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Operational and Actuarial

Aspects of Takaful

Distribution of Surplus

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Sub Topics Definition And Sources Of Surplus

Shariah Perspectives on Surplus

Actuarial Principles of Surplus Distribution Practical Aspects of Surplus Distribution

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Definition of Surplus In simple terms, the takaful fund surplus at

any point in time t would be:

Surplus at time t = Takaful Fund Asset attime t (-) Takaful Fund Liability at time t

S (t) = A (t) V (t)

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Sources of Surplus The amount of surplus greatly depends on how takaful

fund assets and liabilities are valued

Statutory or regulatory definitions of assets have a bearing

on the level of assets and consequently the surplusavailable. This rule is known as the rule on admitted orallowable assets may differ as to the type and percentage ofassets disallowed from country to country.

Takaful Fund Asset or Takaful Fund Liability then Surplus

Takaful Fund Asset or Takaful Fund Liability then Surplus

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Sources of Surplus Surplus comes from the interaction of the takaful

fund being more than that required for liabilityprovision

The sources of surplus can thus be traced to thedifferences in what has emerged in reality withthat assumed (of claims, investment yields andexpenses) in the liability calculation.

Reserving basis (rules that prescribe a set ofassumptions used in calculating or valuing theactuarial liability provisions or reserves) incalculating the reserves also affect the level ofreserves and consequently the level of surplus

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Sources of SurplusGenerally, the more conservative the

reserving basis, the higher the reserves andthus the lower is the surplus.

The amount of surplus that would berevealed at any point in time is affected by

the difference in the valuation basis andwhat has emerged in reality.

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Sources of SurplusConclusion:

Surplus arises due to the difference

between actual experience and the pricingassumption

Valuation surplus arises due to differences

between the actual experience andassumption in actuarial reserving

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Shariah Perspective of Surplus The underwriting surplus that arises from the risk

fund (i.e.. surplus which is determined without

consideration of any investment profit earnedfrom the contributions accumulated in the fund) isreally just an excess of takaful contributionsearned over claims incurred.

Thus the operator has not contributed to anyincremental growth or increase in fund value.

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Shariah Perspective of Surplus: AAOIFI Standard

No. 13 Entitlement to the insurance surplus belongs only to the policyholders.

Shareholders do not share in this surplus, because it belongs topolicyholders collectively as defined by the insurance agreement.Several fatwas and shariah rulings have been issued confirming thatpolicyholders have the existing right to the insurance surplus.

The insurance company may invest the insurance surplus for theaccount of the policyholders, if there is an express provision to thiseffect in the insurance policy. The consideration payable to the partyundertaking such investment (i.e. percentage of investment profit inthe case of mudharabah or amount of commission in case of agency)

should be specified in the insurance policy.

The party undertaking the investment is entitled only to theconsideration specified for this purpose, and should not appropriateany amount from the insurance surplus which is a residual from thepremium contributions.

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Actuarial Aspects of Surplus DistributionDesirable characteristics of a surplus distribution system for the takafulscheme (if distributable to participants ):-

Equitable participants who have contributed more to the surplus

should be given more and vice versa Simple easy to administer and simple for participants to understand

and accept the logic Flexible easily modified if circumstances cause a change in the

amount of surplus available Consistent distributes surplus in line with the actuarial basis for

contribution and liability provisions Acceptable participants need to accept the logic and fairness of the

surplus distribution method otherwise there will be no takers in acompetitive marketplace

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Practical Aspects of Surplus Distribution Firstly, in arriving at the surplus, the surplus has to be fair and to beseen to be fair. In maintaining equity

The particular accounting treatment of several financial items need to

be addressed for consideration in the surplus administration process asfollows:

Unrealized gains as surplus is distributed on income and actual realizedgains, later generations of participants may benefit more than earliergenerations of participants as unrealized capital gains profits are notreflected in earlier distributions of surplus.

Provisions for bad investments provisions for bad investments whichvalue has fallen from the value reflected on purchase will reduce surplus. Acorresponding write back of such provisions will benefit later generationsof participants.

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Practical Aspects of Surplus Distribution Qardhal Hasan as qardhal hasan is considered a loan

injection into the takaful fund, repayment of such loansshould take precedence over distributing surplus toparticipants.

Surplus determination on a fund or product portfoliobasis although there are practical limitations torefining surplus distribution to an individual participantlevel an attempt should be made as far as is practicableto distribute surplus in a way that recognizes theparticular experience of blocks or cohorts of participantssharing similar characteristics.

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Practical Aspects of Surplus Distribution Participants Eligibility to surplus sharing:

Those who have not made a claim in the year, areentitled.

Those that have claimed less than their risk contribution(i.e. Tabarru donation) paid into the risk pool.

Those who have claimed are not entitled at all.

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Summary The opinion of shariah scholars is divided on the issue of

the permissibility of sharing surplus with participants andthe operator with many allowing its distribution to theoperator.

The determination of surplus is essentially an actuarialprocess as it isvery dependent on and sensitive to theactuarial estimation of liability provisions for the business.

The surplus distribution to different generations ofparticipants is also affected by the accounting treatment of

several financial items. Surplus distributed if any should be in proportion to the

good experience contributed by the participantsconcerned.

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End