In perspective of surplus, underwriting surplus arise from


 

In
takaful, the surplus is defined as an asset minus the liability of takaful risk
fund. Surplus exists due to the difference between actual experience and price
assumptions. Total of surplus depends on how assets and liabilities of the
takaful fund are assessed. Surplus can be split among participants
(policyholders), to takaful operators (shareholders), and keep in the fund for
contingencies.

 

The surplus of the tabarru
‘account to be distributed between participants and takaful operators is based
on the fact that takaful contracts are generally built on tabarru’ (donation)
and ta’awun (help-assist) along with mutual consent between parties. Tabarru
principle ‘is a key principle that underlies takaful products while other
principles such as wakalah and mudharabah are used to support the
implementation of takaful operations.

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Surplus
comes from many sources such as excessive investment income, favourable
experience in benefits such as mortality benefits, fire etc. However, in family
takaful, the surplus is usually treated separately, namely underwriting
surplus. This is due to that there are often separate models used for
investment, such as mudarabah while underwriting surplus aspects are more
likely to be considered under the wakala model.

 

From
Shari’ah perspective of surplus, underwriting surplus arise from risk funds
which are actually an excess of takaful contributions derived from claims
incurred regardless of any investment gains arising from the contributions
accumulated in the fund. Therefore, the operator does not contribute to any
incremental growth or increase in the value of the funds.

 

The
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) is an well-known Islamic international autonomous non-for-profit
corporate body that prepare and provide standards for Islamic financial
institutions and the industry, including takaful. According to AAOIFI, there
are relevant standards allocating for the surplus, namely Financial Accounting
Standards (FAS) No. 13 (Disclosure of Bases for Determining and Allocating
Surplus or Deficit in Islamic Insurance Companies). FAS 13 is intentionally
incorporated to determine and allocate surplus or deficit in Islamic Insurance
Companies. It is required in the standards for Takaful operators to provide a
statement of surplus (or deficit) of the policyholder. The Takaful operators
themselves should disclose the method they use in allocating underwriting
surplus and the shari’ah basis applied in the notes.

 

For
general takaful funds, the underwriting surplus is determined for each takaful
business class after taking into account commissions, unearned contributions,
retakaful, claiming incurred and management expenses. Surplus can be distributed
according to the terms and conditions set by the company’s shari’ah committees
and all takaful operators have to disclose the amount of surplus in their
takaful fund.

 

For
family takaful, the surplus is determined by the annual actuarial valuation of
the family takaful fund. The surplus that can be distributed to the
participants is determined after deducting the claims or benefits paid,
retakaful provisions, commissions, management expenses and reserves. It is
distributed according to the terms and conditions set by the company’s Shari’ah
committees.

 

Takaful
company may invest the insurance surplus for the policyholder’s account, if
there is a real provision for this effect in the insurance policy. The
consideration to be paid to the party in such investment related with percentage
of investment profit in mudarabah or commission amount in the case of the
agency, shall be stated in the insurance policy.

 

(i)         
What is the Actuarial principles of surplus
distribution?

Takaful
surplus is usually distributed 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 a
member of 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 as well as contracts that have been agreed with the
takaful participants.

 

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

 

a.
   Equitable

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. The actuarial present value of the surplus generated by the
policy should be same as the actuarial present value of bonus paid to the same
policy. For an equitable surplus distribution, takaful operators may adopt one
of the following three modes which are pro-rata, selective or off-setting.

 

b.   Acceptable

     
Participants need to accept the logic and fairness of the surplus
distribution method prepared by the actuary and adopted by the takaful company.

 

c.
  Simple

     
The method of surplus distribution must be simple and easy to administer.
Therefore, easy for participants to understand and accept the logic.

 

d.
  Flexible

     
Surplus distribution must easy to change or modify if circumstances
cause changes in the amount of surplus available.

 

e.
   Consistent

Distribution
of surplus must 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.

 

(ii)               
In your opinion, what are the factors that need to
be taken into consideration when addressing the practical aspects of surplus
distribution?

 

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

 

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

provision for bad investment which value has fallen
from the value reflected on the purchase will reduce the surplus. Therefore, rewriting
corresponding for such provisions will benefit the future participants.

 

c.  
Qardhal Hasan

Qardhal hasan is considered as a loan injection
into takaful fund. Therefore, the repayment of the loan should be given
priority over the distribution of surplus to the participants.

 

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.

x

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