general takaful

Management Expenses On Takaful Contribution

Participants of the takaful business would have the opportunity to enjoy ‘free cover’. Perhaps it may sound strange as it would imply that takaful is just like another charitable organisation. No business would give away its products or services for free except on the occasion of special event. From the context of insurance it looks more awkward because the core activity of insurance after all is to provide some kind of financial guarantee in order to compensate against loss or liability in the event of a misfortune. What more the quantum of guarantee may exceed the premium paid in the first place in the event of a huge misfortune.

general takaful
general takaful

Nevertheless, through the profit-sharing contract of al-Mudharabah, as provided by takaful such an opportunity is no more a dream. Taking the performance of Takaful Malaysia as an example, where participants have been enjoying a rate of profit averaging at around 35% p.a. for the general takaful business over the last five years, participants who have been sticking to takaful in terms of their insurance needs would fully appreciate the meaning of ‘free cover’. With the total aggregate of the three consecutive years profit it would obviously be more than sufficient to pay for the fourth year renewal contribution (premium), assuming that the amount of contribution each year has been the same throughout. But profit is something which is not guaranteed or assured.

On the other hand, whether such level of profit rate could be sustained would depend on the claim experience as well as the accounting practice adopted by a takaful operator. Certainly, in the event of big claims the financial benefits paid from the takaful fund would be correspondingly high. This would decrease the balance of the fund and hence would affect its underwriting results. Should the amount of claims exceeds contributions the underwriting performance would suffer a deficit. Hence there would be no profit.

From the technical standpoint, takaful, to all intents and purposes, is no difference from insurance. It therefore follows that the art of evaluating or underwriting a risk would also be no difference from the principles commonly and universally practised by insurance, so long as these principles do not contravene the Shariah rules. After all Islam calls for good governance and excellent management, particularly in a situation where one is entrusted as custodian or trustee to manage and handle money. In a contract, the parties involved have to uphold certain obligations and responsibilities to ensure fairness, transparency and equitibality. Honesty and sincerity are essential hallmarks to check one side from taking undue advantage at the unfair expense of the other resulting to unjust loss and injury not only to the other side, but others as well who at the same time may be having joint financial interest in the same contract. This is where the ‘utmost good faith’, a doctrine strongly advocated in Islam, should strictly be adhered to as a way to prohibit all parties in a takaful contract not to conceal any material fact either at the point of inception of the contract or upon the happening of a misfortune leading to claim.

Since it in the best interest of the parties concerned to safeguard the takaful fund from any undue exposure due to unwarranted practices, it would rest upon the shoulder of the takaful operator to see and ensure that proper professional management is in place. After all, the fund which is built from the tabarru’ or donation portion of the contributions paid by the participants is for their common benefit. Together with the operator as trustee and manager on the one hand, and the participants as the `insurers’ and ‘insured’ at the same time on the other must protect the takaful fund from undesired claims. Towards this end, every strategy adopted in ensuring good management of an insurance company would also be relevant in ensuring good management of takaful. If insurance requires professional skills and strong technical know how in the areas of underwriting, risk management and claims evaluation, so would takaful. However in the case of takaful an appreciation of Shariah would help to enhance towards better understanding of its operation.

The accounting practice adopted is also a critical factor in determining the profit. For practical reason, it is generally accepted by Shariah that cash accounting would be a suitable basis for any contract. Although it is not strictly an issue of Shariah, it is however argued that any profit to be shared must be based on actual or realised figure. To distribute profit which has been not realised is simply not practical. In this respect for the type of takaful operation with profit-sharing arrangement, as practised by Takaful Malaysia, for example, the most appropriate accounting policy would be on cash basis. By this policy, only the recognition of income is on cash basis, but liabilities and expenses are accrued.

Following this practice, participants who pay their takaful contributions early, ideally on the day the takaful contract is incepted would have the opportunity to receive relatively higher amount of profit from late paymasters. Profit is calculated from the day contribution was paid. Therefore any delay in the settlement of the contribution would mean an opportunity due to relatively less amount of actual profit received. For example a participant who pays the contribution on the same day the takaful commences would enjoy a full year profit upon the expiry of cover. On the contrary if payment is made three month later, the amount of profit distributed would be equivalent only to three quarter of the full year’s profit.

The other critical feature commonly adopted as part of the accounting policy under the Mudharabah practice is on the treatment of the operator’s management expenses. In this respect, a distinction has to be made between costs of takaful, such as payments of claim, retakaful and reserve which are borne by the takaful fund, from the management expenses of the operator which are charged to the shareholders’ fund. In terms of the takaful contract, participants of general takaful agree that the operator would pay on their behalf claims to their aggrieved fellow participants and other related costs including retakaful and reserve as tabarru’ or donation from their contributions. Like insurance, due to the nature of general takaful, tabarru’ amount can only be known when a misfortune occurs. For the purpose of profit sharing therefore, the contribution recognised as the Mudharabah capital would be the balance after deducting the tabarru’ amount. And investment profit will be added back to the capital.

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