FAQ #14

Why the rate of contribution for family takaful varies by age for different participant?  Is this considered fair and equitable?

Let’s try to understand the following situation where all participants are paying equal contributions irrespective of any factors. 

11)    Assuming that there are two individuals aged 70 and 20 subscribe to family Takaful product covering death with sum covered (benefits) of RM1.0 million each.  The plan requires the participant to contribute till their life expectancy i.e. 75 (actual is 74.84) in Malaysia.  If the contribution rate is say RM5,000 per annum and both will die on their life expectancy year, the first person will contribute only RM25,000 whilst the second will contribute  RM285,000 with the same benefits payout of RM1.0 million to their beneficiaries.  Obviously, there exist unfairness and inequality between the two participants for the same benefit amount.  In other words, the huge shortfall between the benefit payout and the contribution made by the first person shall be topped-up or subsidized by other sources as the normal investment profit say 5% per annum is insufficient to cover the shortfall.

22)    As a result, there shall be a scientific and reasonable methodology to best estimate the duration of future contributions to be made by participant before his death.  Therefore, participant age has been unanimously agreed as one of the factor to determine the contribution amount for each particular participant.  Well, the actual formula to determine the contribution rate is very scientific and sophisticated which was developed by the actuaries based on advanced statistical methodologies to best best estimate the prudent contribution rate for each participant under family takaful plan.

Consequently, Shariah has no objection for such a scientific method to determine the appropriate and prudent contribution with the objective to best estimate and establish a “fair and equal” contribution rate for all participants.

FAQ #13

We always heard that there are many instances where few insurance agents do not carry out their duty professionally as they do not tell the truth with regard to the features of the insurance products.  This situation had resulted in many disputes during claims and some were repudiated due to non-coverage.  Does similar situation happen in takaful agency?

Undeniably, such situation may also happen in takaful business as well as any other sales activities such as automobile industry, multi-level marketing, health and beauty, etc. Nevertheless, the frequency of occurrence in Takaful had been significantly reduced due to various measures taken by the regulator, association as well as takaful operators. 

Under IFSA 2013, it is clearly stated that a takaful agent shall not

(a)   make a statement which is misleading, false or deceptive, whether fraudulently or otherwise;

(b)   fraudulently conceal a material fact; or

(c)   use any marketing brochure or product illustration not authorized by the licensed takaful operator

in order to induce a person to enter into, vary or renew, a takaful contract which will render the contract to be voidable.

Furthermore, Malaysian Takaful Association (MTA), had issued a comprehensive Code of Ethics to be adhered to by all Takaful agents which describe the details of do’s and don’t’s while carrying out their duties as Takaful agents.  Failure to observe any of the terms and conditions prescribed in the Code of Ethics may render the agent to be terminated and the license to be revoked.

Besides the duties and responsibilities enforced onto the agents, potential customers shall also exercise their duties diligently to obtain as much information as possible with regards to the particular takaful product they are interested in before proceeding to complete the necessary documents.  For instance, if you want to purchase a crossbow equipment for sport, you should obviously need to figure out few things like, how it works, how to choose the right bow and arrow, where to play and few precautionary measures as well.  Subsequently, you want to find the best place to purchase them and perhaps any good deals offering.  Similar process or activities apply when you want to participate in a takaful plan. 

Below are several questions which Takaful operator must provide with reasonable explanation in their product disclosure sheet:

1. What is the product about?

2. What are the Shariah concepts applicable?

3. What are the covers/benefits provided?

4. How much Takaful contributions applicable?

5. What are the fees and charges applicable?

6. What are some of the key terms and conditions that potential participant should be aware of?

7. What are the major exclusions under the Takaful certificate?

8.  Can the Takaful certificate be cancelled?

9. What shall the potential participant do if there are changes to his contact details?

10. Where to get further information?

Nevertheless, the potential customer must ensure that he obtain further additional information or explanation for any issues which he has doubt or confusion.

Thus, the potential participant is also a party to be blamed as well in the event of any mis-selling as he has ample of opportunity to ensure that the mis-selling can be avoided.

FAQ #12

Where does takaful company invest the collected contribution and what is the difference compared to the insurance company?

Takaful business is unique and different from insurance where the net contribution (after deducting any charges and fees) will be deposited into two separate funds, namely Participant Risk Fund (PRF) and Participant Investment Fund (PIF) depending on the features of the takaful product.  All general takaful products offer only protection coverage thus the contribution will entirely be credited into PRF.  On the other hand, most of family takaful products offer protection coverage with savings element therefore the contribution will be segregated between PRF and PIF.

All investments must comply with Shariah requirements.  Takaful operator can invest the funds into any investment instruments similar to insurance company provided that no non-Shariah elements exist.  The type of instruments maybe in the form of cash, financing, equities, sukuk, etc.  At the moment, most takaful operators invest the funds domestically due to limitation set by the regulation and fund size. Furthermore, the high volatility in currency exchange rates nowadays had diminished the appetite of many operators to risk their money abroad.  

The management will develop an investment mandate approved by the relevant parties including Shariah committee which outline the details pertaining the investment activities to be carried out by the fund managers whether internally or externally.

In terms of investment strategy, PRF will usually focus on short to medium term investment whilst PIF will focus on medium to long term investment to generate higher returns.  This strategy is in line with the purpose of the fund itself where PRF’s main objective is to cater for claims pay out whilst PIF is mainly to accumulate as much return as possible to prepare for future needs such as retirement or child education.

Thus, the main difference between insurance and takaful investment activities lies on the acceptance of investment instruments from Shariah perspectives.

FAQ #11

What are the attractions of takaful compared to conventional insurance to the non-Muslim potential customers?

To a Muslim, Takaful is the only choice for him to obtain any coverage or related benefits.  It is like being given two options to generate funds to protect any potential future loss.  First option is to participate in a gambling activity at a casino with the hope that he will win huge amount of money to safeguard his future potential loss.  Secondly, he may form a group of people where all members agreed to contribute certain amount of money into a charity fund to be used for those who suffer any loss in future.  Obviously, second option is the only choice for a Muslim to ensure full compliant  to Shariah principles.  Therefore, Takaful fulfils the Shariah requirements for the Muslim.

 

For non-Muslims, they will definitely search for any unique differentiation beneficial to them.  Besides the normal common benefits and features which are available in insurance and takaful, there are few attractive features in takaful which definitely enhance the products. 

Firstly, the participant is given a clear knowledge on the cash flow management of his contribution from inception till claim, surrender or maturity.  Takaful operator will share their business model which usually incorporated in all their marketing collaterals explaining the details on the charges and fees, separation of funds, investment profits as well as surplus distribution management.  Thus, the potential customers will be more confident and convinced to involve in takaful business due to its transparency. 

Secondly, takaful provides a higher opportunity for surplus sharing among the participants.  Theoretically, all surplus belongs to the takaful fund which is owned by all the in-forced participants.  If the fund experiences a lower claim pay out than expected, it will lead to a generation of surplus which can be distributed to all the participants accordingly.  .Nevertheless, as an incentive to the operator for managing the fund effectively, a small percentage of the surplus may be shared with the operator.  Despite of sharing with operator, participants still entitle a handsome amount of money for such situation. This surplus sharing system is not available under the conventional insurance.  

Thirdly, all takaful products provide some cash surrender values (CSV) irrespective of the duration in-forced.  This feature is compelling particularly in the family takaful products where most life insurance products will be forfeited in the event of surrender happens within the first three years of policy in-forced.  The CSV resides in participant’s personal account namely the PIF thus the accumulated amount is a guaranteed amount belongs to the participant.

Last but not least, takaful business must be supervised by a Shariah committee who ensure that all the Shariah principles are followed and the interest of public at large are protected.  Therefore, maximizing the shareholders’ value, which is the normal corporate objective of insurance, is not the ultimate goal of takaful business.  All participants under takaful can be rest assured that their interest is well taken care by the Shariah committee.