ALTERNATIVES TO TAKAFUL SURPLUS … mohan.pdf · Takaful is based on Islamic principles and values....
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Overview Objectives & Expectations
Before we assess the various Surplus distribution options, let us assess the Objectives and expectations of 3 parties involved in the Takaful contract. The Participant, The Tabarru Pool, and The Operator.
Participant : By participating and donating, I am protecting myself and my family from the unexpected events of life. My donations not only protect me, but, will also protect my fellow participants.
My donations benefit me both spiritually (Principled cause of protecting others) and materially (when something happens to me).
I surrender my rights on my donations. I trust that my donations are used in a fair and principled manner. (The other school of thought is that Participants own the pool).
Tabarru Pool : To accumulate the donations and provide benefits to those participants who suffer from the unfortunate events of life.
33 Operator : To prudently manage the Takaful Funds by taking pre-determined fees for expenses and services (Wakala Model), or sharing on pool’s investment returns (Mudharabah model).
Pool shall strive for welfare of participants and maximize the benefits to donators. All participants shall be treated fairly under all scenarios. Clear segregation of donation funds by purpose (Death, TPD, CI etc). Pool shall have minimal and justifiable operational costs (Non claim expenses). Pool shall get optimal returns on its investment at low risk. To a reasonable extent, donations shall be invested in areas of risks prevention, thus, enhance the surplus margin.
Prudent Underwriting – Reduce claims costManage investment of the Tabarru fund in Shariah compliant investments. As manager of the pool, strategize for long term solvency of the Pool.
In line with the objectives of Takaful, should the surplus be shared amongst the participants or can the surplus be
used for other welfare? This article discusses this aspect. We focus on Family Takaful Funds, where the contracts are
Takaful is based on Islamic principles and values. Takaful operator may be in business, but, Takaful fund is not a business. Takaful fund is intended for community welfare.
The foundation of Takaful is enshrined in “Tabarru (Donation)” and “Taawuni (Mutual Help)”. Takaful involves collection of “Tabarru” from participants to facilitate “Taawuni” among them with pre-determined donation as per participant’s protection needs.
With right pricing of Donation amounts, prudent underwriting, availing sufficient protection from Retakaful, the total takaful donations collected are likely to exceed the claims paid/provisions and IBNR (Incurred but not Reported as per actuarial assessments). At the end of each period (usually yearly), this is calculated and declared as surplus. Normal practice prevailing in the industry is to distribute this surplus among the donating participants in the ratio as per their individual donations to the overall pool size. Sharing Surplus with participants is the Key differentiator of Takaful compared to Conventional Insurance.
Performance Fee (Optional)
Benefit from Surplus
Claims Service Fee
Alternatives to Takaful Surplus DistributionJune 2012By : Ravindra Mohan Vijalapuram
Alternatives to Surplus Distribution
11 ReservesSurplus is not distributed and it is kept as reserve to enhance the solvency of the Tabarru pool. There can be a significant need for this during the initial years of Takaful operations. As the claims experience improve in subsequent years, larger surplus can be declared in later years. Retaining surplus as reserves may impact short term participants (Lapse, Surrender and Claims), but, may benefit long term participants, on condition that surplus calculation looks at cumulative mortality contributions from participants (from inception) instead of yearly contributions to pool.
33 Enhanced BenefitsInstead of refunding donations, this approach appears more sensible and appealing. For a participant, as the primary purpose of participating in Takaful is to get protection, any enhanced benefits (or services) during bad times (not promised at contract) are also welcomed. Instead of refunding small donations to many people, we target to provide enhanced benefits to the needy few who suffer the most risks. There are multiple ways these benefits can be extended to the affected participants. Any approach should be principled and be in line with the Pool’s purpose/objectives. Some examples of how enhanced benefits can be provided.
The above enhanced benefits can also be made as deferred and non-guaranteed. This means, claims are registered and payment is only made at the end of the year after assessment of real experience. Adopting and publicizing this method will attract more participants towards Takaful.
44 Preventive ServicesWhile the primary objective of the Tabarru pool is to provide defined financial help to the affected participants, it should be in the generic interest of the pool to take all preventive measures for healthy living of participants. Some examples of how this can be adopted
55 Re-DonationsWhile the primary objective of the pool is to protect the participants, Takaful Funds should always look at society holistically. In line with the objectives of the pool, parts of surplus should be re-donated to the needy at large. Some examples below.
22 RefundSurplus is distributed back to Participants. This current practice is widely used in the industry. This can be handled in two ways.
a. Immediate Distribution (Cash-out) : The declared surplus is transferred from the Tabarru pool to participants’ account. Participants are usually given the options to: i. Take out as “Cash” ii. “Deposit” into his/ her personal fund iii. Adjust it towards next “Contribution”. This method may not be advantageous to the pool in the long run. It also incurs recurring distribution costs. However, this method is widely practiced in the industry.
b. Deferred Distribution : Here, we bring in the concept of “Reversionary Bonus” as in conventional insurance. The surplus is declared and vested in the name of participant. The amount still remains in the Tabarru. Only when the participant exits the pool (Surrender/ Death), this surplus is refunded. For surrenders, reasonable operational expenses can be charged and the surplus amount will be proportionally reduced. The advantage of this method is that
Takaful Fund can extend its benefits beyond just protecting the donating participants. Takaful fund can be invested in businesses which, preserves the environment, improves health of people and to promote overall growth of the society. Surplus amounts from Takaful fund can be utilized in various innovative ways of providing enhanced benefits and services to participants. With these enhanced benefits and services, participants and their families will feel that Takaful is a caring entity. This becomes a good marketing approach to attract more participants towards Takaful, thus benefiting the society at large.
There are 5 alternative approaches which can be adopted for utilization of surplus. Each approach can have multiple options :
It removes explicit distribution costs. Surplus amounts remain in the pool with returns earned. These returns on surplus amounts enhance long term solvency by compensating any future deficits and Qard Hasan needs. It will benefit long term participants, wherein, they can earn surplus on surplus.
Support programs for the un-covered poor families who lost their breadwinners (e.g. work opportunity for widower)Donating a part of Critical Illness surplus towards cancer care foundations Donating a part of Disability surplus towards disability care organizations. Funding and promoting Micro Insurance Programs.
Added Life Coverage : Upon death, an added benefit of 5% of Original Sum Covered to a maximum of $2000 shall be paid to the affected participants. Accelerated or Added Critical Illness Cover : Even if Critical illness is not covered under contract, 5% of life sum covered to a maximum of $2000 shall be paid as living benefit upon diagnosis to all takaful participants.Added Accident Cover : All participants will get a free accidental death cover of $20,000 this year. (This is like allocating a Group PA scheme for all active participants in the Tabarru).Expense Indemnifications : Upon Death, any incidental expenses will be indemnified to a maximum of $2000. These can be any of Repatriation Benefits, Funeral Expenses, Hospital expenses etc. Enhanced Services : Appointing agents for faster document collection to accelerate claims processing, providing legal advisory, estate advisory etc.
Preventive Care and Education : Participants more than 5 years are entitled for a free complete medical checkup and medical advise at designated partner hospitals. Education and discounted preventive medicines can be provided. (Suitable capping on maximum costs can be done). Environment & Social Services : This can be co-implemented with business partners, wherein, participants get free access to “health enhancing services” like Gym, Pools, Parks and other environmental care.
Participants will feel that Takaful really cares for them. Adopting and publicizing this method will attract more participants towards Takaful.
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