Actuary refers to an expert who calculates insurance risks and payments by studying the mobility rates and mortality rates. However, pricing is referring to the value of the policy and the amount of premium rates that need to be contributed by the participant as a result of calculating the insurance risks by the actuaries’ people. Therefore, there is department called actuary and pricing department in Takaful Company, which, specialized on this particular field.
The aimed of this department is provides quality products with good pricing rates. Therefore, the products and the pricing need to fill some criteria before it can be considered as quality product.
§ The product is able to provide
protection and coverage to the participant with a reasonable premium rates.
§ There is mutual cooperation
exist between participant and operator in managing the fund.
§ The profit that creates from
the Mudharabah fund is lawful.
}وَأَحَلَّ اللَّهُ الْبَيْعَ
وَحَرَّمَ الرِّبَا ۚ{
The sentence means that Allah
has encouraged and permitted in trade and commerce and prohibited ‘riba’ in
practices. This verse is related with the concept of the pricing in Takaful,
which is the responsibility of the actuary and pricing department in preparing
the costing for the Takaful product that not contain any elements of ‘riba’ or
‘gharar’.
·
Allocation of the fund
·
Types of payment
·
Types of coverage and benefits received by participant
·
How to apply the Takaful policy.
The allocation of the fund may explain the participant how the money is manages by the operator and in the same time justify whether it’s contains element of ‘riba’ or not. Similarly, in term of the contribution that made by the participant must not involves any surplus or extra charges such as commission.
The concept of cooperation and help each other is determines
in Quran as Allah s.w.t has said[2]:
}وَتَعَاوَنُوا عَلَى
الْبِرِّ وَالتَّقْوَىٰ {
In responding to this verse, the actuary and pricing
department has responsible to prepare costing for the new product by looking
into mobility rates and mortality rates as a consideration. The mortality rates
and mobility rates should come from the primary sources or originally result
from the research which done by the marketing department in Takaful itself. It
is due to emphasize of pure and quality product offers to the society. However,
the way that the fixed the price must be also influenced by the profit of
company as well as the welfare of society.
Takaful also emphasizes regarding the cooperation in helping each other between participant and operator. The participant is contributes of certain amounts in the Takaful plan, as a result the operator will provide the coverage accordingly. Similarly happens in the Mudharabah fund whereas the sharing of profit and lost will divides into a portion that agreed by the participant and operator at the beginning of the contract. Therefore, there is no issue on misallocation of fund or breach of trust.
Briefly, the roles of actuary and pricing department are:
·
Calculating cost for new product by referring to mobility
rates, mortality rates, projector investment return, information from marketing
research as well as needs of the society.
·
Providing a value product to the company.
·
Submitting the proposal of costing for the management
approval.
·
Submitting to the actuary and Bank Negara Malaysia
Finally, factors that
influence the actuary department in preparing department are:
·
Rates of death in certain time
·
Information from the existing products that quite similar
(comparison)
·
Retakaful rate
·
Expectation of Profit
SHARI'AH RULINGS
The basic rule of Shari’ah ruling of Takaful is based on mutual co-operation between two parties as it is stated in the Quranic ayah, Al-Maidah: 3[3];
}وَتَعَاوَنُوا عَلَى الْبِرِّ
وَالتَّقْوَىٰ ۖ وَلَا
تَعَاوَنُوا عَلَى الْإِثْمِ وَالْعُدْوَانِ ۚ وَاتَّقُوا اللَّهَ ۖ إِنَّ اللَّهَ شَدِيدُ الْعِقَابِ{
“And co-operate each ye one another in righteousness and piety, and do not co-operate in sin and rancour”
From the
above verse, the Takaful relates to the mortality risk, which requires
appropriate protection from retakaful. Therefore, it shows the implication of
mutual co-operation between both parties.
As an Islamic insurance, all activities
in Takaful are prevented from riba’. In other words, it is a prohibition of
interest as riba’ in the contractual agreement, as well as in determining the
pricing of takaful. Allah had said in surah Al-Baqarah, verse 278[4];
}وَأَحَلَّ اللَّهُ الْبَيْعَ
وَحَرَّمَ الرِّبَا ۚ{
“Allah had permitted trade, but not allowed Riba”
In Islamic law, Islam emphasizes the
fairness in dealing any transaction and avoids unjustified enrichment at the
expense of others. Therefore, Shariah obligation provides the justice (‘adl)
principle for welfare to others a stated in the Holy Qur’an, 3:77[5];
}إِنَّ الَّذِينَ يَشْتَرُونَ
بِعَهْدِ اللَّهِ وَأَيْمَانِهِمْ ثَمَنًا قَلِيلًا أُولَٰئِكَ لَا خَلَاقَ لَهُمْ
فِي الْآخِرَةِ وَلَا يُكَلِّمُهُمُ اللَّهُ وَلَا يَنظُرُ إِلَيْهِمْ يَوْمَ
الْقِيَامَةِ وَلَا يُزَكِّيهِمْ وَلَهُمْ عَذَابٌ أَلِيمٌ{
“As for those who sell faith
they owe to God and their own plighted word for a small price, they shall have
no portion in the Hereafter: Nor will God (deign to) speak to them or look at
them on the Day of Judgment, nor will He cleans them (of sin), they shall have
a grievous penalty”
From the verse,
Allah stated that every action of Muslims’ activities must follow the law of
Shariah, which is based on the Holy Qur’an as well as the implementation of
takaful that must be guided by Shariah laws. Otherwise, Allah promised a great
punishment to those who do not obey His command in Hereafter.ROLE OF ACTUARIES
1. Product Certification
A takaful
operator is required to submit the regulatory authority (Bank Negara)
certification by an actuary who certifies that the premium basis of any life
insurance product or as the takaful contribution basis of any product of the
Family Takaful Business is based on sound principles.
A Takaful
operator is required to submit yearly to Bank Negara an actuary report on the
actuarial investigation the financial condition of the life insurance found, as
well as the part of Family Takaful Business specifically allocated for the
payment of the takaful benefits.
A takaful
operator must have an appointed actuary who has responsibility to the report to
the Bank Negara should he/she fails to take the necessary steps to address the
issues that may expose the company to undue risk of being insolvent.
Actuarial Techniques (pricing techniques/theory)
From our resources, there are two techniques that have been applied in takaful operation, which are; 1) Theory of Compound Interest, and, 2) Time Consideration.
Theory of
compound interest is applicable in the Family Takaful Business where
anticipating a certain conservative investment return that can be obtained from
the investment. The lump sum of takaful contribution that the takaful operator
received upfront can reduce the lump sum or single takaful contribution under
the Mortgage Takaful Plan
The second technique is time consideration in the business transaction. In Family Takaful Plan, it is possible to have tabarru’ rate for monthly installment to be higher than that for the yearly installment.
Actuarial Valuation
There are three common valuation methods in takaful, which are;
1)
Net premium method,
2)
Gross/office method,
and
3)
Bonus reserve
method.
In the net premium method, the premium valued is the net or pure premium calculated based on the valuation assumption relating the mortality and investment return.
While, under the gross premium method, the premium is the actual office premium less a specific estimate of the likely future expense.
The bonus reserve method is similar to the gross premium method, but with an additional item be valued as a liability namely, the future bonus that expected to be declared.
PRACTICAL SCENARIO 1
En.Ramli has taken
Family Takaful Plan and the maturity period for his plan is 30 years. Now he is
27 years old. The amount of the policy is RM 30 000. He is contributing RM
83.33 every month. He is wondering how the premium is fixed and if something
happens to him within period. How much he will get from the Tabarru’ fund as a
claim?
Application
No of years x 12 = 30 000
30 x 12
= 30 000
360
= 83.33
(monthly)
In Tabbarru’ = 83.33 x 8.3
100
= 6.92
In Mudharabah = 83.33
x 91.7
100
= 76.41
The calculation as
showed below:
Risk
Period |
13 30yr
( maturity)
die
In
Mudharabah
So, 12 999.48 +
1200 = 14 199.48
= 1416.61
Mr. Chong and majority of his friends hold the policy of Kurnia Insurance. They thought that this insurance is better among the other companies especially takaful Insurance. Why?
Application :
In conventional, the transaction is based on buy and sale contract. Means the company insurance as a seller while the policyholder known as a purchaser. In term of claim, the policyholder has right to claim full amount from the company. For example, if the holder has bought the policy amounted RM1000, he would claim the RM1000 too. That is one of strengthen of conventional insurance to attract more people to become of their policyholder.
Meanwhile, the reason why the holder can’t claim the full amount in Takaful, it is due to ; the amount of contribution in Takaful is divided into 2 accounts known as Participant Account (PA) and Participant Special Account (PSA).In this case, the participant is allowed to claim the money only from PA. That’s the reason why he/she cannot get the whole amount from the contribution.
}وَمَن يَبْتَغِ غَيْرَ الْإِسْلَامِ
دِينًا فَلَن يُقْبَلَ مِنْهُ وَهُوَ فِي الْآخِرَةِ مِنَ الْخَاسِرِينَ{
“…if
anyone desires a system other than Islam never will it be accepted from him…”[6]
RECOMMENDATION
1. Mostly, people did not
really understand what is the takaful pricing policy all about.
2. That’s the one reason
why they are more interested in conventional insurance.
3. Therefore, Takaful
agent needs to increase promotion and give detail information about the Takaful
policy and procedure, which is totally based on the shariah rulings.
4.
Beside the pamphlet or brochure provided, Takaful
is encourage including the detail and attractive information via the Internet.
PRACTICAL SCENARIO 3
Issue:
No claim until the end of maturity period
En. Ahmad is one of the Takaful
participants in Motor Takaful. He should renew the policy for every year in 10
years. Fortunately, he does not make any claim until the end of year 10th
due to there be nothing happen on his vehicle. So, how Takaful categorizes this
case. Is it any benefit received by En.Ahmad in this situation?
Takaful provides the benefits for all
participants. There are two types of products; Family Takaful and General
Takaful. These two products have their own pricing procedure including how to
claim the amount if there is no risk occur until the end of maturity period.
For example, in motor insurance policy
in General Takaful, if the participant does not make any claim until at the end
of maturity period, he/she will get two benefits called; No Claim Benefit (NCB)
and Bonus.
The calculation has
been stated below which apply by Actuaries Department.
As an illustration;
1 RM1000 - RM1000
2 RM1000 25% RM750
3 RM1000 30% RM700
Hadith: “ Muslims bound with the conditions, if it exceed the condition,
Muslims are permitted…”
2.Bonus
Bonus Calculation:
The balances from
PSA amounted RM100. Management Cost=RM 30. General Expense = RM 10, and Zakat
is 1% from the balance. Therefore;
[RM 100 – ( RM 30 +
RM 10 )] – RM 6 = RM 54
So, RM 54 is known
as net profit where, some of the proportion will be distributed as bonus to
participant.
}يَمْحَقُ اللَّهُ الرِّبَا وَيُرْبِي
الصَّدَقَاتِ ۗ وَاللَّهُ
لَا يُحِبُّ كُلَّ كَفَّارٍ أَثِيمٍ{
“God will deprive usury of all blessing, but will give increase for
deeds of charity, for He loveth not creatures ungrateful and wicked”.
RECOMMENDATION
2.
The offer is qualified for those who did not
make any claim until at the end of the maturity period.
3.
Takaful should give
this bonus not as a choice that has been practiced before.
4.
The bonus is
assuming as gift or reward on participant’s contribution.
5.
Even there is no
bonus given, Takaful should offer any special facilities benefits for instance;
Offer the discount payment in other products package.
En. Hisham makes a
personal loan in Bank Rakyat amounted RM 10 000. He should pay back his loan
within 7 years with the rate 7.7%. He is required to take a life insurance in
Family Takaful. Now he is 45 years old (1957). What amount on his insurance?
i)
Find the group of
age of En. Hisham
103 – 57
= 46
(Group of
age is 46)
ii)
Refer to the rate
given in Takaful Scheme in Family Takaful Scheme
Let say,
the rate given is 38.77%,
iii) The amount of insurance is:
38.77 x
10 000 = RM 387700
387700/1000
= RM 388
Bank Rakyat has paid the amount of RM388 to Takaful insurance on behalf of En.Hisham. Bank Rakyat can make a claim from Takaful if there is anything happen on En.Hisham in future such as death. This is one of a sample of calculation in determining of pricing in Takaful policy.
Then, in Takaful operation, this amount
(RM388) will be divided in to two accounts; PSA which is based on Tabarru’ fund
and PA which based on Mudharabah. The claim can be made only from PA.
Mr. Jamsuri is taking Family Takaful Plan and the maturity period is 30 years. If now his age is 25 years old and contributes every months about RM 16.90 in the policy. So, if anything happens, he has guaranteed by the Takaful company of having coverage that cause of permanently disable, accident, hospital benefits and ‘khairat’ of family. However, he still don’t understand where is his fund has being allocated and the different with conventional insurance.
Application:
In general, payment made by policyholder in conventional insurance will be credited into the general insurance account for the general insurance and life insurance account of fund for life insurance policy. However it is different with Takaful policy whereas there are two accounts are taking places; Tabbaru’ and Mudharabah.
The person who contributes in the policy is called participant. The Takaful Company only acted as operator who is manages the fund. Tabbarru’ fund is a participant special account which treated as public fund. All funds that credited into this account are considered as donation and can’t be claimed unless the participant falls into a needy group. Fund in the Tabbaru will be allocated into four categories: reserved claim, incurred but not recorder, retakaful and unearned premium. However in Mudharabah, the fund will treat as participant’s saving. The operator has given right by the participant to invest the money. As a result, both parties will allocate the profit gains from the investment into the ration that agreed. Therefore, it is called profit and loss sharing account.
In the Mr. Jamsuri case, as at his age, the operator will credited his money into Tabbaru’ fund about 8.3% and also in the Mudharabah fund. This amount is credited purposely for death and permanently disable.
|
91.7% 8.3%
RM 15.49
RM 1.40
 |  |
If there is a profit incurred in the Mudharabah fund, which is about RM 1. Therefore, according to the portion of 60:40, the company will enjoy 60% of the profit that will become an earning for the Takaful Company. The participant has right on the whole amount in the Mudharabah fund whereas they can take back their money and not necessary to pay back. However, it is so different in conventional insurance, the policyholder did not has any right to get the money unless they borrow from the insurance company. The money must to pay back with interest charge on it. This is unlawful in Islamic principles. It is also differs in term of accounting whereas in Takaful used cash accounting and conventional insurance used several methods such as cash accrual, deferred and embedded values.
RECOMMENDATION
1. The operator should
brief the participant regarding the allocation of the fund and explain how it
is lawful according to the Islamic principles.
2. If there is
misunderstanding occurs, it may affect the trust and reflect with bad
reputation. To avoid all these, it is important to the operator to tell where
their money flow in the Takaful. It is because in conventional, the money is
clearly credited into one account and the contract is base on buy and sell
contract.
CONCLUSION
The role of actuary in Takaful
is to approve the costing proposal that prepared by the actuary department in
Takaful Company. The actuary department is responsible in calculating cost for
new product by referring to mobility rates, mortality rates, projector
investment return, information from marketing research as well as needs of the
society, providing a value product to the company, submitting the proposal of
costing for the management approval and finally submitting to the actuary and
Bank Negara Malaysia for final approval.
In others way, factors that influence the actuary department in preparing department are rates of death in certain time, mortality rate and mobility rate, information from the existing products that quite similar (comparison), retakaful rate and expectation of Profit.
The process of pricing is
starting with the conducting research on the need of the society by the
marketing department. Then, the actuary will make a comparison with the
information from the marketing department with the expecting profit that will
gains from the policy in able to prepare a proposal of costing. The purpose of
the costing is used in determine the right pricing rate for the new products.
The proposal will be submitted to the management department and then to the
actuary in the consultant company for the approval. After getting the approval,
Bank Negara Malaysia
Pricing procedures
in Takaful based on the concept of mutual cooperation between each other, which
has been stated in the Quranic ayah. Pricing procedure include in term of
claim, calculation basis, bonus and payment. There are two types of pricing
technique, which are based on theory of compound interest and time consideration
in transaction. All of the pricing components in Takaful should be free from
elements of riba’ and gharar. Therefore, as a Muslim we should wisely select
the relevant scheme which give us dual beneficial in the world and hereafter.
