Operational and Actuarial
Aspects of Takaful
 Distribution of Surplus
Sub Topics
 Definition And Sources Of Surplus
 Shariah Perspectives on Surplus
 Actuarial Principles of Surplus Distribution
 Practical Aspects of Surplus Distribution
Definition of Surplus
 In simple terms, the takaful fund surplus at
any point in time t would be:
 Surplus at time t = Takaful Fund Asset at
time t (-) Takaful Fund Liability at time t
 S (t) = A (t) – V (t)
Sources of Surplus
 The amount of surplus greatly depends on how takaful
fund assets and liabilities are valued
Takaful Fund Asset ↓ or Takaful Fund Liability ↑ then Surplus ↓
Takaful Fund Asset ↑ or Takaful Fund Liability ↓ then Surplus ↑
 Statutory or regulatory definitions of assets have a bearing
on the level of assets and consequently the surplus
available. This rule is known as the rule on admitted or
allowable assets may differ as to the type and percentage of
assets disallowed from country to country.
Sources of Surplus
 Surplus comes from the interaction of the takaful
fund being more than that required for liability
provision
 The sources of surplus can thus be traced to the
differences in what has emerged in reality with
that assumed (of claims, investment yields and
expenses) in the liability calculation.
 Reserving basis (rules that prescribe a set of
assumptions used in calculating or valuing the
actuarial liability provisions or reserves) in
calculating the reserves also affect the level of
reserves and consequently the level of surplus
Sources of Surplus
 Generally, the more conservative the
reserving basis, the higher the reserves and
thus the lower is the surplus.
 The amount of surplus that would be
revealed at any point in time is affected by
the difference in the valuation basis and
what has emerged in reality.
Sources of Surplus

1.
2.
3.
4.
For takaful business, the obvious sources of surplus in a
takaful risk fund would arise from:
Difference between mortality experienced and that
assumed.
Difference between actual investment performance of the
fund and that assumed.
Difference between actual expenses and the loading
assumed.
Difference between funds paid (if any) to surrendering
participants and the release (i.e. write back) in liability
provisions/reserves on surrender [apparent or a real
gain?]
Sources of Surplus
 Conclusion:
 Surplus arises due to the difference
between actual experience and the pricing
assumption
 Valuation surplus arises due to differences
between the actual experience and
assumption in actuarial reserving
Shariah Perspective of Surplus
 The underwriting surplus that arises from the risk
fund (i.e.. surplus which is determined without
consideration of any investment profit earned
from the contributions accumulated in the fund) is
really just an excess of takaful contributions
earned over claims incurred.
 Thus the operator has not contributed to any
incremental growth or increase in fund value.
Shariah Perspective of Surplus: AAOIFI Standard
No. 13
 Entitlement to the insurance surplus belongs only to the policyholders.
Shareholders do not share in this surplus, because it belongs to
policyholders collectively as defined by the insurance agreement.
Several fatwas and shariah rulings have been issued confirming that
policyholders have the existing right to the insurance surplus.
 The insurance company may invest the insurance surplus for the
account of the policyholders, if there is an express provision to this
effect in the insurance policy. The consideration payable to the party
undertaking such investment (i.e. percentage of investment profit in
the case of mudharabah or amount of commission in case of agency)
should be specified in the insurance policy.
 The party undertaking the investment is entitled only to the
consideration specified for this purpose, and should not appropriate
any amount from the insurance surplus which is a residual from the
premium contributions.
Actuarial Aspects of Surplus Distribution
Desirable characteristics of a surplus distribution system for the takaful
scheme (if distributable to participants ): Equitable – participants who have contributed more to the surplus




should be given more and vice versa
Simple – easy to administer and simple for participants to understand
and accept the logic
Flexible – easily modified if circumstances cause a change in the
amount of surplus available
Consistent – distributes surplus in line with the actuarial basis for
contribution and liability provisions
Acceptable – participants need to accept the logic and fairness of the
surplus distribution method otherwise there will be no takers in a
competitive marketplace
Practical Aspects of Surplus Distribution
 Firstly, in arriving at the surplus, the surplus has to be fair and to be
seen to be fair. In maintaining equity
 The particular accounting treatment of several financial items need to
be addressed for consideration in the surplus administration process as
follows:
 Unrealized gains – as surplus is distributed on income and actual realized
gains, later generations of participants may benefit more than earlier
generations of participants as unrealized capital gains profits are not
reflected in earlier distributions of surplus.
 Provisions for bad investments – provisions for bad investments which
value has fallen from the value reflected on purchase will reduce surplus. A
corresponding write back of such provisions will benefit later generations
of participants.
Practical Aspects of Surplus Distribution
 Qardhal Hasan – as qardhal hasan is considered a loan
injection into the takaful fund, repayment of such loans
should take precedence over distributing surplus to
participants.
 Surplus determination on a fund or product portfolio
basis – although there are practical limitations to
refining surplus distribution to an individual participant
level – an attempt should be made as far as is practicable
to distribute surplus in a way that recognizes the
particular experience of blocks or cohorts of participants
sharing similar characteristics.
Practical Aspects of Surplus Distribution
Different treatment of Surplus
Risk
Contribution
Claim benefits
to participants
Risk Pool
Savings Fund
Surplus may
1.not be shared and 100% is
kept in fund
2.not be shared with operator
(but ok to share with
participants)
3.be shared with operator &
participants
Savings
Contribution
Investment Profit
shared with
participants
Practical Aspects of Surplus Distribution
 Participants Eligibility to surplus sharing:
 Those who have not made a claim in the year, are
entitled.
 Those that have claimed less than their risk contribution
(i.e. Tabarru’ – donation) paid into the risk pool.
 Those who have claimed are not entitled at all.
Summary
 The opinion of shariah scholars is divided on the issue of
the permissibility of sharing surplus with participants and
the operator with many allowing its distribution to the
operator.
 The determination of surplus is essentially an actuarial
process as it is very dependent on and sensitive to the
actuarial estimation of liability provisions for the business.
 The surplus distribution to different generations of
participants is also affected by the accounting treatment of
several financial items.
 Surplus distributed if any should be in proportion to the
good experience contributed by the participants
concerned.
End