What is an underwriting
process in Takaful?
Wikipedia defines underwriting in insurance as
a process to sign and accept liability and guaranteeing payment in case of loss
or damage occurs. Underwriting, in general, is provided by a large financial
service provider such as a bank, insurer, takaful or investment house to screen
their potential customer. However,
underwriting can be further explained as a process to avoid any anti-selection
or adverse selection for any particular event such as application for insurance
or bank’s financing product. For
instance, when a customer applies for a bank’s loan or financing, the credit officer will conduct a
credit assessment process to
determine whether he has the capacity to fulfil
the monthly obligation to the bank. Or,
the officer is trying to determine the risk of default on the monthly payment subsequent
to granting the financing. If the result of assessment is positive, he will be
granted with the financing amount otherwise his application may be rejected or
counter offered with different terms and conditions.
Similarly, when a customer applies for an
insurance or takaful product or coverage, the underwriter (person who handles
the application) will conduct a thorough assessment on the subject matter to be
covered to ensure that there is no adverse effect or higher risk of loss
compared to the norms. If there is
evidence of higher risk involved then the underwriter may impose different
terms and conditions such as higher rate (pricing) to the application. If the
risk is extremely higher than the norm, the case may be rejected. Both activities mentioned above are known as
underwriting process.
In a nutshell, underwriting is a process of screening
and filtering the subject matter to ensure that the case is within acceptable
range of criteria. In Takaful, the same underwriting process is applied for all
proposals to ensure that the risk to be shared in the takaful pool are within
the acceptable level of risk. This will
help to minimize the probability of inadequacy of takaful pool to pay for
future claims.
Technically, the process of underwriting involves the
following key activities:
1- Assessment
2- Selection
3- Rating
Assessment
It is a process of assessing or evaluating the risk of
the subject matter such as a house, a car, or a life to be covered. It
evaluates the probability or chance of loss on the subject matter based on the
information available. For example, if someone wants to participate in a fire
takaful to cover his house, the underwriter will evaluate the probability that the
house is exposed to the risk of fire and related perils. The decision is derived from material facts
given such as type of building, location, and purpose of the building whether
for commercial or private. Nevertheless,
the underwriter may request for further information to ascertain the level of
risk, if need be. In certain
circumstances, the potential customer may enjoy some discounts if there is
evidence that there exist a good risk prevention measures within the premise
such as fire extinguisher or water sprinkler.
In the case of family takaful product such as Medical Takaful,
Investment linked Takaful, or Education Takaful, the underwriter will ascertain
the health condition, life style, employment risk, etc. of the person to be
covered. Basically, the underwriter is
trying to establish the level of risk with respect to the subject matter to be
covered.
Selection
After a comprehensive process of assessment or
evaluation done, the underwriter is ready to select the risk. In other words, this selection process is
basically a process of deciding which risk can be accepted, rejected or
accepted with certain terms and conditions. The underwriter is bound under
certain set of rules and guidelines endorsed by the management and board of
directors of the company. The
underwriting guidelines are usually derived from underwriting guidelines
imposed by the treaty with the retakaful companies. In the past, the underwriting guidelines can
be in a form of thick manual book or folder however most companies nowadays had
already incorporated the details in their system to automate the process. This underwriting guidelines has been
converted into an online underwriting system by most retakaful companies.
Going back to the example of fire takaful application
mentioned above, the underwriter may accept the risk should he find no
abnormality during the assessment process.
On the other hand, he may decline the case if he discover any potential
higher risk threat, for instance, if the house is just next to a petrol station,
which increases the risk of fire. Under
special circumstances, he may accept the risk as standard risk by excluding any
losses arising from fire or related perils from the petrol station.
Rating
Once the proposal is accepted, the underwriter is
ready to establish the relevant rating to the case. With the advance of technology, the rating
process is done automatically by the system provided that all the key
information is captured in the system.
The system is designed to automatically rate the standard risk while any
sub-standard cases will be manually handled by the underwriter by inserting the
appropriate loadings in the system. For
a normal risk, the rating is called a standard rating while any deviation from
the norms, it is considered a sub-standard rating where additional contribution
is imposed to the standard rating. The
gross contribution to be paid by the participant is based on net contribution
plus any loadings, and charges according to the takaful model adopted such as
wakalah fees.
