FAQ #6

What is the difference between Actuary and underwriter in takaful business? Is underwriter also part of actuary’s role?

All Takaful operators are required to appoint an Appointed Actuary (AA) to be approved by Bank Negara Malaysia based on recommendation by the Board of the companies.  The detail of the requirements pertaining the appointment is provided in the Guidelines on Appointed Actuary: Appointment and Duties.  Among key duties of AA are as follows:

(a)  Certify that the valuation of all certificate liabilities are in accordance to the generally acceptable actuarial principles and practices.

(b)  Prepare the Financial Condition Report (FCR) pertaining the operator’s financial conditions and their implications.  This report will include surplus or deficit status as well as any material adverse impact on the financial condition of the operator.

(c)  Provide recommendation to the Board with respect to the surplus or investment income distribution among the participants and shareholders, if any.  Should there be deficit in the Takaful fund, he will also provide the options to rectify the deficit to the Board.

However, the AA shall not assume the accountability for product pricing.  In other words, he shall not involve in the process of new product development including pricing.  Nevertheless, he needs to investigate and provide opinion with regards to all matters impacting the product pricing including scenarios which may lead to insufficient income to meet the payment of anticipated benefits and expenses as well as overall methodology used in determining the pricing.  In this respect, the role of AA is to conform on the basis used during pricing activities.  Besides AA, there are also Actuaries who involve in pricing, investment, risk management as well as marketing.

Meanwhile, underwriter will manage the underwriting process effectively in order to avoid any anti-selection and ensure the viability of takaful funds in the long run.  Anti-selection refers to the tendency of individuals to participate into takaful cover where their exposure to risks is much higher than the normal or average risk.  The underwriter shall ensure that the underwriting process is in line with the assumptions used in pricing of the product. Potential participant is required to provide material facts or relevant information pertinent to the risk to be covered to enable the underwriter to do the assessment thoroughly.  These information is commonly requested in the proposal form and further additional information may be sought to, if needed.

Thus, Actuary looks upon the technical matters of managing the entire takaful business while underwriter focus on activities in screening the application to participate in the takaful business.  However, the pricing Actuary will establish all the necessary criteria needed by the underwriter to conduct his underwriting activities effectively.  This is provided in the actuarial certificate during the development of new takaful product.  Those criteria are also incorporated in the underwriting guidelines as part of the Standard Operating Procedures (SOP).

FAQ #5

What is the concept of actuarial in the takaful business?

Actuarial is basically a process of applying mathematical and statistical methods to estimate the prudent pricing for any particular product introduced by Takaful. Prudent pricing means that the contributions paid by the participants are expected to establish a fund which will be sufficient to pay for all future claims relevant to the coverages provided.  This can be achieved by applying actuarial methodologies based on the past experience and trend regarding a particular risk to estimate future contribution.  For instance, if the takaful product is to cover losses arising from death, actuarial will apply the mortality table or death rate in their pricing formula. The mortality table is derived based on several years of study on the death rate of the population in depth.

In addition, actuarial will also apply other key factors during the pricing such as expenses, profit margin as well as expected future investment return for the fund.  As the estimation will usually apply some conservative assumptions to provide some buffer against any negative impact, the actuarial team will also conduct a regular assessment on the fund to ensure the assets are at least equal to the liabilities of the coverages.  This process is commonly known as actuarial valuation and the regulator has set the minimum criteria for such calculation.  The valuation exercise lead to the determination of surplus or deficit in the takaful fund.  Should there be any surplus, they will recommend to the Board for sharing of surplus among the participants otherwise a recommendation is made to the Board to rectify the deficit via interest free loan known as Qard.

Those mentioned above are just handful of responsibilities of actuarial team in takaful company as they are primarily responsible and accountable to assist the management in making the right decision from developing new products till ensuring that the takaful fund is always sufficient to cater for all claims.  

FAQ #4

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.  

FAQ #3

What is the difference between insurance underwriting method and takaful underwriting method?

In general, the underwriting methodology applied in insurance and takaful is quite similar in most activities.  However, underwriting process under takaful will also involve activities to evaluate whether the subject matter is acceptable to Shariah principles.  In other words, underwriter will ascertain whether there exist any elements which are against the Shariah principles related to the subject matter to be covered.  For instance, a customer applies to participate in fire takaful to cover his business premise.  If the premise is used for non-Shariah activities such as related to gambling, drugs, prostitution, or alcohol then the underwriter may decide to decline the risk.  Nevertheless, there are instances where the Shariah Committee may allow to accept the risk provided that the proportion of non-Shariah activities is insignificant say less than 5%.  This is applicable in the event that the subject matter is a hotel or an aircraft where alcohol is commonly served and constitute a small proportion of their business activities which is less than 5%.  

 

How about in a case where a person want to participate in a family  takaful covering her life while her profession involves in prostitution or alike?  There are two possible situation for this case.  If the applicant does not declare on her profession which is related to the non-Shariah activities, the underwriter will proceed to conduct the underwriting process without the knowledge on her profession.  On the other hand, if she declares her profession in detail, there are two different opinion by Shariah scholars.  Some scholars will agree to reject the risk due to the nature of her profession. However, there are some scholars who agree to accept the risk based on the fact that her sinful activities is her accountability with God.  Nevertheless, this kind of situation  shall be presented to the Shariah Committee for their deliberation and decision.