Is
underwriting absolutely necessary for the takaful operator or is there any
other way to manage the risk?
First and foremost, we need to understand what
underwriting means in Takaful perspective as well as insurance. In general, underwriting is a process of
activities to assess the level of risk of the subject matter to be covered and
subsequently making a decision on the acceptance of the proposal. The final decision may involve acceptance at
standard terms, acceptance with special terms and conditions or merely
rejection. For
instance, a person goes to Etiqa Takaful to obtain a
fire Takaful coverage to protect his home with a market value of RM500,000. After analyzing the information obtained, the
underwriter of Etiqa decided to charge an additional contribution of say 50% of
standard rate due to certain additional risk factors detected on the subject
matter to be covered i.e. the house.
Thus, if the person agrees to the underwriting decision, he has to
contribute an additional 50% higher than normal contribution rate on the same
subject matter.
The question now is whether it is acceptable from Shariah
point of view to do the underwriting which may lead to different charges of
contribution for different participants.
Universally, we require equality and fairness served in any form of risk
sharing. If a property has a 90% chance
to catch fire while the other has only 10% chance, obviously the latter should
contribute much lower amount of contribution into the pool as it is unlikely
that the participant will benefit from the pool compared to the rest. Similarly, a person aged 20 has lower
probability to claim due to death in 5 years time compared to a person aged 75
therefore the latter fairly needs to contribute much higher amount to the pool
compared to the earlier. Assuming that
there is no underwriting process imposed and everybody pays the same amount of
contribution into the pool irrespective of their risk level, the Takaful pool
will sooner or later be insufficient to cater for all claims needed by the
participants. As a result, future
claimants may be unfairly treated due to the deficit in the pool. Furthermore, the pool will naturally appeal predominantly
to those with high risk who want to take advantage of the benefits. Ultimately, the pool will be in serious shortfall
which demand additional contributions or “qard” from shareholders to ensure
viability of the takaful business. Re-pricing
or pricing with higher rate to recover the shortfall will only be imposed on
new participants and not the earlier ones.
This is an issue of cross subsidizing between new participants and
earlier participants.
Therefore, underwriting is absolutely required by the
takaful operator as it can help to determine a fair contribution system into
takaful fund by participants. The underwriting process will justify the
appropriate contribution amount in tandem with the level of risk carried by the
subject matter to be covered.
