mudarabah takaful model works on the following basis: takaful operators (known
as shareholders) bear all expenses incurred in operating the business and as a
reward are entitled to share underwriting excess and investment profits. This
is an adjustment of mudarabah Islamic commercial contracts between takaful
operator and participants (or policyholders) who provide the capital. The
biggest dissent of this model is underwriting excess is non-profit. It is
excess of premium over claims known as surplus. This business model is
difficult to manage where expenses are fixed but income (surplus) is not.
However, this is a very good model from the participants’ perspective because
they do not directly contribute to the operator’s cost. All their contributions
are available to meet claims. Only when there is any excess of contribution to
the claim, the operator will be compensated for the expenses incurred, and even
if only to the extent that the surplus is sufficient to meet this expense.
into the takaful risk pool is deemed as donation which under the Islamic
contract of tabarru’, towards the expected increase in claims. The adoption of
tabarru’ and the risk-sharing concept in this risk pool address the Shari’ah’s
fundamental concerns about conventional insurance. However, the tabarru’ will
not be exactly equal with the claim. If tabarru’is inadequate, there will be a
deficit; if it is excessive, there will be surplus. Surplus under the mudarabah
takaful model is crucial for companies to commercially viable. If take away the
surplus sharing then the whole model will collapse.
the mudarabah takaful model is an unpopular choice. In Malaysia, only two of
takaful operators practice this mudarabah model.
Under wakalah model, the surplus is referred
to the surplus contributed by the participant into the Risk Fund based on
tabarru’ contract. Upon reaching a financial period, the sum of tabarru’ will
not be equal with the amount the claim. If the tabarru’ amount is less than the
sum of claims then the Risk Fund will be deficit, otherwise the tabarru’ amount
exceed the claim then the Risk Fund will have a surplus.
wakala model is the default standard for takaful. Operators charge and carry
out takaful operations. For takaful operators, he makes a profit if wakala fee
surplus is actually the excess premium paid by the participants, so the surplus
refund can be explained as a experience refund. Once this is accepted, then the
surplus is belongs of the participants.
Malaysia, several takaful companies provide shareholders to share in experience
refund. Given that the participants are responsible for the deficit in the risk
pool, it may seem odd that participants should share any excessive contribution
to the shareholders. Many see this as an incentive compensation to the operator
to manage the portfolio well, as evidenced by the surplus. However, whether
this incentive is necessary given since the operators have already received a
fee for underwriting services. As practised in Malaysia, wakala models is a
model where operators only impose their management and distribution costs
through wakala fees, while the profits are from the sharing of any underwriting
surplus. There is also a wakala model where even management expenses and
distribution costs are met from underwriting surpluses and zero fees are
charged. This last extreme wakala model is similar to the mudarabah model. Even
some Shari’ah scholars will also describe mudarabah model as a wakala model
with zero fees
can explain this wakala model from the perspective of both participants and
operators. From a participant’s perspective, the decision on the use of a
wakala model whether operators share in excessive premiums or not will depend
on how much higher is the wakala fee he has to pay. It is not always clear that
having a share of the operator in the the underwriting surplus gives the
participants the best value proposition.
operator’s perpective, the wakala fee is determined as the sum of:
Distribution costs include commissions; and
Benefits to the operator
a scenario where the surplus and deficit are in the participant’s account and
where the operator’s solvency requirements, hence the capital requirements are
not excessive. It is possible to impose a low wakala fee, thereby benefiting
the participants. If the operator’s profit depends solely on the underwriting
surplus, then such as the mudarabah model, this wakala model will not be
commercially sustainable in the long run.