Operational and Actuarial Aspects of Takaful Topic 3 Takaful Models

Sub Topics Takaful Models Cash Flow Differences between Takaful and Insurance

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

Mudharabah Model Participant Contribution (Premium) Policy Benefits 100% (1 – x)% Policy Benefits Investment Profit Participant Account (Personal) Participants Special Account (Common) Underwriting Surplus Investment Profit x% Actual Management Expenses Operator

Wakalah Model Participant Contribution (Premium) Policy Benefits Wakalah Fee (to operator) Contribution (Premium) 100% 100% Policy Benefits Investment Profit Participants Account (Personal) Participants Special Account (Common) Underwriting Surplus Investment Profit Actual Management Expenses Operator

Waqf Model Participant Contribution (Premium) Policy Benefits Wakalah Fee (to operator) Contribution (Premium) 100% 100% Policy Benefits Investment Profit Participants Account (Personal) Waqf Fund Underwriting Surplus Investment Profit Actual Management Expenses Operator

Simplied Profit and Loss – Pure Wakalah Example :Conventional Insurance Takaful Operator’s Fund + Investment Income + Wakalah Fees Commissions Management Expenses Profit/Loss Takaful Fund + Contribution + Investment Income - Wakalah Fees - Claims Reserves Surplus/Deficit Shareholders’ Fund Life Fund (Par) + Investment Income - Expenses + Premium Claims Commissions Management Expenses Reserves Profit/Loss Surplus/Deficit Surplus shared by both Shareholders and Policyholders. Formula for allocation fixed by regulators Surplus NOT shared with Operator

Participant Account (Saving) Sources of Income – Pure Wakalah Takaful Operator’s Fund + Investment Income + Wakalah Fees Commissions Management Expenses Profit/Loss Takaful Fund + Contribution + Investment Income - Wakalah Fees Claims Reserves Surplus/Deficit Participant Account (Saving) + Contribution + Investment Income - Tabarru Surplus Risk Fund + Investment Income + Tabarru Claims Reserves Surplus/Deficit Surplus NOT shared with Operator

Simplified Profit and Loss (for illustration only) This is not an indication of the profitability of an insurance company against a takaful operator. For accounting entries illustration only. Conventional Insurance Takaful Surplus shared by both Shareholders and Policyholders. Formula for allocation fixed by regulators Surplus NOT shared with Operator

Insurance v Takaful General Rulings ; Sources of laws & regulations : Conventional – state and man-made laws; Takaful – based on divine revelations; Contract : Conventional – sale & purchase between insured and insurer; Takaful – participatice in nature involving the principle of tabarru’ & profit sharing; Investment of premium: Conventional – No involvement of policyholders; Takaful – Different contract has different approach; the Al Mudharbah and Al-Wakalah models;

Insurance v Takaful Business Operation Profit-motive: Conventional – Maximizing returns to shareholders; Takaful – Optimizing operations for affordable risk protection as well as fair profits to operator; Initial capital: Conventional – Shareholders; Takaful – Rabb al Mal or paid via contributions from participants;

Insurance v Takaful Losses: Conventional – Transfer of losses among insurance pools and from policyholders to shareholders; Takaful – Losses retained within classes of business; Investment and profit-motive: Conventional – No moral guides, allows riba and maisir; According to Islamic values and Shariah guidelines;

Insurance v Takaful Agent & Intermediaries: Conventional – typically independent from insurers and paid commissions from the premium charged to policyholders that is not disclosed; Takaful – some are employees while others are independent and wakalah fees are disclosed

Insurance v Takaful Treatment of Returns: Profits and/or Bonus; Conventional – to be returned to policyholders and determined by managers and the Board; Takaful – specifies in advance how and when profit/surplus will be distributed; Right of insurable interest: Conventional – vested in the nominee absolutely (for non- muslims); Takaful – determined by Islamic Principles of Faraid;

Insurance v Takaful Dissolution; Conventional (non-mutual) – reserves and excess surplus belongs to the shareholders; Takaful – reserves and excess/surplus could be returned to participants, although consensus opinion prefers donation to charity; Benefits paid from General Business: Conventional – owned by insures; Takaful – made by participants as mutual indemnification; Process of Claim: Conventional – insured may elected cost or replacement cost valuation; Takaful – entitled to compensation only for repair or rebuild or replacement

Insurance v Takaful Other issues: Taxes: Conventional – subject to local, state and federal taxes; Takaful – subject to local, state and federal taxes plus obligated to pay zakat ; Regulation (Malaysia): Conventional – Insurance Act Takaful – Takaful Act 1984

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