In Takaful business, surplus distribution is important operation. Surplus become an issues because as a corporative instrument that provide mutual guarantee for possible risk, determines on how to dealt with it is difficult. Whether through risk sharing or indemnification.
Younes Soualhi in his research mentioned that there are two juristic views dominated the takaful industries in Middle East and Malaysia. Majority of scholars including AAOIFI prohibits the sharing of the underwriting surplus between the takaful operator and the participants. Contrary, Shariah Advisory Council of Bank Negara Malaysia (BNM) legitimize the sharing of surplus based on ratios that different according to the line of products offers.
Briefly from AAOIFI Standard No. 13 stated that policyholders is entitle to the takaful surplus. Thus, the shareholders cannot received any of the surplus. These rulings also have been supported by several fatwas and shariah rulings mentioning that policyholders have granted the right to the takaful surplus. Takaful companies however are allowed to invest the takaful surplus on behalf of policyholders and the consideration payable to the undertaking such investment must be mentioned and stated clearly in takaful policy.
(a) (ii) What is the Actuarial principles of surplus distribution?
There are five characteristic of surplus distribution system for the takaful scheme if it distributable to participants listed below:
a. The surplus is distributed equitable based on the contribution made by the participants. Participants who contribute higher will received more as compared to other participants who contributed less. Participants who contribute higher will received more as compared to other participants who contributed less.
b. The surplus is distributed on the simple basis that can be understand by all the participants.
c. The surplus is distributed flexibly so that it can be modified if there is a change in the amount of the surplus available.
d. The surplus is distributed consistently according to the actuarial basis for the contribution and liability provision.
e. The participants will need to accept the logic and fairness of the surplus distribution method in order to ensure there is a takers in a competitive marketplace.
(a) (iii) In your opinion, what are the factors that need to be taken into consideration when addressing the practical aspects of surplus distribution?
It is important for the takaful companies to properly handle the surplus in order to ensure the fairness of the distribution of the surplus. The distribution of surplus must also comply with the shariah.
In the surplus administration process there particular accounting treatment of several financial items need to be addressed which include:
a. Unrealized gains
Surplus is normally distributed base on income and actual realised gains. Thus, later generation of takaful participants will benefit more in term of surplus distribution as compared to earlier generation due to the fact that unrealized capital gains profit are not reflected in earlier distribution of surplus.
b. Provision for bad investments
Provisions for bad investments which value has fallen from the value reflected on purchase will reduce surplus. A corresponding write back of such provisions will benefit later generations of participants.
Other factor that need to be considered before distributing surplus is the priority for loan repayment obligation of qardhal hassan. This is due to the fact that qardhal hasan is a loan injection into the takaful fund. Lastly, the distribution of surplus must be determined on a fund or product portfolio basis.
(b) In his article, ‘Takaful: A question of surplus’, En Zainal Abidin Mohd Kassim discussed the issue of surplus from the perspective of (i) Mudarabah Model and (ii) a Wakalah Model. Elaborate on the discussion.
Based on the article by Mr. Zainal Abidin Mohd Kassim, it is clear that the mudarabah model that has been used by takaful companies is actually a commercial contract, thus, in my opinion, do not suitable for a tabbarru’ based scheme. Donation received from participants cannot become a capital for mudarabah at the same time.
In term of distribution of surplus, the distribution of surplus is according to the participants contribution and somehow or rather looks like a conditional gift or hibah bis-sawab. This kind of situation is prohibited by shariah. Besides that, in general takaful, sharing of surplus instead of profit make the contract similar to conventional insurance contract.
In wakalah, income will always there due to the fact that operator’s remuneration is based on capital. Wakalah model is the first choice among as compared to mudarabah model because the agency concept in takaful is similar with that contract applied in some other businesses.
However, the distribution of surplus among the participants in wakalah model is the same like mudarabah model which is according to the contribution made by the participants. It is like conditional gift and it is prohibited by shariah.