1. Operational and Actuarial Aspects of Takaful
Topic 3
Takaful Models

2. Sub Topics Takaful Models Cash Flow
Differences between Takaful and Insurance

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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;

11. 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;

12. 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;

13. 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

14. 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;

15. 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

16. 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

17. End
Thank you