The contractual model adopted by retakaful
operators are similar with underlying contracts used by takaful operators. The models
used by both operator is wakalah
based model and wakalah-mudarabah
model, the retakaful participants will give contribution to the takaful fund as
donation (tabarru’). The donation is
for mutual indemnity and protection among the retakaful participants. The
retakaful operator will act as wakalah
in managing the fund which involves insurance and investment activities. As a
return, the operator receives wakalah
fee for the management services imposed to the participants. The wakalah based model can be illustrates
based Operational Model
Meanwhile, in wakalah-mudarabah model, retakaful operator receives two sources of
income which are wakalah fee for
managing the insurance activities and profit share of the investment based on mudarabah contract for managing the
investment activities. The wakalah-mudarabah
based model can be illustrate as below.
based Operational Model
Other than wakalah
based and wakalah-mudarabah based,
takaful operators also adopt other operational model which are pure cooperative
model, mudarabah model and waqf
model. The pure cooperative model usually applied by government-backed takaful
for cater the needs of rakyat where the operations profits are self-contained.
The mudarabah model is profit sharing
model which the profit distributed based on the agreed ratio and the loss borne
by financiers. Lastly, the waqf model is focusing on the contribution for the
purposes of benevolence.
actuarial control cycle involves THREE (3) crucial steps which is (i) the
pricing step; (ii) the experience monitoring step; (iii) the liability
provisioning step. Explain what are the activities in the pricing step?
In determine the
pricing of takaful products, there are several activities in the pricing step.
First and foremost, the takaful operator will form a technical committee. Generally,
this committee will consist of relevant department which are actuarial/pricing
department, underwriting department, claims department, marketing department,
investment department, information and technology department as well as account
department. On top of that, the committee also will co-operate with shariah
council and the takaful operator’s actuary to ensure that the takaful product
offered are (1) religiously and (2) financially accepted.
Thus, in meeting these
two objectives, the shariah council will play the role in assessing the product
in ensuring that the product is shariah compliance. Meanwhile, the takaful
operator’s actuary is responsible in providing opinions and suggestions on
alternate designs and structures from financial perspective. The operator’s
actuary also must determine the suitable rate that is adequate for benefit
payment and equitable for participants as well as consider other important
element such as probability of risk occurred, time value of money and
contingencies. Referring to Appointed Actuary: Appointment and Duties issued by
Bank Negara Malaysia on 28 April 2014, the appointed actuary must investigate
and provide opinion relating to these matters:
probable scenarios which may lead to income
being insufficient to meet the payment of anticipated benefits and expenses;
consistency of pricing of different risk categories
within the same product;
the appropriateness of underlying assumptions
used, taking into consideration experience studies and sensitivity testing;
consistency between assumptions used;
the adequacy of buffers in the premiums as a
cushion against risk; and
the overall methodology used in determining
Basically, the pricing mechanism in actuary
control cycle can be describe as follows.
Mechanism in Actuary Control Cycle
takaful operators are facing many daunting challenges in operationalizing the
business. Describe THREE (3) current practical challenges in risk management
that is confronting these takaful operators.
In risk management,
takaful operators confronting several challenges in operationalizing the
business and it can be describe based on the categories of risk as follows:
The owner of the subject matter speculate
that the risk is present and by getting takaful on that particular subject
matter would either result a total loss or gain to the owner. When the owner
decided to covers the risk of the subject matter with takaful, the act is akin
to gambling and it is strictly prohibited in Islam as mentioned in Surah
Al-Maidah para 5 verse 90, stated that “O
ye who believe! Intoxicants and gambling, dedication of stones…are an
abomination of evil’s handiwork so refrain from such abomination…”. Thus,
this category of risk in takaful is expressly prohibited in shariah principle.
Risk of a Certain Happening
The owner of the subject matter is obliged
to disclose all the relevant information to risk manager/assessor in applying
for takaful as describe in utmost good faith principle. However, the owner may bona fide believe that the risk will
definitely occur. This scenario could happen if the owner proceeds to buy
takaful policy on the subject matter that is already damaged. This act is
considered as deceiving takaful operator for gain seeking through unlawful
means and prohibited against shariah principle. In Surah an-Nisa para 4 verse
29, it is clearly mentioned that “O you
who believe! Do not consume your property among yourself by way of unlawful
means…”. Therefore, the risk manager may confront big challenges if the
owner conceals or fraudulent misrepresent the information relating to the
Risk to Unlawful Subject Matter
Based on shariah principle, unlawful
subject matter such as alcohol, pigs, smuggled property as well as goods
containing elements of riba and maysir are not allowed to be covered by
takaful policy. It is because the main objective of takaful is to protect
peaceful material rather than create intense in society. In Surah al-Baqarah
para 2 verse 205, stated that “…and Allah
swt does not appreciate destruction or mischief…”. Hence, takaful policy
that covers unlawful subject matter is against shariah principle because it may
lead to social destruction.
surplus in the takaful fund at any point arises from the excess of takaful fund
assets over the fund liabilities outstanding at that point in time.
What is the Shariah perspective on surplus?
What is the Actuarial principles of surplus distribution?
In your opinion, what are the factors that need to be taken into consideration
when addressing the practical aspects of surplus distribution?
In Islam, transfer of risk to a third party is
prohibited, therefore any surplus earned from the risk element are also
prohibited. However, there are three juristic views on surplus distribution
Takaful main concept is pooling of donations to
help other participants who are in misfortune conditions, so the participants
should not expect any economic return for this good act. Thus, surplus
distribution to the participants is clearly contradict with donation concept;
Surplus distribution to the takaful operator is
prohibited because the participants is the sole owner of the surplus and the
takaful operator is not entitle to the surplus as they did not contribute to
the takaful fund; and
The participants share surplus with takaful
operator is permissible as the surplus is as a reward to the takaful operator
in managing the fund effectively.
these views, the operators treat the takaful surplus based on AAOIFI standards.
According to AAOIFI Financial Accounting Standards No. 12, takaful providing
insurance that are free from gharar, riba
and other prohibitions. Thus, any amount of surplus after indemnity payment and
transfer fund to reserves, is allowed to be distributed among the participants.
AAOIFI Financial Accounting Standards No.13 stated that the shariah ruling on
surplus is derived from the ruling made on the origin of that surplus which is
the premium contributions. These contributions are donated by the participants in
accordance with takaful system whereby the conditions on the natures of the
surplus does not conflict with shariah provisions. The donations are allowed to
be allocated for specific purpose and made as contingent upon certain
conditions under shariah perspective. In addition, according to Maliki school
of thought, gharar does not
invalidate the contract of donations.
contract with participants also stated clearly that the takaful surplus is
entitle to participants only, thus the participants have the rights on the
surplus from shariah perspective. If in the situation of investment activity as
agreed upon in contract, the party undertaking the investment is entitled only
to the consideration specified for this purpose, and should not exceed any
amount from the surplus which is a residual from the premium contributions.
Surplus distribution process is managed through
actuarial valuation. The actuary will identify the risk fund and determine the
present value of the guaranteed benefits that need to be paid. The amount of
surplus that are allowed to be distributed would be the excess of the risk fund
over the required reserves. The distribution could be on annual basis or at
maturity of the contract whereby the overall surplus is allocated to the
various participants after asset share study was performed.
to Takaful Operational Framework issued by Bank Negara Malaysia, the basic
principles on surplus distribution that need to be complied by takaful operator
Takaful operator must consider the long-term
viability of takaful fund;
Surplus distribution is subject to the
recommendation by the takaful actuary and also endorsement by the Board;
The distribution must consistent with
underlying contract and complied with the actuarial basis for contribution and
The surplus distribution can only be
implemented if there is no deficit in the fund;
Takaful operator can only receive the portion
of the surplus if the surplus portion of participants is already distributed;
The surplus amount distributed to the takaful
operator must less than the amount distributed to the participants.
In addition, in
ensuring the surplus distribution is adequate and fair, the distribution must
be equitable and based on the contribution ratio, the distribution mechanism is
easy for the participants to understand and acceptable by all participants as
well as the distribution is flexible and can be adjusted based on any changes
in the amount of surplus.
Basically, the actuary
will process the surplus distribution as follows.
In my opinion, the factors that need to be
taken into consideration when addressing the practical aspects of surplus
distribution are as follows.
Fair and Equitable
The surplus distribution has to be fair, equitable and
acceptable to each participant.
Benefit earned by later group of participants maybe more
than earlier group of participants as unrealized capital gains profits are
not reflected in earlier surplus distributions.
The takaful actuary need to assess and calculate the
investment return. Any bad investment will affect the current value and
reduce the surplus. Thus, the written on such conditions and provision of
this type of investment will alert and benefit the next group of participants.
Priority of Loan Repayment
Takaful contract also can apply qard al hasan concept. Since this concept is a loan basis that
provide finance into takaful fund, the repayment to the loan is more priority
as compared to surplus distribution to the participant. Therefore, the
distribution process can only be implemented after loan repayment settle
under qard al hasan principle.
for now, the surplus distribution determines on a fund or product portfolio
basis and not on individual participant level. Thus, the method of surplus distribution
should be reconsidered so that it is possible to distribute surplus based on
individual that identifies the particular experience of participants cohorts who
shares similar characteristics.
the surplus distribution, the takaful operator have to identify the
participant who is eligible to earn the surplus. The participant who never
claim or claim less than their risk contribution in that particular year are
entitle to be included in the surplus distribution. But, participants who
have never claimed in that year are not entitled to claim the surplus at all.
Form of Distribution
to AAOIFI’s Shariah Standards for Islamic Financial Institutions, surplus
distribution among participants can be in one of the following forms:
proportion to their contributions regardless their claims status during the
whom have not made claims during the financial year;
deduction of claims they have made during the financial year; or
any method approved by the shariah boards of the respective takaful provider.
article, ‘Takaful: A question of surplus’, En Zainal Abidin Mohd Kassim
discussed the issue of surplus from the perspective of (i) Mudarabah Model and
(ii) a Wakalah Model. Elaborate on the discussion.
In Malaysia, takaful
operators may practice mudarabah, wakalah or other Islamic contract model
in takaful operation. According to article by En. Zainal Abidin Mohd Kassim, mudarabah and wakalah model raised issues on surplus ownership which are whether
the surplus should be (1) distributed back to the participants who mutually
insure each other, (2) share the surplus with takaful operator as reward for
managing the portfolio well; or (3) donated to charity purposes. In this
context, surplus is referring to excess of contribution (premium) over claims
in the risk pool.
model, takaful operators will act as an entrepreneur who run the business and
borne all the expenses, meanwhile the participants will act as a capital
provider. Since it is a profit sharing principle, the takaful operators are
entitle of the share in underwriting surplus and investment profit based on
predetermined ratio mutually agreed with the participants. This model apply
option (2) in the above paragraph. However, underwriting surplus through this
model is actually is the excess of premiums over claims and not a profit, so it
is not permitted to be distributed as the surplus is arise from takaful risk.
Thus, profit sharing element in this concept is not shariah compliant and more
akin to conventional business venture. As a result, the takaful operator is
actually not entitle to this surplus and the participants should understand
that there is a possibility that the underwriting surplus may not be
distributed to them in the event it is held back as reserves.
In addition, the participants donate (tabarru’) into the takaful risk pool
that are expected continuously to arise. When tabarru’ contract term is end, the amount donated is not equal with
the claim. The surplus is only occurred when the donation is sufficient. Even
though the participants think that this model is beneficial as their
contribution available to meet claims and the takaful operator only receive the
surplus in the event of excess of donation over claims, however this model is quite
difficult to manage as the expenses are fixed and the surplus are volatile. In
addition, if the fund is in deficit, the takaful operator is obliged to provide
qard al hasan to be repaid once the
fund is in surplus.
Meanwhile, in wakalah model, the takaful operator will run the operation as an
agent and in return will receive wakalah
fee. The operator will gain profit when the fee is exceeded their expenses. The
operator does not share the risk and surplus gain from investment and
underwriting activities as the risk borne by the takaful operator and the surplus
or deficit are owned by the participants. But, there are also takaful operator
share the surplus as a performance fee in managing the takaful portfolio
successfully. This model also apply option (2) in surplus distribution as
mentioned in first paragraph. In normal circumstances, the takaful operator
already received the wakalah fee for managing the takaful portfolio and gain
profit from underwriting surplus. Thus, it does seem inappropriate for the
participants have to share the surplus with takaful operator.
In both takaful operation, the expenses are
borne by the shareholder’s fund. Meanwhile, the participants will contribute
premiums into the risk pool normally before the service is delivered. The
premiums paid are for the purpose of meeting the claims and any excess of the
premiums are called surplus that is belong to the participants. The surplus
issues arise when there are some views from the scholars that the refund
exercise is inappropriate and suggest the surplus is more viable to retain in
the risk fund to build the capital strength of the fund or should be donated to
the charity purposes.
In my opinion, surplus
distribution to participants and takaful operators is beneficial as it serves
as a medium in aligning the interest of both parties. The takaful operator does
not bear the underwriting risks and any loss is borne by the participants. In
terms of return, even though the operator is paid upfront through the wakalah fees, additional portion of the
surplus can treat as an incentive to motivate the takaful operators to manage
the fund more effectively. Therefore, sharing the surplus will benefit the
participants and the takaful operators as well. But, the takaful operator also
need to balance the amount of surplus to be retained for the reserves purposes and
the amount to be distributed in order to sustain takaful long-term operation.