Takaful Operational Mechanism PDF

Topic 8 Takaful operational mechanisms Outline 8.1Survey of the Takaful industry in Malaysia 8.2Concept and operational system of Takaful 8.3 Family Takaful plan 8.4General Takaful business 8.5Accounting concept in Takaful business Takaful industry in Malaysia “…verily never will Allah chang...

Topic 8 Takaful operational mechanisms Outline 8.1Survey of the Takaful industry in Malaysia 8.2Concept and operational system of Takaful 8.3 Family Takaful plan 8.4General Takaful business 8.5Accounting concept in Takaful business Takaful industry in Malaysia “…verily never will Allah change the condition of a people until they change it themselves…” (Surah Ar-Ra’d:11) Birth of Takaful industry in Malaysia ⚫ The development of the Takaful industry in Malaysia in the early 1980s was inspired by the prevailing needs of Muslim public for Shari’ah compliance insurance as well as to complement the operation Islamic bank that was established in 1983 ⚫ At the same time, Malaysian National fatwa Committee ruled the life insurance is a void contract due to the presence of the elements of Gharar (uncertainty), Riba’ (usury) and Maisir (gambling) Takaful industry in Malaysia (ctd) Birth of Takaful industry in Malaysia (ctd) ⚫ In 1982, a Special Task Force was established to study the viability of the setting up of an Islamic insurance company ⚫ Following the recommendations of the Task Force, the Takaful Act was enacted in 1984 and the first Takaful operator was incorporated in November 1984 Takaful operation in Malaysia ⚫ Participants contribute a sum of money into a common fund, which will be used to mutually assist the members against a defined loss or damage Takaful industry in Malaysia (ctd) Takaful operation in Malaysia (ctd) ⚫ A takaful operator is entrusted to manage the fund, who runs the operation commercially as a business venture for profit ⚫ Sources of income for the operator are from;- i. profit from the investment of its shareholders’ fund ii. agency/wakalah fee iii. share of investment profit of takaful funds iv. surplus of the takaful funds Takaful industry in Malaysia (ctd) Underlying concepts ⚫ Takaful:- ✔ derived from an Arabic word which means joint guarantee ✔ whereby a group of participants agree to jointly guarantee among themselves against a defined loss ⚫ Tabarru:- ✔ tabarru means donation, gift or contribution. A participant agrees to relinquish, as a donation, a certain proportion of the contribution into a takaful fund to assist other participants faced with difficulties ✔ it embraces the elements of shared responsibility, joint indemnity and mutual protection ✔ it is the core of the takaful system that makes the uncertainty element allowable under the takaful contract Takaful industry in Malaysia (ctd) Underlying concepts ⚫ Mudharabah/wakalah:- ✔ the takaful operator is the administrator of the fund and manages fund in trust on behalf of the participants and the contract between the participants and the operator is governed under the contract of mudharabah (profit-sharing) or wakalah (agency) ✔ mudharabah gives the right to the contracting parties to share the profit, while liability for losses is borne by the participants ✔ under the wakalah model, the takaful operator earns a fee for services rendered while liability for lossess is borne by the participants, ✔ the fee may be varied based on the performance of the takaful operator Takaful industry in Malaysia (ctd) Comparison between Insurance and Takaful Insurance Takaful Contract An exchange contract (sale A combination of tabarru’ and purchase) between insurer contract (donation) and agency or and insured profit sharing contract Responsibility Policyholders pay premium to Participants make contributions to of the insurer the scheme policyholders/ Participants mutually guarantee participants each other under the scheme Liability of the Insurer is liable to pay the Pay the takaful benefits from the insurer/operato insurance benefits as promise takaful funds r from its assets(insurance fund In the event of deficiency in the and shareholders’ fund) takaful fun, TO will provide interest-free loan to rectify the deficiency Investment of No restriction apart from Invested in Shari’ah-compliant the fund those imposed for prudential instruments reasons Takaful industry in Malaysia (ctd) Changes in Malaysia takaful Industry 1984-2008 1984 2004 Operators Sole operator with RM10 9 takaful operators with minimum million paid-up capital paid-up capital of RM100 million Investors/ Islamic bank and state religious Broad range which includes private shareholders council and foundations investors, banking groups, insurers and reinsurers Products Limited products mainly Broad range of product mix with confined to motor, life and sophisticated features mortgage takaful Family products dominated the General products dominated the market markets Customers Mainly Muslims Muslims and non-Muslims Distribution Branches and marketing officers Branches, marketing officers, channels agency force, bancatakaful, brokers, internet and strategic alliances Investment Confined to Islamic deposits Wider range of investment avenues and Government Islamic instruments issued by Government securities and private sector  Concept and operational system of Takaful Concept & Description operational system Islam and insurance Muslim jurists generally accepted the concept of takaful. It should be based on the principles of mutuality and cooperation. Types of takaful Family Takaful Business business General Takaful Business Underwriting It is a process to ensure that the principle of equity is being applied and upheld – it is essential for the participants to be seen as “equal” at the point of entry. A participants should not be burdened unfavourably with the risks of the other participants without a fair and just contribution by the said participants. Hence, underwriting would help to determine a fair system of contribution by the participants. The participants that pose undue strain to the takaful fund may have to increase his contribution to the level assumed to correspond with high risk exposure.  Concept and operational system of Takaful (ctd) Concept & Description operational system Marketing Branches, Marketing officers, Agency force, Bancatakaful, Brokers, Internet Strategic alliances Sources of income to Profits from investment of its shareholders’ funds the company Wakalah fees Surplus of fund  Concept and operational system of Takaful (ctd) Participant Upfront 1 charges Wakalah Fee Contribution 2 2 2 Less 6 Participants’ Participants’ Risk Claims Account (PA) Account (PRA) Retakaful/ Reserves 4 4 Operating 6 Expenses 4 Surplus 3 5 5 7 Investment Profit 5 7 Shareholders’ fund 8 Operating expenses Concept and operational system of Takaful (ctd) 1. Participant pays contribution under the scheme. 2. Depending on the model adopted by the takaful operator, the contribution will be divided into:- Wakalah fee (applicable for wakalah model) Participants’ Account Participants’ Risk Account *The allocation between WF, PA, PRA is based on the pre-agreed ratio as specified in the contract. 3. WF that consists of commission and management expenses will be paid to shareholders Concept and operational system of Takaful (ctd) 4. The PA fund and excess in PRA after deducting operating expenses will be invested in assets mainly as follows:- Government Islamic instruments Islamic private debt securities and equities Fixed assets Cash and investment account 5. Investment profit, if any, will be distributed between the takaful operator and the fund (participant) in the form of profit-sharing or performance fee based on the pre-agreed ratio between takaful operator and participant. The amount in PA will be accumulated and paid to participant upon death, surrender or maturity. Concept and operational system of Takaful (ctd) 6. The amount in PRA will be used to pay claims, retakaful and reserves. 7. Surplus in PRA at the end of the year (after deducting claims, retakaful and reserves) will be distributed to the takaful operator and the participants. The distribution of surplus will be based on the pre-agreed ratio as stipulated in the contract. 8. Shareholders will use the WF and investment profit (for mudharabah model) to pay for operating expenses.  Family Takaful plan Concept/ Description operation Objective Provides coverage/security to participants who wishes to save a sum of money for his dependents should he die prematurely Contingency saving Financial preparation should he suffer from ill luck such as total permanent disability Operation Participants is required to contribute takaful fund by way of salary deduction, bank standing instruction, Inter-bank GIRO, credit card, or pay directly to the takaful operator Contribution can be made in the interval of monthly, quarterly, semi-annually or annually The contributions will be split into two accounts, namely Participant’s Account (PA) and Participants Risk Account (PRA). The contributions made by participant will be invested in a manner deemed fit by the takaful operator. Any returns (profits) from the investment will be shared in accordance with the principle of al-mudharabah based on pre-agreed ratio.  Family Takaful plan (ctd) Concept/ Description operation Benefits In the event of death Total amount of the contributions from the date of inception of his takaful plan to his death and share of profit from the investment Amount of sum insured. Maturity benefit Total amount of the contributions from the date of inception of his takaful plan to date of maturity and share of profit from the investment Surrender benefits Total amount of the contributions from the date of inception of his takaful plan to date of surrender and share of profit from the investment  Family Takaful plan (ctd) Concept/ Description operation Underwriting Underwriting is the process by which takaful operators consider and decide whether to accept participation of cover made by a proposer and the terms to be imposed. Underwriting objective:- Ensure rate adequacy Rates of takaful contribution must be adequate in light of the benefits promised. It should be sufficient to fund the current and future benefits promised plus cover related expenses. Equity Under the principle of equity, the contributions amount should commensurate with the risks that he or she brings to the takaful. It is one of the principles embedded in the concept of takaful.  Family Takaful plan (ctd) Concept/ Description operation Underwriting Factors affecting the risk:- i. Age Expected future mortality is highly correlated age. The older a person, other things being the same, the greater the likelihood of death. It is a key factor in determining the contributions rate. ii. Sex It is routinely used as a classification (rate-setting). Probabilities of death of females are generally less compared with the probabilities of male.  Family Takaful plan (ctd) Concept/ Description operation Underwriting Medical aspects:- The physical condition of a proposer is of basic significance in underwriting One of the determinants of physical condition is built which include height, weight, and distribution of the weight. Experience has shown that overweight increases the likelihood of death at all ages i. Personal history Participants background also has the significant impact on the mortality. Investigation may include the participant’s health record, habits, lifestyles and etc The health record is the most important evidence of the personal history. Insurance history is also important – the proposer may have been refused life insurance or family takaful by some other companies. ii. Family history Family history is important because of the transmission of certain characteristics by hereditary For instance, if the history show that most members of the family have lived to old without incurring heart disease, cancer, diabetes and other serious disease, it may be inferred that the proposer will be less susceptible to these disease.  Family Takaful plan (ctd) Concept/ Description operation Underwriting Financial status The amount of sum insured should be compatible with the anticipated amount of loss. The amount of indemnity will compensate for an untimely loss but not provide a profit to someone. Occupation Occupation may increase the risk in at least three different ways:- i. The occupation may present an environmental hazard, such as exposure to violence, irregular living, a temptation to experiment with drugs or overindulge in alcohol. ii. The physical conditions surrounding and occupation can have a decided bearing upon health and longevity iii. The risk from accident, such as faced by professional auto racers, professional divers and etc.  Family Takaful plan (ctd) Concept/ Description operation Underwriting Source of information concerning life risks:- Application The Form by no means uniform in its content and arrangement. The Form generally consists of two parts. Part 1 Part 2 Name Medical history Present home Use of alcohol, tobacco, and drugs Business address Parents and sibling, which include the number who are living, their present Occupation health condition and date and cause of any death that have occurred Sex Date of birth Amount and type of plan already in force General Takaful business Participant Upfront 1 charges Wakalah Fee Contribution 2 Less 2 General 5 Claims Takaful Fund Retakaful 4 Reserves 4 3 Operating 5 5 Expenses 4 Surplus Investment Profit 5 4 Shareholders Fund 6 Operating Expenses General Takaful business (ctd) 1. Participation pays contribution. 2. Contribution will be divided into:- Wakalah Fee (WF) (applicable for wakalah model) General Takaful Fund (GTF) The allocation between WF is based on the pre-agreed ratio between participant and takaful operator as specified in the contract and depending on the type of products. 3. WF that consists of commission and management expenses will be paid to shareholders’ fund. 4. Excess in GTF (after deducting operating expenses (applicable for mudharabah model)) will be invested and investment income will be ploughed back to the fund. Takaful operator will receive an agreed portion of the investment income as performance fee. General Takaful business (ctd) 5. Surplus at the end of the year (after deducting claims, retakaful and reserves) will be distributed to the takaful operator and participants based on the pre-agreed ratio as stipulated in the contract. 6. Shareholders will use the WF and investment profit (for mudharabah model) to pay for operating expenses.  General Takaful business (ctd) Description Types of a) Fire takaful scheme takaful scheme Basic fire Houseowners Householders Industrial all risk Business interruption Growing trees Rumah desa b) Motor takaful scheme Private motor car Motor cycle Commercial value c) Accident/Miscellaneous takaful scheme Personal accident Group personal accident Personal accident for pilgrims All risks Workmen compensation  General Takaful business (ctd) Description Types of c) Accident/Miscellaneous takaful scheme (ctd) takaful scheme Public liability Money Equipment all risks Employers liability Plate glass Fidelity guarantee Sprinkler leakage Burglary Computer (material damage) Professional indemnity d) Marine takaful scheme Cargo  General Takaful business (ctd) Description Types of e) Engineering takaful scheme takaful scheme Machinery breakdown Erection all risks Boiler Pressure vessel Contractors all risks Contractor all risks Bonds Storage tanks Loss of profits (machinery) Underwriting The underwriter must endeavor to arrange the terms and conditions of the cover and its price – which reflect the degree of risk brings to the General Takaful Fund. The underwriter also need to ensure that the proposer has the capacity to the contract and is in compliance with Shari’ah Law.  General Takaful business (ctd) Description Takaful Participant’s interest principle Financial interest which a person has in the subject matter of the cover. Participants interest constitutes the legal right to cover arising out of financial relationship and the subject matter covered. Utmost Good Faith A positive duty to voluntarily disclose, accurately and full, all facts material to the risk proposed, whether asked for them or not. Indemnity Exact financial compensation sufficient to place the participant in the same financial position after a loss as he enjoyed immediately before it occurred.  General Takaful business (ctd) Description Takaful Subrogation principle Subrogation occurs when takaful operators that has paid off its injured participants takes the legal rights the participant has against a third party that caused the injury, and sues that third party. Contribution The right of the company to call upon other takaful operators or insurance companies, but not necessarily equally liable to the same participant to share the cost of an indemnity payment. It can recoup an equitable proportion from the other company. Accounting concept in Takaful business Definition and purpose of accounting ⚫ In 1966 the American Accounting Association defined accounting as:- “…the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of that information” ⚫ In 1975 they added that the purpose of the process was:- “…to provide information which is potentially useful for making economic decisions and which, if provided, will enhance social welfare”  ACCOUNTING A PROCESS OF Recognising, Measuring Recording, Analyzing, Reporting & Classifying Interpreting presenting & summarising result of financial position Business operation transaction Financial statement Documents Profitability = Income Balance sheet Vouchers – Expenses Income statement Ledger Growth Stmt of changes in Trial balance Liquidity equity Report (mgt) Productivity Cash flow statement Notes of account STAKEHOLDERS 1. Management 3. Shareholders 6. Authorities – BNM, LHDN, 2. Board of directors 4. Investors Baitulmal 5. Creditors 7. Staff 8. Public Accounting concept in Takaful business (ctd) Accounting and Islam Al-Baqarah:282 “O ye who believe! When ye deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing let a scribe write down faithfully as between the parties; let not the scribe refuse to write: as Allah has taught him, so let him write. Let him who incurs the liability dictate, but let him fear his Lord Allah, and not diminish aught of what he owes. If the party liable is mentally deficient, or weak or unable himself to dictate, let his guardian dictate faithfully. And get two witnesses, out of your own men, and if there are not two men, then a man and two women, such as ye choose, for witnesses, so that if one of them errs, the other can remind her…” Accounting concept in Takaful business (ctd) Accounting and Islam Al-Baqarah:282 (ctd) “…The witnesses should not refuse when they are called on (for evidence). Disdain not to reduce to writing (your contract) for a future period, whether it be small or big: it is juster in the sight of Allah, more suitable as evidence, and more convenient to prevent doubts among yourselves but if it be a transaction which ye carry out on the spot among yourselves there is no blame on you if ye reduce it not to writing. But take witnesses whenever ye make a commercial contract; and let neither scribe nor witness suffer harm. If ye do (such harm), it would be wickedness in you. So fear Allah; for it is Allah that teaches you. And Allah is well acquainted with all things” Accounting concept in Takaful business (ctd) Lesson from verse Al-Baqarah:282 ⚫ The importance of proper recording ⚫ Fear God in recording transactions (Islamic true and fair view) ⚫ Justice in financial transactions (e.g. the rights of debtor and creditor) ⚫ Islamic materiality concept ⚫ Financial transactions require trustworthy witness ⚫ Witnesses must be independence and protected by law ⚫ Proper accounting to avoid doubts and disputed among human beings  Accounting concept in Takaful business (ctd) Description Concept Contribution Treated as advance in the financial statement. Technical reserve Reserve is the amount calculated from the unused period of takaful cover. Provision for claims reserve Sufficient provision for claim must be made before the profit for a financial period is distributed. This is because not all amount of claims forwarded to the company can be approved at the time of claims made. Family takaful revenue account Takaful contribution is accumulated monthly and treated as fund at year end. Excess of fund and any profit declared will be distributed accordingly to eligible participants  Accounting concept in Takaful business (ctd) Description Concept Income and expenditure recognition The income and expenditure is recognized according to the approved accounting standard complying with the principle of shari’ah. Expense is accounted according to the approved accounting standard. Operating expenses is borne by the takaful operator governed by shari’ah requirement. Accounting of Takaful operates two types of business; manages and maintaining three types of Family fund:- Takaful Fund i. Family Takaful Fund ii. General Takaful Fund iii. Shareholders Fund Income There are two types of income generated from the family takaful business:- i. Takaful contribution ii. Return from investment  Accounting concept in Takaful business (ctd) Description Accounting of Expenses Family Family takaful expenses consists of the following:- Takaful Fund Refund contribution Retakaful Depreciation Death claims Maturity of certificate Certificate surrender Part withdrawal Accounting of Income General Income Takaful Fund There are two types of income generated from the general takaful business:- i. Takaful contribution ii. Return from investment  Accounting concept in Takaful business (ctd) Description Accounting of Income General Income Takaful Fund There are two types of income generated from the general takaful business:- i. Takaful contribution ii. Return from investment Expenses General takaful expenses consists of the following :- i. Refund contribution ii. Retakaful outwards iii. Claims admitted and paid iv. Levy  Accounting concept in Takaful business (ctd) Description Accounting of Income Shareholders’ i. Investment return Fund Profit from family takaful fund is accounted for in general ledger every month. ii. Share of profit from family takaful fund Share of profit from family takaful fund is accounted for in general ledger every month. iii. Share of profit from general takaful fund Share of profit from general takaful fund is accounted for in general ledger every month. Expenses Operating expenses for shareholders fund are categorized into three main classes:- i. Staff cost ii. Establishment cost iii. Administrative cost