OPERATIONAL AND
ACTUARIAL ASPECTS OF
TAKAFUL
 Regulations and Takaful Models.
Shariah Basis for Protection and
Guarantee
 Insurance is aim at providing protection from future
unforeseen constraints upon the occurrence of an
unexpected particular future risk
 The following sayings by the Holy Prophet justified the
concept of protection for those who are in need.
“Narrated by Abu Huraira (r.a.. the Holy
Prophet(s.a.w.) said: whosoever removes a wordly
hardship from a believer, Allah (s.w.t.) will remove from
him one of the hardships of the day of judgement.
Whosoever alleviates from one, Allah(s.w.t.) will alleviate
his lot in this world and the next."
Shariah Basis for Protection and
Guarantee
 One should strive hard in overcoming one’s
unexpected future risk or perils before leaving
one’s destiny in the hand of Allah(s.w.t.)
 “Anas bin Malik r.a. narrated that the Holy
Prophet (s.a.w) told a Bedwin Arab who left his
camel untied trusting to the will of Alah (s.w.t.) to
tie the camel first then leave it to Allah (s.w.t.)
Takaful is not simply a Name Change
No Riba
Islamic trade and finance thrived in
the 7th to 16th century guided by the
principles propagated by Islam
The current revival of Islamic
Finance necessitates the
construction of a full set of
acceptable financial instruments
No Gharar
Its implementation in accordance to
Shariah principles
No Maysir
Prohibition of Riba
 “ ..Allah (s.w.t) permitted trade while prohibited Riba.” (Al-
Baqarah 2:275)
 “…Allah (s.w.t) those who believe, deal not in usury,
doubling and quadrupling the sum lent. Fear Allah, and
you would be successful (Al-Imran 3:130)
 Narrated by Abu Huraira (r.a.) “The Holy Prophet said: “if
a person conducts two transactions contained in one, he
should stick to the lower one or he will commit an act
involving riba”
Prohibition of Gharar
 The Holy Quran has explicitly forbidden all
business transactions including injustice in any
form to any of the parties, whether in the form of
deceit or fraud or undue advantage or peril
leading to uncertainty in the business or any
dealing. (Quran: 6:151-152).
 Hadith of the Prophet as narrated by Anas bin
Malik states that the Prophet forbade the sale of
fruits till they were almost ripe.
Prohibition of Maisir
 “ O you who believe! Intoxicants, gambling,
idolatrous practices and soothsaying are
abomination of Satan’s handiwork. So avoid it in
order that you may be successful.” Surah al-Maidah
(5:90)
Concepts of Takaful

1.
2.
3.
The contract of Takaful is founded on the following
three principles:
Mutual responsibility,
Mutual assistance and cooperation,
Mutual protection or guarantee.
Takaful Act 1984 (TA 1984)
 Enacted in 1984 and currently under review
 Follows closely the Insurance Act (amended in 1996)
Main Provisions under TA 1984
 Section 4 – Requirements for carrying on biz as a Takaful

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
operator
Section 8(5) – Registration of takaful operators by the DG
(must be Shariah compliant and establish an SAC)
Section 11(a);(g);(h)- Cancellation of Registration if not
Shariah Compliant; carrying on biz detrimental to the
interest of participants ; not able to meet it’s obligations.
Section 16- Establishment and maintenance of takaful
funds, and allocation of surplus
Section 17-Requirements as to Assets of the Takaful
Fund
Main Provisions under TA 1984
 Section 21- Establishment and maintenance of
Takaful Guarantee Scheme Fund
 Section 23 – Re takaful
 Section 25- Assumption of risks (on General Biz)
 Section 35- Takaful agents and brokers
 Section 36 – Intermediaries in takaful
transactions
 Section 42-Actuarial investigation and reports
Main Provisions under TA 1984
 Section 46 - Investigations of affairs of Takaful
Operator
 Section 47 – Powers of the Director General to
issue directions (Guidelines)
 Section 53A - Advice of the Shariah Advisory
Council
 Section 60 – General provisions to offences
 Section 66 – Knowledge or statements of agents
is deemed that of operator
BNM Guidelines (Sec 47)
 Guidelines on Directorship for Takaful Operators
 Guidelines on the Governance of Shariah Committee
 Guidelines on Prohibitions Against Unfair Practices in




Takaful Business
Guidelines on Proper Advice Practice for Family Takaful
Business
Guidelines on Operating Costs of Family Takaful
Business
Guidelines on Financial Statements for Takaful Operators
Guidelines on Related Party Transactions for Takaful
Operators
BNM Guidelines (Sec 47)
 Guidelines on Outsourcing For Takaful Operators




(Investments, IT etc…)
Guidelines on Role of Appointed Actuary
Guidelines on Financial Condition Report (FCR)
Guidelines on Min Standards and Disclosure for Health
Takaful
Guidelines on Family Takaful Products
Main AAOIFI Standards
 FAS 12- General Presentation and Disclosure in





Financial Statements of Islamic Insurance Companies
FAS 13- Disclosure of Bases for Determining and
Allocating Surplus in Islamic Insurance Companies
FAS 14- Investment Funds
FAS15- Provisions and Reserves in Islamic Insurance
Companies
FAS 17- Investments
FAS 19- Contributions in Islamic Insurance Companies
Main AAOIFI Standards
 GSIFI 1- Shariah Supervisory Board:Appointment,






Composition and Report
GSIFI 2- Shariah review
GSIFI 3- Internal Shariah Review
GSIFI 4- Audit& Governance Committee for Islamic
FIs
GSIFI 5- Independence of the Shariah Board
GSIFI 6- Statement on Governance Principles for
Islamic FIs
Code of Ethics for the Employees of Islamic FIs
Shariah Advisory Council
 Roles and Functions
 To advise the Board on Shariah matters in its business


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


operation;
To endorse Shariah Compliance Manuals;
To endorse and validate relevant documentations;
To assist related parties on Shariah matters for advice
upon request;
To advise on matters to be referred to the SAC;
To provide written Shariah opinion;
To assist the NSAC on reference for advice;
Contract/Models in Takaful
The contract defines issues such as:
 Who pays for the expenses incurred in the business
venture
 How profits are shared between the parties in the
agreement
 Who are liable for any losses arising from the
venture
Potential Models
Potential Models Include:
 Cooperative
 Wakala
 Mudharaba
 Modified Mudharaba
 Wakala Mudharaba
 Wakala with incentive compensation
Potential Models
 The Takaful Model would need to satisfy:
 Shariah Concerns
 Technical Concerns
 Regulatory Concerns
Cooperative Model
Participant
Contribution
(Premium)
100%
Investment
Profit
Participants
Account
(Personal)
Investment
Profit
Operator
100%
Policy Benefits
Participants
Special
Account
(Common)
Actual
Management
Expenses
Underwriting
Surplus
Mudharabah Model
Participant
Contribution
(Premium)
(1 – x)%
Investment
Profit
Participant
Account
(Personal)
Investment
Profit
Policy Benefits
Participants
Special
Account
(Common)
x%
Operator
100%
Actual
Management
Expenses
Underwriting
Surplus
Wakalah Model
Participant
100%
Contribution
(Premium)
Wakalah Fee
(to operator)
Investment
Profit
Participants
Account
(Personal)
Investment
Profit
Actual
Management
Expenses
Operator
100%
Policy Benefits
Participants
Special
Account
(Common)
Underwriting
Surplus
Waqf Model
Participant
100%
Contribution
(Premium)
Wakalah Fee
(to operator)
Investment
Profit
Policy Benefits
Participants
Account
(Personal)
Waqf Fund
Investment
Profit
Actual
Management
Expenses
Operator
100%
Underwriting
Surplus
Modified Mudharaba Model
Participant
Contribution
(Premium)
(1x)%
Investment
Profit
Participants
Account
(Personal)
Investment
Profit
Participants
Special
Account
(Common)
(1y)%
Policy Benefits
Underwriting
Surplus
x%
Operator
Actual
Manageme
nt Expenses
y%
Wakala Mudharaba Model
Participant
Wakala Fee
(to 0perator)
(1-x)%
Investment
Profit
Contribution
(Premium)
Participants
Account
(Personal)
Investment
Profit
x%
Operator
Mercer
Participants
Special
Account
(Common)
100%
Policy Benefits
Underwriting
Surplus
Wakala with Incentive Compensation
Participant
Wakala Fee
(to operator)
(1-x)%
Investment
Profit
Contribution
(Premium)
Participants
Account
(Personal)
Investment
Profit
Participants
Special
Account
(Common)
(1-y)%
Policy Benefits
Underwriting
Surplus
x%
y%
Operator
Mercer
Potential Models
 Models which may be of concern to some
Shariah councils:
 Modified Mudharaba
 Wakala with Incentive Compensation
 These models allow the Operator to share
in underwriting surplus which may not be
allowed
Mercer
Potential Models
 Takaful Models which would be of concern
to Actuaries:
 Cooperative
 Mudharaba
 Insufficient income to the Operator
generally results from these models, as
well as difficulties matching income and
outgo
Potential Models
 There may also be restrictions on the model
which can be used due to regulatory
constraints. This would vary by country.
Bank Negara currently favors the wakala
mudharaba and wakala with incentive
compensation models
Potential Models
 Takaful Models which should be universally
acceptable worldwide from a technical and
shariah point of view:
 Wakala
 Wakala with a Mudharaba in investments
profit
Simplified Profit and Loss – Pure Wakalah
Example :Conventional Insurance
Shareholders’
Fund
+ Investment
Income
- Expenses
Life Fund (Par)
+ Premium
+ Investment
Income
Claims
Commissions
Management
Expenses
Takaful
Operator’s
Fund
+ Investment
Income
+ Wakalah
Fees
Commissions
Management
Expenses
Takaful Fund
+ Contribution
+ Investment
Income
- Wakalah
Fees
- Claims
Reserves
Profit/Loss
Reserves
Surplus/Deficit
Profit/Loss
Surplus shared by both
Shareholders and
Policyholders. Formula
for allocation fixed by
regulators
Surplus/Deficit
Surplus NOT shared
with Operator
Sources of Income – Pure Wakalah
Takaful
Operator’s
Fund
+ Investment
Income
+ Wakalah
Fees
Commissions
Management
Expenses
Takaful Fund
+ Contribution
+ Investment
Income
- Wakalah
Fees
-
Claims
Participant
Account
(Saving)
+ Contribution
+ Investment
Income
- Tabarru
Risk Fund
+ Investment
Income
+ Tabarru
-
Claims
Reserves
Profit/Loss
Surplus/Deficit
Reserves
Surplus NOT shared
with Operator
Surplus
Surplus/Deficit
Simplified Profit and Loss (for illustration only)
This is not an indication of the profitability of an insurance company against a takaful operator.
Conventional Insurance
Surplus shared by both Shareholders and
Policyholders. Formula for allocation fixed by
regulators
Takaful
Surplus NOT shared
with Operator
Risk Management via Technical
Design
 In terms of the technical design of the Takaful model:
 With risks come rewards, no risks mean no rewards
 The key to success is to understand exactly what risks
are being taken and manage them appropriately
 There is much more diversity in the risks taken by the
various Takaful operators compared to conventional
insurers and other Islamic Financial Services
Risk Management via Technical
Design(…contd)
 Certain risks will be present irrespective of model
chosen: Expenses risks
 Investment risks
 Underwriting risks
 Shariah risks
 Regulatory risks
 Market risks
Risks Associated with Model
 Possible risks:
 Investment





A Wakala model can be designed with incentive
compensation for good investment returns
A Wakala model with charges as a percentage of
Net Asset Value (NAV) also has investment risk
A pure Mudharaba(on Investments) model hinges on
iinvestments income to succeed
A modified Mudharaba model also contains
investment risk
Thus differing levels of investment risk can be taken,
with corresponding levels of rewards expected
Risks Associated with Model Design
 Mortality / Benefit Risk:
 All models have some level of underwriting risk, as if
experience is poor enough a Qardl Hasan loan will be
given by the operator
 A Wakala model can be structured to share in
underwriting surplus, thus increasing mortality/benefit
risk
 A modified Mudharaba model generally has significant
mortality/benefit risk
Risks Associated with Model Design
 Expense Risk:
 For most models management expenses and
commission are paid from the operators fund. Thus
expense risk is significant
 In some models expenses are paid from the risk fund,
thus passing this risk back to the participants
Risks Associated with Model Design
 Distribution Risks
 A complicated model might have excellent risk reduction
features/be technically pleasing, but if it is too complicated
for the distribution force to understand then sales will be
affected
 Similarly the model can be designed such that the products
look very similar to conventional products or distinctly
different depending on the needs of the distribution force
Risk Management via Technical
Design(…contd)
 Insurers may vary risk exposures via the products sold:
 Mortality risk may be the focus for insurers promoting
mortgage reducing term plans
 Investment risk may be the focus for insurers
promoting participating products
 Expense risk may be the focus for insurers promoting
unit linked plans
Risk Management via Technical
Design(…contd)
 Medical and health risk may be the focus for insurers
selling health plans and yearly renewable riders
 Hence, Takaful Operators may focus on these risks and
diversify via product development similar to conventional
insurers, but may also address risk via the Takaful model
chosen
HLTMT Business Model
Participant
Contribution
surrender payment
(less maturity charges),
expiring payment.
benefit payment
(Death/TPD Benefit)
Participants’
Fund
Wakalah Fees
Monthly Walah
Monthly Tabarru’
Yearly
Investment Profit
(Mudharabah Basis)
Special Reserve
Fund
Risk
Fund
Operator’s
Fund
*Annual Allocation
Yearly
Surplus
Note : * Subject to the recommendation by the Appointed Actuary
Actual
Management
Expenses
Qardhul Hasan Loan (if necessary)
How is it different from Conventional Insurance
The Issues
Conventional Insurance
Takaful
Regulations
Insurance Act 1996, BNM GPI and
LIAM regulations
Takaful Act 1984, BNM JPIT and
MTA regulations
Shariah Standards may follow
BNM SAC and AAOFII
Governance
Structure
Board of Directors representing
shareholders. Audit, Risk Mgt,
Nomination and Renumeration is
required under GPI 1
Board of Directors representing
shareholders and SAC.SAC is
required by the Act.
Audit, Risk Mgt, Nomination and
Renumeration is required under
JPIT 1
Risk
Management
Underwriting of risks.
Invariably uses Reinsurance
If strictly. Operator just manage
the risks and the investment fund.
To mitigate larger risk exposure
Retakaful is given priority.
Doctorine of neccessity can allow
Reinsurance.
Nature of
Contract
Risk is tranfered to Insurer through Participation in Risk Pool by
a Buy and Sell contract
making Tabarru’ . Gharar must be
minimal
How is it different from Conventional Insurance
The Issues
Conventional Insurance
Takaful
The “black box”
The policyholder does not know
how his premium is utilised, i,e,
how much goes for expenses , how
much goes to profit of the insurer
and how much to pay claims.
In accordance to the requirement
to avoid gharar, the Takaful
contract clearly sets out what is
for expenses and profit and what
is used to pay claims.
The investment
Insurance companies usually
invest in riba earning instruments
and in companies involved in
forbidden businesses.
The benefits
In some cases the policyholder
makes a windfall as result of being
eligible to claim under a policy.
This has elements of gambling
(maysir)
No Riba investments and
investments only made in
accepted businesses (significant
overlap with Socially Responsible
Investments).
Strictly a contract of Indemnity.
The participant may or may not
claim under a Takaful contract.
Profitability
Sources include experience
gains,investment gains and
expense margins.
Strictly, sources should be from
wakalah fees, and profit sharing of
investment returns
The End