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Takaful company surplus usually distribute one time
per annum at the end of the financial year. Referring to the ultimate sum of
surplus, the surplus to be distributed should refer to the guidelines given by
appointed actuary and endorse by the board of directors. The guideline prepared
by appointed actuary are based on several factors such as expectations of
takaful participants, regulations has been established by financial regulators,
internal policy of takaful institutions and contracts that have been agreed
with the takaful participants and takaful company as well.

 

The actuarial principles of the desired
characteristics of the takaful surplus distribution method are stated as follow
with assumption the surplus belongs exclusively to the participants:

 

a.
   The element of equitable should be applicable in surplus distribution which means
only the participants who really contribute to profit entitled to get the surplus
distribution. For an equitable surplus distribution, takaful operators may
adopt one of the following three modes which are pro-rata, selective or
off-setting.

 

b.
The surplus distribution method must be acceptable
by participants. Participants have no doubt towards the logic and fairness of
the surplus distribution method prepared by the actuary and adopted by the
takaful company.

 

c.
 The method of surplus distribution must
be simple and easy to govern by
takaful company. At the same time, easy for participants to understand and
accept the logic. It is important to avoid confusion that the participants may
encounter if the method used is too comprehensive.

 

d.
 The method of surplus distribution must
be flexible, easy to change or
modify by takaful companies if circumstances cause changes in the amount of
surplus available.

 

e.
  Distribution of surplus must be consistent and in line with the
actuarial basis for the provision of contributions and liabilities.

 

The determination of surplus
is essentially an actuarial process because it relies strongly on and sensitive
to the actuarial estimation of liability provisions for the business.

In the distribution of
surplus, the takaful company should prioritize the interests of takaful
participants as essentially the surplus is belonging them. When it comes to
issues of surplus, the distribution of the surplus must be carried out fairly
and transparent.

 

In implementing surplus administrative
process, the following factors need to be considered and taken into account:

 

a.  
Unrealized profits

The surplus is distributed on income and actual realized profit. This
mean the future participants will get more benefit than the previous generation
of participants as unrealized capital gains are not reflected in previous
surplus distributions.

 

b.  
Provision for bad investment

In takaful industry, provision for bad investment
which value has fallen from the value reflected on the purchase will reduce the
takaful surplus. Therefore, takaful company should rewrite corresponding to
that particular provisions to ensure it benefits the future participants.

 

 

 

c.  
Qardhal Hasan

The repayment of the loan, known as Qardhal Hasan should be given priority
over the distribution of surplus to the participants. This is because Qardhal
Hasan is considered as a loan injection into the takaful fund.

 

d.  
Determination of a fund-based
surplus or product portfolio

While there
is a practical limitation to filter out surpluses to individual participants,
efforts must be made to distribute surpluses in a way that identifies the
particular experience of a cohort of participants who share the same
characteristics.

 

The surplus distribution
process needs to identify those who qualify for the surplus sharing. Among the
eligible participants are as follows:

a.     takaful participants who have
never made a claim throughout the year.

b.     takaful participants who claim
less than their risk contribution is paid into the risk pool.

c.    
takaful participants who have made maximum claims are definitely not
entitled.

The
mudarabah takaful model works on the following basis: takaful operators (known
as shareholders) bear all expenses incurred in operating the business and as a
reward, takaful operators are entitled to share underwriting excess and investment
profits. This is an adjustment of mudarabah Islamic commercial contracts
between takaful operator and participants (or policyholders) who provide (contribute)
the capital. The biggest dissent of this model is underwriting excess is
non-profit. It is excess of premium over claims known as surplus. This business
model is difficult to manage where expenses are fixed but income (surplus) is
not. However, this is a very good model from the perspective of participants because
they do not directly contribute to the operator’s cost. All their contributions
are available to meet claims. Only when there is any excess of contribution to
the claim, the operator will be compensated for the expenses incurred, and even
if only to the extent that the surplus is sufficient to meet this expense.

 

  Contribution into the takaful risk pool is
deemed as donation which under the Islamic contract of tabarru’, towards the
expected increase in claims. The adoption of tabarru’ and the risk-sharing
concept in this risk pool address the Shari’ah’s fundamental concerns about
conventional insurance. However, the tabarru’ will not be exactly equal with
the claim. If tabarru’is inadequate, there will be a deficit; if it is excessive,
there will be surplus. Surplus under the mudarabah takaful model is crucial for
companies to commercially viable. If take away the surplus sharing then the
whole model will collapse.

 

         However, the mudarabah takaful model
is an unpopular choice. In Malaysia, only two of takaful operators practice
this mudarabah model.

 

(i)         
Wakalah Model

 

  Under wakalah model, the surplus is referred
to the surplus contributed by the participant into the Risk Fund based on
tabarru’ contract. Upon reaching a financial period, the sum of tabarru’ will
not be equal with the amount the claim. If the tabarru’ amount is less than the
sum of claims then the Risk Fund will be deficit, otherwise the tabarru’ amount
exceed the claim then the Risk Fund will have a surplus.

 

  The wakala model is the default standard for
takaful. Operators charge and carry out takaful operations. For takaful
operators, he makes a profit if wakala fee exceed expenses.

 

  The surplus is actually the excess premium
paid by the participants, so the surplus refund can be explained as a
experience refund. Once this is accepted, then the surplus is belongs of the
participants.

 

  In Malaysia, several takaful companies
provide shareholders to share in experience refund. Given that the participants
are responsible for the deficit in the risk pool, it may seem odd that
participants should share any excessive contribution to the shareholders. Many
see this as an incentive compensation to the operator to manage the portfolio
well, as evidenced by the surplus. However, whether this incentive is necessary
given since the operators have already received a fee for underwriting
services. As practised in Malaysia, wakala models is a model where operators
only impose their management and distribution costs through wakala fees, while
the profits are from the sharing of any underwriting surplus. There is also a
wakala model where even management expenses and distribution costs are met from
underwriting surpluses and zero fees are charged. This last extreme wakala model
is similar to the mudarabah model. Even some Shari’ah scholars will also
describe mudarabah model as a wakala model with zero fees

 

  We can explain this wakala model from the
perspective of both participants and operators. From a participant’s
perspective, the decision on the use of a wakala model whether operators share
in excessive premiums or not will depend on how much higher is the wakala fee
he has to pay. It is not always clear that having a share of the operator in
the the underwriting surplus gives the participants the best value proposition.

 

From
operator’s perpective, the wakala fee is determined as the sum of:

a.
Management expenses;

b.
Distribution costs include commissions; and

c.
Benefits to the operator

 

Given a scenario where the
surplus and deficit are in the participant’s account and where the operator’s
solvency requirements, hence the capital requirements are not excessive. It is
possible to impose a low wakala fee, thereby benefiting the participants. If
the operator’s profit depends solely on the underwriting surplus, then such as
the mudarabah model, this wakala model will not be commercially sustainable in
the long run.

 

 

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