1. Operational and Actuarial Aspects of Takaful
Actuarial Concepts and Actuarial Control Cycle

2. Sub Topics Role of the Actuary The Business Environment
Basic Actuarial Concepts
Components of Actuarial Control Cycle
Pricing
Experience Monitoring
Liability Provision

3. BNM Guidelines – JPIT 10 Role of the Appointed Actuary
AA must be a FSA, FIA,FAIA or FAA under Section 2 of TA 1984
Appointment or termination only with BNM’s approval

4. BNM Guidelines – JPIT 10
Section 3 -To interpret participants reasonable expectations
Section 4 - Valuation of Liabilities
Section Ensure data accuracy
Section 4.3 -Testing of assumptions
Section 4.7- Test profitability of Business
Section Recommends Distribution of Surplus

5. BNM Guidelines – JPIT 10 Section 4.13 - Preparing an FCR
Section Comments on Investment Policy
Section Comments on Re Takaful Policy
Section Additional Solvency Test

6. Role of the Actuary - Monitoring and Reporting
FCR Contents:-
Comments on Co Strategic Plan
Performance of Business vis a vis budget
Design of Takaful Model and Adherence
Comments on Profit Test assumptions
Adequacy of Reserves
Comments on Investment Strategy and Performance
Comments on Retakaful
Comments on Surplus Sharing provisions
Overall Risk Management capabilities
Shariah Issues

7. Role of the Actuary - Monitoring and Reporting
Development of KPIs and KRIs (from FCR)- relates more to underwriting risks
Expense overruns
Annual Expense Inflation
Expense Analysis
Loss Ratios
Accuracy of Assumptions used
Investment Performance

8. Role of the Actuary The Balancing Act Shareholders Employees
Takaful
Scheme
Regulators
Agents
Participants
Management

9. Role and Qualifications of The Actuary in other Countries
Baharin; Refer to Central Bank of Bahrain Rule book sections TA 2.4.3, TA and TA 2.4.5
Pakistan; Refer to Insurance Ordinance 2000 section 26. Actuary is as prescribed by the authority
Brunei; Same as Malysia and includes FCIA

10. Role and Qualifications of The Actuary in other Countries
UK; FIA
US; Member of the American Academy of Actuaries as a minimum qualification
Canada; Member of the Canadian Institute of Actuaries

11. The Business Environment
Legal System
Taxation
Economic growth & other factors
Employment & Income Patterns
Demographics
Regulations on Takaful
Economic Environment
Competition
Literacy, Health & Living standards
Investment Yields
Status of Capital Market
Existence of welfare / retirement systems

12. Basic Concept -Risk Pool
Risk Exposure
Risk Contribution
Risk Pool
Covered benefits
Contractual Sums Covered
Ex Gratia Benefits
Risk Fund Expenses:-
Claims Handling Fees
Loss Adjuster Fees
Risk Survey Fees
Medical Test Costs
Hospital Reports
Underwriting Expenses
Retakaful Expenses

13. Basic Concepts - Level Contribution
The incidence of many contingencies increase with age
Unlikely that participants will pay increasing contributions
Hence, level contributions
But the sum total of contributions and investment profit earned thereon accumulated over each point in time is sufficient to match the increasing risk pattern effective at that point in time

14. Basic Concepts - Dripping
Risk Contribution (Tabarru’)
Savings Contribution
Level Takaful Contributions
Risk Fund
Savings Fund

15. Actuarial Control Cycle
The actuarial control cycle describes the essential process by the actuary to assist the operator to manage its takaful funds on a sound financial basis
The actuarial control cycle can be broken down into three major steps namely 1) the pricing step 2) the experience monitoring step and 3) the liability provisioning step.
The actuarial control cycle may also be seen to operate within the pricing and liability provisioning steps as pricing and liability provisioning are themselves continual loop processes.

16. Early Actuarial Control Cycle
a) Initial Assumptions
b) Profit Test
c) Model
e) Updating of Assumptions
d) Monitoring
Appraisal Values
Analysis of Surplus

17. Actuarial Control Cycle Simplified
Monitor Experience
Pricing
Set Liability Provisions

18. Pricing
Involve the collection of relevant data, assumptions and other inputs that will be needed
The assumptions need to be made will include the following:
Underlying mortality/morbidity/claims distribution pattern
Investment rate of return for discounting cash flows
Rate of management expenses for marketing and processing
Withdrawals pattern which affect the recoverability of initial expenses incurred (marketing, underwriting and issuing new business contracts)
The level of taxation, statutory reserving requirements, factors affecting the takaful business

19. Pricing
The actuary need to understand the nature of the data and statistics obtained and the degree of its applicability to the particular product or business portfolio in question.
The actuary’s task in pricing and re-pricing products will also include consideration of the relative weightage to place on pricing factors obtained from internal experience as well as external sources.

20. Experience Monitoring
What to monitor and analyze?
Claims
Expenses
Investment performances
The experiences must be compared against assumptions used.
Must compare “apple to apple”

21. Experience Monitoring-Claims
Need to set up monitoring capabilities
Look to determine degree of fluctuations; random or not?
Determine monitoring period

22. Experience Monitoring - Expenses
Severity of impact depends on Model used.
How to allocate expenses? New or renewal expenses? By product types?
Must set up capabilities to segregate and track such expenses.

23. Experience Monitoring - Investment
How to determine yield?
i=(2xI)/(A+B-I)
How to implement Mudarabah on returns?

24. Liability Provisioning
Making provisions for future claims arising from the takaful fund.
The liability provisions so created will have an impact on the surplus available in the takaful fund
Estimate the profit generated for the takaful operator.
Increase Retakaful

25. Experience Monitoring
Purpose of Analysis:
Change assumptions?
Re price products
Withdraw products

26. End