Family Takaful Operating Model
Based on the nature of relationship there are various operating business models like wakalah (agency), mudarabah and the combination of wakalah and mudarabah. In the pure mudarabah model the Takaful Operator acts as a mudarib (manager) and is only entitled to a share of the income from the investment of the Participants Takaful Fund. The participants are entitled to the income on their part of funds invested and the surplus of the underwriting operations, subject to the Takaful Operator producing a net surplus after allowing for expenses and contingency reserves. The profit sharing basis is determined in advance and approved by Shari’ah committee for each year (in advance). The operations expenses are usually charged to the participants through the Participants Takaful fund, and the most expenses for the investment activities are charged to the shareholders of the Takaful Operator through the Shareholders Fund.
In the pure wakalah model the Takaful Operator acts as an agent or wakeel of the participants and is only entitled to defined fee that is deducted from the contributions made by the participants. The participants are entitled to the income on their part of funds invested and the surplus of the underwriting operations.
In the wakalah-mudarabah model, the Takaful Operator acts as an agent for the underwriting operation and is entitled to a defined fee; in addition the Operator is entitled to an agreed share of the income from the investments of the Participants Takaful Fund. The participants are entitled to the income on their part of funds invested and the surplus of the underwriting operations.
Treatment of Participants’ Contributions (premium amounts)
The takaful contract sets out the rights and obligations of the parties to the contract. The participant is required to pay regularly the takaful contributions in consideration for his participation in the takaful family plan.
The participants will decide the amount of takaful contributions that each one of them wishes to pay, but such an amount will be subject to the minimum sum as determined by the Takaful Operator.
The premium amounts vary from assured to assured depending primarily on the sum (face amount) that each insured targets to accumulate at the end of the coverage period and on the age, gender and health condition of that insured. The insurer may set the minimum face amount for this purpose. It may also set the minimum and maximum age limits for participating in this type of policy, accept standard risks only and maintain separate classes of assureds of the same age but with different year of entry to the plan (Ali, 1988).
Each contribution paid by the participants into the common pool (the Participants Takaful Fund) is divided and credited into two separate accounts for each participant:
- The Participants’ Special Account (PSA): A certain proportion of the contribution is credited into the PSA on the basis of tabarru’ or donation. What proportion of the takaful contribution to be relinquished as tabarru’ and credited to the PSA is determined based on sound actuarial principles, such as the expected claim rate; the incidence of claim; the basic cover; the provisioning basis for reserves; the profit-sharing expectation between the Operator and participant; and any expenses or commission loading. Mutual financial assistance such as takaful death benefits to fellow participants is paid from the total PSA fund, as its purpose is to provide financial security for the participants.
- The Participants’ Account (PA): The balance of the contribution (a substantial proportion) goes into the PA which is meant for savings and investments only. If there is no claim made during the policy period, the participant can claim from the PA fund only. The reason for this is that the participant is a donor to the tabarru’ fund (PSA), which cannot be taken back.
The Takaful contributions credited to the two accounts (PSA and PA) of all the participants will be pooled as a single fund (the Participants Takaful Fund) for the purpose of investment activities undertaken by the Takaful Operator under the profit sharing principle of mudarabah and in a manner permitted by the Shari’ah. Any income generated from the investment will be shared between the participants and the Takaful Operator in a ratio agreed in advance and in accordance with the contract of mudarabah. For instance, if the ratio agreed is 70:30 then the participant will be entitled to 70% of the investment income and the Takaful Operator’s entitlement will be 30%. The participants’ share of the investment income will be credited into each individual participant’s accounts pro rata. With the accumulation of the investment incomes, the balance in the each participant’s accounts (and the total Participants Takaful Fund) will build up over a period of time, along with reserves. In addition, any underwriting surplus payable to the participants will be credited the Participant Account of each individual takaful participant, prop rata.