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, takaful operators 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 (contribute) 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 perspective
of participants 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.
However, the mudarabah takaful model is an unpopular choice. In
Malaysia, only two of takaful operators practice this mudarabah model.
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
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.
From operator’s perpective, the wakala
fee is determined as the sum of:
a. Management expenses;
b. Distribution costs include
c. Benefits to the operator
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.