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 faculty

members without whom this project would have been a distant reality. I also extend my heartfelt thanks to my family and well wishers.

Table of Contents
Page o.

1. Introduction
1.1 Objectives 1.2 Motivation 1.3 Plan

1 3 3 4 5 7 7 9 10 14 14 17 18 21 22 23 23 24 26 31 32 32 33 33 34 36 39 40

2. Literature Review
2.1 Insurance Review 2.1.1 Insurance Overview 2.1.2 Takaful Insurance Overview i. History and evolution of takaful insurance ii. Basic concepts of takaful insurance iii. Sources affecting takaful insurance iv. Current Statistics of takaful 2.1.3 Mutual Insurance Overview 2.1.4 Stock Insurance Company Overview 2.2 Market Study 2.2.1 Population 2.2.2 Gulf Cooperation Council (G.C.C) 2.2.3 Economic Performance 2.2.4 Bahrain Insurance Market 2.2.5 Regulatory Authority 2.2.6 Distribution Channels i. E-commerce ii. Other Direct Marketing iii. Bancassurance 2.2.7 Bahrain takaful Market

3. Hypothesis 4. Methodology
4.1 Questionnaire

5. Data
5.1 Interviews 5.1.1 Solidarity General 5.1.2 Takaful International 5.1.3 Hannover re 5.1.4 BKIC 5.1.5 RSA

41 41 42 46 49 53 56 59 59 60 61 63 64 65 65 66 67 67 68 69 69 71 75

6. Analysis
6.1 Capital and Fund Management 6.2 Marketing Strategies 6.3 Risk Management 6.4 Life and on-Life Markets 6.5 Limitations

7. Conclusions
7.1 Conceptual Differences 7.2 Marketing differences 7.3 Growth 7.4 Alternatives 7.5 Core Competency 7.6 The Kingdom of Bahrain and its Market 7.7 Future strategy

8. References 9. Appendix

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 of getting 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.

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 indepth 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 12th 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.

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.

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 offshore 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 the regional 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's predecessor organization, the Bahrain Monetary Agency, undertook a major project during 200304 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.

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.

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 NonMuslim 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.

A Conventional Insurance Company`s Fund Management

Insured

Shareholders

Premium
General Expenses (Admin)

Capital

Investment
Operation Expenses (Claims, R.I)

Shareholders Fund

Profit/Loss

(Source: Takaful International, Bahrain)

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.

A Takaful Insurance Company`s Fund Management

Shareholders

Participan ts

Capital
Contribution

Operation Expenses (Claims, R.I)

General Expenses (Admin)

Participants Fund

Invest.

Mudarib Fee

Shareholders Fund
Investment

Wakala Fee
Qarad (QH) Al Hassa

Surplus

Deficit

Participants General Reserve

Profit/ Loss

(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.

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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 risk does 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 10thSession at Riyadh held on 4-41397 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 Quran and the Sunnah or 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 Quran principles. 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 ones unexpected future risk or peril before leaving ones fate and destiny in the hands of Allah. 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 of al - 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 of diyat (blood wit) for manslaughter committed by one of their members of their own tribe.

Rules of the Shariah Supervisory Board

Behind every Shariah based 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 Council by 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 and practice. 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 Week held in Damascus from 1st - 6 th April in 1961; The Seminar held 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 in Libya 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 2006 Total Takaful Premiums

$1.7 billion = 60 Takaful companies in 30 countries worldwide

Asia / Pacific 9% Malaysia 27%

Europe / USA 1%

GCC 63%

Total estimated Takaful premiums of US$ 1.7 billion (growing at 15 to 20% p.a)
Source: Salama Arabic Islamic Insurance Company

2008 World Takaful Premium: 1.7 billion to 2.5 billions Middle East = 47% Africa = 7% Asia = 46 % Europe & USA = 1%

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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 number of 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 multiline insurers 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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2.2 Market Study

The Kingdom of Bahrain is an archipelago of small islands with a total area of 267 square miles (691 sq kilometers), lying just off the east coast of Saudi Arabia halfway down the Arabian Gulf. The population is over 700,000, including a significant number of foreign workers, who in 2006 accounted for about 39% of the population and 72% of the total workforce. In 1829 Bahrain entered into the first of a series of treaties with Great Britain. After Great Britain announced its intention to withdraw from the region, Bahrain became independent in 1971.

The country has a desert climate with minimal rainfall, although there can be occasional flash floods. Bahrain is a hereditary monarchy ruled by the Al-Khalifa family. The head of state is the Emir, Sheikh Hamad bin Isa al-Khalifa, who became king in 2002, and announced an ongoing programme of democratic reform. Political parties are forbidden, although political "societies" are formally recognized. Bahrain has the smallest oil reserves in the Gulf and has diversified its economy into aluminium smelting, manufacturing, tourism and financial services.

The economy remains heavily dependent on oil for the bulk of its export and fiscal revenue, however. Between 2006 and 2009, economic growth is forecast to be robust, at between 5.5% and 6% per annum (Axco Report). Total gross market premium income in 2005 was BHD 94.90mn (USD 252.46mn) of which BHD 78.30mn (USD 208.30mn) was non-life. There are no separate figures for personal accident and healthcare business, although these are not major classes. Motor and property are the main classes, accounting for 47.1% and 18.9% respectively of non-life premiums in 2005.

There are no longer any tariffs, with the exception of motor third party where maximum permissible rates are stipulated. There are no restrictions on foreign ownership of insurance companies, and 100% foreign ownership of insurance brokers is also permitted. The concept of "national insurance companies" i.e. companies which have a majority local shareholding is no longer applied.
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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 GCC countries 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.

1977 Ministerial 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.

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

1990 Emiri Decree

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

legislation, came into effect.

1994 Emiri 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 offshore 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

Marine 8%

Life 4%

Motor 42% Accident 25%

Property 21%

(Source MedGulf 2008)

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

Bahrain Market -Gross Premium Per Capita

$1,000 $900 $800 $700 $600

U SD

$500 $400 $300 $200 $100 $0 2004 2005 2006 Per Capita

Year

(Source MedGulf 2008)

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MedGulf

(Source MedGulf 2008)

(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 Bahrain secured 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 1987 became

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% foreignowned. 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 any distribution 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 is also 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 some differences 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 the shareholders 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. Data
5.1 Interviews
Interviews were conducted in 5 leading insurance/re-insurance companies in Bahrain. These five companies were; Solidarity General Takaful International Hannover re BKIC Royal and Sun Alliance

Solidarity General and Takaful International are the two major takaful insurance companies in Bahrain, BKIC and Hannover re are the two major conventional insurance and re-insurance companies respectively in Bahrain, Hannover re on the other hand is a conventional reinsurance company but has lately commenced operating in the takaful industry by opening a Re-Takaful reinsurance company. The General Managers of these five companies were interviewed. After the interview, analysis of the information gathered through these interviews would make it possible to find out what are the major differences that exist in the management of a takaful insurance company and a conventional insurance company and whether the derived hypothesis based on the literature available is valid or not. The transcripts of the interviews are provided below along with its respective question number. Analysis on each interview is given along with a generalized analysis provided later.

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5.1.1 Solidarity 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 the projections 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 share the 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 on gathering 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 is done 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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5.1.3 Hannover-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 whollyowned 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 retakaful 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 comes to premium pricing decisions. Q2. Capital requirement is a function of the firms risk appetite. The more risk barring an insurance company is, the more capital it will require. Regulatory requirement is also another important factor when it comes to the decision of capital requirement. Rating of an insurance firm also has to be kept to a standard, and in order to maintain a substantially good rating the company should have adequate capital. Q3. Hannover-re usually has financial projections going up to 5 years. Q4. Yes, Central Bank of Bahrain (C.B.B) is the sole regulator in the country which regulates the minimum capital requirement and regulates certain policies too. Q5. Hannover-re does use modeling depending on the risk portfolio. Both Takaful and conventional firms use similar modeling techniques for the calculations of future claims, there is no difference between the models used for conventional and takaful insurance companies. Certain models use foreseeable loss scenarios or from past experience. Q6. Hannover-re believes in having a marketing strategy that will target people who believe in the concept of takaful, who believe in ethical practices and transparency in business. Shaping
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their products in a way that will highlight their relevance to Islamic beliefs. Bahrain being an Islamic country would have a vast majority of individuals who believe in the principles and practices of the Sharia Law. Q7. Being a takaful company, we target people who deal with other Islamic institutions. People who take loan from an Islamic bank or an Islamic financing company would be more willing to take Insurance from a Takaful company. Hence we exclusively deal with companies who are takaful cooperative and have products which confirm with Sharia Law. Q8. The distribution of Hannover-re`s products is very flexible. We make use of direct distribution as well as brokers. Q9. Pricing strategy is governed by the market situation. The pricing strategy is market oriented and there is very little difference between Hannover-re and Re-Takaful. The parameters we use are the same. Q10. There is a risk management framework, which exists only for the international operations. Q11. Re-insurance is taken as little as possible when it comes to Re-Takaful. This is done only for compliance purpose with the Sharia Law. Q12. When it comes to a takaful operated insurance company, sharing or distribution of profits depends on the model used by the takaful company. For Re-Takaful, the profits are shared amongst the direct insurers in the form of discounts in premiums. Sharing and distribution depends on Mukala. The investment opportunities are also less when it comes to Takaful. Q13. Hannover-re is looking at a group diversification process. This includes a geographical spread, a portfolio spread and looking for business that have been neglected in the past e.g. The Gulf floods. Hannover-re is looking forward to diversify its business to high frequency and low severity business and vice versa.

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On the whole, Hannover re-Takaful is trying to ensure that the pool of policy holders is as homogeneous as possible to ensure logitivity and surplus distribution to its participants. The quality of the pool is highly important when it comes to takaful insurance. The business is increasing in the Gulf region through awareness and a little support from other Islamic institutions as well. New projects financed on Islamic principles have given a rise of 30% to 40% growth in the industry. The probability of growth is due to the emergence of a more effluent middle class society who have starting to believe in ethical practices and transparency and the increasing need for security has given a little more inclination towards the takaful operating companies. It has created a demand in the region which has given rise to the recent growth in the industry, and the growth is not confined to the Gulf region only, there has been a noticeable growth in the non-Muslim region as well.

The interview with Hannover re proved to be substantially informative, the pricing decisions of Hannover re are the same as that of the previous two takaful insurance companies interviewed. Hannover re too bases its pricing decisions on the market scenario but also takes into consideration the cost of transaction. Again, the usage of modeling for forecasting purposes in Hannover re is the same as that used in a conventional insurance company. Hannover re targets the audience who believe in the principles and practices of the Sharia law. However, the profit sharing in Re-Takaful is done amongst the direct insurers who take reinsurance from Re-Takaful as compared to a takaful insurance company who shares its profits amongst policyholders. Distribution of Hannover re and Re-Takaful is done the same was as in the conventional insurance companies do, that is, direct distribution as well as In-direct using brokers etc. Hannover re too wants to diversify geographically indicating that the Bahrain market isnt big enough at present for Hannover re to be satisfied. The essential information gathered from this interviews is that Hannover re and Re-Takaful are similar to each other when it comes to managing the business, the only difference is that, the target audience of Re-Takaful is different to that of Hannover re and the profit sharing mechanism is different due to the laws and regulation of the Sharia Law.

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5.1.4 BKIC, The Kingdom of Bahrain.

Bahrain Kuwait Insurance Company (BKIC) was established in 1975 with Bahraini and Kuwaiti shareholders. By virtue of its shareholding structure, BKIC is allowed to operate as a national insurance company both in Bahrain and Kuwait, the only company to enjoy such a privilege. The company is currently listed on both the Bahrain Stock Exchange and the Kuwait Stock Exchange. BKIC is involved in all classes of insurance with the major categories being Fire, General Accident, Engineering, Marine, Motor, Group Life and Health. BKIC has grown to occupy a leading position in the Bahrain insurance market. The gross premium income written by the company in 2005 amounted to BD22.44 million. The gross premium has reached BD26.93 million in 2006. In March 2007 the share capital of BKIC was increased by way of a rights equity offer and the current paid up capital of the company is BD6.063 million. Shareholders Equity as at end of 2006 stands at BD 23.171 million. With a good track record and the financial strength, BKIC is well positioned to face the competitive pressures of the market and expand into new lines of business as well as innovative methods of distribution.

The interview was conducted with Mr. Sai Gopal (Deputy General Manager, BKIC, Bahrain 2008)

Q1. The premium pricing decisions are taken on the basis of loss experience and the cost of re-insurance. Premium prices vary accordingly depending on the risk type as well. Q2. No such specific modeling is used to decide how much capital is needed.

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Q3. BKIC has financial projections that vary accordingly; 3 years Firm Projections 10 years Indication provisions which revise every 5 years (rolling provisions)

Q4. Yes, C.B.B sets a specific minimum capital requirement and BKIC has more capital than the recommended minimum by C.B.B Q5. BKIC doesnt use any modeling for forecasting future claims. Again just experience rating is done and accordingly claims are forecasted. Q6. There are mainly two types of Arab Muslim, Shiites and Sunnis, Shiites contribute to 60% of the Muslim population in Bahrain. Hence it is difficult to have a marketing strategy that targets only Muslims. Majority of the populations constitutes of expats with varying nationalities and religious practices Therefore BKIC, being a conventional insurance company, we target the customers who dont make use of Islamic services, especially large projects which are not financed by Islamic financing companies. Q7. As said earlier, targeting individuals is difficult. Hence targeting projects and companies which are not financed by Islamic companies is promising. Q8. Distribution of BKIC`s products is done by direct sales as well as agents. Brokers are used along with nationalized agents. Tie ups with banks such as Bank of Bahrain and Kuwait (BBK) also helps in developing awareness among people about the products BKIC is offering. Q9. Yes, Brokers are used. Q10. Pricing strategy is used only for smaller risk portfolios e.g. Household Insurance, Auto Insurance and Cargo. Q11. There is a risk management committee headed by the C.E.O. This is recommended by the regulatory authorities who have risk books. It is a risk owners responsibility to have a proper risk management system.

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Q12. Re-insurance is taken based on the covered risk and the capacity of the company. Q13. Profits are usually distributed as dividends amongst shareholders and a certain amount is added to the reserve for future investments. Retaining some profits is always good for the company. Q14. BKIC doesnt plan any diversifications as of now. There are no plans to go into the Takaful business as well since the market is very small. Even geographical diversification is not feasible for the company as even outside G.C.C, like Malaysia, the growth in the market is not much. Analyzing the above interview, we understand better how a conventional insurance company works and what are the major differences as compared to that of a takaful insurance company. According to the information provided in the above interview, it is surprising to know that BKIC doesnt use any modeling for future forecasting purposes. It relies on past experience. It doesnt segment the market on individual basis, it just targets large projects which are not financed by Islamic financing companies, when it comes to the risk portfolio of motor insurance, it has no choice but to target individuals. Distribution of products is done in the same way how all the insurance companies do in Bahrain that is, using direct sales as well as brokers. When it comes to risk management, BKIC is very organized in this matter. It honestly follows the rules set up by the regulatory authority by having a well organized committee headed by the C.E.O. Profits, as expected are distributed amongst shareholders and not policyholders, as a conventional insurance company would normally do. Investment is necessary for any firm and so does BKIC, hence some of its profits are used for investments as well. Surprisingly, compared to the other insurance companies interviewed in this report, BKIC doesnt plan any diversification, be it in terms of territory or risk portfolio. This indicates, BKIC is satisfied with the Bahrain market and doesnt see any growth in other regions, which proves that BKIC is expecting the Bahrain market to grow in the future focusing on a conventional rather than a takaful oriented audience.

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5.1.5 Royal and Sun Alliance, The Kingdom of Bahrain.

Royal and Sun Alliance (RSA) is a leading conventional insurer in Bahrain. It is one of the world's leading conventional insurance groups that writes business in 130 countries and serves over 20 million customers worldwide. The group has an A credit rating (strong) from Standard & Poor's and an A- credit rating (excellent) from A. M. Best. The Middle East offices are located in Saudi Arabia, UAE and Oman, all of which are supported by a regional office which is located in the Internet City, Dubai. RSA commenced operations in Bahrain on 1 January 2003, building on the successful acquisition of the Northern Assurance Portfolio, whose history in the Gulf dates back to the 1950s. Building on the strength and reputation of the parent company, RSA Bahrain is targeting market leadership through capitalizing on its reputation for providing a professional, knowledgeable and personalized service. The Bahrain business of RSA has had a track record of steady growth despite increasing competition in a rapidly changing market environment. In the Middle East, RSA`s gross written Premium is US$ 195,624,000 and Net Written Premium is US$121,806,000. RSA has shown growth in its performance, particularly in the motor segment. RSA's rating by global credit rating company Standard&Poor's has been raised to an 'A' (A stable) from a previous rating of 'A -'

The interview was conducted with Mr. Philippe Dominique (General Manager, RSA, Bahrain 2008) Q1. Premium pricing decisions are mainly influenced by the market conditions. It is essential to first evaluate the market and find out, how the market is performing, what the requirements are and how are we to cope up with the market in order to survive the competition. We also make use of technical pricing techniques and also base our pricing on past experience.

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Q2. As stated earlier, we do use modeling techniques like we do for pricing decisions so do we for future capital requirements. Q3. Our financial projections usually go up to 3 years. Q4. Yes, Central Bank of Bahrain does regulate our capital Q5. Yes, we do a forecasting of future claims solely by analyzing our past experience. It sometimes helps us predict the future scenario. Q6. We use a different marketing strategy for our local Arab customers and for our expatriate customers living in Bahrain. Q7. We target generally as a conventional company would do. Major audience as of now is nonMuslim or expats who are known for taking insurance conventionally. Hence we use a conventional way of targeting the whole population without focusing on Muslims or NoMuslims. Q8. Distribution of products is done by agents. We also use direct sales force and also provide bank assurance. Q9. Yes, we use brokers as agents for acquiring our business. Q10. Our pricing strategy does not differentiate for local and expatriate population. Q11. At the branch level there is no re-insurance division as such, but at the regional level we do have a specialized department which is responsible for the re-insurance business of the company. Q12. The risk management division at the regional office will analyze and decide how much reinsurance is to be taken from the re-insurers. Q13. Profits are generally reserved and used for further investments. Some of the profits are also distributed to the shareholders.

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Q14. Diversification is been thought about but mainly in the regional bases. Expanding the business to Qatar and Kuwait is under discussions. Further diversification into property, motor and engineering is also planned in terms of increasing and diversifying the risk portfolio.

The above interview provided us with information that was assuring enough to prove that the conventional insurance companies do not differ in the marketing, risk management and distribution of their products from a takaful insurance company. As seen in BKIC, even RSA resolves to technical pricing techniques when it comes to future forecasting and premium pricing. It also uses modeling, but it is more clear that, the conventional insurance companies are more sophisticated when it comes to future forecasting. The reason for this could be the vast experience of conventional insurance companies as compared to that of new and upcoming Takaful insurance companies who are trying to establish themselves in this new market and are still in their learning phase. RSA segments its market into local Bahraini nationals and foreign expats. This is a unique segmentation which hasnt been seen in other takaful or conventional insurance companies which have been interviewed. The possible reason could be that the audience has now been observed with a stricter and trend changing decision making capabilities to choose Takaful over conventional which RSA notices and reacts accordingly to capture this trend changing audience. Distribution techniques used by RSA, again are common techniques observed to be used by every insurance company in Bahrain that is direct sales and brokers. The risk management of RSA is done at a regional level, which shows that the conventional insurance companies take their risk management as seriously as do the takaful insurance companies. Profits again, as expected RSA being a conventional insurance company, are primarily invested and then distributed amongst shareholders. Diversification for RSA is said to be considered regionally. Unlike the other conventional insurance company (BKIC) who is satisfied with the Bahrain market, RSA seems to think the Bahrain market isnt sufficient enough for the company to progress.

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6. Analysis
The above interviews with five insurance companies, two which were a conventional insurance company, two which were a takaful insurance company and one which was a takaful and a conventional operating re-insurance company together provided us with some information which we already had some knowledge about from the literature available and some important information which wasnt known to us and would help us in evaluating the hypothesis. In order to evaluate the results achieved and compare it with the hypothesis developed earlier, we need to categorize the results based on the categorization done in the hypothesis. It is essential to prove the validity of the hypothesis developed and to see whether our assumptions on the differences that could exists between a takaful insurance company and a conventional insurance company were right or wrong. In order to do this, we evaluate and compare each section of our findings with the hypothesis developed earlier and state our comments.

6.1 Capital and Fund management

The capital and find management are different for the takaful insurance companies and the conventional insurance companies as it has been proved by the literature we have reviewed earlier. The findings from the interviews has also proved to be consistent with the hypothesis we had developed that stated that, there would be a difference in the modeling techniques for future forecasting and pricing decisions between a conventional insurance company and a takaful insurance company. This is evident as Solidarity, Takaful International and Hannover ReTakaful all consider market conditions for their pricing strategies unlike the conventional companies who use modeling techniques due to their experience e.g. RSA. However, modeling is used for future claims forecasting amongst both, the takaful insurance company and the conventional insurance company, the difference of sophistication comes only when dealing with
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techniques used for premium price calculations, although there is an exception of BKIC who unexpectedly do not use modeling. The conventional insurance companies use loss experience, cost of re-insurance etc (e.g. BKIC) to decide what should be their appropriate pricing strategy, which shows the sophistication and the importance the conventional insurance companies have for their pricing decisions. Reinsurance is a pricing determinant in both types of companies, but emphasis is given more on detailed methods of pricing in a conventional insurance company. The reason for this difference in pricing strategies would be that the takaful insurance companies have recently entered the market and need to establish themselves before trying to compete and lead the market. Hence their pricing of their products should be such that it should help them sustain in the market, be competitive price wise and hence should be able to attract more customers than the conventional insurance companies. Although, with the sophistication of the pricing techniques used by a conventional insurance company, it is difficult to say that, a takaful insurance company would attract more customers than a conventional insurance company due to competitive pricing and how long will it continue with market driven pricing as opposed to using a more detailed analysis of loss experience. Also the need for Takaful companies to quickly establish themselves in the market enforces them to use such methodologies. Hence, the hypothesis that there would be a difference in the Capital and fund management between a takaful insurance company and a conventional insurance company is right.

6.2 Marketing Strategies

When it comes to marketing the products and selecting a target audience, the takaful insurance companies mainly targets the Muslim populations or individuals who have strong Islamic beliefs and who prefer a product that abides by the Sharia law and the principles of Islam. The takaful insurance companies target large projects, SME`s and individuals who make use of Islamic financial services. These services could be loans or financial aid taken by companies, up-coming projects and individuals from Islamic banks and Islamic financial companies. Such customers are more likely to take insurance from a takaful insurance company rather than a conventional
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insurance company. The targeting of individuals and SME`s is evident in the interview conducted with Hannover re where the answer to Question 6 says that individuals who believe in the principles and practices of the Sharia law should be targeted. Hannover re being a reinsurance company, the interviewee meant, Hannover re would target takaful insurance companies. The conventional insurance company on the other hand targets both, the Muslim and the non-Muslim population in the country. This is evident in the interview conducted with RSA where the whole population is target be it a Bahraini local or a foreign expat. The takaful insurance companies also argue that they also target the non-Muslim population by positioning themselves as insurance companies with more ethical practices and transparency. When it comes to distribution channels, all the insurance companies, be it a takaful insurance company or a conventional insurance company, use the same distribution techniques. There is absolutely no difference in the distribution techniques used by a takaful insurance company and a conventional insurance company. Direct sales and brokers are used by both, the takaful insurance company and the conventional insurance company. But overall, the hypothesis developed, that the market segmentation and target audience would be different for a takaful insurance company and a conventional insurance company was proved right. There definitely exists two types of audience for each of the insurers but targeting is done at the whole market with the complete audience since survival by targeting just one segment would not be feasible due to the small size of the market.

6.3 Risk Management

The risk management of the takaful insurance companies seems to be more organized and dealt with more importance than a conventional insurance company. However, detailed information could not be gathered on risk management, but it can be said that the conventional insurers could have a more sophisticated risk management system taking into consideration its experience and expertise in the industry. It is worth making a note that Takaful International appoints a risk management engineer to deal with the management of risk in the company, and at a branch level. Whereas in a conventional insurance company, the risk management committee is at a regional or at an international operational level evident from the interview with RSA. Although the risk
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management framework of RSA at an international operations level proves that a RSA is consistent with their responsibility as an international company quoted in the U.K stock market, hence the risk management is not modest compared to a takaful insurance company. This does not support the hypothesis developed earlier that risk management for a conventional insurance company would be modest as compared to a takaful insurance company. The only similarity would be that the risk management of both the takaful insurance companies and the conventional insurance companies is done by a committee. The head of the risk management committee differs from a takaful insurance company to a conventional insurance company. Risk management of a conventional company could be at par with that of a takaful company if not more. Risk management again is a corporate decision that differs within different companies, but eventually we could see the inclination of takaful companies resorting to the same techniques as that of a conventional company once it has enough experience to support such methodologies as used by the conventional companies. The issue of profit sharing arises many questions. Based on the literature review in the earlier chapter, the takaful insurance companies profits are to be distributed amongst the policyholders. But upon reviewing the interviews, it is clear that, although the takaful insurance companies distribute their profits amongst the policyholders, they tend to mostly use their profits or surplus for further investments. Some of the surplus is distributed as dividends to the shareholders. At this stage we could ask a very interesting questions as to whether investments done by a takaful company to gain returns which are essential for its survival and growth, is in accordance to the Islamic beliefs or not. In the conventional insurance companies, the scenario is the same, where the profits are distributed amongst the shareholders as dividends and some used for further investments. The reason for the takaful insurance companies to concentrate more on investing the surplus would be the fact that, the takaful insurance companies are still in a growth stage and need to survive the competition present in the market, and in order to that, it has to invest further to increase its returns and make the customers as well as the shareholders satisfied. This reduced profit sharing in a takaful company would make the policyholders expectations to lower which indirectly reduces the incentives to manage risks in a takaful insurance company.

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6.4 Life and on-Life Insurance markets

The takaful insurance companies and the conventional insurance companies have one common problem. The problem is that, the market for Life insurance is very small and not very attractive in Bahrain. Hence, both, the takaful insurance companies and the conventional insurance companies do not benefit much from the Life insurance products. Therefore, the hypothesis that the life insurance market would affect only the takaful insurance companies now also extends to the conventional insurance companies as well. If the market was to become better and bigger, the conventional insurance companies would perform better. But if the takaful insurance companies make the most of the growth in the market and develop life insurance products, there is a higher chance of the takaful insurance companies to do better than the conventional insurance companies due to the fact that, most Muslims if not all, would prefer takaful life products because of their compliance with the Sharia law and the transparency that exists in the management of these products. As of now, the hypothesis that, the takaful insurance companies are concentrating more on the non-life market is supported by the risk portfolios the takaful insurance companies are dealing in. The market size and condition greatly influences the diversification plans of both, the takaful insurance companies and the conventional insurance companies. Since the market is very small and not that attractive compared to the other G.C.C countries in the region, the takaful insurance companies and the conventional insurance companies are both trying to diversify territorially. Qatar, Kuwait and Saudi Arabia are bigger markets and are looked upon by the insurance companies to expand their territory. This is evident from the interviews conducted with Solidarity, Takaful International, Hannover re and RSA. Although, the no diversification plan of BKIC was unexpected, but majority of the companies stated their plans of geographical diversification which proves, that the Bahrain market is still a rather slow growing environment for growing companies because of its smaller size as to that of the neighboring G.C.C countries in the region.

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6.5 Limitations
There exist certain limitations in this research process. The fact that only 5 insurance companies were interviewed out of which, two were takaful insurance companies, two were conventional insurance companies and one was a takaful and a conventional re-insurance company cannot give a perfect and in-depth picture of the whole market. Certain other issues such as companys confidentiality issues of disclosing certain confidential information, like detailed risk management techniques, plans etc could create information asymmetry in the interview process. Another essential problem that could rise is the attempt by the interviewee to project the performance of his company as good. Such issues are not avoidable and hence the analysis has to be done based on what information is provided to us through the interview process and the literature on the subject available. As discussed earlier, there is still very little literature available on differentiating concepts, methodologies and tactics of these two types of insurers specifically focusing on the Kingdom of Bahrain market, hence our analysis, interpretations and conclusions should also consider the limitations of the resources for this research. However, taking into consideration all the data gathered through this research, a fair and reasonable analysis and conclusions can be drawn.

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7. Conclusion

7.1 Conceptual Differences

We have seen the differences in the management practices of a takaful insurance company and a conventional insurance company which make it clear that, a takaful insurance company`s priority is to keep its policyholders satisfied as well as their shareholders keeping the Sharia law into consideration. In a conventional insurance company, paying the policyholders claims is essential but at the same time working towards shareholders wealth maximization is also important. The difference lies when profits are made, in a conventional insurance company, the priority is to distribute the profits as dividends to the shareholders, whereas in a takaful insurance company, the priority is to distribute the profits amongst the policyholders and then to the shareholders and then to further invest. Investment as seen earlier is commonly done by both the type of companies. Takaful insurance companies would sort to Islamic investment companies for further investments as compared to the conventional insurance companies who would sort to conventional investment alternatives. Investment is essential for any organization to survive and grow; the most essential conceptual difference between these two companies lies in the importance a policyholder gets as a contributor in a takaful insurance company. The question then might arise, as to why would an individual go to a conventional insurance company rather than a takaful insurance company, when he knows that he would get a part of the profits from the takaful insurance company and nothing in return from the conventional insurance company. The answer is simple, although the conventional insurance companies dont literally pay back the profits to its policyholders, but they do discount their policyholders if they have made no claims in the year, in the form of no-claims bonus etc. In the takaful insurance companies, especially in Bahrain, the necessity for growth is so essential that it compels the takaful insurance companies to invest most of its profits rather than distributing most of it, hence the policyholders wont get back much of the share of the profits. It would be very difficult to
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conclude as to the policyholder would benefit more from which of the two types of companies as both utilize their profits in almost similar fashions. The Takaful is obliged to share the profits with the policy holders but has the need to grow as well; this makes the takaful insurer to be more like a conventional insurer. Therefore, the only factor that a takaful insurance company would distinguish itself from a conventional insurance company and attract its target audience is by using their core competency features of ethical business practices, transparency and the practice of insurance based on the teachings of Islam and by abiding to the Sharia laws. One of the key methods for a takaful insurer to benefit more using this core competency method is to also target the non-Muslim audience who are now inclined towards these features.

7.2 Marketing differences

The concept of takaful has just developed recently (1976) and hence will take time to be accepted by the non-Muslim communities. Educating the public about the concept, products and benefits of the unique Islamic financial system will allow the Takaful industry to rise to the challenges of global competition. The recent generations, contrary to the popular belief, have strengthen their belief`s in ethical business practices which is delivered by a takaful insurance company, hence takaful companies can now survive in non-Muslim regions as well. Therefore companies are now trying to establish their business outside the G.C.C and enter the U.K markets and the U.S.A markets by targeting not only the Muslim population that has a strong faith in the Sharia principles, but also the non-Muslim individuals who respect the principles on which a takaful insurance is based and the transparency it provides. Providers of family and general Takaful products in Bahrain and the region need to apply best business practices in their operations, aiming to have maximum market share of such audience who are inclined to the features of a Takaful concept and need to change the perception of the remaining audience through effective marketing and promotional strategies.

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7.3 Growth
The Bahrain market might be a small market compared to other G.C.C countries, due to which large insurance companies, be it a takaful insurance company or a conventional insurance company would rather not be interested in establishing its offices to sell its products and services, but the market is growing as it is noticeable from the G.D.P growth charts. Based on the pie charts presented in the literature review, it can be seen that the insurance market in The Kingdom of Bahrain is doing considerably good in the non-life sector with motor insurance consisting most of the business share. The life insurance market is negligible constituting to just 4% of the total market, and the remaining 96% being the non-life market. Hence, insurance companies that solely practice in the life insurance market, be it a takaful insurance company or a conventional insurance company, would hesitate to establish their business in Bahrain. But the market is tempting for insurance companies that mainly rely on the business they do in the non-life insurance market since the market has a potential for growth especially in the motor insurance market as motor insurance is mandatory by the government. Companies like Medgulf which is leading the market in its net premium and profits which are over USD $250000, is a proof that companies are doing well regardless of the size and performance of the market.

7.4 Alternatives
The takaful insurance companies may be compared to the mutual insurance companies and the stock insurance companies who work on the same principles of cooperative management, wherein the members of the cooperative committee, which are the policyholders and the shareholders, would get a part of the profits if any. But, there exists a major difference between the core principles around which these three types of companies that is, the takaful insurance company, the mutual insurance company and the stock insurance company operate. The core difference is that in a mutual insurance company and a stock insurance company, the
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management is elected by the policyholders or the stockholders, this is not true in the takaful insurance company, as the policyholders do not have a right to elect the managers. The principle difference lies in the fact that, a takaful insurance company works on the principles of Islam, whereas a mutual insurance company and a stock insurance company do not. This is the sole principle due to which, it is more beneficial for a takaful insurance company to operate in the Muslim region rather than a non-Muslim region. Hence, a takaful insurance company would do better in a Muslim region as compared to a mutual insurance company or a stock insurance company. Now the question could arise as to why would an individual, be in a Muslim region or a non-Muslim region, prefer a takaful products as to that of a mutual insurance or a stock insurance product. The answer is simple; the transparency and ethical practices of a mutual insurance company and a stock insurance company have always been under question. If an insurance company cannot be trusted, that is, if a policyholder cannot be sure if he would get a part of the profits even if the company makes profits, there is no reason for policyholder to take a contract under such doubt and uncertainty. A takaful insurance company is more transparent in this case.

7.5 Core Competency

The sole principle around which a takaful insurance company is based is the fact that it abides in accordance to the Sharia principles and the principles of Islam, which the mutual insurance company and the stock insurance company dont. The mutual insurance company and the stock insurance company will not hesitate in insuring a casino or an alcohol manufacturer. This is against the Sharia law and the principles of Islam, hence an individual with a strong Islamic belief wouldnt prefer using the products and services of a company whose practices are prohibited in the principles of Islam. Therefore he would rather take an insurance contract from a takaful insurance company than a mutual insurance company or a stock insurance company. Hence, it is best for a mutual insurance company or a stock insurance company to practice its business and sell its products and services in regions where the majority of population is nonMuslim and vice versa, it is in the best interest of a takaful insurance company to practice its
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business and sell its products and services in a region where the majority of the population is Muslim.

7.6 The Kingdom of Bahrain and its Market

When it comes to the Bahrain insurance market, new takaful insurance companies trying to establish their business in Bahrain have to compete with existing takaful insurance companies, local and international life and non-life insurance providers. It can be seen that takaful insurance companies are, on the whole, limited by size, as compared to the global insurance industry. Takaful Insurance companies should distinguish themselves from conventional insurance competitors by offering competitive insurance solutions that comply with the guiding principles of Sharia. This is very essential as one of the primary reasons behind the slow growth of insurance in the region is because of the lack of acceptability of insurance products in the Islamic faith. The Kingdom of Bahrain although having a small market, the takaful insurers are trying to shift the understanding of non-Muslims into the realization of the importance of their core competency features and creating a awareness in the Muslim populations of the importance of having insurance and the availability of it in the market without having to compromise on their religious beliefs and faith through the takaful products they offer.

7.7 Future strategy

Based on the understanding of the research and the analysis done, the following steps have to be taken by a takaful operator to ensure its growth not only in The Kingdom of Bahrain, but globally as well,

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Use the present retail banking network of the partners to distribute products locally Focus on developing products that cater to specific markets Offer competitive products by using detailed risk assessment Emphasize the Islamic validity of products. Capture the non-Muslim audience Create more awareness about life insurance by providing takaful products

Using these strategies, the new and existing takaful insurance companies can survive the competition present in the market and stand a possibility of becoming a market leader in the near future. These strategies will not only help a takaful insurance company to withstand competition amongst the takaful insurance market but also in the overall global insurance market. Therefore, to summarize the purpose of the research, the findings and the analysis, it can be said that, this research was focused in analyzing and finding the differences that lie in the management of a takaful insurance company and a conventional insurance company, and upon analyzing the available literature and the sample data, it can be concluded that, the sole factor that differentiates a takaful insurance company from a conventional insurance company, is the principles on which the takaful insurance company is based on. Although the management system of a takaful insurance company is similar to that of a mutual insurance company, the sole difference still remains the same, and that is, that a takaful insurance company operates on the principles and teachings of Islam and abides by the Sharia law, which is widely accepted in the Muslim population and slowly being accepted by the non-Muslim population as well and has a great scope of dominating the insurance market globally and especially in Bahrain.

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9. Appendix
Table 1: Insurance companies in Bahrain (takaful/conventional)

Company Al Ahlia Insurance Arabia Ins. Co. Axa (Gulf) BKIC BNIC Gulf Union Iran Ins. NEDGULF New India Royal & Sun Alliance Takful International Solidarity United Ins. Co Total

Type Conventional Conventional Conventional Conventional Conventional Conventional Conventional Conventional Conventional Conventional Takaful Takaful Conventional

Shareholders' Equity 9,848,000 536,000 16,451,000 23,171,000 35,016,000 4,857,000 6,203,000 38,333,000 5,343,000 6,337,000 12,550,000

Table 2: Insurance companies in Bahrain (takaful/conventional)

Company MEDGULF Axa (Gulf) BNIC BKIC Solidarity Gulf Union Al Ahlia Insurance Takful International United Ins. Co New India Royal & Sun Alliance Iran Ins. Arabia Ins. Co. Total

Type Conventional Conventional Conventional Conventional Takaful Conventional Conventional Takaful Conventional Conventional Conventional Conventional Conventional

Shareholders' Equity 101,491,000 43,556,000 92,708,000 61,348,000 12,859,000 26,074,000 16,778,000 33,227,000 14,146,000 16,423,000 1,419,000

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Table 3: Net Premiums (Al Ahlia to United Insurance company)

Company 2004 Al Ahlia Insurance Arabia Ins. Co. Axa (Gulf) BKIC BNIC Gulf Union Iran Ins. NEDGULF New India Royal & Sun Alliance Takful International Solidarity United Ins. Co Total 2,151,000 909,000 18,163,000 6,082,000 8,706,000 4,767,000 1,869,000 29,740,000 2,442,000

Net Premium 2005 2,582,000 930,000 29,559,000 7,214,000 9,407,000 4,486,000 1,648,000 58,647,000 2,612,000 2006 3,432,000 991,000 41,850,000 7,233,000 10,949,000 5,164,000 1,394,000 64,941,000 2,718,000

2,480,000

2,711,000

3,280,000

2,921,000 80,230,000

3,717,000 123,513,000

4,137,000 146,089,000

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Table 4: Net Incurred Claims (Al Ahlia to United Insurance company)

Company 2004 Al Ahlia Insurance Arabia Ins. Co. Axa (Gulf) BKIC BNIC Gulf Union Iran Ins. NEDGULF New India Royal & Sun Alliance Takful International Solidarity United Ins. Co Total 1,239,000 633,000 7,951,000 3,868,000 5,049,000 3,806,000 1,275,000

Net Incurred Claims 2005 1,758,000 553,000 14,079,000 4,422,000 5,730,000 3,467,000 1,292,000 30,612,000 2006 2,126,000 783,000 22,066,000 4,437,000 5,352,000 3,545,000 969,000 42,339,000

19,876,000

1,238,000

1,473,000

1,629,000

967,000 45,902,000

1,456,000 64,842,000

1,754,000 85,000,000

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Table 5: Net Profit/Loss (Al Ahlia to United Insurance company)

Company 2004 Al Ahlia Insurance Arabia Ins. Co. Axa (Gulf) BKIC BNIC Gulf Union Iran Ins. NEDGULF New India Royal & Sun Alliance Takful International Solidarity United Ins. Co Total 920,000 119,000 4,417,000 1,634,000 3,143,000 584,000 192,000 3,543,000

Net Profit/Loss 2005 2,320,000 204,000 4,928,000 2,519,000 3,490,000 626,000 110,000 6,479,000 2006 2,555,000 82,000 5,174,000 3,494,000 4,728,000 632,000 164,000 10,602,000

23,000 276,000

45,000 1,033,000

118,000 (129,000)

1,360,000 16,211,000

1,733,000 23,487,000

1,919,000 29,339,000

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Table 6: Net Premium (MEDGULF to Arabia Insurance Company)

Company 2004 MEDGULF Axa (Gulf) BNIC BKIC Solidarity Gulf Union Al Ahlia Insurance Takful International United Ins. Co New India Royal & Sun Alliance Iran Ins. Arabia Ins. Co. Total 78,740,000 48,088,000 23,050,000 16,103,000 12,621,000 5,695,000 6,566,000 7,734,000 6,465,000 4,948,000 2,407,000 212,417,000

Net Premium 2005 155,274,000 78,261,000 24,906,000 19,100,000 11,877,000 6,836,000 7,178,000 9,841,000 6,916,000 4,363,000 2,462,000 327,014,000 2006 171,938,000 110,802,000 28,989,000 19,150,000 13,672,000 9,087,000 8,684,000 10,953,000 7,196,000 3,691,000 2,624,000 386,786,000

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Table 7: Net Incurred Claims (MEDGULF to Arabia Insurance Company)

Company 2004 MEDGULF Axa (Gulf) BNIC BKIC Solidarity Gulf Union Al Ahlia Insurance Takful International United Ins. Co New India Royal & Sun Alliance Iran Ins. Arabia Ins. Co. Total

Net Incurred Claims 2005 81,048,000 37,276,000 15,171,000 11,708,000 9,179,000 4,654,000 3,900,000 3,855,000 3,421,000 1,464,000 171,676,000 2006 112,097,000 58,422,000 14,170,000 11,747,000 9,386,000 5,629,000 4,313,000 4,644,000 2,566,000 2,073,000 225,047,000

52,624,000 21,051,000 13,368,000 10,241,000 10,077,000 3,280,000 3,278,000 2,560,000 3,376,000 1,676,000 121,531,000

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Table 8: Net Profit/ Loss (MEDGULF to Arabia Insurance Company)

Company 2004 MEDGULF Axa (Gulf) BNIC BKIC Solidarity Gulf Union Al Ahlia Insurance Takful International United Ins. Co New India Royal & Sun Alliance Iran Ins. Arabia Ins. Co. Total 9,380,000 11,694,000 8,321,000 4,326,000 1,546,000 2,436,000 731,000 3,601,000 61,000 508,000 315,000 42,919,000

Net Profit/Loss 2005 17,154,000 13,047,000 9,240,000 6,669,000 1,657,000 6,142,000 2,735,000 4,588,000 119,000 291,000 540,000 62,182,000 2006 28,070,000 13,699,000 12,518,000 9,251,000 1,673,000 6,765,000 (342,000) 5,081,000 312,000 434,000 217,000 77,678,000

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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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