Underwriting and managing risks in takaful
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Azman Mohd Nor and Zuhairah Ariff Abd Ghadas. International Islamic University Malaysia Seminar on Seminar on Insurance and Risk in Asia Pacific Kyoto International Community House 24 September 2010o. Underwriting and managing risks in takaful. Some Common Risks in Takaful.

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Underwriting and managing risks in takaful

Azman Mohd Nor and Zuhairah Ariff Abd Ghadas.

International Islamic University MalaysiaSeminar on Seminar on Insurance and Risk in Asia Pacific

Kyoto International Community House

24 September 2010o

Underwriting and managing risks in takaful

Some common risks in takaful

Some Common Risks in Takaful

  • Underwriting Risk.

  • Transferring/ sharing of risks

  • Shariah non Compliance risks

  • Operational Risk.

  • Credit Risk.

  • Liquidity Risk.

  • Capital Adequacy Risk

  • Market Risk.

  • Moral Hazard Risks

Takaful underwritting

Takaful Underwritting

  • Introduction

  • Each insurance company has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk. The information used to evaluate the risk of an applicant for insurance will depend on the type of coverage involved.



  • Insurance underwriters evaluate the risk and exposures of potential clients. They decide how much coverage the client should receive, how much they should pay for it, or whether even to accept the risk and insure them. Underwriting involves measuring risk exposure and determining the premium that needs to be charged to insure that risk.

Takaful underwriting key points for consideration

Takaful Underwriting: Key Points for Consideration

  • Concept and Objectives.

  • Contractual relations between the takaful operator and the policyholders and the participants among themselves.

  • Shariah Governance

  • Adopting conventional Insurance principles and actuarial skills in underwriting as long as they are not against Shariah.

Underwriting and managing risks in takaful

Adopting conventional Insurance principles and actuarial skills in underwriting as long as they are not against Shariah

  • -Conventional insurance principles includes insurable interest, subrogation, proximate lost, indemnity, utmost good faith and contribution.

  • -Conventional insurance principles in determining risks such as being definable, probable of happening, accidental, non-catastropic, a large number of homogenous, measurable and lawful.

  • Other actuarial skills and applications.

Shariah requirement in ccepting risks underwitting

Shariah Requirement in ccepting Risks (Underwitting)

The requirements are very essential to:

  • Ensure acceptance, validity and enforceability from Islamic Law (Shariah) point of view.

  • Ensure that any risk to be accepted comply with the Shariah principles

  • Fulfill the goal and objectives of takaful operator to be Shariah compliant business entity.

  • Meet the religious requirements of Muslims in line with their belief and faith

Impacts of shariah non compliance

Impacts of Shariah Non Compliance

  • Against the command of Allah

  • Possibility of cancellation of the company’s registration

  • Impediment from Allah’s barakah or blessing

  • Business reputation

  • Invalidation of contract (Akad)

  • Non-halal income

Accepted and rejected risks

Accepted and Rejected Risks

Accepted Risks

  • Risks permitted by the Shariah.

  • Risks not forbidden by the Shariah or not harmful.

  • Risks which may secure public interest.

  • Risks which give good images.

  • Rejected Risks

    Risks prohibited by the Shariah :

    • Risks involving riba

    • Risks involving gambling

    • Risks involving liquor

    • Risks involving element of syirik.

  • Cont rejected risks

    Cont’.. Rejected Risks

    • Risks on producing impermissible things or bringing harmful effects to the community.

    • Risks relating to musical instruments.

    • Risks on non-permissible activities like entertainments activities which contradict with the Shariah, working in liquor factories, entertainment centers, discos.

    • Risks relating to tobacco goods

    • Risks that bring bad image to takaful operator as an Islamic financial institution

    Risks for mixed activities services products revenues

    Risks for mixed activities/services/products/revenues

    • The risk could be accepted, however, the non-permissible portion needs to be excluded to be covered by insurance companies subject to the following requirements :

    • Non Shariah compliant portions for activities or rental or products i.e. riba, gambling, liquor, pork , rental payments from premises used in gambling, sale of liquor, tobacco related activities with less than 5%,

      • For hotel and resort operations, conventional share trading, stockbroking not exceeding than 25%.

  • If the percentage of non permissible exceeds the percentages as mentioned above, the risk can not be accepted.

  • Cont risks of mixed activities

    Cont’ Risks of mixed activities

    • The public perception or image of the company is good, and,

    • Core activities of the risk owner are important and considered maslahah (benefit) to the Muslim ummah and the country and the non-permissible elements are very small and involving matters such as umumbalwacommon plight and difficult to avoid), `uruf(custom) and the rights of the non-Muslim community which are recognised by Islam.

    Non shariah compliant businesses according to malaysian securities commission guidelines

    Non Shariah Compliant Businesses According to Malaysian Securities Commission Guidelines

    First Criterion

    The primary activity of the company is based on riba as practised by conventional financial institutions, including commercial banks, merchant banks, finance companies, etc.

    Second Criterion

    A company whose primary activity is gambling, such as companies running, casinos, gaming and others.

    Underwriting and managing risks in takaful

    Third Criterion

    The primary activity of a company is the production and sale of goods and services that are prohibited in Islam, including:

    (a) Processing, producing and marketing alcoholic drinks;

    (b) Supplying non-halal meat like pork, etc.; and

    (c) Providing immoral services like prostitution, pubs, discos, etc.

    Fourth Criterion

    The primary activity of the company is gharar (uncertainty) such as conventional insurance trading.

    Risk sharing trough retakaful reinsurance

    Risk Sharing trough Retakaful/reinsurance

    The importance of retakaful in takaful business

    The Importance of Retakaful inTakaful Business

    Generally, to assist takaful operators


    • Protecting the solvency of the takaful operator and its participants.

    • Providing underwriting flexibility and the capacity to accept risk.

    • Stabilizing claims cost and therefore giving greater stability to takaful contribution pricing

    • Allowing takaful operator to effectively utilize the assets of the retakaful provider to give coverage to its clients


    Types of retakaful


    Types of treaty retakaful


    Underwriting and managing risks in takaful

    • Proportional Treaty

    • Quota share

      - It is the basic form where the retakaful operators accepts all the

      risks within the defined categories.

      - It’s usually for new companies and new risks that operator has not

      dealt with.

    • Surplus

      - It is the excess of assets over liabilities.

      - Under this type, the primary takaful operator cedes the surplus

      liability above a specified retention.

    Underwriting and managing risks in takaful

    b) Non- proportional

    • Excess of loss

      - Recoveries are available when loss exceeds a cedant’s retention.

    • Stop loss

      - Reinsurer pays a cedant’s aggregate retained losses in excess of a

      percentage contribution.

      - Now, it is not being actively practiced in Malaysia compared to the

      excess of loss process.

    Retakaful operators in malaysia

    Retakaful Operators in Malaysia

    • In Malaysia, for the time being, there are four Retakaful operators, namely, ACR Retakaful SEA Berhad, MNRB Retakaful Berhad, Munchener Ruckversicherungs-Gesellschaft (Munich Re Retakaful) and Swiss Reinsurance Company Ltd. (Swiss Re Retakaful); and one International Takaful Operator in AIA Takaful International Bhd.

    Contractual relationship between takaful company and retakaful

    Contractual Relationship Between Takaful Company and Retakaful

    • It is again based on wakalah bi ajr (agency with fee/hire on services) contract. But the particpants are the takaful operators on behalf of the participants

    • Collection of premium from takaful operators, investment of funds, maintenance and reimbursement of reserves when they are not needed, handling the risk and settlement of claims of the takaful operators


    Model of retakaful

    Model of Retakaful:

    • Essentially about handling risk (takaful operators) by sharing the risk with the retakaful company.

    • In principle, its operation is similar to that of takaful .

    • Therefore, all Shari’a principles applying to takaful mustapply to retakaful operations


    Retakaful or reinsurance

    Retakaful or reinsurance?

    • Sec. 23 (1), Takaful Act provides: “ An operator shall have arrangements consistent with sound Takaful principles for r-takaful of liabilities in respect of risks undertaken or to be undertaken by the operator in the course of his carrying on takaful business. “

    • Shortage of retakaful capacity with paid-up capital at about USD250M. Also issue of a viable, reputable and effective retakaful with good rating

    • Result  Re takaful capacity is constrained – perhaps fulfilling less than 14% of takaful primary gross premium.


    Underwriting and managing risks in takaful


    • “With total gross written premiums by Takaful operators of approximately US$3.9 billion in 2006, and a total reTakaful capacity of about US$400 million, it is evident that Takaful operators must avail themselves of reinsurance from conventional reinsurers”

    • Dr Omar Fisher, Islamic Finance News, page 28, 9th may 2008

    Cont retakaful or reinsurance

    Cont.. Retakaful or Reinsurance

    • Based on doctrine of necessity (darurah) or at least needs (hajah), the jurist has allowed for reinsurance, but the allocation must be made within the limits (The exercise of darurah must be made within its limits)

    • Abuse of doctrine of necessity by putting all the reinsurance portion (or the biggest portion) to reinsurance only without any proper investigation to the capacity and risk allocation.

    • Boosting and accelerating the retakaful capacity: Takaful Operators are required to cede its takaful needs within retakaful as far as possible and only to cede with reinsurance to the extent that retakaful companies cannot fulfill their needs.

    Parameters for ceding to conventional reinsurance

    Parameters for Ceding to Conventional Reinsurance

    • AAOIFI standards:

    • 1. The ceding should be done initially with retakaful operator at the maximised level.

    • 2. The takaful operator should not hold the reserves belong to the reinsurance operator if it is interest bearing. It is allowable to keep and invest if the arrangement is based on mudharabah and wakalah.

    • 3. It must be on short term basis, the volume must be small compared to the total portfolio and on top of that, must be approved by their respective Sahriah Committee.

    • 4. Takaful operator cannot take any ceding or profit commission from reinsurance company as it is not it’s agent.

    Can retakaful underwrite conventional insurance

    Can Retakaful underwrite conventional insurance?

    • According to AOOIFI standards it is allowable with the following conditions:

    • 1. The contract used must be the Retakaful contract (where the concept, terms and conditions were approved by the Shariah Committee).

    • 2. It is not based on treaty arrangement.

    • 3. The subject matter/insurable interest is not against Sahriah

    Underwriting and managing risks in takaful



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