Operational and Actuarial
Aspects of Takaful
 Actuarial Concepts and Actuarial Control
Cycle
Sub Topics
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Role of the Actuary
The Business Environment
Basic Actuarial Concepts
Components of Actuarial Control Cycle
Pricing
Experience Monitoring
Liability Provision
BNM Guidelines – JPIT 10
 Role of the Appointed Actuary
 AA must be a FSA, FIA,FAIA or FAA under Section 2 of
TA 1984
 Appointment or termination only with BNM’s approval
BNM Guidelines – JPIT 10
 Section 3 -To interpret participants reasonable
expectations
 Section 4 - Valuation of Liabilities
 Section 4.2 - Ensure data accuracy
 Section 4.3 -Testing of assumptions
 Section 4.7- Test profitability of Business
 Section 4.12 - Recommends Distribution of Surplus
BNM Guidelines – JPIT 10
 Section 4.13 - Preparing an FCR
 Section 4.14 - Comments on Investment Policy
 Section 4.15 - Comments on Re Takaful Policy
 Section 4.16 - Additional Solvency Test
Role of the Actuary - Monitoring and
Reporting
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FCR Contents:Comments on Co Strategic Plan
Performance of Business vis a vis budget
Design of Takaful Model and Adherence
Comments on Profit Test assumptions
Adequacy of Reserves
Comments on Investment Strategy and Performance
Comments on Retakaful
Comments on Surplus Sharing provisions
Overall Risk Management capabilities
Shariah Issues
Role of the Actuary - Monitoring and
Reporting
 Development of KPIs and KRIs (from FCR)- relates
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more to underwriting risks
Expense overruns
Annual Expense Inflation
Expense Analysis
Loss Ratios
Accuracy of Assumptions used
Investment Performance
Role of the Actuary
The Balancing Act
Shareholders
Employees
Regulators
Takaful
Scheme
Agents
Participants
Management
Role and Qualifications of The Actuary in
other Countries
 Baharin; Refer to Central Bank of Bahrain Rule book
sections TA 2.4.3, TA 2.4.4 and TA 2.4.5
 Pakistan; Refer to Insurance Ordinance 2000 section
26. Actuary is as prescribed by the authority
 Brunei; Same as Malysia and includes FCIA
Role and Qualifications of The Actuary in
other Countries
 UK; FIA
 US; Member of the American Academy of Actuaries as
a minimum qualification
 Canada; Member of the Canadian Institute of
Actuaries
The Business Environment
Legal
System
Taxation
Economic growth
& other factors
Employment &
Income Patterns
Demographics
Regulations
on Takaful
Competition
Investment
Yields
Economic
Environment
Status of Capital
Market
Literacy, Health &
Living standards
Existence of welfare
/ retirement systems
Basic Concept -Risk Pool
Risk Exposure
Risk Contribution
Risk Pool
Covered benefits
Contractual
Sums Covered
Ex Gratia
Benefits
Risk Fund Expenses:Claims Handling Fees
Loss Adjuster Fees
Risk Survey Fees
Medical Test Costs
Hospital Reports
Underwriting Expenses
Retakaful Expenses
Basic Concepts - Level Contribution
 The incidence of many contingencies increase with
age
 Unlikely that participants will pay increasing
contributions
 Hence, level contributions
 But the sum total of contributions and investment
profit earned thereon accumulated over each point
in time is sufficient to match the increasing risk
pattern effective at that point in time
Basic Concepts - Dripping
Risk Contribution
(Tabarru’)
Savings Contribution
Level Takaful
Contributions
Risk Fund
Savings Fund
Actuarial Control Cycle
 The actuarial control cycle describes the essential process
by the actuary to assist the operator to manage its takaful
funds on a sound financial basis
 The actuarial control cycle can be broken down into three
major steps namely 1) the pricing step 2) the experience
monitoring step and 3) the liability provisioning step.
 The actuarial control cycle may also be seen to operate
within the pricing and liability provisioning steps as
pricing and liability provisioning are themselves continual
loop processes.
Early Actuarial Control Cycle
a) Initial
Assumptions
b) Profit
Test
c) Model
e) Updating of
Assumptions
d) Monitoring
Appraisal
Values
Analysis of
Surplus
Actuarial Control Cycle Simplified
Monitor
Experience
Pricing
Set Liability
Provisions
Pricing
 Involve the collection of relevant data, assumptions and other inputs
that will be needed
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The assumptions need to be made will include the following:
Underlying mortality/morbidity/claims distribution pattern
Investment rate of return for discounting cash flows
Rate of management expenses for marketing and processing
Withdrawals pattern which affect the recoverability of initial expenses
incurred (marketing, underwriting and issuing new business contracts)
5. The level of taxation, statutory reserving requirements, factors
affecting the takaful business
Pricing
 The actuary need to understand the nature of the
data and statistics obtained and the degree of its
applicability to the particular product or business
portfolio in question.
 The actuary’s task in pricing and re-pricing
products will also include consideration of the
relative weightage to place on pricing factors
obtained from internal experience as well as
external sources.
Experience Monitoring
 What to monitor and analyze?
 Claims
 Expenses
 Investment performances
 The experiences must be compared against
assumptions used.
 Must compare “apple to apple”
Experience Monitoring-Claims
 Need to set up monitoring capabilities
 Look to determine degree of fluctuations; random or
not?
 Determine monitoring period
Experience Monitoring - Expenses
 Severity of impact depends on Model used.
 How to allocate expenses? New or renewal expenses?
By product types?
 Must set up capabilities to segregate and track such
expenses.
Experience Monitoring - Investment
 How to determine yield?
i=(2xI)/(A+B-I)
 How to implement Mudarabah on returns?
Liability Provisioning
 Making provisions for future claims arising from the
takaful fund.
 The liability provisions so created will have an impact
on the surplus available in the takaful fund
 Estimate the profit generated for the takaful operator.
 Increase Retakaful
Experience Monitoring
 Purpose of Analysis:
 Change assumptions?
 Re price products
 Withdraw products