The rapid growth of the takaful sector means there are constantly changing issues and challenges facing the industry. The ICMIF takaful exchange is designed to facilitate the sharing of knowledge and opinions across the takaful sector in an effort to increase awareness of Takaful principles and practices, encourage open and infomal debate, and increase understanding of different viewpoints. ICMIF will send out questions on a regular basis for comments, the answers received will then be made available on the web site, visitors also have the opportunity of sending in questions or request for information.
What is the 'source' of the obligation of corporations to pay zakat and its basis of calculation. Note corporations may have different mix of Muslim interest.
The sources of obligation to pay Zakat are highlighted in many verses of the Al-Quran, hadith and ijma’ (consensus of Islamic scholars), which are the fundamental reference and sources of hukm for ahl-sunnah wal jamaah. For example, as mentioned in:
- “And be steadfast in prayer: Give Zakat…”(Al-Baqarah:43)
- “And be steadfast in prayer and give Zakat: and whatever good ye send forth for your souls before you, ye shall find it with Allah: for Allah sees well what ye do”(Al-Baqarah:110)
- “…And give Zakat, to fulfil the contracts which ye have made” (al-Baqarah 177)
- “So establish regular prayer and give Zakat and obey the Messenger; that ye may receive mercy” (An-Nur:56)
- A hadith narrated by ibn Abbas “Tell them that Allah has made them compulsory to pay Zakat taken from wealth of the rich and given to the poor and needy”.
Thus, zakat must be and is compulsory (wajib) to all individual Muslim who has fulfilled the conditions and requirements upon reaching “haul” and “nisab” to pay zakat such as having zakatable properties, business and trading, agriculture and so on. Thus, the shareholders (individuals) of the corporation or those who run the company are obliged to pay zakat for their business when the conditions have been fulfilled.
Answer by: Dr Zulkifli Zakaria, Assistant Vice-President, Corporate Office-Shariah Secretariat & Compliance, Takaful Nasional (Pte. Ltd) Sdn Berhad, (Malaysia)
The Corporation is under no obligation to pay Zakat on behalf of its Policyholders or the Shareholders - It is Policyholders and Shareholders individual responsibility to pay Zakat.
Answer by: Anonymous
I see no obligation for any corporation to pay Zakat on behalf of an individual. This is only an obligation of each individual to look at his total finances, income and expenses, not just that portion handled by any specific financial organisation. This is why an individual organisation can not determine an individuals zakat.
In terms of an organisation paying zakat on its own profits, under Islamic principles they should be obligated to pay.
This is exactly how it works in KSA.
Answer by: Dawood Yousef Taylor, Assistant General Manager, Head of Takaful Ta’awuni (Saudi Arabia)
Why Shariah compliant business enterprises do not seem to do as well as conventional enterprises. Is a Scholarstic review and re- interpretation of permissable Muamalah practices required?
Through our observation, we do not see any particular Shariah compliant business enterprise(s) showing unsatisfactory performance failing due to complying to the Shariah. The performance of a company is very much related to management and person(s) who manage and run the company, and the people working in the company.
Allegations that shariah compliant enterprises are not showing well as compared to the conventional has to do with insufficient or minimal public awareness, leading to misconception. Also similar to "normal business” advertising and publicity is a necessity. Despite that, there are numerous shariah compliant companies who are performing very well, and at the same time there are many conventional companies that have not done well, and are forced to close operations. Historically and current much focus has been given on failed corporations but little was highlighted on successful ones – the comparison is also unfair!
Islamic banking has grown tremendously, and received even by the Western countries with significant interest. During the World Islamic Banking Conference held in Manama Bahrain on 28 October 2000, Zeti Akhtar Aziz announced about USD 170 billion of funds, managed by about 170 Islamic financial institutions (Aziz, 2005, p.5). Later, in the year 2004 the amount increases by 35% to USD 262 billion, managed by 265 Islamic financial institutions and denotes a USD 400 billion in investments (Kanafani, 2004).
Based on the above opinion, it is nice to have a further scholastic review or re-interpretation of Muamalah practices to enhance certain products or practices in order to be far better as compared to the conventional. It is also better to enhance campaign, promotion and awareness program to get more confidence and support from the public at large. Thus shariah compliant product will be looked upon as a more supreme product, as compared to the conventional.
Answer by: Dr Zulkifli Zakaria, Assistant Vice-President, Corporate Office-Shariah Secretariat & Compliance, Takaful Nasional (Pte. Ltd) Sdn Berhad, (Malaysia)
The main contributory factor could be that the Takaful companies have restricted avenues of investment income.
Answer by: Anonymous
As an industry, we must look to the Malaysian and Sudanese Takaful industries as the father of modern day Takaful. Both countries have seen significant growth in the Takaful industry, both in terms of general and life Takaful operations. Hand in hand with this growth has been government’s role in establishing Islamic insurance regulations, in the case of Malaysia, as a separate regulatory body, solely responsible for the regulation and monitoring of the Takaful industry.
Unfortunately, other than Bahrain, which is in the process of developing separate Islamic insurance regulations, Takaful development in other regions of the world has, in the main, had to come under conventional insurance regulations. This has not stopped the development of Takaful in countries such as Indonesia, Sri Lanka, Kuwait, Saudi Arabia, and many others, but it does raise the question of how a Takaful company can compete on equal terms with conventional insurance when the uniqueness of Takaful may not be considered when considering the development of Takaful or the regulation of a Takaful operator. Such an unregulated Takaful environment is creating uncertainty for the future direction of the Takaful industry.
Although such issues are not impeding the development of Takaful in certain regions such as in the Middle East, which is a good example of where there is an “explosion” of Takaful operators, both in life and general in Kuwait, Saudi Arabia and the UAE, this uncertainty and lack of clear direction from a regulatory perspective can and probably will lead to difficulties in the future when the Takaful operators are looking for a level playing filed in terms of competing with conventional operators, but only having conventional regulations to guide them
We are already seeing such problems facing the Takaful industry in Saudi Arabia where a new Cooperative Insurance Law has been introduced which unfortunately does not distinguish between conventional and Islamic insurance operators thus leading to confusion in the market for the consumer. We should never forget the consumer when considering regulatory arrangements, as ultimately such regulations should primarily be for the protection of the consumer more than the operator.
It is fair to say that such concerns are primarily related to a market environment, which is predominantly Muslim, rather than a western type environment where Muslim minorities need to be served.
Answer by: Dawood Yousef Taylor, Assistant General Manager, Head of Takaful Ta’awuni (Saudi Arabia)
Is there available a central resource (print or virtual media) collating and publishing Islamic edicts (fatwa) on business practices (muamalah)? And one that preferably has academic discussion together with the edicts?
There are references available in the website such as e-fatwa and islamonline for resource of Islamic edicts especially in muamalah. In Malaysia, the Islamic University College of Malaysia has formed and created the World Fatwa Management & Research Institute. The institute was officiated on 26 May 2003. So far the institute had categorized the fatawa into 11 topics/ categories - contemporary fatawa; fatawa al-ahwal al-syakhsiah; fatawa aqeedah; diet specific fatawa; general fatawa; fatawa ibadah; fatawa jinayat; medical fatawa; fatawa muamalat; fatawa siyasah al-syar'iyyah, and fatawa turath. They also have link to the Malaysian National Fatwa Council, Majma' al-Fiqh, and Jurist & Scholars Fatwa; e-fatwa Malaysia; Fatwa Online and Islam Q&A.
References:
Aziz, Zeti Akhtar (2005). Islamic Banking and Finance progress and Prospects Collected Speeches: 2000-2005. Kuala Lumpur: Central Bank of Malaysia.
Islamic University College of Malaysia. http://infad.kuim.edu.my/
Kanafani, Mohamad Toufic (2004). Examining trends and future prospects for Islamic finance. A paper presented at the Asian Islamic Banking & Finance Summit, Kuala Lumpur.
Answer by: Dr Zulkifli Zakaria, Assistant Vice-President, Corporate Office-Shariah Secretariat & Compliance, Takaful Nasional (Pte. Ltd) Sdn Berhad, (Malaysia)
The greatest challenge to the development of a Takaful industry worldwide is the lack of a standard set of sharia guidelines. Whether this be at international, national, sharia board or unfortunately even at sharia board member level, there are too many examples of contradictory sharia decisions that just seem to be inconsistent and which cannot be explained. Although pluralism in Islam is one of its beauties, such inconsistencies will eventually lead to both national and international arbitration, only holding back the development of the industry at a time when the Islamic community is in need of such Takaful services.
Answer by: Dawood Yousef Taylor, Assistant General Manager, Head of Takaful Ta’awuni (Saudi Arabia)
Whether flat rate contributions and the flat rate Tabarru can be made applicable when duly approved by Actuary?
Yes as he is responsible to calculate the risk based contribution.
Answer by: Mohamed El-Dishish, Chief Financial Officer, Takaful Re, UAE
At TN currently we only allowed for group scheme. For individual, we maintain as per prudent actuarial principle. Of course if the actuary decides due to relevant circumstance, then flat rate can still be applied. Mathematically we are trying to be equitable i.e. older people tend to have higher mortality, thus higher contribution rate.
Answer by: Mohd Khairi Bin Nasaruddin, International Operations, International Ventures & Alliances, Takaful Nasional, Malaysia
In our eyes, although takaful is based on mutual help and solidarity, a takaful model should strive to be fair. This fairness can come in several different ways. One way is to make the contributions fair, with everyone paying their fair share. At the end of the year or the end of the policy term (depending on the model) surplus is shared equally by all policies based on contributions into the fund. Alternatively everyone can pay a flat rate contribution, but the surplus sharing mechanism would give more to participants who "paid too much" versus those that paid too little. This is not favored actuarially as fairness is nearly impossible. Although some people feel that takaful does not need to be fair, I personally disagree as Islam is fair. There is a myriad of particular circumstances which might call for a simplified approach, which really should be discussed directly with a qualified actuary familiar with takaful. For instance, in some cases there is a tradeoff between system constraints and fairness, for instance for credit takaful policies for smaller loans and due to necessary expense minimization many banks will require flat rates. Similarly some takaful plans which are heavily savings in nature have a small death benefit where practical considerations imply a simplified approach as necessary. A rule of thumb is that whenever unsure follow conventional insurance practice in the same jurisdiction, as it reduces potential antiselection.
Answer by: Hassan Scott P. Odierno, Consultant / Actuary, Mercer Zainal Consulting, Malaysia
In Takaful Family plans, premiums are more like installments in saving plans and the premiums are calculated based on how much return the policy holder needs on maturity. According to their maturity value need the premium will be adjusted (where as the conventional premium is purely based on mortality) and then the flat premium becomes possible in Takaful.
The premium collected will be separated into 2 funds and then a specific percentage goes to Tabarru fund, which is also a flat rate.
Answer by: Oneeza Fareen, Asst. Manager Underwriting, Amăna Takaful Limited, Sri Lanka
Actuary is required to certify the adequacy of the intended product to be launched. So the issue of having flat contribution and flat Tabarru’ are not an issue from the actuarial perspective. We should be looking from the Shariah perspective at the mechanism of how we arrive and conclude such rating. Tabarru’ rate can be increasing, decreasing, flat or mixture of these with no restriction imposed. Tabarru’ essentially in its widest application means ‘donation’. And if the participant has consented to the structure of the tabarru’, meaning agreeable to pay ‘donation’ as illustrated, it is considered valid.
The regulator may be concern of adequacy of the risk fund to cover future obligations (liabilities). The flat rate can be looked upon from two perspectives:
- Above average flat rate
The regulator may view this as overcharging and the company is expected to make adjustment to ensure equitableness and reasonableness of the flat rate.
- Below average flat rate
The regulator may view this as undercutting and require the company to furnish extensive info and basis for such rating. The company may need to run an asset share or cash flow testing to ensure that this rating structure is able to support future liabilities and would not cause a major risk fund strain.
So the issue of flat rate lies with the organization business strategy.
Answer by: Saiful Bahri, Chief Actuary, Takaful Ikhlas, Malaysia
What should be the formula for calculation of surrender and paid up value?
I presume this question relates to family plans. This would depend on the model being used. In Malaysia we have what are called drip plans. Here the entire contribution less wakalah fees are put into a savings fund, and drips are taken monthly or yearly for benefits. In such a case the surrender value would be the value of the savings fund less any surrender charges. In Bangladesh I would guess they have a long term risk fund for such plans as single contribution mortgage. In such a case some people feel no surrender benefits need to be paid as the contribution is a donation with nothing expected back. I personally would prefer to design the plan to be fair. In such a case a method known as asset shares would be used. In this method the various cash flows of the plan are collected from inception till date of surrender and paid out, less any surrender charges. I haven't heard of paid up values being mentioned in takaful, though theoretically as long as a surrender value is payable there can be a paid up value. Such a paid up value would be calculated by making assumptions as to the future experience of the fund, adding some margins for conservatism.
Answer by: Hassan Scott P. Odierno, Consultant / Actuary, Mercer Zainal Consulting, Malaysia
There is no formula for surrender value or paid up value in Takaful Family plans, because according to the Takaful concept, the participant can cancel his plan at any time (where as at conventional market, the insured only can go for a surrender after paying for 3 year premiums) and during cancellation the participant will get all the money which is in his PIF and the profits earned by the fund. A small fee for cancellation will be charged by the Takaful operator (where as the conventional market will only pay a maximum of 30% of the total amount of the within mentioned premiums paid excluding this premiums for the first and all extra premiums and /or additional premium for the rider benefits).
Answer by: Oneeza Fareen, Asst. Manager Underwriting, Amăna Takaful Limited, Sri Lanka
First of all, we need to establish where the payment of surrender / paid up is coming from, i.e. investment fund or risk fund or other funds (shareholder). We need to handle these two issues separately.
- Surrender Value
If the payment is coming from the investment account then the SV is the balance in the investment account, i.e. subject to deduction of associated cost.
If there is no investment account, we may need to toy around with the idea of ‘tanahud’ principle, i.e. the portion of the contribution (or full amount) is considered tabarru’ when it is utilized to pay benefits (claims) and any remaining balance after payment of claims is due to the rightful contributor. Tanahud concept is still new and in its development and testing stage.
If the whole amount of the contribution goes to tabarru’ fund (risk fund), any refund should come from the shareholder’s coffer. When we donate something, we are relinquishing our rights to ownership of such asset(s). The company may feel oblige to refund the SV due to competitive pressure and business consideration. However, high rate of surrender may have an adverse impact on the shareholder’s fund (free money to pay surrender) as well as the risk fund (insufficient fund due to lost of future contributions).
- Paid-up Value (PU)
When a participant stops paying his contribution (premium), his policy may have accrued a cash value. This cash value will be used to define the new benefit scale that will last the policy to its maturity date (as stated in the policy). From the technical perspective, there is no issue of calculating the PU. But from the Shariah perspective, there could be some issues to consider: - Takaful operator requires the consent of the participant to execute such option. We need to explicitly mention this in the aqad and policy.
- Guaranteeing that the available fund is sufficient to last the policy until maturity.
- What if there is no ‘investment fund’ availability, where do we get the cash value to fund the PU?
PU calculation is dictated by the company’s practice.
Answer by: Saiful Bahri, Chief Actuary, Takaful Ikhlas, Malaysia
The Actuary can answer this question.
Answer by: Mohamed El-Dishish, Chief Financial Officer, Takaful Re, UAE
Surrender Value:
For mortgage plan , can use ratio of reserve (less management expense/comm) against the unearned contribution i.e. assuming ME and Comm is 25%, after k years, then, the formula is : Contribution * (1-25%) * v(k)/v(0).
For Individual Plan with Participant Account : The accumulated amount in Participant Account with Investment Return
Paid Up Value:
Amount in Participant Account Value used to "contribute" to the sum covered not exceeding the the original sum covered and term, using standard actuarial formula.
Answer by: Mohd Khairi Bin Nasaruddin, International Operations, International Ventures & Alliances, Takaful Nasional, Malaysia
Whether, discrimination between male and female is permissible while underwriting life policy?
Rate differentiation is more than permissible, it is preferrable when trying to maintain the ideal of takaful being fair. The question is to what level to make this fairness: males versus females, smoker versus non-smokers, other risk classifications? A rule of thumb is to follow consistent standards with conventional insurers operating in the country. This eliminates some antiselection concerns.
Answer by: Hassan Scott P. Odierno, Consultant / Actuary, Mercer Zainal Consulting, Malaysia
No, while underwriting there is no discrimination as such.
Answer by: Oneeza Fareen, Asst. Manager Underwriting, Amăna Takaful Limited, Sri Lanka
Life policy is underwritten based on the available information. Male and female have different risk profile associated with them. There is no discrimination in underwriting life policy at all.
Answer by: Saiful Bahri, Chief Actuary, Takaful Ikhlas, Malaysia
Yes as each one has different responsibility as per Islam.
Answer by: Mohamed El-Dishish, Chief Financial Officer, Takaful Re, UAE
Currently we allowed lower rating for female based on life expectancy. Differentiation is permissible, from our view point.
Answer by: Mohd Khairi Bin Nasaruddin, International Operations, International Ventures & Alliances, Takaful Nasional, Malaysia
What terms and conditions need to be followed for revival of lapsed policy and whether any charge/penalty can be imposed to policy holders for the unpaid period?
This would depend on the particular operator. Again maintaining fairness is a worthy ideal, so the operator should determine what direct and hidden costs are involved. An actuary can help with this.
Answer by: Hassan Scott P. Odierno, Consultant / Actuary, Mercer Zainal Consulting, Malaysia
Option I - Up to 1 year lapses are just revived by paying the arrears premium and by filling the normal DGH
Option II - 1 - 3 year lapses are done with arrears premiums + DGH + Spl reports if necessary
Option III - policies lapsed for more than 3 years will be technically treated as New business to follow all the medicals and procedures as new business and then the sum assured, term and the premium will be recalculated and the paid premiums will be adjusted towards the new plan
No penalties are imposed within Takaful concept.
Answer by: Oneeza Fareen, Asst. Manager Underwriting, Amăna Takaful Limited, Sri Lanka
To revive (reinstatement) of lapsed policies may require the same process as new business. The company should set its own guidelines on reinstatement of policy within the ambit of Shariah principles.
From the Shariah perspective, there should not be any charges or penalty against the policy or late contributions. We can charge fee for processing the reinstatement. The charges should be reasonable and justifiable.
Answer by: Saiful Bahri, Chief Actuary, Takaful Ikhlas, Malaysia
Again Actuary is the one to answer this question.
Answer by: Mohamed El-Dishish, Chief Financial Officer, Takaful Re, UAE
The lapsed policy may be reinstated subject to payment of all outstanding contribution and the submission of satisfactory evidence of current medical condition (Health Declaration Form/medical reports). However it is at the company absolute discretion whether to accept or reject the reinstatement. There is a charge for the revival of lapsed policy.
Answer by: Mohd Khairi Bin Nasaruddin, International Operations, International Ventures & Alliances, Takaful Nasional, Malaysia
How the death benefit amount is arrived at in case of Term, Endowment and Anticipated Endowment policies?
This would depend on the ingenuity and creativity of the actuary. There are numerous structures possible depending on the needs of the participants. One potential ideal with respect to this is the concept of universal life policies in the US, where the death benefit is variable depending on the life stage of the policyholder. For instance a policyholder might purchase a plan just after finishing university. He might not have much money and no dependents, so his coverage is low. Later he gets married and needs higher coverage. As he gets children the death benefit would increase further. As he gains stability in his work and has more disposable income he would save more in the plan, and withdraw much of it when the children go to university.
Answer by: Hassan Scott P. Odierno, Consultant / Actuary, Mercer Zainal Consulting, Malaysia
Death benefit is the sum assured for, and in case of a natural death the sum assured against natural death will be given and due to an accidental death, the accidental death benefit amount will be given (same as for all the riders) after obtaining the relevant claim documents.
Answer by: Oneeza Fareen, Asst. Manager Underwriting, Amăna Takaful Limited, Sri Lanka
Factors to consider in determining the rate are (though non-exhaustive):
- age
- gender
- mortality experience
- expense assumption
- acquisition cost
- profit rate assumption
The death benefit amount can be a by-product of contribution selection or personal choice, i.e. say an annual premium $X will provide a sum cover of $10,000 or just choose the sum cover and determine the annual premium.
Answer by: Saiful Bahri, Chief Actuary, Takaful Ikhlas, Malaysia
Again Actuary is the one to answer this question.
Answer by: Mohamed El-Dishish, Chief Financial Officer, Takaful Re, UAE
Death Benefit is selected by the participants according to their need. Calculation of mortality risk is based on the standard actuarial principles.
Answer by: Mohd Khairi Bin Nasaruddin, International Operations, International Ventures & Alliances, Takaful Nasional, Malaysia
Whether Tabarru amount is to be deducted from maturity benefit?
This would depend on the model being used. For plans with a savings component normally the savings component is either in a separate fund from the tabarru, or the tabarru is dripped regularly. It appears possible to design a structure where tabarru is paid in arrears either yearly or at maturity. This would solve issues of surplus sharing, though it might be capital intensive.
Answer by: Hassan Scott P. Odierno, Consultant / Actuary, Mercer Zainal Consulting, Malaysia
Maturity Value = PIF total + profits at PIF + a specified % of surplus
Tabarru amount will not be given back to the customer during maturity since it is inclusive of all the operational costs. But a share of the profits earned by the Tabarru fund (Surplus) will be given back to the participant.
Answer by: Oneeza Fareen, Asst. Manager Underwriting, Amăna Takaful Limited, Sri Lanka
No.
Answer by: Saiful Bahri, Chief Actuary, Takaful Ikhlas, Malaysia
Again Actuary is the one to answer this question.
Answer by: Mohamed El-Dishish, Chief Financial Officer, Takaful Re, UAE
No, amount of tabarru is deducted solely from contribution. However in the case of plan with Participant Account, there is a provision before maturity to deduct from the accumulated amount to pay for contribution (Automatic Premium Loan for conventional)
Answer by: Mohd Khairi Bin Nasaruddin, International Operations, International Ventures & Alliances, Takaful Nasional, Malaysia
Is it acceptable under the principles of takaful for rating to differentiate for the respective risk involved, taking into account moral and physical hazards as with conventional insurance, as each member would be paying a tabarru relevant to the risk they bring to the pool?
There is no objection under the Takaful principles for rating to differentiate for the respective risk involved. Because….Tabarru’ is an unclaimable Donation to the common pool, chargeable on the degree of each risk basis, assessed with foreseeable test considering the environment concerned. Hence, each risk has to be differently (but not commonly) rated.
Answer by: Prof. Dr. Mohd Ma’sum Billah, Professor of Islamic Financial, Banking and E-commerce, University of King Abdul Aziz (Saudi Arabia).
Yes, this would be encouraged as a worthy goal of takaful is fairness.
Answer by: Hassan Scott Odierno, Consultant, Mercer (Malaysia)
Yes, it is acceptable and technically prudent.
Answer by: Dr. Mohamed Khairy, General Manager, Takaful Insurance, (Saudi Arabia)
Yes, according to Sharia'a there is no objection to utilize such procedures to implement a risk based contribution estimation policy.
Answer by: Younis Jamal, General Manager, Takaful International Co (Bahrain)
Yes. Each risk has to be rated according to its weight, taking into consideration moral and physical hazards involved. It is not equitable to charge same rate for high and low risks.
Answer by: S. A. Mohideen, General Manager, Ceylinco Takaful Ins. (Sri Lanka)
Yes
Answer by: Majeed Nawab, Canada
Yes, even if the basic principle is the “tabarru’, we should always have in mind that we have top protect the Takaful fund; therefore, the differentiation is necessary to make any donation proportional to the nature of the risk and the Sum Insured. Takaful being a non charity operation, we have also to stick to minimum technical underwriting rules. By doing this we are not penalizing the “good” policyholders, and we are moralizing the pool.
Answer by: Chakib Abouzaid, CEO, Takaful Re (U.A.E)
Yes it is deemed acceptable and actually a common practice to differentiate rates based on risk profiles especially for individual business.
Answer by: Agus Haryadi, CEO, Takmin Working Group (Indonesia)
I think it is acceptable that a member pays a tabaru relevant to the risk he brings to the pool
Answer by: Bocar Sow, Marketing /Communications, Sosar Al Amane (Senegal)
Regarding the distribution of surplus, which of the following is the 'best' method of undertaking such distribution and has the administration of the suplus distribution been problematical at all?:
- Surplus for year one goes to all policholders who renew in the next year
- Surplus goes to policyholders who took out or renewed a policy in the year in question irrespective of whether they renew in the next year or not
- Surplus from the prior year goes to all current policyholders at the time that surplus is distributed; irrespective of whether they are new or renewal policyholders in the next year
Among all the above three options the best is:
- Surplus from the prior year goes to all current policyholders at the time that surplus is distributed; irrespective of whether they are new or renewal policyholders in the next year. Because…
- Takaful policy is not an opportunity but a scheme providing coverage on cooperative basis (Ref. Surah al Maidah (5:2)).
Answer by: Prof. Dr. Mohd Ma’sum Billah, Professor of Islamic Financial, Banking and E-commerce, University of King Abdul Aziz (Saudi Arabia).
This is difficult to answer without knowing more about the specifics of the situation. Actuarially the goal would be to ensure fairness in distribution. Assuming the rating is fair, then surplus distribution would be consistent for all policyholders who contributed to the surplus. New participants would not have contributed to this surplus, thus should not get a portion. Similarly participants who did not renew but did not claim do contribute to surplus and thus should receive it. Note that this is different than reductions in future year rates (no claims discount), which is not based on surplus per say, but rather the expectations of future experience being better due to the lack of claims in the past.
Answer by: Hassan Scott Odierno, Consultant, Mercer (Malaysia)
Option 3 is the best method as surplus distribution is independent of renewal.
There is administration "challenge" but it is still manageable. Some companies use the surplus to negate the future contribution. In cases where the surpluses are too small, the amount are aggregated and sent for donation (consent from participants at the beginning)
Answer by: Dr. Mohamed Khairy, General Manager, Takaful Insurance, (Saudi Arabia)
We use the second method as it is fair to distribute surplus according to performance of participants, whether they renew the following year or not. The problem associated with this method is that the funds generated from surplus payments which are notified but not claimed from participants. This amount can not be used for other purposes.
Answer by: Younis Jamal, General Manager, Takaful International Co (Bahrain)
Surplus should go to the policy holders whose policies were in force during the year, irrespective of whether they renew the policies the following year, because of their contribution to Takaful fund for that year, moreover the contract is for one year only.
Answer by: S. A. Mohideen, General Manager, Ceylinco Takaful Ins.
(Sri Lanka)
Surplus goes only to policyholders who took out or renewed a policy in the year in question irrespective of whether they renew in the next year or not.
Answer by: Majeed Nawab, Canada
We have to differentiate between underwriting year and accounting year. The surplus goes to the policyholders in the underwriting year N, irrespective of whether they are renewing their contract in N+1 or not. For each and every year, we have a pool and different policyholders. In N+1, the distribution is for the previous year, and policyholders during the current year have to wait until next distribution
The major question about surplus is: Should we make a distribution among all the policyholders? Or should we limit our distribution to policyholders are performing well? Both positions are acceptable from a Shari’a point of view. My personal position – from a technical point of view- is to exclude policyholders making claims –and already settled to them- from the distribution.
Answer by: Chakib Abouzaid, CEO, Takaful Re (U.A.E)
Based on the Fatwa of Indonesian National Shariah Council No: 53/DSN-MUI/III/2006, Article 6, there are 3 options in surplus distribution: (1). all surplus is retained in the Tabarru fund; (2) some retained and some distributed to qualifying policyholders; or (3) some retained and some distributed to p'holders and the takaful operator. As a common approach, qualifying p'holders are those who made no claim above a discretionary (by the management) claim limit in the respected underwriting year irrespective of whether they are new or renewal policyholders in the next year.
We believe the administration issue depends much on the IT support.
Answer by: Agus Haryadi, CEO, Takmin Working Group (Indonesia)
Regarding the distribution of surplus, the best method is that surplus of the prior year goes to all current policyholders at the time that surplus is distributed , irrespective of whether they are new or renewal policyholders in the next year;
Answer by: Bocar Sow, Marketing /Communications, Sosar Al Amane (Senegal)
Where there is a number of product lines, is it essential that the surplus is calculated for each product which could leave the company in deficit but paying surpluses on individual lines? Could it be argued that as a collective enterprise its the good derived by all that drives the shared result as opposed to breaking it down to subsets of clients.
Surplus shall be calculated on each individual policy (Individual / Group) and distributed to the each policy holder (Individual / Group)
Answer by: Prof. Dr. Mohd Ma’sum Billah, Professor of Islamic Financial, Banking and E-commerce, University of King Abdul Aziz (Saudi Arabia).
My personal opinion is that it depends on the source of the losses for the loss making product lines. If the losses were due to underpricing or other things which the operator was aware of, then the operator should be fully responsible. On the other hand, if the losses were due to random fluctuations then this can be distributed amongst all participants. We would need to know more of the particular circumstances to comment more.
Answer by: Contributor: Hassan Scott Odierno, Consultant, Mercer (Malaysia)
The latter comment is agreeable. If breaking up according to product lines, there will never be strength in the fund. Fund can be break up provided the extreme nature is diverse i.e. long term plan vs one year. For similar products, regardless of the features, it should be treated as one i.e. 10 year endowment is no different than 20 year or longer endowment.
Answer by: Dr. Mohamed Khairy, General Manager, Takaful Insurance, (Saudi Arabia)
Takaful or guaranteeing each other is a principle which is shared amongst all participants and hence, if the collective pool generates 0 surplus then participants on all line of business will not get any payments. However, if the collective pool produces surplus, then we can consider rewarding the participants under the specific lines who actually participated in producing the surplus and not the lines which produced loss.
Answer by: Younis Jamal, General Manager, Takaful International Co (Bahrain)
Essentially, distribution of surplus must be on individual lines. However, there are practical problems which make implementation extremely difficult.
Answer by: S. A. Mohideen, General Manager, Ceylinco Takaful Ins.
(Sri Lanka)
When company makes overall surplus, the surplus should be distributed amongst the participants of only those takaful lines which have produced a surplus.
Answer by: Majeed Nawab, Canada
As you are aware, we cannot mix Motor with Aviation. In a direct company we should have a minimum for 2 or 3 funds: Family Takaful, General Takaful split between Motor and property, casualty, marine and accident. There is a need for a sophisticated model with pools for each and every line of business
Answer by: Chakib Abouzaid, CEO, Takaful Re (U.A.E)
No, surplus is determined on the total-product lines basis. However each surplus is determined for life and general business.
Answer by: Agus Haryadi, CEO, Takmin Working Group (Indonesia)
It is important as for the first viewpoint to calculate the surplus for each product which could leave the company in deficit but to pay also surpluses on individual lines.
Answer by: Bocar Sow, Marketing /Communications, Sosar Al Amane (Senegal)
Calculating surplus on an underwriting year basis will result in distribution some time (2 to 3 years) after the end of that underwriting year. Is this generally accepted among current takaful providers?
- It is not acceptable Calculating surplus on an underwriting year basis but will result in distribution some time (2 to 3 years) after the end of that underwriting year.
- Exceptionally, however it may some times be acceptable due to any reasonable technical failure encountered during the calculation or distribution.
Answer by: Prof. Dr. Mohd Ma’sum Billah, Professor of Islamic Financial, Banking and E-commerce, University of King Abdul Aziz (Saudi Arabia).
The general practice is to distribute surplus yearly. This is not technically correct however, as reserving is an estimate, which may or may not be correct. For short tailed business (and family business structured in a "drip" method similar to unit linked plans) this is not far off. For long tailed business the reserves are only a guess and might be quite far off. For such business by right surplus should only be distributed after 7 years or so. This is difficult to do in reality however.
Answer by: Hassan Scott Odierno, Consultant, Mercer (Malaysia)
I am not certain the first statement is applicable as some companies do distribute almost immediately after the end of underwriting year.
Answer by: Dr. Mohamed Khairy, General Manager, Takaful Insurance, (Saudi Arabia)
We calculate surplus on financial year basis and publish the same at year end i.e. 31/12, but the actual reimbursement will be at renewal time-whether the participant renewed or not- to ensure that 12 months period has passed which the fair period for entitlement.
Answer by: Younis Jamal, General Manager, Takaful International Co (Bahrain)
There are certain practical problems, for instance, some third party claims are determined through legal process which takes considerable time. However, sufficient provision for such liabilities takes care of undecided claims.
Answer by: S. A. Mohideen, General Manager, Ceylinco Takaful Ins.
(Sri Lanka)
This should be the case, but generally the surplus is calculated and distributed without taking this into consideration.
Answer by: Majeed Nawab, Canada
This is the only option I could see. We have from a technical point of view to stick to the underwriting year
Answer by: Chakib Abouzaid, CEO, Takaful Re (U.A.E)
