Takaful, which in 2010 constituted only 9 percent of new family Takaful business.

The second dimension of growth relates to the transformation of Malaysia as a high income economy. With Islamic finance specifically identified as one of new growth areas under this new economic model, the Takaful industry stands to gain from this socio-economic transformation by seizing the opportunity to grow business beyond the more traditional business lines. This entails broadening product offerings to include bespoke and more sophisticated investment-linked and wealth-management products aimed at more affluent customers. At the other end of product spectrum, there should also be more emphasis to cover low-income individuals via microtakaful.

The third dimension of growth relates to the opportunities to be harnessed under the Malaysia International Islamic Financial Centre (MIFC) initiative which seeks to enhance the international dimension of Malaysia's Islamic finance proposition. "This presents a huge window of opportunity for our Takaful operators to accelerate their regional and global orientation and move up the global value chains. It is therefore important for strategic international partners such as ING to explore all possible avenues to elevate the business potential of Takaful internationally," he stressed.

Other factors critical to the successful development of the Takaful industry include human capital development; ensuring that Shariah governance and compliance remains at the heart of governance and business operations; the adoption of the highest level of professionalism and good market conduct; the ability of Takaful operators to deliver products which appeal to both Muslim and non-Muslims, whether corporates or individuals; and the adoption of a strong risk management culture in the light of the changing regulatory landscape towards risk-based capital, which is soon to be implemented for the Malaysian Takaful industry.

Pay Premium To Insurer Directly

When it comes to paying the annual or renewal premium on our policies, we want to avoid the botheration of visiting the insurance company. Most of us expect the agent to collect the premium from us and deposit it with the company. We feel the agent has a duty to provide this “service” as he is earning commission on our policy. Is this expectation justified? What are the repercussions if, for some reason, the agent fails to deposit our premium in time?

Case Study: Shah had taken four insurance policies, of Rs 25,000 each, from the Life Insurance Corporation (LIC) of India. All of them came with double accidental benefits and were taken on March 6, 1986 through the same insurance agent. The premium was payable on a half-yearly basis.

The half-yearly premium due on March 6, 1987 was not paid in time. Later, the agent met Shah and obtained from him a bearer cheque worth Rs 2,730 and dated June 4,1987 towards the premium on all four policies. The cheque was encashed by the agent’s son the following day, but the premium was deposited with LIC much later, on August 10. Meanwhile, Shah met with a fatal accident on August 9 and died the same day.

Shah’s widow, who was the nominee under the policies, claimed the amount payable under the policies. LIC repudiated the claim saying the policies had lapsed on account of non-payment of premium in time or even thereafter, within the grace period.

So the widow, along with the Consumer Education & Research Society (CERS), filed a consumer complaint against LIC as well as the insurance agent. She claimed that the premium was paid to the agent on behalf of LIC, much before Shah met with an accident and expired. On the other hand, LIC contended that agents were not authorized to collect the premium, and so the premium paid to the agent could not be considered as having been paid to LIC.

The Maharashtra State Commission observed that in order to garner more business, agents collected the premiums from policyholders, either in cash or by cheque, and then deposited the money collected in the LIC office. The administration of LIC was aware that this practice was being followed, despite departmental instructions that the agents were not authorized to collect premiums. In view of this, LIC was held to be negligent. Accordingly, the Commission directed LIC to settle the claims in respect of the four policies, after deducting the amount of interest necessary to treat the policies as surviving.

LIC challenged the judgement before the National Commission, which held that the agent receiving a bearer cheque from the insured for the payment of the premium was not acting as LIC’s agent. Hence, the date of receipt of premium by LIC had to be considered and not the date of receipt of the premium by the agent. Since the premium was deposited by the agent a day after the death of the insured, the policy had lapsed. So, the National Commission set aside the order of the State Commission and dismissed the complaint.

Shah’s widow then approached the Supreme Court, which considered the provisions of the Life Insurance Corporation of India (Agents) Regulations, 1972. According to Regulation 8 (4), an agent does not have the authority to collect money or accept any risk for or on the behalf of LIC. This condition is also stated in the letter of appointment issued to agents. Hence, the Supreme Court ruled that an agent did not have any express or implied authority to receive premium on LIC’s behalf. Consequently, payment to the agent cannot be regarded as payment to LIC so as to make it liable in case of a claim.

It was further held that as the insured had died a day prior to the payment of the premium, the policy had lapsed. It is possible to revive a lapsed policy only during the lifetime of the insured and not after his death.

The SC said the widow was not entitled to a claim under the policies. However, in view of the peculiar facts and circumstances of the case, LIC was directed to refund the entire amount of premium, along with interest at 15 per cent a year, and costs of Rs 10,000. [Harshad J Shah & Anr v/s LIC & Ors – III (1997) CPJ 9 (SC)]

Impact: Consumers must ensure the premium is paid directly to the insurance company in time

Life Insurance in 2020

Will bifurcate into large conglomerates, serving a broad and increasingly international market and niche carriers, which will differentiate themselves by leveraging deep expertise and customised product features for their targeted audiences or products.

By the year 2020, the insurance industry will bifurcate into large conglomerates, serving a broad and increasingly international market and niche carriers, which will differentiate themselves by leveraging deep expertise and customised product features for their targeted audiences or products.

This is one of the predictions made by the panel of senior executives from leading insurance companies surveyed by LOMA in December 2010. The report, entitled: What's Ahead: Our Industry in 10 Years, is featured in the March issue of LOMA's Resource magazine.

Overwhelmingly, the panel agreed that the industry will experience significant and accelerated change over the next 10 years.

"Looking forward, change is likely to continue at an accelerated pace that becomes the norm, positioning companies that are agile, innovative, responsive and strategically focused for profitable growth," noted Steve Callahan, senior consultant and practice development director for the Robert E. Nolan Company.

Panelists also noted that the ever-changing and diversified consumer population will impact companies' strategies.

"I expect to see more interest in the middle market," said Michael Fanning, MassMutual executive vice president. "LIMRA's research indicates that nearly a third of US households have no insurance, the highest percentage in four decades. Expanding more broadly to the larger—and more traditionally underserved—US population and developing solutions that leverage brand, product, technology and customer service that speak to this demographic group will be the attributes of a winning company in 2020."

Of course, the executives believe legislation will drive many different changes in the industry.

"Legislation may well create a far different landscape for us in 2020," observed Peter Golato, senior vice president, individual protection, Nationwide Financial Services. "Commission disclosure in New York may lead to the advent of more fee-based products should the legislation spread to other states. Fiduciary type standards may pass for life insurance producers, which may also spur fee-based sales."

Who Is Li Yukun ???

64-year-old sanitary worker and garbage collector Li Yukun has long passed her retirement age of 50 in China but she begged the Wendeng environmental protection department to let her keep her job because she has more than 10 students to support. Since 1998, Li has helped 15 students from poor families.


Sanitary worker Li Yukun, 64, sweeps a street in Wendeng city, East China's Shandong province, Dec 22, 2010.

Kang Yujing, a senior at Qufu Normal University in East China’s Shandong Province, is one of the 15 students helped by Li. She had been receiving 1,000 yuan from the kind-hearted grandmother yearly over the past four years. But she never imagined her “Rich Uncle Li” would turn out to be a sanitary worker and garbage collector, or even a 64-year-old woman, before meeting her in April.

After finding out the identity of her “angel” the Year Four undergraduate of Qufu Normal University decided to visit her. When she saw Li sweeping the Wendeng street, Kang ran towards her and held her tightly. Kang Yujing (L), a senior at Qufu Normal University in East China's Shandong province, burst into tears in Li Yukun's arms after learning it is this 64-year-old grandmother who has been giving her 1,000 yuan each year, at their meeting April 19, 2010.

“I had always thought that the philanthropist was a rich man called ‘Uncle Li’.”
In her thank-you letters to Li, Kang addressed her as “Uncle Li” before their meeting on April 1

Li, whose colleagues call “Iron Feet Li”, has always spent all her money helping the poor and the underprivileged. She leads a very simple life and lives in a crude home with an old donated TV set as the only appliance.

Wendeng’s construction bureau has given Li 50,000 yuan for living expenses, but she has donated all of the money, against the advice of her colleagues. She also decided, after discussing it with her two married daughters, to donate her organs after her death. Li has also donated 100,000 yuan to victims of the 2008 Wenchuan earthquake and to other charitable causes.


Li counting her money before donating to a victim of the 2008 Wenchuan earthquake at a post office in Wendeng city

Li may be just a poor garbage collector but she has a heart of gold!
It is people like her that makes our world a much better place.

Investment-linked Policy

KUALA LUMPUR: Total life insurance premiums in Malaysia grew 11.9% to RM8.42bil in 2010 from RM7.53bil a year earlier due to investment-linked policies which recorded a 26.6% growth, said the Life Insurance Association of Malaysia (Liam).

“In particular, the growth of investment-linked business came from annual premium business, signifying the switch in strategy by insurers to focus on less capital-intensive products,” Liam president Adnan Md Zain said in a statement yesterday.

For individual annual premium business, annualised premium for investment-linked policies outpaced traditional policies by growing at a strong 37.8% compared to a growth of 3.3% for traditional.

Investment-linked policies first lost their popularity in 2007 and it took three full years for the trend to reverse in 2010. In absolute terms, the size of traditional business with annualised premium of RM2.1bil is still larger than the size of investment-linked business with annualised premium of RM1.7bil.

Traditional to investment-linked business mix as at Dec 31, 2010 was 55.6%:44.4% compared with 62.5%:37.5% a year earlier.

On the outlook of the life insurance industry in 2011, Liam said that despite the increasing number of people who were aware of the importance of life insurance, the current gross domestic product for life insurance stands at 2.8%, which is relatively low compared with other countries like Singapore (6.1%) and Japan (7.5%).

“The Government intends to increase this figure to 4% (75% of population) by 2020 with the various initiatives based from the ETP (Economic Transformation Programme) announcement last year.

“While it's a challenge, we see it as an opportunity to grow the business. And with the various initiatives lined up by the Government for the year, we are fairly optimistic that the industry will achieve a 12% to 15% growth,” said Adnan.

Liam said among the contributing factors that may spur better sales would be the possible separation on tax reliefs of RM6,000 in Employees Provident Fund contributions and insurance premiums (a net increase of RM2,000 in relief).

“Such a move will motivate consumers to choose a plan that best suits their needs instead of just having basic coverage.

“The tax relief would provide flexibility for one to select products made available by the insurance providers,” it said.

Islamic Insurance : Challenges Ahead

DUBAI, April 10 (Xinhua) -- How can Islamic insurances, known as Takaful, flourish and expand globally? This is the topic of the sixth edition of the two-day World Takaful Conference in Dubai which was kicked off Sunday and attended by 350 industry professionals.

In the Gulf Arab region, financial products which obey the religious rules of Islamic law, known as Sharia, have seen growth rates of more than 20 percent annually. Islamic insurances even grow by 31 percent globally in 2010, according to the Ernst and Young World Takaful Report 2011.

While all Islamic asset classes, which deny interest and money speculation, reached more than 1 trillion U.S. dollars worldwide and Islamic insurances sum up to 12 billion dollars, Marwan Lutfi, head of Business Development of the Dubai International Financial Center (DIFC) Authority, told Xinhua that there is still a long way to go.

"Whether Islamic or conventional: the Middle East is still underinsured," he said, "In Saudi Arabia, people spend only 41 dollars per year for insurances, that's only half of the amount in Argentina."

According to Lutfi, market penetration of insurances in the region stands at 1 percent, compared to 7 percent globally. Firms which offer Islamic insurance are called Takaful operators.

In the United Arab Emirates, there are 10 Takaful operators, insurers and banks which offer Takaful products, while the largest market is Saudi Arabia with 32 operators. Sixty percent of global Takaful products are Islamic life insurance called Family Takaful, while 40 percent is non-life, such as Islamic house insurance or Islamic car insurance.

Nevertheless, the Takaful industry has reached hearts and minds of Muslims worldwide, not only in the Middle East and North Africa, but globally.

In Malaysia, Egypt or Iran, Takaful is common, and even in Western countries, such as Britain and Germany, Takaful operators mushroom.

"There are 4 million Muslims in France, over 3 million in Germany and 2.4 million in the UK. There is definitely potential in Europe," said Marcel Omar Papp, director of client markets at Swiss Re in Zurich, the world's second largest reinsurer. Swiss Re has been offering re-Takaful since 2006, when it started to insure Takaful operators in Malaysia.

"But there are challenges," the DIFC's Lutfi said, "We need to educate professionals and create a new management generation. Many Takaful managers will soon reach retirement age."

Globally, there are 180 Takaful operators. "Takaful puts faith into finance, and the vast majority of Gulf Arab people are ready to invest in line with Sharia," he said.

Under Takaful, the paid insurance sums by the insured are not allowed to be invested in stocks from conventional banks, alcohol producing firms or weapon firms, as all of them are regarded un- Islamic or haram. The insured also pay a special fee called Tabarru, which serves the entire community in case there is a loss or damage one of the insured suffers.

Meanwhile, established Takaful operators reached out to the tech-savvy young generations through the Internet distribution channels. Dubai's Noor Takaful, for example, created Noor Takaful Online in 2009. "Our growth rate in 2010 was 100 percent," the firm's Managing Director Dr. Ahmed Al-Janahi said.

"Embracing new technologies and increasing marketing activities can increase the global Takaful industry to 15 billion dollars in 2012," said Lutfi.