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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

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operational and actuarial aspects of takaful

OPERATIONAL AND ACTUARIAL ASPECTS OF TAKAFUL

Regulations and Takaful Models.

shariah basis for protection and guarantee
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. Whosoeveralleviates from one, Allah(s.w.t.) will alleviate his lot in this world and the next."

shariah basis for protection and guarantee1
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 Malikr.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.)
slide4

Takaful is not simply a Name Change

  • 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
  • Its implementation in accordance to Shariah principles

No Riba

No Gharar

No Maysir

prohibition of riba
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
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).
  • Hadithof 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
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
Concepts of Takaful
  • 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
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
Main Provisions under TA 1984
  • Section 4 – Requirements for carrying on biz as a Takaful 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 19841
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 19842
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
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 471
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
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 standards1
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
Shariah Advisory Council
  • Roles and Functions
    • To advise the Board on Shariah matters in its business 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
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

Potential Models Include:

  • Cooperative
  • Wakala
  • Mudharaba
  • Modified Mudharaba
  • WakalaMudharaba
  • Wakala with incentive compensation
potential models1
Potential Models
  • The Takaful Model would need to satisfy:
    • Shariah Concerns
    • Technical Concerns
    • Regulatory Concerns
slide21

Cooperative Model

Participant

Contribution (Premium)

100%

100%

Policy Benefits

Investment Profit

Participants Account (Personal)

Participants Special Account (Common)

Underwriting Surplus

Investment Profit

Actual Management Expenses

Operator

slide22

Mudharabah Model

Participant

Contribution (Premium)

100%

(1 – x)%

Policy Benefits

Participant Account (Personal)

Investment Profit

Participants Special Account (Common)

Underwriting Surplus

Investment Profit

x%

Actual Management Expenses

Operator

slide23

Wakalah Model

Participant

Contribution (Premium)

Wakalah Fee (to operator)

100%

100%

Policy Benefits

Investment Profit

Participants Account (Personal)

Participants Special Account (Common)

Underwriting Surplus

Investment Profit

Operator

Actual Management Expenses

slide24

Waqf Model

Participant

Contribution (Premium)

Wakalah Fee (to operator)

100%

100%

Policy Benefits

Investment Profit

Participants Account (Personal)

Waqf Fund

Underwriting Surplus

Investment Profit

Operator

Actual Management Expenses

modified mudharaba model
Modified Mudharaba Model

Participant

Contribution (Premium)

(1-y)%

(1-x)%

Policy Benefits

Investment Profit

Participants Account (Personal)

Participants Special Account (Common)

Underwriting Surplus

Investment Profit

x%

Actual Management Expenses

Operator

y%

wakala mudharaba model
WakalaMudharaba Model

Participant

Contribution (Premium)

Wakala Fee

(to 0perator)

100%

(1-x)%

Policy Benefits

Investment Profit

Participants Account (Personal)

Participants Special Account (Common)

Underwriting Surplus

Investment Profit

x%

Operator

wakala with incentive compensation
Wakala with Incentive Compensation

Participant

Contribution (Premium)

Wakala Fee

(to operator)

(1-y)%

(1-x)%

Policy Benefits

Investment Profit

Participants Account (Personal)

Participants Special Account (Common)

Underwriting Surplus

Investment Profit

x%

y%

Operator

potential models2
Potential Models
  • Models which may be of concern to some Shariahcouncils:
    • Modified Mudharaba
    • Wakala with Incentive Compensation
    • These models allow the Operator to share in underwriting surplus which may not be allowed
potential models3
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 models4
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 wakalamudharaba and wakala with incentive compensation models
potential models5
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
slide32

Simplified Profit and Loss – Pure Wakalah

Example :Conventional Insurance

Takaful

Surplus shared by both Shareholders and Policyholders. Formula for allocation fixed by regulators

Surplus NOT shared with Operator

slide33

Sources of Income – Pure Wakalah

Takaful

Surplus NOT shared with Operator

slide34

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

Takaful

Surplus shared by both Shareholders and Policyholders. Formula for allocation fixed by regulators

Surplus NOT shared with Operator

risk management via technical design
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
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
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 modifiedMudharaba 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
Risks Associated with Model Design
  • Mortality / Benefit Risk:
    • All models have some level of underwriting risk, as if experience is poor enough a QardlHasan 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 design1
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 design2
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 distinctlydifferent depending on the needs of the distribution force
risk management via technical design contd1
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 contd2
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
slide43

HLTMT Business Model

Participant

benefit payment

(Death/TPD Benefit)

surrender payment (less maturity charges),

expiring payment.

Contribution

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

Actual

Management

Expenses

Qardhul Hasan Loan (if necessary)

Note : * Subject to the recommendation by the Appointed Actuary