shariah

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.

 

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.