azman ismail: theory and practice of takaful surplus distribution

INTERNATIONAL ISLAMIC FINANCE INSURANCE

Theory and Practice of Takaful Surplus Distribution

Azman [email protected]

www.iifin.net

mailto:[email protected]


[email protected] www.iifin.com

SURPLUSRT

ULTIMATE CLAIMS & RESERVES

TAKAFUL CONTRIBUTIONS

I

FEES& RT



Surplus From An Islamic Perspective

INSURANCE• Deemed Exchange

Contract– Insurer own premium– Gharar– Maisir– Riba

TAKAFUL• Wakalah or

Mudharabah Contract– TO only agent– Partnership among

participants– Commitment to donate– tanahud



Principles of Surplus Distribution

S E XSOUND EQUITABLE FLEXIBLE



Soundness Principle• Sound statistical methods• Sound methodology of underlying

model• Mathematically sound actuarial and

statistical techniques



Soundness Principle• Quran urged us to study mathematics

and accounting • Mentioned 48 X

– “….so that you might know the number of the years, and the reckoning. …” (10:5)

– “Observe the measure strictly, nor fall short thereof.” (55:9)



Soundness Principle• “Observe the measure strictly, nor fall

short thereof.”• whoever learns hisab (mathematics

/accounting), will be knowledgeable



SURPLUSRT

ULTIMATE CLAIMS & RESERVES

TAKAFUL CONTRIBUTIONS

I

FEES& RT



SURPLUS

ON ACCOUNTING…• “Allah keepeth good account”

(33:39)• “On the day when Allah will

raise them all together and inform them of what they did. Allah hath kept account of it while they forgot it. And Allah is Witness over all things (58:6)



Cont…• “And every man's augury have We fastened to

his own neck, and We shall bring forth for him on the Day of Resurrection a book which he will find wide open. (And it will be said unto him): Read thy book. Thy soul sufficeth as reckoner against thee this day. (17:13-14)

• “Our Lord! Forgive me and my parents and believers on the day when the account is cast.” (14:41)



Our Balance Sheet…• “Then whoso is given his account in his

right hand, he truly will receive an easy reckoning and will return unto his folk in joy but whoso is given his account behind his back, he surely will invoke destruction…” (84:7-11)



On Recording…• “…Be not averse to writing down (the

contract) whether it be small or great, with (record of) the term thereof…” (2:282)

• “If ye be on a journey and cannot find a scribe, then a pledge in hand (shall suffice). And …Hide not testimony. He who hideth it, verily his heart is sinful. Allah is Aware of what ye do.”



Accuracy Principle• “And We set a just balance for the Day of

Resurrection so that no soul is wronged in aught. Though it be of the weight of a grain of mustard seed, We bring it. And We suffice for reckoners.” (Quran, 21:47)

• “And whoso does good an atom's weight will see it then, and whoso does ill an atom's weight will see it then.” (Quran, 99:7-8

• )The Prophet said, “Whoever does an action, must do so with excellence.”



NUM3ERS• He made you Kings, and gave you that (which)

He gave not to any (one) of (His) creatures (5:20)• “And if ye fear that ye will not deal fairly by the

orphans, marry of the women, who seem good to you, two or three or four; and if ye fear that ye cannot do justice (to so many) then one (only) or (the captives) that your right hands possess. Thus it is more likely that ye will not do injustice.” (4:3)



NUM3ERS• “…and (some) say: Five, their dog the sixth,

guessing at random; and (some) say: Seven, and their dog the eighth. Say (O Muhammad): My Lord is best aware of their number. None knoweth them save a few. So contend not concerning them except with an outward contending, and ask not any of them to pronounce concerning them.” (18:22)



NUM3ERS• “And there were in the city nine persons

who made mischief in the land and reformed not.” (27:48)

• “ .. that is, ten in all.” (2:196)



Equity Principle• “equity” is mentioned 22 X

– “… if you judge, judge between them with equity. Indeed Allah loves the equitable.” (5:42)

– “O you who believe! Be steadfast witnesses for Allah in equity…” (5:8)

– “Proclaim their real parentage. That will be more equitable in the sight of Allah. …” (33:5)



Equity Principle…• “…that He may reward those who

believe and do good works with equity.” (10:4)

• “Lo! those who disbelieve the revelations of Allah, and slay the Prophets wrongfully, and slay those of mankind who enjoin equity: promise them a painful doom.” (3:21)



Equity Principle…• “O ye who believe ! Be ye staunch in equity,

witnesses for Allah, even though it be against yourselves or (your) parents or (your) kindred, whether (the case be of) a rich man or a poor man, for Allah is nearer unto both (than ye are). So follow not passion lest ye lapse ( from truth ) and if ye lapse or fall away, then lo! Allah is ever Informed of what ye do.” (4:135)



Equity Principle In Wealth Mgmt• “And approach not the wealth of the orphan save with

that which is better; till he reach maturity. Give full measure and full weight, in equity...” (6:152)

• “O my people! Give full measure and full weight with equity, and wrong not people in respect of their goods. And do not evil in the earth, causing corruption.” (11:85)

• “And give full measure when you measure, and weigh with a straight equity. That is good (advantageous) and better in the end.” (17:35)



Flexibility Principle• “...We task not any soul beyond its scope. And

if ye give your word, do justice thereunto, even though it be (against) a kinsman; and fulfil the covenant of Allah. This He commandeth you that haply ye may remember.” (6:152)

• “Make it simple and not make it difficult.”• “If you cannot do all, do not leave all.”• “Hardship begets facility.”



Flexibility Principle…• Subject to framework of fiqh aulawiyyat

(priority jurisprudence)– It alone cannot sacrifice soundness and

equity– to balance between the various masalih

(interests/benefits), the various mafasid (harms) and to balance between the various masalih and mafasid.



Between Benefits



Between Harms



Which Is Priority?



Lessons From Conventional Insurance

• General Insurance– Not much except from CAS, IMS– Eg. Bonus malus system

• Life Insurance– With-profits (participating) policies



Lessons From Life Policies• Principle of soundness, has been given

priority over equity and that the actuary should seek to protect the ongoing financial soundness of the company.

• Equity principle difficult in practice– Simple RB, Compounded RB, Terminal Bonus, – Only investment profit relatively without

controversy



Flexibility Principle In Life Ins• Inequity issues

– Intergenerational esp previously based on triennial– Cross subsidy between different classes– Net premium method– “Pooled fund” method– “Partitioned fund” method” eg. Par and non par– Equity backing ratio– Asset share method



Inequity issues• Many discussions – to many to discuss

here. See following..– Suttee, Equity In Bonus Distribution,

Journal of the Institute of Actuaries, Volume 73,

– Ranson and Headdon, With Profits Without Mystery, Journal of the Institute of Actuaries, Volume 116,



Back to Flexibility Principle In Life Ins…

• Bonus Method– not be an easy task to fix an equitable rate

of bonus.– reversionary bonus system, which paid out

so much quicker, became the accepted standard

– maintaining certain rates of bonus not justifiable at times



Flexibility Principle…• suggestions of “maximum practicable

degree of equity”• achieve “rough equity”• took into account the concept of equity

over• a period of time• asset shares – considered final entitlement



Flexibility Principle…• Smoothing

– smoothing with fairness is elusive.– costs of maintaining the Bonus Smoothing

Account– near maturity and not all with-profit policies– approximations could be made which

would be refined with the passage of time



Counterargument• “Commendable pursuit of simplicity has

materially flawed the foundations on which the structure is built…”



Guide For Actuaries• Notes on the search for equity in life

insurance submitted to IAA– Equity is a basic objective – While equity is important it must be

secondary to soundness.– Equity apply to classes and generations &

extend to shareholders.– Precise equity does not exist



According to a Standard…• Actuaries

– should seek to protect the ongoing financial soundness of the company;

– should seek to ensure that reasonable benefits are provided to participating and experience related non-participating policyholders;

– should seek to achieve equitable treatment between different groups of participating and experience related non-participating policyholders.



Cont…• Appointed actuary should give

consideration to:– the sources of the surplus disclosed– the relative risks taken – the need to maintain the overall viability of

the company for existing policyholders;– prevailing attitudes within the actuarial

profession.



Surplus Distribution In Practice

• many and varied as it depends on the contract between the takaful operator and the participants and the relationship among participants – refer 2:177



Example• Surplus rate rt = p X St-2/Cet-2

– St = Cet + I - CI - IBNR - comm- RT + CNS– Two months lag may be improved to one

month lag as ICT develops



Reserves• UCR

– time apportionment method preferred or at least 1/365th method

– 1/8th method may be for marine cargo but at least 1/24th method preferred

• IBNR– By Uruf



Conclusion• Principles of soundness, equity and

flexibility applicable• Greater cooperation between actuaries

and IT and/or operations people in each of the TO

• Towards developing a sustainable algorithm



Thank You• Azman Ismail• www.iifin.net

azman ismail: theory and practice of takaful surplus distribution

Documents