Part A & C

Introduction to Islamic Muamalat
PART A
BASIC TAKAFUL AND MEDICAL & HEALTH TAKAFUL
Basic Takaful Practices
CHAPTER A1
INTRODUCTION TO ISLAMIC MUAMALAT

OVERVIEW The Islamic teaching was revealed since the prophet of Adam a.s and the teaching is not only confined to belief and moral values, but also include laws that are suitable to be implemented by mankind. Islam to the Muslims is not just a religion but a way of life. The Arabic word 'Islam' simply means 'submission', and derives from the word meaning 'peace'. In a religious context it means complete submission to the will of Allah s.w.t. Islam, the same truth that Allah s.w.t revealed through all His prophets to the ummah. In fact the word Islam is not mere religion but is deen because it carries the meaning of the way of life touches virtually every spectrum of life not only restricted to ritual and spiritual, but also encompasses not limited to political and economic as well. It is, in essence, the same message and guidance which Allah revealed to all Prophets, from Adam, Noh, Ibrahim, Ismail, Daud, Musa and Isa a.s and right through His last prophet Mohammed s.a.w, but the message which was revealed to Prophet Mohammed s.a.w is Islam in its comprehensive and complete form. The Quran has emphasized the completeness of its teaching and this is in line with a Quran verse; This day I have perfected your religion for you, complete My blessing on you and approve Islam as the way of life for you (AlMaidah : 3 ).
A1.1
INTRODUCTION TO SHARIAH
1.1.1
Objective of Shariah
Shariah is the entire body of Islamic law, and the term literally means "the way to the water source." It is a wide-ranging body of law and personal rules, regulating matters not limited to jurisprudence, politics, business, banking, family, and society. The main objectives of the Shariah are to ensure that human life is based on maruf (good) and to cleanse it of munkar (evils). The term maruf denotes all the qualities that have always been accepted as good by the human conscience, and conversely, the world munkar denotes all those qualities that have always been condemned by human nature as evil. 1.1.2 The Concept of Ad Deen (Shariah) ISLAM
AQIDAH
SHARIAH
AKHLAK
IBADAT
MUAMALAT
MUNAKAHAT
JINAYAT
POLITIC
ECONOMIC
SOCIAL
Source: Kitab mughnil muktaj (Imam Shafie), Kitab al-mughni (Imam Hanafi), Kitab Bidayatul mujtahid wa nihayah, (Imam Malik)
Broken down to its bare elements, Islam comprises of Aqidah (a set of beliefs), Shariah (a set of laws) and Akhlak (a code of moralitie). Aqidah means a set of beliefs. From the Islamic point of view, Aqidah means strong belief in Allah s.w.t, His Prophets and the hereafter, also belief in the angels, the holy books and predestination. Shariah or Islamic law is also known as Fiqh. Fiqh is Islamic jurisprudence. Fiqh deals with the observance of rituals, morals and social legislation in Islam. Branches of Fiqh include Ibadat, Muamalat, Munakahat and Jinayat. Fiqh Ibadat The rules of ritual purification, prayer, pilgrimage, fasting, zakat, jihad and some other forms of worship are dealt under this heading. Most of these rules deal with the rights owed to Allah s.w.t by the individual alone or by the community as a whole. Fiqh Muamalat This area deals with property, contracts, business organisation, security of debts and insolvency, pre-emption, gifts, bequests and waqfs. Fiqh Munakahat/Usrah This area deals with marriage, divorce, inheritance, guardianship and related matters. This is similar to conventional version known as personal law.
Fiqh Jinayat This area deals with major offences like illicit sexual (zina), theft (sariqah), robbery, pirate and brigandage (hirabah), and other matters collectively known as hudud laws.
Akhlaq is a term referring to the practice of virtue, morality and manners in Islamic theology and falsafah (philosophy). It refers to ones disposition, nature, temper, ethics, morals or character (of a person). Akhlaq covers all aspects of Muslim behaviour, attitude and work ethics which influence his acts. 1.1.3 Mandatory Law (Hukm Taklif)
Taklifi law is the law that describes the commands, prohibitions and the option to run or leave an activity / job. According to Islamic terminology, the acts of a Muslim must be guided by these five commandments (al-Ahkam al-Khamsah) classified as follows: Wajib (obligatory) The term wajib means an act the performance of which is obligatory for the subject. Example: performing solat and fasting in month of Ramadhan. In its technical sense, it is an act whose commission is demanded by the Lawgiver (Allah s.w.t) in certain and binding terms. Mandub (recommended) Mandub is defined as a demand by the Lawgiver (Allah) for the commission of an act without making it binding and without assigning any blame for its omission. The rule for mandub is that for doing so there is reward (thawab) for the doer, while omitting it entails no penalty such as giving charity to the others.
Haram (prohibited / unlawful) Haram is defined as one which omission is required by the Lawgiver (Allah) in binding and certain terms. An example of prohibited act (Haram) is the misappropriation of anothers wealth.
Makruh (reprehensible or disapproved) Makruh is defined as one which omission is demanded by the Lawgiver (Allah) in non-binding terms. An example of reprehensible act (Makruh) such as debt which is not documented (unrecorded).
Mubah (permissible) The Mubah or permissible act is one in which the Lawgiver (Allah) has granted a choice of commission and omission, without blame or praise for omission or commission. According to this principle, all contracts and transactions are permissible, unless there is evidence indicating otherwise.
1.1.4
Nos. i
Sources of Shariah
Primary Source Quran Description The Quran is the very word of Allah s.w.t revealed to the Holy Prophet s.a.w for the benefit of all mankind. It is a divine revelation and is the first and main source of Islamic Law and to the Muslims, the absolute authority in deciding the legality and every legal obligation. The Quran is a comprehensive and indivisible guide and must be accepted and implemented in its
entirety ii As-Sunnah The Sunnah, means method, that includes all that is from the Holy Prophet s.a.w comprises what the Prophet s.a.w said (Qaulan), did/action (Filan) and agreed (Taqiran). Whatever originated from the Holy Prophet does come out from his own desire, but it is an inspiration from Allah s.w.t. The word Sunnah should be distinguished from the term Hadith, which is a narration of the saying of the Holy Prophet.
Nos.
Secondary Source Ijma
Description
Ijma is Juristic consensus of opinion of the imams mujtahid among Muslims in a particular time after the death of the Prophet s.a.w regarding the legal position of a matter or problem. In its application, Ijma is an agreement of Muslim jurist in the event the ruling being sought is not found in either of the main sources ie the Quran and the Sunnah. All the mujtahidin must reach a consensus on a juridical opinion at the time an issue arises.
ii
Qiyas (Analogy)
Qiyas means to equate the legal position of a matter that has no ruling from the Quran and the Sunnah to one that has due to the illat (underlying cause or reason) of the ruling. In other words, the mujtahids refer back to the
Quran and the Sunnah and make an analogical reasoning between new matters that has no ruling with the one that already has a ruling. Literally, it is the extension of a Shariah value from the original case to a new case, because the new case has the same effective cause as the original case. iii Maslahah Maslahah ('public interest') is a concept in traditional Islamic Law, invoked to prohibit or permit something on the basis of whether or not it serves the public's benefit or welfare. The concept is related to that of Istislah. While the meaning of maslahah is 'public interest', the meaning of istislah is 'to seek the best public interest'. Urf is a term referring to the custom or 'knowledge' of a given society, leading to change in the fiqh. Ùrf is a source of Shariah rulings where there are no explicit primary texts of the Qur'an and Sunnah specifying the ruling. Ùrf can also specify something generally established in the Quran and sunnah. Istishab means presumption of existence or nonexistence of facts. It can be used in the absence of other proofs (dalil). Istishab relates to the sense that the past accompanies the present without any interruption or change. Istihsan means juristic "preference". Muslims scholars may use it to express their preference for particular judgments in Islamic Law over other possibilities. It is one of the principles of legal thought underlying personal interpretation or ijtihad.
iv
Urf
Istishab
vi
Istihsan
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1.1.5
Objectives of Shariah (Maqasid Shariah)
Maqasid is the Arabic word for goals or purposes. In Islamic context, it can refer to the purposes of Islamic faith. In terms of Shariah, there are five Maqasid (foundational goals). The five maqasid are as follows:The preservation of: Religion Description/Remarks Shariah requires the preservation and protection of Deen (religion) under all circumstances. Example defending the Islamic faith particularly if it attacked by the enemies of Islam. Shariah requires the preservation and protection of life under all circumstances. Example in order to protect life is enacting a severe punishment for those who kill another. The punishment for those who kill innocent human being is the death penalty in Islam. Shariah requires the preservation and protection of descendants and honor under all circumstances. Example Islam prohibit it followers in committing adultery or other immoral behaviors. Shariah requires the preservation and protection of intellect and mind under all circumstances. Protection of mind requires safeguarding it from anything that might harm the ability and functions of the brain, Example the consumption of liquor or similar substances that will upset the functions of the brain. Shariah requires the preservation and
Life
Lineage
Intellect
Property/Wealth
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protection of property under all circumstances. Example the pro-active initiatives and planning in safe guarding ones property against misfortunes or disasters. A1.2 1.2.1 BASIC MUAMALAT Introduction to Muamalat
The literal meaning of the term Muamalat (plural of Muamalah) is the transactions while its technical idea is any form of mutual dealings held between men to solve their everyday needs, especially in matters relating to trade and commerce. Muamalat is a social relationship which consists of various economic and noneconomic activities. Basic Principles of Muamalat Among the basic principles that play the role in forming Shariah rulings in Muamalat are: Freedom of contract Muslims are free to put conditions in their agreements except that which prohibits something which is permissible or permits something which is prohibited. Permissibility as original status of matters The status of all matters other than rituals is permissible until evidence is given that a certain matter is prohibited. Custom is of force
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A fiqh legal maxim states that Custom is of force. In many Shariah commercial contracts many things become permissible following customs. 1.2.2 Prohibition in Muamalat
All economic activities are legally permissible as long as these activities do not transgress any of the tenets of Shariah. In line with this maxim, it is the unanimous opinion of all four major Islamic Shariah School of thought (Shafii, Hanafi, Hanbali, and Maliki) that all forms of business transactions that transgress any of the tenets of Shariah are considered invalid. General Principles: No contract should be made for selling or buying forbidden products such as alcohol or any other forbidden substances. Likewise, no contract should be made for any financial deal on the basis of usury (riba). Contract involves in gambling (maisir) is forbidden in Islam. Contract that involves major uncertainty (gharar) is also forbidden as gharar may made the contract voidable
Riba (Usury) The Arabic word 'riba' literally means 'increase in' or 'addition to' anything for example, to the effect made through the following Qur'anic verse: "O you who believe, devour not usury, doubling and quadrupling, the sum lent. Fear Allah and observe your duty to Him, that you may really prosper." Qur'an (3:130) The Prophet Muhammad s.a.w said, Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt - like
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for like, equal for equal, payment being made on the spot. If the species differ, sell as you wish provided that payment is made on the spot'. [Reported by Muslim] From the above hadith, gold and silver represent money while wheat, barley, dates and salts represent fungible item or food stuff. These items are known as ribawi item. It would appear that the prohibition regarding riba has two dimensions. The first one prohibits increases arising from debts/loans (duyun), known as Riba Duyun, while in barter trades (buyu), unequal exchange of ribawi item of same kind and same basis in is known as Riba Buyu. This can be summarised as follows: Riba Duyun (singular dayn) is formed through financial loan: i. Riba Qard - where the increase (interest) on the principal sum of the loan is agreed upon at the point of contract; ii. Riba Jahilliyah - this refers to the increase levied on the borrower for late repayment or failure to repay the financial loan. Riba Buyu (singular Bai) is formed through exchange contract in barter trade; i.e Riba Fadhl (happen in unequal exchange of its counterpart) and Riba Nasiah (due to extension of time of delivery). The following rules of exchange apply in deciding whether the said transactions fall under Riba Fadhl or Nasiah. Rule 1: Exchange between ribawi materials of the same kind (and of the same basis) must be with equal weight, measurement or number and payment delivery must be made at the same time.
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o If payment and delivery are made at the same time but the weights, measurements or numbers of the materials exchanged are not equal, then Riba Fadhl occurs. o If payment and delivery are not made at the same time but the weights, measurements or numbers of the materials exchanged are equal, then Riba Nasiah occurs. Rule 2: Payment and delivery between ribawi materials of different kinds and of the same basis must be made at the same time, though they may be made at different prices. Equal weights, measurements or numbers of the materials exchanged are not required to be observed here. o If payment and delivery are not made at the same time (on spot), then Riba Nasiah occurs Maisir (Gambling) Any transaction or activity relating to games of chance or gambling. A contract that involves element of maisir (gambling) is Batil (void). Maisir can be concluded as betting or charging something that will be forfeited if one fails to obtain the greater gain that one hopes for. It is also defined as zero-sum game i.e the sum of those who gain and those who lose equal to zero. For a transaction to be equated to gambling, it must involve the devouring and unlawful appropriation of the property of others. Allah s.w.t says: "They will ask thee about intoxicants and games of chance. Say: In both there is great evil as well as some benefit for man; but the evil which they cause is greater than the benefit which they bring" Al-Quran (2: 219) Gharar (Uncertainty)
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Gharar or uncertainty makes a transaction or activity unIslamic as it will result into an unjust or unfair outcome for the parties involved. It is where the quantity and the quality involve in the transaction is not predetermined and known. Gharar means hazard, chance, stake or risk. Gharar occur when there is element of uncertainty in a transaction whose existence or characteristics are not definite, due to the risky nature which may makes the contract void or voidable. The Messenger of Allah also forbade us from Gharar, Al-Baji Al-Andalusi states: The Prophet s.a.ws prohibition of the sale of al-gharar renders such a sale defective. The meaning of sale of al-gharar refers to sale in which gharar was the major component, leading it to be justifiably described as sale of al-gharar. This is the type of sale which is unanimously forbidden. On the other hand, minor gharar does not render a sale contract defective, since no contract can be entirely free of gharar. Gharar can be divided into Minor Gharar and Major Gharar. (i) Minor (Yaseer) Gharar Minor Gharar is forgiven as it does not render a sale contract defective. It is a Gharar which does not affect the principal components (arkan or essential elements) of the contract and necessary conditions of the essential elements (e.g. requirements relating to asset, price, language of the contract etc). (ii) Major (Fahish) Gharar The Gharar that causes a contract to be invalid is major (excessive) Gharar. In general terms, major Gharar is: an uncertainty which is so great that it becomes unacceptable; or
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It is so vague that there is no means of quantifying it.
1.2.3
The Concept of Contract in Muamalat
Barbati defined aqad or contract in his kitab Inayah ala Fath alQadri as follows: Legal relationship created by the conjunction of two declarations, from which flow legal consequences with regard to the subject matter. The literal meaning of aqad is join or tie. The English word for aqad is contract. Contract can also be defined as being an expression of the matching between a positive proposal made by one of the contractors and the acceptance of the other contractor in way which has an impact on the subject of the contract. A contract must consist of:
Elements of Aqad Aqidan (the parties to the contract) Descriptions/Remarks It is a condition of a valid contract that the parties possess capacity. Capacity is a quality which makes a person qualified for acquiring rights and undertaking duties and responsibilities. Sighah is the form of the contract consisting of ijab and qabul (offer and acceptance). The offer made by the first party to the contract is called ijab because it gives and confirms the freedom of acceptance to the second party. The subject matter and price. They are conditions to be taken into consideration according to Islamic jurisprudence for subject of contract has to be legal, in existent and identified.
Sighah
Maaqud alaih
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A1.3
APPLICATION OF SHARIAH CONTRACT COMMONLY USED IN TAKAFUL BUSINESS

Underlying Contract Kafalah A contract of guarantee whereby a person adds to himself a responsibility or liability on behalf of another person. In Takaful business, the participant contributes to the Takaful fund by a mutual agreement that the Takaful Operator is entrusted to undertake in managing the Takaful fund prudently and to pay the Takaful benefits to the participants in the event a misfortune. The Kafalah contract is prevailing in the Takaful operational system in Malaysia and worldwide. Supported Takaful Contract
Nos i.
ii.
Tabarru Means gift or donation which is given by one in favor of someone without seeking any consideration. In Takaful business, the participants mutually agree to contribute to the Takaful fund based on the contract of Tabarru. Tabarru contract is the core element in takaful business and is not only practiced in Malaysia but also the Tabarru contract is practiced worldwide.
iii.
Wakalah A contract of agency, in In Takaful business, the
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which a person delegates his business to another and substitutes the other in his place. The person delegated is called Wakil. Thus, both the principal and the wakil are equally bound by each other under contract of Wakalah. iv. Ujrah A contract of hiring whereby one person hires someone for definite services, in which the hirer is under the duty to provide a reward for the services rendered to him.
participants appoint theTakaful Operator as their wakil and to manage their Takaful coverage and the Takaful fund. The wakalah contract is practiced by all Takaful Operators in Malaysia most of the Takaful Operators worldwide operational under the Wakalah model.
In Takaful business, the participant contributes to the Takaful fund by a mutual agreement that the Takaful Operator is entrusted to manage the Takaful fund prudently in terms of investment and pay out takaful benefits to the eligible participants in the event of a misfortune. The Takaful Operator is entitled to a fee for the service rendered. The Ujrah contract is practiced by all Takaful Operators in Malaysia most of the Takaful Operators worldwide operational under the Wakalah model.
v.
Ju'alah A contract of hiring for services, in which one party undertakes to pay a specified amount of money for rendering a defined service in accordance with the terms negotiated between them. In Takaful business, the participants contribute a sum of money to the Takaful fund. The Takaful Operator is entrusted to manage the Takaful fund prudently in terms of investment and pay out takaful benefits to the eligible participants in the event
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of a misfortune. The Takaful Operator is entitled to a fee for the service rendered. The Jualah contract practiced by all Takaful Operator in Malaysia and most of the Takaful Operators worldwide operational under the Wakalah model. vi. Mudharabah The nature of Mudarabah (profit sharing) practices is that, it is a financial contract whereby one party called Rabbu al-Mal provides fund to the other party called Mudharib who undertakes to manage the fund through investment or trade and generates profits, in which both the Rabbu al-Mal and also the Mudharib shre in the profit in a preagreed proportion. In Takaful business, the participants contribute a sum of money to the Takaful fund in which the participants are like Rabbu al-mal, while the Takaful Operator is like Mudharib who agrees to manage the fund in view of making profit in which both, the participants and also the operator share the profit proportionately. Mudharabah contract as practiced by Syarikat Takaful Malaysia when it first started operation. However, for some Takaful Operators in Malaysia Mudharabah is still practiced only on certain products.
vii.
Musharakah The contract of Shirkah (partnership). Musharakah is an agreement between two or more parties to operate a particular business in which all parties contribute to the In Takaful business, the respective shareholders mutually agree to contribute a sum of money to initiate the Takaful business. This mutual agreement among the shareholders is called musharakah.
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capital in view of profit. In al-Musharakah dealing, the parties involved herein share the liability, profit, and also loss according to their agreement.
Musharakah contract is practiced among all the Shareholders of all Takaful Operators in Malaysia and most of the Takaful Operator worldwide.
Concept of Risk
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CHAPTER A2
CONCEPT OF RISK
OVERVIEW Risk is uncertainty about the future outcome of an event. The term risk has a variety of meaning in business and everyday life. Risk traditionally means possibility of harm, injury or loss. It is to describe any situation where there is uncertainty about what will be the outcome. Risk is generally related to an unfavourable outcome or unfortunate event whereas a chance is something which relates to a favourable outcome. An example of a risk would be of being diagnosed with lung cancer among smokers as there will always be an uncertainty as to whether a smoker will suffer from cancer of not. A2.1 CONCEPT OF RISKS
Since our purpose is to relate risk to Takaful, focus will be on a risk which entails the possibility of a financial loss. Financial loss may be defined as a decline in or disappearance of value due to a contingency. Apart from risk being the uncertainty of whether or not a loss may occur as a result of unexpected event, it is also about the relationship between frequency and severity. The level of risk is determined by this relationship. This relationship is explained by the Heinrich Triangle. The Heinrich Triangle explains that where there is a high frequency the severity will be low and for incidents that have a low frequency the severity will be high e.g. a plane crash happens very seldom but when it takes place the severity will be high.
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2.1.1
Term Peril
Peril and Hazard

Description Peril is referred to as the main cause of a loss. Any accidental losses that are caused by a peril may be subject to a claim under the respective policy. Example of perils include fire, flood, collision, accident, earthquakes, sickness, premature death. Example The insured vehicle under a motor policy is damaged in an accident, (accident is the insured peril under a motor policy and a claim can be made under the policy). If a restaurant is destroyed in a fire, (fire is the insured peril and a claim can be made under the fire policy).
Hazard
Refers to the condition that increases the chance of loss. There are two (2) types of hazards: 1. Physical Hazard Refers to the physical condition of the subject matter that increases the chance of loss. 2. Moral Hazard Refers to the attitude of an individual that increases the chance of loss. Moral hazard is difficult to determine. Intentionally burning unsold merchandise that is insured to collect from an insurer or a dishonest insured who exaggerates the claim amount Defective wiring in a building that increases the chance of fire
2.1.2
Categories of Risk
Risk can be classified into several distinct categories. The most important categories are the following:
Concept of Risk
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Risk Pure
Description Refers to the possibilities that can result in only a loss or breakeven. The possible outcome can be adverse (loss) or breakeven (no loss). Pure risks can generally be covered. Refers to the possibilities that can result in loss, no loss or profit (gain). It is an uncertainty about an event that could produce either a profit, neutral (no loss) or a loss. Speculative risks generally cannot be covered.
Example Fire, lightning, flood, storm, premature death, accident, theft etc
Speculative
Investments in the stock market, foreign currency fluctuations, venturing into a new business
2.1.3
Fundamental and Particular Risk

Risk Description A fundamental risk will affect the whole society or a large numbers of people within the economy. It is not within the control of individuals. A particular risk will affect only individuals and not the entire community and is within the control of individuals. Example Damage to property due to earthquake, war etc
Fundamental
Particular
Damage to property from accidents, thefts, robbery
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2.1.4
Types of Pure Risk
Pure risks are generally insurable and the topic of Insurance and Takaful will emphasize primarily on these risks. Pure risk can be categorized into three (3) types that create financial insecurity, namely Personal Risks; Property Risks; and Liability Risks.
Risk Personal Description Example
Refers to risks that directly affect individuals. It will lead to the possibilities of loss or reduction of income, extra expenses incurred and depletion of assets. Personal risk can be further divided into the following four (4) types: Risk of Premature Death The death of a bread winner can cause financial hardship to the dependants. This premature death risk will cause financial problems for dependents. Possibility of retirees losing their earned income if they dont have sufficient financial assets or other sources of retirement income. The risk may cause reduced standard of living. Possibility of having to pay catastrophic medical bills and loss of income. Major threat to financial security resulted from business cycle down swings, technological and economy changes etc.
Risk of Insufficient Income during Retirement
Risk of Poor Health
Risk of Unemployment
Concept of Risk
25
Risk Property
Description
Example
Refers to the possibility of loss due to damage to property from various causes, such as fire, flood, earthquakes and other natural disasters. There are two (2) types of risk related to property: Direct Loss Financial loss that results from the physical damage, destruction or theft of the property. Indirect Loss or Consequential Loss Financial loss that results indirectly from the occurrence of a direct physical damage or theft loss of the property. A factory damaged by a fire, (the physical damage to the factory is a direct loss). In addition to the physical damage to the factory, the owner would lose his income due to reduction in turnover whilst the factory is being repaired. This will cause a loss of income and would be a consequential loss. Business firms can be held legally liable for defective products that could cause bodily injury or property damage to consumers who use these products.
Liability
Refers to the risk of third party bodily injury or property damage. In this case the court may order you to pay substantial damages to the person you have injured.
2.1.5
Characteristics of Insurable Risks

Description The risk must involve a loss that is capable of financial measurement where monetary compensation is capable following a loss, e.g. fire damage to home, stolen motorcar. An article may have pecuniary and personal value but it can only be insured according to its pecuniary value and not the sentimental value attached to the subject matter of insurance.
Characteristic Pecuniary Value
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Homogeneous Exposure
There must be a large number of similar, homogeneous risks before anyone of that number is capable of being insured. a) the measurement of risk by probabilities and statistic relies on there being a reasonable experience of past events. b) if there were only 3 or 4 exposures that each one would have to contribute a very high amount (uncompetitive premium) for the loss to be met from these contributions, e.g. models legs. In general, only pure risks (loss or break-even situation) are insurable as insurance cannot be used to make a gain. A speculative risk involves loss, gain or break-even and therefore is not insurable. Particular risk are insurable if they satisfy other criteria of insurable risks. Fundamental risks are generally uninsurable, e.g. war, changing customs although certain such risks may be considered depending on the geographical location of the risks.
Pure Risks
Particular Risk
Fortuitous
It is not possible to insure against an event that will occur with certainty as in such a case there would be no risk, or uncertainty of loss. The frequency and severity of any risks must be completely beyond the control of the person insuring, eg Life insurance timing of death is uncertain. Risk that are intentional cannot be insured, eg suicide. Defined as the legal relationship between insured and the subject matter of insurance. The risk to be insured must result in some form of financial loss recognized by law. The Insured person insuring must be the one who stands to suffer some financial loss if the risk materializes, e.g. homeowner insuring own house.
Insurable Interest
Concept of Risk
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A2.2
CONCEPT OF RISKS IN ISLAM
Many Muslims misunderstood the concept of fate (Qadha and Qadar). Some Muslims believe that their future is in the hand of Allah. Muslims are required to be proactive in order to be able to change their conditions as God says: " Verily never will Allah change the condition of a people until they change it themselves (Ar Rad 13:11). Prophet Muhammad s.a.w once asked a Bedouin who had left his camel untied, "Why do you not tie your camel?" the Bedouin answered, "I leave it to the will of God". The Prophet then said, "tie up your camel first then put your trust in God". This conversation depicts not only how should Muslims accept their fate but also indicates how Muslims should make efforts to reduce the risk of loss and calamities. Risk management is a concept that is not only accepted by Islam, but embraced as one of the ways to ensure the fulfillment of goals and objectives, that ultimately should arrive at saadah (happiness) in this world and the hereafter. A2.3 RISKS AND TAKAFUL
Risks that relates to the operation of Takaful business includes but are not limited to the following:
Types of Risk Operational risks Description The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events inter alia: Employment practice and workplace safety: losses arriving from acts inconsistent with employment, health, or safety laws or agreement, workers compensation. Internal fraud: losses due to acts of a type
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intended, misappropriate property or circumvent regulations, the laws or company policies, bribery External fraud: loss due to the acts of a type intended to defraud forgery, misappropriate property or circumvent the laws, by third party. Damage to physical assets: losses due to loss or damage of physical assets from natural disaster or other events such as terrorism, vandalism. Business disruption and system failures: loss arising from disruption of utility disruptions, software failures, hardware failures Execution, delivery and process management: loss from failed transactions processing or process management, from relation with trade counter parties and vendors such as data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets. Clients, products and business practices: loss due to unintentional or negligent failure to meet professional obligation to specific client (including fiduciary and suitability requirements), or from the nature or design of a product.
Legal risks
The risk of loss from possible litigations from third parties. The risk of loss from erroneous decisions or strategies that result in negative consequences. Any questionable or erroneous decisions, activities or initiatives that marred the reputation of the Takaful operator.
Strategic risks
Reputational risks
Underwriting risks
Risk that contributions will not be sufficient to cover future incurred losses and that losses and loss adjustment expenses' current reserves are not sufficient
Concept of Risk
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Investment risks
The risk that an investment will result in a loss. Nearly all investments have some investment risk: a stock/share may decline; a bond or sukuk may default, and the underlying assets of a derivative may not behave in a certain way. Typically encompasses activities such as corporate governance, enterprise risk management (ERM) and corporate compliance with applicable laws and regulations. It is a risk in planning which identifies the organization's exposure to internal and external threats and synthesizes hard and soft assets to provide effective prevention and recovery for the organization, whilst maintaining competitive advantage and value system integrity, in order to ascertain the viability and continuity of the company. The risk of takaful operations and transactions may not be in compliance to Shariah principles. The takaful operator may faces risk of non-recognition of income and reputational risk. For example, risks that have been accepted could turn out to be unacceptable, requiring the takaful operator to cancel the contract or donate the income to charity.
Governance risks
Business Continuity risks
Shariah Compliance risks
A2.4
METHOD OF HANDLING RISKS
Once risks have been identified and assessed, all techniques to manage the risk fall into one or more of these four major categories: Risk Avoidance Risk Reduction Risk Retention
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Risk Transfer Risk Avoidance
2.4.1
Avoid or eliminate the risk if the risk is so unacceptable then the individual or organization may decide not to continue with the activity or business that presents such a risk. If this decision is made, then the individual or organization will decide to avoid the risk. Avoidance may seem the answer to all risks, but avoiding risks also means losing out on the potential gain that accepting (retaining) the risk may have allowed. Not entering a business to avoid the risk of loss also avoids the possibility of earning profits. An example would be not buying a property or business in order not to take on the liability that comes with it. 2.4.2 Risk Reduction or Loss Control
This is an action taken to improve the risk to achieve a standard and acceptable level. A constant review process will be required in order to ensure that the correct standard is achieved. It involves methods that reduce the severity of the loss or the likelihood of the loss from occurring. For example, fixing sprinklers designed to put out a fire to reduce the risk of loss by fire. 2.4.3 Risk Retention
If the current level of the risk is already at an acceptable level, the individual or organization may decide to retain the risks. It involves accepting the loss when it occurs. Risk retention is a viable strategy for small risks where the cost of insuring against the risk would be greater over time than the total losses sustained. 2.4.4 Risk Transfer
This involves the transferring of risks to an organization or individual. When a risk is transferred, losses will be paid by the
Concept of Risk
31
organization or individual to whom the risk is transferred. There are two ways of transferring risks: Insurance/Takaful Contract- example: A house owner can transfer the risk of loss incurred when his house is destroyed by fire by entering into a fire Takaful contract. Non Insurance/Takaful Contract: Example, a supermarket can transfer potential risk (liability) arising from sale of defective products by entering into agreement whereby the manufacturer agrees to compensate the supermarket from any liability arising from the defective product. A2.5 2.5.1 RISK MANAGEMENT Risk Identification
Risk identification is the most important step in risk management process. It is necessary to identify the risks that could damage the finances of an individual or a firm before a solution can be provided. Once the risks are identified, they must be measured and evaluated individually to determine the probability or chance of loss and the financial impact it can have on individual or a firm. Risk management takes the view that a firm is exposed to risk in a variety of ways, which may cause financial losses. Risk is viewed therefore in its widest sense, and not limited to those risks that can be insured. A risk manager's job is to identify exposed areas where a company is likely to suffer. Methods of Risk Identification Physical Inspection A brief walk over the plant is essential to help in giving a feel for the place which may later direct the formal risk identification.
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Organization Charts A chart showing the organizational structure of the company and the relationship between different personnel and departments can highlight the weaknesses an organizational structure Flow Chart A chart showing materials or work flowing through various stages of process in which a weak link of the process can be identified Check List A list asking questions or a questionnaire relating to the main areas of activity can highlight areas that present risks. 2.5.2 Risk Screening and Evaluation
Risk screening and evaluation is the process of determining the risk impact or potential losses so that appropriate action can be taken, considering the resources available. Risk evaluation involves the estimation of frequency and severity of the risk exposures and ranking them to their relative importance. Those risks with high potential losses will be given priority in the risk management plan. Risk Frequency refers to the number of times a loss producing event will occur during given time period (probability of its occurrence). Risk Severity refers to the cost or amount of loss, in money terms, arising from a loss producing event. Not all risks are significant and need to be handled or to be insured/covered. For the smaller risk, it can be ignored even there is a great chance that it may occur. However, size alone does not determine whether the risk should deserve priority. A risk which have a slight chance of occurrences but carry potentially severe
Concept of Risk
33
financial impact on the individuals life or the firms well-being, it should be handled first. Example: A loss exposure with the potential for bankrupting the firm is much more important in a risk management plan than a frequent risks exposure that cost a small amount. 2.5.3 Development of a Risk Management Plan
Once the risks have been evaluated completely, it is time to choose the appropriate risk mitigation method. The selection of methods should take place in the early development stage. Selection must consider cost and effectiveness. There are four methods of risk mitigation Risk Avoidance; Risk Control; Risk Retention and Risk Transfer. 2.5.4 Implementation of Risk Management Plan
Once the selection of a suitable method is made, the plan is ready for implementation. In performing this step, the risk should be prioritized and matched with the actions to be taken. One of the action of course is to insure/cover the risk. 2.5.5 Reviews and Monitoring of Risk Management Plan
Reviews and monitoring is another important step in the risk management process. These activities involve periodical reviews, monitoring the implementation process as well as progressive revision on the plan in light of any changes in the business and economic environment. The monitoring and risk review stage would include the production of risk manuals, claims performance reports and experience studies and audits. It is quite possible that different risks would have different types of monitoring, with insurance risks in particular monitored on a more frequent basis and reported directly to the management.
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Periodical reviews can help to identify any deficiencies or adjustments and also ensure the objectives of the plan are met. Reviews should be done at least once a year. Communication of Risk Management Objectives and Plan
2.5.6
It is often said that it is not the plan which is important, it is the planning itself. This is very true in this case, meaning that proper communication at all phases of the risk management planning is needed. The need of communication is often ignored and usually as a result the implementation and monitoring stages are compromised leading to the objectives of the plan not being achieved. The drivers of risk management need to include both internal as well as external sources. Both sources will need to be included in the risk management policy. These drivers can be further split into their area of risk specialization. Risk management has to be integrated into the corporate culture. In modern risk management practices every person in the company will bear responsibility in achieving the firms risk management objectives. Hence during all phases of risk management, communication between the concern parties is vital.
Introduction to Takaful
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CHAPTER A3
INTRODUCTION TO TAKAFUL
OVERVIEW During the pre Islamic period, it is customary of the pagan Arabs to pay diyat. It was the custom of the pagan Arabs for a killer to pay Blood-Money (diyat) as compensation to the family of the slained. It was the right of the family of the deceased to demand compensation from the tribe or the family of the offender. Diyat custom is to replace the primitive custom blood called for blood. Diyat was introduced to curb the fury of war. The system of blood-money was retained after the advent of Islam because of its virtue and benefits as follows; It reduced bloodshed and feud. Replace individual responsibility to collective responsibility. Lessened financial burden of the individual. Developed a spirit of co-operation and brotherhood.
The doctrine was approved by the Holy Prophet s.a.w and subsequently made mandatory during the period of the second Caliph. This is the foundation doctrine based on which todays Islamic insurance practices have been developed. In Islam, all economic activities are legally permissible as long as these activities do not transgress any of the tenets laid down through the two formal sources of Shariah law, i.e the Quran and the Hadith. In line with this maxim, it is the unanimous opinion of all four major Shariah School of Thoughts (Shafii, Hanafi, Hanbali, and Maliki) that all forms of business transactions that contain the elements of riba (interest), gharar (uncertainty) and maisir (gambling) are considered invalid.
36
The doctrine of Maqasid Shariah imposed a duty upon all Muslims on the protection of tangible assets, property and the well beings of the person. The means of such protection must conform to Shariah rulings and its legal guidelines and principles. Unfortunately, most conventional means of insurance are based upon practices that are prohibited by Shariah. A3.1 DEFINITION OF TAKAFUL
The word Takaful is derived from the Arabic verb kafala which simply means to take care of ones need. Therefore the pact between at least two parties agreeing to jointly guarantee one another in the event of a loss, as a consequent of being afflicted by a calamity defines the term Takaful. Likewise, the joint-guarantee as embedded in the concept of takaful can be translated into practical operation in the form of business or commercial transaction within the tijari or private sector as one of the Islamic financial players in a market economy. In this manner, like banking, Takaful can be the alternative to the conventional insurance. Under the tijari sector the public as consumers will have the right to choose the types of product and service suitable to their taste and need. A3.2 TAKAFUL CONCEPT
The Academic Council of the Muslim world league, after making appropriate modification concluded that the co-operative form of insurance is acceptable and considered an alternative to insurance. The system within the confine of Islamic framework should be founded on the following concepts: 3.2.1 Takaful
Muslim jurists unanimously agreed that cover which fits the requirements of Shariah may be based on the Islamic concept of Takaful. Takaful is a noun stemming from the Arabic verb
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Kafala meaning to take care of ones needs. Takaful means mutual help among the group i.e. each member of the group pools efforts to support the needy within the group. The takaful concept is based on solidarity, shared responsibility and brotherhood among members. Takaful can be defined as the act of a group of people who desires to reciprocal guarantee each other within the group against certain loss or damage that might be inflicted upon anyone of them. The salient features of Takaful operations are as follows: o o o o The company is not the one assuming the risk, the Participants who are mutually covering each other. The company is acting as trustee on behalf of the Participants to manage the operation of the Takaful business. All contributions (premiums) paid by the Participants will be accumulated in the Takaful fund for payment of the Takaful benefits. The Takaful fund at the same time can be invested in areas approved by Shariah Council. Mudharabah
3.2.2
Mudharabah can be defined as the commercial profit sharing contract between the provider or providers of fund and the entrepreneur for a business venture. Mudharabah is profit sharing partnership whereby one party, known as Sahibul Mal, provide all of the capital for a business venture. The other party, known as Al-Mudharib or the entrepreneur, does not put in any capital but puts in effort and entrepreneurship. Any profit from this venture will be shared between the two parties on an agreed ratio of say 50:50 or 60:40 or whatever is mutually agreed.
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For the Mudharabah contract to be permissible the various elements should be present:o o o o o o Capital Provider Entrepreneur Capital Activity Profit Ratio Offer and Acceptance
Salient Features of the Mudharabah Contract. o o o o In the event of a loss, it is the duty of the capital provider to make good the loss. In the event of a loss and the loss is due to the mismanagement of the Takaful Operator, the Takaful Operator will make good the loss. In the event of a profit the profit will be shared between the Takaful Operator and the capital provider. The contract is cancellable and upon cancellation all cumulative capital plus profit (in Family Takaful only) must be returned to the capital provider less administrative expenses. The capital provider will have to give consent to appoint the entrepreneur to work on his behalf. The capital provider will not dictate the Takaful Operator or getting involved in the management of the Takaful business. Tabarru
o o
3.2.3
Tabarru is an Arabic word that means donation or gifts. Tabarru is where the Participant shall agree to relinquish as donation all or certain portion of his contribution thus enabling him to fulfil his obligation of mutual help and joint guarantee.
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In the contract of Takaful, what it means is a voluntary specific amount of donation made by the Participant for a specific cause as stated in the agreement on the spirit of brotherhood and mutual cooperation. The fund will be utilised to help the unfortunate member. Tabarru apparently Islamises the insurance contract by removing most of the objectionable elements. This is actually the fundamental difference between insurance that is Shariah compliance and conventional insurance. Without this concept of donation, the transaction will be that of buying and selling of insurance i.e the purchase of a promise that some form of benefit will be paid in the event that the insured faced a misfortune. The promise may or may not be fulfilled depending on whether or not the event insured against occurs. Should there be no claim the insurer will stand to earn the premium paid.
However, the spirit embedded in the concept of tabarru is that the Participant is not thinking only of his own protection but he should also be thinking of helping other Participants. The Participant must be aware that his contribution if paid with the right intention would not only entitle him a protection for him and his fellow brothers but also be rewarded in the hereafter. This is unlike insurance where one buys certain protection coverage for oneself only. What makes Tabarru concept appealing is the double benefits they get when participating in Takaful scheme, firstly, they get insurance cover that is halal and secondly, the benefits of doing a good deed at the same time Wakalah
3.2.4
The term Wakalah in Arabic means agency. Therefore under the structure, an agency relationship is agreed between two
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parties to conduct a certain business undertaking. Based on this premise, the model describes an agency agreement between the operators, acting as the agent or wakil to the participant as the principal to manage the participation of the latter in a variety of Takaful products provided by the operator. In return for rendering the agency services, the operator is permitted to charge a fee under the agreement. The fee is payable from the Takaful contribution paid by the participant. In this sense under the above model, management expenditure can be charged to the Takaful fund as upfront charges. TAKAFUL APPLICATION AND BENEFITS
A3.3
Takaful Application Jurist resolved that the system of insurance which falls within the confine of Islamic framework should be founded on the following basis; Taawun Takaful, is based on the concept of Taawun meaning mutual assistance. Participants mutually agree to assist each other financially in case of certain defined needs (as defined in the takaful contract) by contributing to a common fund. Allah s.w.t commanded: "... co-operate ye one another in righteousness and piety but help ye not one another in sin and rancor" (Surah al-Maidah:2) Al-Hadith : Allah will always help His servant for as long as he helps others (Narrated by Imam Ahmad and Imam Abu Daud).
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Ownership Under the principles of Al Milkiyah (ownership): The benefits of the certificate are the sole ownership (Al Milkiyah) of the participant. Upon demised of the participant the benefit are entrusted to the nominee.
Shared Responsibility and Shared Guarantee In tandem with the Shariah discipline on Takaful (which means shared responsibility and shared guarantee), the participants are mutually agreed to provide compensation in the event of a misfortune.
Responsibility and Mutual Protection The participant of the Takaful Scheme all agreed to be mutually responsible or shared responsibility.
Mutual Compensation The validity of Takaful is derived from the Arab custom (urf) of Al-Aqila. This is an early form of insurance by way of mutual protection within a group of people taking steps to cover the losses incurred. The Participant of the Takaful Scheme to cooperate and to help one another.
Masalih al-Mursalah (Public Interest) Takaful is also based amongst others on the doctrine of Masalih al-Mursalah or public interest. The primary purpose is to lessen the burden of members of the community caused by the occurrence of certain loss or damage.
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Contract A Takaful certificate binds the parties by an offer and an acceptance in reliance on the principles of contract. The relationship between the Takaful Operator and the participants has to be governed by a special contract i.e Wakalah or Mudharabah contract.
The niche of Takaful Fulfils the social obligation towards community and family Enables financial assistance for the unfortunate Avoidance of riba (interest), maisir (gambling) and gharar (uncertainty) and similar prohibited elements Promote moral values, ethical dealings and full disclosure in all its business activities and operations Through charitable donations (tabarru) it allows participants to achieve self purification and peace of mind. Promote the spirit of solidarity, mutual help and brotherhood
Comparison between Takaful and Insurance
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CHAPTER A4
COMPARISON BETWEEN TAKAFUL AND INSURANCE

OVERVIEW Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool. Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type. A4.1 DEFINITION OF INSURANCE AND ITS HISTORY
Insurance can be define as a contract whereby one person called the insurer, undertakes in return for the agreed consideration, called the premium to pay to another person, called the insured, a sum of money, on the happening of a specific event during a specific period. Thus, in very simple words, a contract of insurance is a contract between two parties, the Insurer and the Insured, the former promises to compensate the latter on the happening of a definite event in return for his contribution.
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Insurance has existed for many centuries. Some historians trace the origin of insurance to 215 CE, when the roman government was required by military supplies to accept all risks arising from enemy attacks, storms, and other natural disaster for supplies carried on their ships. (Omar Fisher, 2009). The earliest evidence of insurance contracts dates back to the period around 2,800 B.C. where the Babylonian legal code showed regulations on insurance. Basically the concept of insurance was developed to deal with perils faced by merchants and traders at sea. This varied from protection of the cargo and goods carried by ships to the protection against the loss of lives of sailors and officers. In other words, there is a need for human to prepare for the loss. And modern insurance can be traced its beginning to the 1600s, when British merchants and ship owners began to meet a coffeehouse near Lombard Street in London. The coffeehouse was called Llyods, there they made an agreement to mutually share in the profits and losses of sea voyages (Omar Fisher, 2009). There is evidence showing that such practices were also prevalent among the Chinese, Greeks and Europeans. The first case of life insurance dates back to 1583 in England where a term contract was issued on the life of a certain William Gybbon. A significant development in the life insurance industry was the development of the mortality table by Edmund Halley in 1693. However, it was about a century later that any degree of accuracy was achieved in predicting mortality rates. The introduction of insurance in Malaysia dates back to the 18th and 19th centuries where trading firms and agency houses acted as agents for insurance companies from the United Kingdom. Upon the achievement of independence, there was an effort to establish domestic insurance companies. The early 1960's saw the growth of many life and general insurance companies. Some of these companies operated on an unsound basis with improper underwriting guidelines.
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The Government subsequently intervened and the Insurance Act, 1963 was introduced. Under the Act, the general conduct and supervision of the insurance industry was vested in the DirectorGeneral of Insurance under the Ministry of Finance A4.2 BASIS OF INSURANCE
Insurance is a process through which losses suffered by a few is spread to and borne by many. In modern practice, insurance is a medium through which the financial burden of a misfortune is transferred from the Insured to Insurer. The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums. In general, any person who has a legal right in financial interest in a property may insure under a contract of insurance if as a result of loss or damage he will suffer financial loss. An insurance contract is an agreement or promise that is legally enforceable between two parties, i.e., the Insurer and Insured whereby the Insurer in return for a consideration (premium) agrees to undertake for a stated length of time (period of insurance) to indemnity the Insured up to an agreed amount (sum insured) for the value of such defined property (property insured) if damaged by an insured peril. A contract of insurance is a contract of indemnity (excluding Life and Personal Accident Insurance) and this principle is to put the Insured in the same financial position as he was in before the misfortune occurs. The sum insured must be fixed at a level, which will provide an adequate compensation at the time of loss. For insurance in real property, depreciation must always be taken into account. The cost of insurance would depend on the scope of cover as additional cover requires additional premium. Generally speaking, only unforeseen and fortuitous losses are insurable.
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Therefore, foreseeable misfortune or losses are generally not insurable (except in Life Insurance). A4.3 TYPES OF INSURANCE
Sections 4 of the Insurance Act 1996 provides that: 1. For the purposes of this Act, insurance business shall be divided into two classes a) life business, which in addition to all insurance business concerned with life policie6s shall include any type of insurance business carried on as incidental only to the life insurers business; and b) general business, which means all insurance business which is not life business. 2. For the purposes of this Act, reinsurance of liabilities under a policy is treated as insurance business of the class and description to which the policy would have belonged if it had been issued by the reinsurer. Insurance business is divided into life insurance, general insurance and reinsurance. A4.4 SHARIAH RESOLUTION ON INSURANCE
The concept of conventional insurance has not achieved full agreement from scholars whether it is permissible (halal) or prohibited (haram). Since conventional insurance as it is being practiced now did not exist during the Prophets time, ijtihad is used to determine whether it is permissible or otherwise.
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4.4.1
Fatwas on Prohibition of Insurance
The National Fatwa Committee Fatwa Committee of the National Council for Islamic Religious Affairs Malaysia, at its meeting on 15 June 1972 discussed and deliberated on the issue of Life Insurance. Resolved: That Life Insurance provided by present-day insurance companies is a business transaction which is voidable because it contradicts the Islamic business principles in view that the contract contains the elements of Gharar, Maisir and Riba. As such from the Shariah point of view, insurance is haram. A committee known as Badan Petugas Khas was set up by the government in 1982 to study the feasibility of setting up Islamic Insurance in Malaysia. The Badan Petugas Khas concluded that conventional insurance contract is fasid, however, the objection is not against the concept of insurance per se but against the existence of certain weaknesses in the insurance contract. The Takaful Act 1984 was enacted and subsequently the first takaful company namely Syarikat Takaful Malaysia Bhd was formed in 1984.
The Islamic Fiqh Academy, OIC The Islamic Fiqh Academy, emanating from the Organisation of Islamic Conference, meeting in its Second Session in Jeddah, Kingdom of Saudi Arabia, from 10 to 16 Rabiul Thani, 1406 H. (corresponding to 22 - 28 December 1985). And after reviewing the presentations made by the participating scholars during the Session on the subject of Ìnsurance and re-insurance, and after discussing the same, and after closely examining all types and forms of insurance and deeply examining the basic principles upon which they are
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founded and their goal and objectives, and having looked into what has been issued by the Fiqh Academies and other edifying institutions in this regard; Resolved: The Commercial Insurance Contract, with a fixed periodical premium, which is commonly used by commercial insurance companies, is a contract which contains major element of risks, which voids the contract and therefore, is prohibited (Haram) according to the Shariah. The alternative contract which conforms to the principles of Islamic dealings is the contract of co-operative insurance, which is founded on the basis of charity and co-operation. Similarly is the case of re-insurance based on the principles of co-operative insurance. The Academy invites the Muslims countries to work establishing co-operative insurance institutions and operative entities for the re-insurance, in order to liberate Islamic economy from the exploitation and violation of system which Allah has chosen for this Ummah. 4.4.2 Prohibited Elements in Insurance Practices Gharar Gharar means deficient clarity with regard to the subject-matter being contracted or as uncertainty where the results are hidden or not known. In business terms it means to undertake anything blindly without sufficient knowledge; or to risk oneself in a venture not knowing exactly what will be the outcome. on cothe the
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Prohibition Justification It is not permissible to sell an article without making everything (about it) clear, nor it is permissible for anyone who knows (about its defects) to refrain from mentioning them. Al Hakim and Al Bayhaqi. Gharar in insurance contract occurs when one party takes what is due to him but the other does not receive his entitlement. - Ibn Taymiyyah
Types of Gharar Al Gharar al Kathir. Excessive gharar, this would render the contract invalid. Al Gharar al Yasir. Trifling gharar, this is tolerable and permissible. Al Gharar al Mutawassit. Average gharar which falls between the two.
Gharar in insurance practices: Both parties to the insurance contract do not know exactly what their obligations and responsibilities are to each other, neither the insurer nor the insured knows the outcome of the contract The insured does not know the amount of compensation he is likely to get in case of an accident or a peril as the insured does not know if there will be compensation as the outcome of the contract is not known The insurer does not know when the peril will occur. There is no equity in insurance in that the insured has got to pay the premium but if the peril insured against does not happen, the insured is not paid anything at all. Insurance is a promise to pay compensation which is sometimes fulfilled and sometimes not. Uncertainty in
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the results of the exchange as at the point the contract is made, the result of the exchange is still uncertain. o Riba The word riba literally means increase in or addition to anything. Islam has prohibited lending of money for profit because it is often ruinous to the borrower and at the same time makes the lender obnoxious and sullen. o Prohibition Justification O you who believe, devour not usury, doubling and quadrupling, the sum lent. Fear Allah and observe your duty to Him, that you may really prosper. Al-Imran 3:130 o Types of Riba Riba Duyun. Riba Qardh. - Where interest is agreed upon at time of contract. Riba Jahilliyah. - The increase levied on the borrower for late or failure to repay the loan. Riba Buyu. i. Riba Fadhl. - The difference in weight, volume and quantity. ii. Riba Nasiah. - The difference in time.
Riba in insurance practices; Insurance company invest the premium in interest bearing investment. Insurance company pay interest on their product. Insurance company consider future interest when calculating the premium.
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Insurance contracts contain usury; promise to pay more than the premium paid. Interest charged on late payment of premium. Interest charged on policy loan.
Maisir The word Maisir means getting something too easily or getting a profit without working for it. Islam forbids all forms of business in which the monetary gain comes from mere chance or speculation and not from work. Unlike gharar which is tolerated to a certain degree, maisir is not accepted at all.
Prohibition Justification O Believers! Intoxicants and gambling - and divining arrows are an abomination of satans handywork. Leave it aside in order that you may prosper. - Al Maidah 5:90
Maisir in Insurance Contract: Insured could receive huge amount of money, without equivalent input. Paying premium without getting any amount in return. Insurer loses if there are too many claimants. Premium collected exceeds the claims, Insurers could make huge profits.
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A4.5
DIFFERENCES BETWEEN TAKAFUL AND INSURANCE

Pertinent Issues Essence of Intention Formalities Accounts Treatment Takaful Intention is to create both spiritual and legal relationship. Unilateral contract. For General Takaful the account is Tabarru, means donation. For Family Takaful, there are two accounts, PA treated in line with principles of Mudharabah, while PSA treated in in line with the basis of Tabarru. Subject Matter must be Shariah Justified. The Takaful Operator is only the Fund Manager. The Participant mutually guarantees each other. The fund belongs to the Participant and managed by the Takaful Operator for a legitimate consideration for the services rendered. Paid contribution is treated as donation (Tabarru). Insurance Intention is to create legal relation only. Bilateral contract. For General insurance the paid premium is credited into the General Insurance Account. In life the premium is credited into the Life Insurance Account. Subject matter must be Common Law justified. The company provides the guarantee.
Items 01
02 03
04
Subject matter
05
Guarantee
06
Fund
07
Payment of contribution/ premium
The fund belongs to the Company though separation of assets is maintained between the Shareholders and the policy holders. Paid premium creates an obligation against
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08
Forbidden Elements
09
Religious Supervisory
Islamic model is based on Islamic principles and free from any of the forbidden elements. Religious Supervisory is made mandatory by the Takaful Act 1984. The profit is shared between the Participant and the Company. A combination of tabarru contract (donation) and agency or profit sharing contract. The indemnity is provided by the Takaful Fund. Operational principle in Insurance is Shariah compliance.
10
Profits
11
Contract
12
Indemnity
13
Operational Principle
14 15 16
Risks Treatment Taxation Benefits
17
Profits /Bonus
Risks sharing concept among Participants. Taxation and Zakat Paid from the defined funds under joint indemnity borne by the participants. Specifies from the outset how the profits are to be shared
the insurer on a sale and purchase contract. Insurance policy evolves around the element of Gharar, Riba and Maisir. There is no Religious Supervisory in Insurance. In insurance the profit is at the discretion of the Company. An exchange contract (sale and purchase) between insurer and insured. The Company provides indemnity from the Companys fund. Operational principle in Insurance is not Shariah compliance. Concept of risks transfer. Tax Paid from the fund legally owned by the company. May offer bonus or profit in general terms only
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18
Responsibility of Policyholders / Participant
19
Liability of the insurer / operator
between the participant and the company. Participants make contributions to the scheme. Participants mutually guarantee each other under the scheme. Takaful Operator acts as the administrator of the scheme and pays the Takaful benefits from the Takaful funds. In the events of deficiency in the Takaful funds, operator will provide interest free loan to rectify the deficiency. Assets of the Takaful funds are invested in Shariah-compliant instruments.
especially with profit participating policies. Policyholders pay premium to the insurer.
Insurer is liable to pay the insurance benefits as promised from its assets (insurance funds and shareholders fund).
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Investment of Fund
There is no restriction apart from those imposed for prudential reasons.
Principles and Business Models of Takaful
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CHAPTER A5
PRINCIPLES AND BUSINESS MODELS OF TAKAFUL

OVERVIEW Takaful contracts are not only subject to the general principles of the law of contract but also certain special legal principles that are embodied in takaful contracts. Based on the established legal maxims of the fiqh concept of al-Asl fi al-Ashya al-Ibahah (all things are permissible unless prescribed otherwise), takaful contract assimilates with the normal conventional insurance principles in its practices that embody the concept of fairness in dealings as expounded by Shariah. These principles however must not contravene the Shariah. These special legal principles embodied in Takaful contract principles are: Insurable Interest; Utmost Good Faith; Indemnity; Subrogation; Contribution; Proximate Cause; Warranty and Tabarru A5.1 5.1.1 BASIC PRINCIPLES OF TAKAFUL Insurable Interest
Insurable Interest refers to the legal right to participate in a Takaful arising out of a financial relationship recognized at law between the
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participant and the subject matter of Takaful, that is, the person covered. Insurable Interest exists when there is a relationship between participants and the subject matter, normally arising from several situations as follows: Ownership of property the owners of property will lose financially if their property is damaged or destroyed. Potential legal liability Insurable Interest can also exist when there is a financial loss arising from legal liability. For example employers have legal liability to pay compensation to their employees if accidents occurred during employment. Contractual right the above interest can be established if there is a provision in the contract that one party is financially responsible for any loss or damage to the property and third party liability.
The financial relationship between the participant and the subject matter covered should be such that the participant will financially or economically benefit by the survival or safety or existence of the subject matter or alternatively will suffer financial or economic loss due to the destruction or loss to the subject matter. Insurable Interest must therefore be capable to be measured or valued financially in order to be covered by Takaful. For the General Takaful contracts, Insurable Interest must exist at the beginning and at time of loss otherwise, the Takaful affected is void. Example: a person cannot validly arrange for motor Takaful on a car which he anticipates to own in the future. However, this general rule is not applicable to marine Takaful. In marine Takaful, the participant needs to have Insurable Interest at the time a loss occurs to be able to enter into a valid contract. Example: Due to the nature of business transaction, an importer of goods will be able to validly arrange for Takaful on the goods or merchandise he expects to import so long as he later acquires
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Insurable Interest that is by becoming the owner before covered peril happens. In accident Takaful coverage, the Insurable Interest must exist both at the time the contract is put into effect and at the time of loss. For Family Solidarity Takaful, Insurable Interest must exist at the beginning only. The participant needs only to have Insurable Interest at the time of effecting the Family Takaful contract. Some examples of persons having Insurable Interest are:a) An individual has an unquestionable Insurable Interest in his own life and body to any amount. Such an interest is not capable of valuation and no proof of it is necessary. (Wainwright v. Bland [1835]) b) Spouses have Insurable Interest in each others lives and property. c) A person to his child or ward being under the majority age at the time takaful cover is effected, and of anyone on whom that person is at that time wholly or partly dependent. d) A creditor can cover the life of a debtor (up to the amount of debt) but not debtor on the life of creditor. e) Surety on the life of his principal. A lender may not be entirely satisfied by the security offered by a borrower but he may be willing to accept the guarantee of a surety. By giving such guarantee the surety has an Insurable Interest in the life of the borrower. f) Employer covering employees life. g) Property owners (sole, part of joint owners) and his property. h) Mortgagors & Mortgagees of properties have their own respective interest in the properties. i) Lessees & Lessors of properties also have their own respective interest in the properties. j) Bailers - e.g. pawnbrokers, carriers or watch repairers have an interest in the properties of the bailors as the properties are in their possession.
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k) Agents - If the principal has Insurable Interest his agent can affect Takaful cover on his behalf. l) Trustee - In respect of the legal right or interest in the trust property vested in him, if the trust deed permits or directs this. m) Takaful Operator and Retakaful Operator - Takaful Operator have an Insurable Interest in participant lives sufficient to support Retakaful Operator. 5.1.2 Duty of Utmost Good Faith (Uberrima Fides)
Utmost Good Faith can be defined as a positive duty to voluntarily disclose, accurately and fully all facts material to the risks being proposed, whether requested or not Takaful contracts, both Family and General are entered into by all parties in utmost good faith, meaning that they are both required to disclose all relevant facts, whether asked for or not, that are material to the other partys decision to enter into the contract. Failure to reveal vital information even if not asked for it, gives the aggrieved party the right to regard the contract as void. Under the doctrine of Utmost Good Faith both parties i.e the participants and the Takaful Operator must disclose all the material facts fully and truthfully. In fire Takaful, an example of a material fact is the occupation (use) and type of construction. If a participant declared in the proposal that his building is used as a sundry shop built of bricks and it was discovered after a fire that the premise was actually a wooden building used for storage of chemicals. This is a real breach of the doctrine of Utmost Good Faith resulting in the claim to be rejected. Similarly, in the case of family takaful, examples of materials facts are age, occupation and state of health. The doctrine of Utmost Good Faith also entails that there should be no concealment, misrepresentation, fraud about the material facts. This duty of Utmost Good Faith shall continue throughout the period of takaful where the participant is required to inform and disclose to the Takaful Operator of any changes which might
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materially increase the risk. The Takaful Operator will then decide whether such increase in risk requires a corresponding increase in the contribution rate, need for additional conditions, or in the worst case, be duly cancelled. An example is a change in the occupation of a building from a sundry shop into a fireworks storage. Nevertheless, the participants need not disclose the following facts: Facts which tend to lessen the risk. However participants are encouraged to disclose such facts in order to obtain better terms, conditions and rate discounts in view of the better risk. Facts of public knowledge such as all buildings in Kuala Lumpur are subject to the City Council by-laws with regards to fire safety provisions in high-rise buildings. Facts which could be inferred from the information disclosed by the participant. For instance, a participant whose height is 150 cm with a weight of 100 kg which can be inferred as an obese would be subject to medical underwriting. Facts waived by the Takaful Operator. Facts governed by the conditions in the Certificate of Takaful.
In a Takaful contract, for the enforcement of the certificate, the parties involved in it should have good faith. Therefore, nondisclosure of material facts, involvement of a fraudulent act, misrepresentations or false statements is all elements that could invalidate a takaful certificate. Utmost good faith is breached when a proposer who knows or is reasonably expected to know a material fact: Fails to disclose the material fact, or Misrepresents the material fact.
When a participant fails to disclose a material fact, the breach of utmost good faith is termed either as a non-disclosure or concealment i.e. a fraudulent non-disclosure. If he misrepresents a
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material fact, the breach is termed as an innocent misrepresentation or fraudulent misrepresentation. When a breach of utmost good faith takes place the Takaful contract becomes voidable irrespective of whether the breach has been committed innocently or fraudulently. The contract of Takaful imposes a duty of "uberrima fides" or "utmost good faith" on the parties to the takaful contract. It is therefore the duty of the participant to disclose to the Takaful Operator, all material facts regarding the subject matter of Takaful cover and the circumstances pertaining to it. A material fact is a fact, which would influence the judgment of a prudent operator in fixing the contribution or determining whether he will accept or reject the risk. (Rivaz v. Gerussi [1880] 6 Q.B.D. 222). Whether is not a fact is material cannot rest upon the opinion of the proposer. What is material is a matter of fact, and the final judgment can be given only by a court of law. Material facts include the following: Facts, which tend to render a risk proposed greater than normal. Physical defects such as the loss of an eye or a limb could indicate accident proneness and affect the health and longevity of the life to be covered. Habits, pursuits and family history are also relevant. Facts necessary to explain the exceptional nature of a risk proposed for takaful cover where, without them, the Takaful Operator would justifiable believe the risk to be normal e.g. hazardous occupation. Facts, which appear to suggest some special motives for underwriter, e.g. gross over- cover.
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It is a requirement under the law to display prominently in all Proposal Forms the following statement: Pursuant to Section 28, Takaful Act 1984; "You are to disclose in the proposal form fully and faithfully all the facts which you or ought to know, otherwise the certificate issued hereunder may be invalidated". The duty of disclosure arises: At inception of certificate The duty operates up to the time when the negotiations for cover are completed. However, before the risks are accepted and if Proposer learns of further material facts, he is bound to disclose them. At renewal The duty to disclose revives during renewal negotiation. During currency of the certificate The participant has a duty to disclose all material facts relating to changes in the risk. Principle of Indemnity
5.1.3
Indemnity can be defined as a mechanism used by the Takaful Operator to provide compensation in an attempt to place the participant in the same pecuniary position after the loss as enjoyed immediately before the loss. Takaful contracts promise to make good the participant loss or damage. When a loss takes place, the sum which the participant can recover is called the measure of Indemnity. The dictionary meaning of the word indemnity is compensation for loss or injuries sustained. The principle of indemnity requires the takaful operator to
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restore the participant to the same financial position as he had enjoyed immediately before the loss. All property and pecuniary Takaful are Contract of Indemnity i.e., the amount payable on the happening of an event covered against is limited to the extent of participants pecuniary loss only. Thus the intention of the Takaful Operator following a loss is to place the participant in the same pecuniary position as he occupied immediately before its occurrence, subject to adequacy of Sum Covered and other restrictions application of average, excess and limits. Takaful product provides financial compensation in order to place the affected participant in the same pecuniary position as he enjoyed immediately before the loss. It ensures the participant does not get more than his actual amount of loss to prevent the participant from making profit from the claim. All contracts of property and liability takaful are subjected to this principle. Family Takaful including Health and Personal Accident are not contracts of indemnity as no money payment can actually indemnify for loss of life. The principle of indemnity shall apply in the following circumstances: The participant has to prove that he has suffered a loss on the subject matter covered under the Takaful at the time of the happening of the event and the loss is an actual monetary loss The amount of compensation will be the amount covered under the Takaful whereby indemnification cannot be more than the sum covered. If the participant receives more than the actual loss, the Takaful Operator has the right to recover the extra amount from the participant. Similarly if the participant receives an amount more than his actual loss from a third party after being fully indemnified by the Takaful Operator, the Takaful Operator has the right under the principle of Subrogation to recover such amount paid by the third party.
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It must be cautioned that the sum covered is not a measure of indemnity by itself but it sets an upper limit to which the loss can be indemnified. The actual amount of indemnity will be based on the principle of the sum covered or the market values whichever is the lower.
In the practise of General Takaful, the participant should ensure that he should not under declare the value of the subject matter to be covered simply to pay a lower contribution and expect to be indemnified fully for the loss. This is abhorrent in Islam as he is not making a fair contribution to the takaful fund at the expense of the other participants. In this situation, the Average Clause will be applied. For example, a participant covered his car under Motor Takaful for RM30,000 knowing full well that the market value is actually RM50,000. When the car was damaged in an accident, if the repair costs is RM20,000 then he will be indemnified based on the Average Clause formula as follows : Sum Covered X Loss Market value RM 30,000 RM 50,000 X RM 20,000 = RM 12,000
In this case the Takaful Operator will only pay the participant RM12,000 The balance RM8,000 will have to be borne personally by the participant himself. The participant can claim to be indemnified only for the material loss sustained, i.e., sentimental losses or consequential losses of any kind are excluded. Moreover the participant cannot make a fortune from the misfortune suffered by him. Where the damage is partial, the participant is not entitled to claim a total loss, but is entitled to claim only for the amount of damage. Where the participant has been fully indemnified he must transfer to the operators all his rights against third parties; the participant cannot obtain a further indemnity from such third parties. (This concerns the right of
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Subrogation). The participant is not entitled to recover his loss more than once, irrespective of the number of certificates he holds; he may not obtain more than the full amount of the loss from various takaful operator. (This concerns the Principle of Contribution). Indemnity fixes the maximum payable under a Takaful, subject to the limit of Sum Covered. The Sum Covered is the limit of operators liability. General Takaful contracts are contracts of indemnity where Insurable Interest is measurable, for example property, pecuniary and liability Takaful contracts. Personal accident and Family Solidarity Takaful contracts are not strictly contracts of indemnity. The measure of indemnity depends on the nature of Takaful. Generally, indemnity in property Takaful is based on either replacement cost less depreciation, or the market value; while in liability Takaful it is measured by the amount of court award or negotiated out of court settlement plus approved costs and expenses. Indemnity in pecuniary Takaful is measured by the amount of financial loss suffered by the participant, for example Class of Takaful Property Liability Pecuniary Indemnity Measure Replacement Cost Less Depreciation or Market Value Court Awards + Cost & Expenses Financial Loss
In fidelity guarantee Takaful, indemnity is measured by the amount of financial loss suffered as a result of an employees dishonesty. The methods of indemnity include payment by cash, repair, replacement or reinstatement. Where a claim is valid, the participant can be indemnified (at Takaful Operators option) by way of cash payment, repair, replacement or reinstatement subject to the certificate conditions. The maximum amount recoverable under any certificate is limited by the sum covered or limit of indemnity. However, the amount
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payable is also subject to the following clauses: Average Condition If property covered is of greater value than the sum covered, the participant shall be considered as being own Takaful Operator for the difference and shall bear the ratable proportion of the loss accordingly. Excess/Deductible This is the first amount of a loss, which must be borne by the participant before the certificate begins to pay. Franchise It excludes any payment up to excess amount of loss but if the loss is more than this figure the loss is paid in full. Principle of Subrogation
5.1.4
Subrogation can be defined as the right of one person, having indemnifies another under a legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies of that other, whether already enforced or not. This is a corollary of the Principle of Indemnity. Subrogation is the right of an operator who has granted an indemnity to receive, after payment of a loss, the advantage of every right of the participant, against a third party who has caused a loss. The doctrine of Subrogation refers to right of the takaful operator to stand in place of the participant, after settlement of the claim, in so far as the participants right of recovery from a third party. The subrogation right may however, be exercised by the Takaful Operator before payment of the loss. Essentially, the doctrine of Subrogation is applied in the following: It is a corollary to the principle of indemnity to ensure that the participant does not profit from his actual loss.
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It may be applied before payment to the participant in cases where the participant had been partly indemnified by a third party, the Takaful Operator will only pay the balance. It is only up to the amount of payment made to the participant. If the Takaful Operator recovers from the third party more than what it has paid to the participant, such excess must be given to the participant. It is not applicable to Family Takaful and personal accident Takaful as they are not contracts of indemnity.
The principle of subrogation can be simply described in the following example: Participant As house was destroyed by fire due to the explosion of a closeby factory. A claim was submitted by A to his takaful operator for RM500,000. Upon payment of the claim, the Takaful Operator is accorded with the subrogation right to claim the amount settled with participant A from the factory owner who is ultimately responsible for the loss. Before the implied right of Subrogation operates in favor of the operators, two conditions must be fulfilled:i. The Takaful contract must be one of indemnity. Therefore, Subrogation does not apply to non-indemnity certificates like personal accident Takaful and Family Solidarity Takaful contracts. ii. The operator must have settled the claim. In practice, the operators by expressly stating this condition in the certificate usually obtain these subrogatory rights before the payment of claim. Subrogation is the right of one person to stand in the place of another and avail himself to all the rights and remedies of that other, whether enforced or not. (Burnard vs. Rodocanachi).The principle was put forward that the participant, having indemnified a person, was entitled to receive back from the Takaful Operator anything he may receive from any source.
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The common law right of subrogation does not arise until the Takaful Operator have admitted the participant claim and paid for it. Due to problems arising from this doctrine, takaful operator placed a condition on the certificate giving themselves subrogation rights before a claim is paid (exception marine) but the Takaful Operator must take action in the participant's name. 5.1.5 Contribution
Contribution can be defined as the right of an insurer to call upon other similarly but not necessarily equally liable to the same participant to share the cost of an indemnity payment. Contribution is another corollary of indemnity. It is also an implied condition in a contract of indemnity whereby, if any other contract (or contracts) of indemnity is in existence covering the same interest in the same subject matter against the same peril, any claim must be apportioned amongst all the operators. The principle of Contribution is applied to General Takaful in order to prevent the participant from making profit out of multiple claims for the same loss from different takaful operators. Under this principle the loss shall be proportionately shared between the Takaful Operators concerned. This further reinforces the principle of indemnity. An example of the working of the principle of contribution is as follows: Particpant B obtained cover for his house worth RM1 million with Takaful Operator X, Y and Z hoping to make a profit by making claims from all the Takaful Operators for a an amount of RM3 million (RM1 million from each takaful operator) should his house be damaged by fire. When the house was damaged by fire, participant B submitted his claims to all the Takaful Operators as planned. However, upon discovery by the three Takaful Operators of the multiple cover, each Takaful Operator will only pay their
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proportionate share of the loss i.e. RM333,333 each totalling RM1 million. Contribution applies to contracts of indemnity only. The operators called into contribution must have covered:

The same interest (i.e., applied only when the same person covers the same interest with more than one insurer) The same subject matter interest (i.e., both the certificates must cover the same item in respect of which a claim is made) The same peril (i.e., contribution arises only if both certificates include the same perils which caused the loss)
By expressly incorporating a condition of contribution in the Takaful certificate, the operators will not be liable to pay or contribute more than its ratable proportion of any loss damage compensation or expense. If this condition is not expressed in the certificate, the participant will have a right to claim against either of the operator. Subsequently, the operator who has paid the loss, proceeds against the other operator and recovers his ratable proportion. At common law, when a participant has more than 1, certificate he can confine his claim to one of them. That Takaful Operator must meet the loss to the limit of his liability then can only call for contribution from others after he has paid. Contribution will only apply where the following conditions are met. Certificates do not require to cover the same interests, perils, or subject matter of Takaful, provided there is an overlap between one certificate and another where: a) Two or more Certificates of indemnity exist. b) The Certificates cover a common interest. c) The Certificates cover a common peril, which give rise to the loss.
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d) Each certificate must be liable for the loss.
To overcome this difficulty, most non-marine Certificates contain a contribution clause. It states that the Takaful Operator is liable only for his 'ratable proportions" of the loss. The Takaful Operator is liable for his share only, and the participant is left to make a claim against the other Takaful Operator. The purpose of the clause is to prevent the participant from claiming against one Takaful Operator only and that Takaful Operator is put to a disadvantage of having to meet the total cost of claim and then subsequently pursue contribution recoveries from other interested Takaful Operator in the same loss. The market agreement of calculating contribution in properly Certificates (not subject to average) is: a. Sum covered by particular operator X Loss = Liability Total of sums covered of all operator e.g. A covers: RM6,000 x RM1,000 = RM600 B covers: RM4,000 Loss: RM1,000
A pays:
RM6,000 x RM1,000 = RM600 RM10,000
B pays: RM4,000 x RM1,000 = RM400 RM10,000 b. Other property Certificates (more frequent method used)
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Where Certificates are subject to an average or where an individual loss limit applies within a sum covered, the independent liability method is used. The independent liability is the amount, which a Takaful Operator would be obliged to pay it it were only, or independent Takaful Operator. operators independent liability X Loss = operators Independent Liability Total of sums covered of all operator i) A covers: B covers: Loss: A pays: RM2,000.00 RM1,000.00 RM450.00 RM2,000 x RM450 = RM200 RM4,500 RM1,000 x RM450 = RM100 RM4,500 RM300
B pays:
ii) If A covers RM4,500 A pays: RM4,500 x RM450 = RM450 RM4,500
B pays:
RM1,000 x RM4,500 RM450 = RM100 RM550
In this case the total of the independent liabilities comes to more than the loss, the proportional payments are: A pays: RM450 x RM450 = RM368.20
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RM550 B pays: RM1,00 x RM550 RM450 = RM81.80 RM450
This principle does not apply to personal accident Takaful, and a person may claim the full sums payable under several certificate with different Takaful Operator (with the exception of medical expenses). It is, however, customary for insurers to require a proposer to disclose in the proposed details of any other personal accident certificate held. Some offices include a certificate condition rendering the Takaful certificate void if the participant has affected Takaful with another without the written consent of the original Takaful Operator. 5.1.6 Proximate Cause
It is defined as the active efficient cause that sets in motion a train of events which brings about a result, without intervention of any force started and working actively from a new and independent source. The legal maxim is termed, sed causa proxima non-remota spectature (the proximate cause, not the distant cause). The cause of a loss must be established because only risks specifically covered (not excluded risks as mentioned in the Takaful certificate) can be compensated. A loss may not be occasioned from a single event. There may be concurrent causes or chain of causes which may occur in sequence or in broken chain. The doctrine of proximate cause can be aptly described in a celebrated legal case in the UK, where a policy holder sustains an accident while hunting. He was unable to walk after the accident and as a result of lying on wet ground before being picked up, he suffered pneumonia. There was an unbroken change of cause between the accident and the death, and the court decided that the proximate cause of the death was the accident and not the pneumonia.
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Onus of proof of loss rests on the participant. When a loss occurs, the onus is on the participant to prove that the loss in respect of which a claim is made has been caused by an covered peril. If the loss is the result of one cause, it will not be difficult to decide on the question of liability. 5.1.6.1 The Takaful Operator is not liable for an uncovered or Excluded Peril A Takaful Operator is liable for a loss caused by an uncovered peril. On the other hand, the Takaful Operator will not be liable for a loss caused by either an uncovered peril or excluded peril. Covered perils are perils which are expressly covered-by a Takaful certificate. Uncovered perils are perils not mentioned in the certificate and therefore not covered by the certificate unless they occur as a result of covered peril. Examples of uncovered perils in a fire certificate are smoke and water damage. Excluded perils are perils which have been expressly excluded from the certificate. A loss may be the result of two or more causes occurring at the same time or one after the other. Problem arises when the two or more causes involved both participant perils and excluded perils. In such a situation, it becomes difficult for a participant to establish the actual cause of loss. To resolve this difficulty, the law developed the doctrine of proximate cause based on the Latin maxim causa proxima non remota spectatur which means that the proximate cause and not the remote must be looked at. Thus when a loss is the result of many causes the proximate cause, that is the dominant or effective cause, must be identified and attributed as the cause of the loss. Proximate Cause is the active, efficient cause that sets into motion a chain of events that bring about a loss. If the
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Proximate Cause is a covered peril, the loss will be payable, otherwise not. It must be noted that there must be direct relationship of cause and effect, of which the cause must be Proximate in efficiency though not necessarily in point of time. This doctrine applies mainly where a loss is produced by a succession of causes. In these cases, it is necessary to consider whether:5.1.6.2 The Takaful Operator is only liable for losses proximately caused by a covered peril. In Pawsey & Company v Scottish Union & National Insurance Company (1907) the court defined proximate cause "as the active efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force stated and working from a new and independent source". Usually there is a chain of events or causes leading up to a loss rather than a single cause. If a covered peril operates and directly causes a loss than that loss will be covered provided that there was no excepted peril operating efficiently or dominantly in the chain of events leading up to the operating of the participant peril. This doctrine is important because more than one cause may operate to produce the condition resulting in the claim. It must then be ascertained whether the dominant and effective cause was a covered peril or one which are excluded from the contract. Example:1. A Participant suffers from a gallstones, is knocked down by a motorcar and dies, although but for the
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gallstones, he would not have died. His death is not an accident within the policy (Louden v British Merchants Ins. Co. Ltd [1961]). 2. A Participant falls from a ladder, breaks his leg, and is taken to hospital. There he contracts diphtheria from a patient in the next bed and dies. Death is not proximately caused by the accident, for the diphtheria was not the natural sequel to a broken leg. 3. However, where the chain of causation is unbroken, the original cause is the proximate cause. A participant accidentally scratches his leg, causing erysipelas; this turn into septicemia, followed by septic pneumonia and death. Death is proximately caused by the scratch, each successive disease being a natural and probable link between the scratch and death (Mardorf v Accident Insurance Co. [1903]). Some other examples are: If a disease precedes the accident, the disease and the accident are to be regarded as separate and independent cause. E.g. where the participant, whilst suffering from a disease which does not prevent him from attending to his business, is killed in a railway accident on the way to work, his death is caused by accident the existence of the disease is to be disregarded. Where the effect of the accident reveals the existence of a disease, which is the sole cause of death of disablement, the participant is not covered by the certificate. Where after an accident, the participant claims on the ground that the accident has cause a rupture and it is
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established that he sustained no injury from the accident, but that he was suffering from congenital hernia, the claim must fail. Where disease follows the accident they are not necessarily separate and independently causes death or disablement, through resulting directly from the disease, may nevertheless be natural consequence of the accident disease being a link in the chain of causation, and the accident being the proximate and not the remote cause.
Thus death by hernia caused by an accidental fall is death by "accident" within the meaning of the certificate, notwithstanding an express exception against hernia. In the event of a loss, the onus or burden of proof that the loss was the result of a covered peril rests on the Participant. On the other hand, the onus of proof that the loss is excluded by reason of a specific exception in the certificate rests on the Takaful Operator. 5.1.7 Tabarru (Donation)
Tabarru (literally means donation), is a shared responsibility and shared guarantee principle which explicitly mentions that the money collected is to be used for the purpose of assisting fellow participants who require assistance according to the terms agreed as long as these terms are not in conflict with the Shariah. In General Takaful and Family Solidarity business, Tabarru (Takaful donation) is a contract where a participant agrees to donate a pre-determined percentage of his contribution (to a Takaful fund) to provide assistance to fellow participants. In this way he fills his obligation of joint guarantee and mutual help should another participant suffer a loss. This concept eliminates the element of gharar from the Takaful contract.
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Taking into account these basic Takaful concepts, practitioners have taken the step further to expand the model into a more commercially viable model of Takaful. Whenever one of the members makes a legitimate claim, they draw money out of the Tabarru pool. In the meantime, the funds in the pool are invested in Shariah compliant investment portfolio and without exposing the certificate/policy holders to any extra significant risk. Islam accepted this principle of reciprocal compensation and joint responsibility. 5.1.8 Warranty
Another principle applicable in Takaful is warranty. A warranty is a usually written guarantee of the integrity of a product and of the maker's responsibility for the repair or replacement of defective parts. A warranty in Takaful coverage is a promise by the participant party that statements affecting the validity of the contract are true. Most Takaful contracts require the participant to make certain warranties. For example, to obtain a health Takaful certificate, a participant may have to warrant that he does not suffer from a terminal disease. If a warranty made by a participant party turns out to be untrue, the Takaful Operator may cancel the certificate and refuse to cover claims. Not all misstatements made by a participant give the Takaful Operator the right to cancel the certificate or Takaful coverage or refuse a claim. Only misrepresentations on conditions and warranties in the contract give an operator such rights. To qualify as a condition or warranty, the statement must be expressly included in the contract, and the provision must clearly show that the parties intended that the rights of the participant and operator would depend on the truth of the statement. Warranties Takaful contracts can be divided into two types: Affirmative; and
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Promissory.
Types of Warranty Affirmative warranty
Description An affirmative warranty is a statement regarding a fact at the time the contract was made. An untruthful affirmative warranty makes takaful contract void at its inception. A promissory warranty is a statement about future facts or about facts that will continue to be true throughout the term of the certificate.
Promissory warranty
For example, if a participant party warrants that property to be covered by a fire Takaful certificate will never be used for the mixing of explosives, the Takaful Operator may cancel the certificate if the participant party decides to start mixing explosives on the property. Warranty provisions should contain language indicating whether they are affirmative or promissory. A Takaful contract is an agreement that the Takaful Operator will indemnify the certificate holder against loss caused by a covered peril. A Takaful certificate does not guarantee the integrity of a product, such as a home, car, or boat, etc. It also does not guarantee that if something bad happens to that item (or to the participant), it will be covered. A Takaful certificate sets out specific categories of what is and is not covered. A5.2 TAKAFUL FUND
Takaful Operators are required to maintain and segregate three types of fund: General Takaful Fund Family Takaful Fund Shareholders Fund
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The salient provisions as provided for in the Takaful Act 1984 in respect of Takaful fund are as follows: Section 16 - Establishment and maintenance of Takaful funds, and allocation of surplus. (1) Every operator registered under this Act shall establish and maintain in accordance with this section a Takaful fund in respect of the class or each of the classes of Takaful business carried on by the operator in Malaysia so far as that business relates to Malaysian certificates. There shall be paid into a Takaful fund all receipts of the operator properly attributable to the business to which the fund relates (including the income of the fund), and the assets comprised in the fund shall be applicable only to meet such part of the operators liabilities and expenses as is properly so attributable. TYPES OF TAKAFUL MODELS
(2)
A5.3
The operation of Takaful within the tijari sector can be structured on a number of business models as shown below: Wakalah model Mudharabah model Mudharabah + Wakalah model also known as hybrid model Waqf model
What is important though, the foundation of any of the above models as depicted in its respective contracts is based on Shariah. The choice of models by a Takaful Operator demonstrates the flexibility of Shariah. After all, its objective is the attainment of the well-being of mankind as outlined in the Maqasid Shariah. 5.3.1 Wakalah Model
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The term Wakalah in Arabic means agency. Therefore under the structure, an agency relationship is agreed between two parties to conduct a certain business undertaking. Based on this premise, the model describes an agency agreement between the operators, acting as the agent or wakil to the participant as the principal to manage the participation of the latter in a variety of Takaful products provided by the operator. In return for rendering the agency services, the operator is permitted to charge a fee under the agreement. The fee is payable from the Takaful contribution paid by the participant. In this sense under the above model, management expenditure can be charged to the Takaful fund as upfront charges. By this model, the operator earns its revenue from the agency fee described in the aforementioned as well as returns on the investment of its shareholders fund. However, there are also operators practicing the above model charged performance fees on its roles and services of managing the investment of the takaful fund. In the event of a cancellation or surrender, the participant will be refunded of the net balance of his contribution, if any, after deducting all the upfront charges such the wakalah fees and other management expenses from the Takaful fund. General Takaful Wakalah Model Flowchart
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Family Takaful Wakalah Model Flowchart
5.3.2
Mudharabah Model
Basically, Mudharabah is defined as a profit sharing principle applied normally to a business or commercial contract between the party that provides the fund or capital and the party that manages the
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business. For Takaful this would mean the contract of profit sharing between the Takaful participants and the operator from the profit, if any, of the takaful business. Under this arrangement, a profit sharing contract is signed between the operator, as the entrepreneur or termed Mudharib entrusted with managing the Takaful business and the participant(s) as the provider of capital, called sahibul-mal who is obliged to pay the Takaful contribution as the capital or rasul-mal. The contract will define profit of the Takaful business and the ratio to be shared between the two parties such as 50:50, 60:40 or 70:30 between the participant and operator respectively. In essence, profit in Takaful is defined as returns on the investment and surplus from the underwriting in respect of the Takaful funds only. Therefore this does not include profit posted by the Shareholders Fund. For the family business it includes the mortality surplus to be allocated to the eligible participant as declared by the actuarial valuation at the end of every financial year. However, unlike the Mudharabah contract for Islamic banking product, profit sharing in Takaful will be undertaken only after all the obligations of Takaful have been accounted for: the biggest factor is claim. In the event of a loss or deficit of the takaful fund, the loss will be borne wholly by the participant(s) as provider of capital. Notwithstanding the above, it is the responsibility of the operator to safeguard the interest of the participants in order to ensure the business will not be seriously affected by the loss that might jeopardize the credibility and confidence of Takaful as a whole. For this reason proper governance, prudence and professionalism in managing the business on the part of the operator is imperative. In the event of such loss, it is incumbent upon the operator to make good the loss by qard or loan by the shareholders. An important feature to note is that under the Mudharabah model, management expenditure is not charge on the Takaful fund instead it is borne by the shareholders fund. Revenue of the latter is its portion from the profit sharing of the Takaful funds with the participants, and all returns on the investment of the shareholders fund itself. General Takaful Mudharabah Flowchart
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Family Takaful Mudharabah Flowchart
5.3.3
Hybrid Model
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As the term denotes, the business model is a combination of the two principles above. Under the model, a relationship between the operator which combines the role of entrepreneur or Mudharib as well as the agent or wakil of the participant, whilst the latter in the capacity as both provider of capital or sahibul-mal and principal to the agent. By this arrangement on the part of the operator, an agency fee can be remunerated as upfront charges from the Takaful fund whilst at the same time will have the right to profit-sharing on returns on the investment of the takaful fund in accordance with the Mudharabah contract. In this regard, the Mudharabah contract is applied on the investment activity only. Profit to the fund in this instance comprises surplus from underwriting as well as returns on the investment as a whole. In addition to the wakalah fee the model provides discretion to the operator to charge on surplus of the Takaful fund a performance fee in consideration for managing the Takaful business as a whole. Therefore, to the operator it has three sources of income: Wakalah fee and profit sharing from the investment return of the Takaful fund; and returns on the investment of its shareholders fund. As for participants, they will have the right to share the net underwriting surplus as well as profit sharing of the investment of the Takaful fund. The above model underpins the cooperative risk sharing taking place among participants whilst the operator earns a fee for the services provided as agent or wakil of participant. In other words the operator derives part of its revenue from upfront deductible fee on the contributions. Thus, unlike the Mudharabah model, this model enables the operator based on the agency arrangement to charge the Takaful fund to cover both the management expenses as well as the agency cost. In addition, there is profit sharing on Mudharabah on the investment of the takaful fund. On the other hand, any underwriting surplus of the Takaful fund will be shared among participants only. General Takaful Hybrid Model Flowchart
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Family Takaful Hybrid Model Flowchart
5.3.4
Waqf Model
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The term waqf referred for this model explains the contract of takaful that underlines the agreement or consent of the participant that the takaful contribution paid in return for participating in the takaful product to be credited by the operator into the Takaful fund in accordance with the principle of waqf or endowment. To begin with, a waqf account has to be established by the operator within the Takaful fund. To this effect the operator is required to relinquish some kind of seed money as waqf to generate the said waqf account. This waqf account of the Takaful fund will be invested similar to the three business models hereinbefore. The Waqf fund shall work to achieve the following objectives: a) To extend financial assistance to its members in the event of losses. b) To extend benefits to its members strictly in accordance with the Waqf Deed. All the expenses related to the underwriting and operational cost of Takaful shall be charged to the Waqf fund. As manager, the Takaful Operator will perform all functions necessary for the operations of the Waqf against a Wakala fee to be deducted from the contribution paid by the participants. As Mudarib, the operator will manage the investment of the takaful fund including its Waqf account in Shariah-compliant investment avenues and will share its returns on the investment at an agreed ratio similar to the profit sharing structure under the Mudharabah contract.
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It is important to note the different principles of Shariah are used in the Takaful contract to express the consent of the participants for their contributions to be credited into the Takaful fund for the purpose of undertaking the concept of joint guarantee as encapsulated in the term takaful. In contrast to the Waqf Model, the other three models applied the principle of tabarru to the contract. It is a basic feature of the model that the Waqf Fund will lay down the rules for distribution of its proceeds to the beneficiaries and will determine how much compensation be paid out to a participant. In addition, the Waqf will be the owner of the contributions and has the right to act as a legal entity and dealing with its surplus. The operator, whilst managing the Waqf Fund, will assume two different functions at the same time manager and mudharib or entrepreneur.
Development and Supervision of Takaful Industry
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CHAPTER A6
DEVELOPMENT AND SUPERVISION OF TAKAFUL INDUSTRY IN MALAYSIA

OVERVIEW The development of the Takaful industry in Malaysia in the early 1980s was inspired by the prevailing needs of the Muslim public for a Shariah-compliant alternative to conventional insurance, as well as to complement the operation of the Islamic bank that was established in 1983. It was, to a large extent, triggered by the decree issued by the Malaysian National Fatwa Committee which ruled life insurance in its present from is a void contract due to the presence of the elements in 1972 of Gharar (uncertainty), Riba (usury) and Maisir (gambling). In 1982, a committee was set up by the government to look for the alternatives of insurance that is compliance to Islamic law. The committee submitted the report and the Takaful Act, which was endorsed by the Parliament in 1984. The Takaful Act 1984 is the source of takaful legislation in Malaysia. The Insurance Act 1963 forms the basis of the Takaful Act 1984. The Takaful Act 1984 (the Act) is the Act which provides for the regulation of Takaful business in Malaysia and for other purposes relating to or connected with Takaful. A6.1 TAKAFUL INDUSTRY IN MALAYSIA AT A GLANCE
Development of Malaysian Takaful Industry 1984- 2010
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Basic TakafulPractices
Issues Takaful Operator(s)
1984 Sole composite operator with RM10m capital that sets the foundation for the industry. An Islamic bank and state religious councils and religious foundations.
2010 Nine composite operators with minimum capital of RM100m each, which enhances competition. Broad range investors comprising private investors, banking groups, insurers and reinsurer. Broad range of product mix with sophisticated features. Family products dominated the market with 71% share (in terms of contributions).
Investors/ Shareholders
Products
Limited products mainly confined to motor, fire and mortgage takaful. General products dominated the market with 63% share (in terms of contributions). Mainly Muslims
Customers
Muslims and nonMuslims with different expectations, preference and demands. Branches, marketing officers, agency force, bancatakaful, brokers, internet and strategic alliances.
Distribution Channels
Branches and marketing officers and Takaful Desks.
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Investment Avenues
Confined to Islamic deposits and Government Islamic securities.
Wider range of investment instruments issued by the Government and the private sector.
In developing the Takaful industry in Malaysia, Bank Negara Malaysia has adopted a gradual approach which can be divided into three phases: Phase I (1984-1992) Started with the enactment of a dedicated regulatory law, i.e the Takaful Act 1984 and the establishment of the first Takaful Operator in 1984. This Act which is still in use is enacted to govern the conduct of Takaful business and requires the registration of Takaful Operators. It also provides for the establishment of Shariah Committees to ensure that the business operations of a Takaful Operator are in compliance with Shariah principles at all times. Phase II (1993-2000) Marked the introduction of competition with the entry of another Takaful Operator. This period also saw greater cooperation among Takaful Operators in the region including the formation of the ASEAN Takaful Group in 1995 and the establishment of ASEAN Retakaful International (L) Ltd in 1997. This has facilitated (retakaful) arrangements among Takaful Operators in Malaysia and in the region, namely Brunei, Indonesia and Singapore Phase III (2001-2010) Began with the introduction of the Financial Sector Master Plan (FSMP) in 2001 which, among other objectives, is to
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enhance the capacity of Takaful Operators and strengthen the legal, Shariah and regulatory framework. The section of the FSMP which relates to Islamic Banking and Takaful is a roadmap towards realizing the aspiration of Malaysia becoming an international centre for Islamic finance. This period has so far witnessed an increased pace of development of the takaful industry, the Malaysian Takaful Association (MTA), an association for Takaful Operators, was establish in 2002. The MTA aspires to improve industry self-regulation through uniformity in market practices and in promoting a higher level of cooperation among the players in developing the industry. A6.2 REGULATORY DEVELOPMENT OF TAKAFUL REGULATIONS
As described earlier, Takaful is not a contract of exchange of buying and selling. Under Takaful the risk is not transferred to the operator and to be guaranteed by it. From the perspective of the concept of mutuality and cooperation, it is a pact of joint guarantee among its participants. Translated into practical operation, it is a contract of al-mudharabah, al- wakalah, a combination of both or al-waqf between a participant and operator. As trustee of participants, Takaful Operator is also acting as the custodian of the public, in the sense that participants contribute with distinct objectives and obligations attach to it as reflected in the Takaful fund. In line with this fiduciary responsibility, it is incumbent upon the authority which is responsible to protect the interest of the public to ensure that Takaful operation is properly regulated and good governance is practiced. In this respect, the operational and regulatory framework of Takaful in Malaysia is guided by the following: Companies Act 1965 Takaful Act 1984
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6.2.1
Accounting and Auditing Organisation for Financial Institutions (AAOIFI) Islamic Financial Services Board (IFSB) Central Bank of Malaysia Act 2009 Malaysian Accounting Standard Board (MASB) Income Tax Act1967 Companies Act 1965
Islamic
In Malaysia, a Takaful Operator has to be a corporate entity with limited liability and a prescribed paid up capital. For this purpose, the operator must be a company incorporated under the above Act. The operator has its own legal standing with its members and officers including directors as defined in the Act together with their objectives, power and authorities. 6.2.2 Inter-Takaful Operators Agreement (ITA)
The framework which came into effect in July 2007, is an industry effort aimed at further improving the general insurance premiums settlement practices by facilitating the reconciliation of accounts as well as payments of premiums and commissions between brokers and insurers or Takaful Operators. It also provides for the more effective enforcement of premium warranty conditions for certain non-motor classes of insurance and Takaful, thereby reducing risks borne by insurers and Takaful Operators for policies on which premiums have not been received. The adoption of the Inter-Takaful Operators Agreement (ITA) by the takaful operators further enhances the level of professionalism in the takaful industry. The ITA governs: the conduct of takaful practitioners and intermediaries; and provides for the establishment of a centralized mechanism: for the registration of Takaful intermediaries,
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enforcement mechanisms and disciplinary framework to ensure compliance by its members.
The implementation of the ITA will promote orderly conduct and ensure more consistent market practices among Takaful Operators while promoting a level playing field between insurance and Takaful players in the industry. 6.2.3 Insurance and Investment Regulations in Malaysia
The Insurance and Investment Regulations in Malaysia are facilitated and controlled by Bank Negara Malaysia. It is important for Financial Services Professionals in the United States and elsewhere to beware of this when dealing with immigrants or citizens from Malaysia with Insurance and Investment interest in Malaysia. It is critically important to understand that Bank Negara Malaysia is the central bank for Malaysia. Bank Negara Malaysia supervises: A6.3 Investment Operations and Financial Market Insurance and Takaful Supervision LEGAL FRAMEWORK OF TAKAFUL INDUSTRY
In 1982, a committee was set up by the government to look for the alternatives of insurance that is compliance to Islamic law. The committee submitted the report and the Takaful Act were endorsed by the Parliament in 1984. The Takaful Act 1984 is the source of takaful legislation in Malaysia. The Insurance Act 1963 forms the basis of the Takaful Act 1984. Section 53A of the Takaful Act 1984 requires a Shariah Committee be established by the operator. The Takaful Act 1984 (the Act) is the Act which provides for the regulation of Takaful business in Malaysia and for other purposes relating to or connected with Takaful.
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The Takaful Act 1984 is the Act which provides for the regulation of Takaful business in Malaysia and for other purposes relating to or connected with Takaful. The general law governing Takaful would rest on the general principles of contract wherein there must be Ijab (offer) and Qabul (acceptance), and additionally the issuance of a cover note or temporary cover note (as the case may be) as a Takaful certificate is a binding contract. The consideration exists in the contract that is constituted by the payment /servicing of periodic contribution by the participant and indemnity by the Takaful Operator for the insured. The Act is supplemented by the Takaful Regulations (Regulations) through which Bank Negara Malaysia (BNM) prescribes the details of mandatory requirements contained in certain provisions of the Act. A6.4 SHARIAH ADVISORY COUNCIL AND SHARIAH COMMITTEE
Shariah Advisory Council for Islamic Banking and Takaful was established by BNM in May 1997. Its objective is to look after the Shariah decision with regards to Islamic Banking and Takaful business under the supervision of BNM. It is responsible to harmonize the Shariah interpretation for matters under its authority. BNM Act 1958 and Takaful Act 1984 were amended in 2003 to further strengthen the role of Shariah Advisory Council. The amendment provides the recognition to the council as an authoritative body that has the right over the Shariah matters that relate to Islamic finance and Takaful. The status of the council was upgraded as a reference point for the Malaysian court for Shariah issues with regards to Islamic finance and Takaful cases.
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6.4.1
Shariah Advisory Council (SAC) Bank Negara Malaysia
Bank Negara Malaysia has amended the Central Bank Malaysia Act 1958 to enhance the roles and functions of its SAC for Islamic Banking and Takaful. This amendment has accorded the SAC as the sole Shariah authority in Islamic finance. As the sole Shariah authority, SAC will be referred to by the court or arbitrators in dispute involving Shariah issues in Islamic Banking, Finance and Takaful. To effectively play its role the SAC operate as an independent body and with high level of integrity will command public confident and thereby will spur the industry to greater heights. There is a crucial need to define the relationship between the SAC and Shariah bodies which act as advisers in the industry. A Shariah body in the industry known as the Shariah Supervisory Council (SSC) will play a complimentary role to the SAC of Bank Negara Malaysia. Bank Negara Malaysia has prepared a guideline on the governance of SSC for the Islamic financial institution that regulates the governance of SSC of an Islamic Financial institution. The objective of the guideline aim at achieving the following: to set out the rules, regulations and procedure in the establishment of a SSC. to define the role, scope of duties and responsibilities of a SSC. to define relationship and working arrangement within the SSC and the SAC of the Bank Negara Malaysia. 6.4.2 Shariah Committee (SC) Takaful Operator
Every Takaful Operators is required to establish a SSC in line with Takaful Act 1984. The detailed guidelines on the governance of SSC are as follows;
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Appointment of Membership The Board of Directors upon recommendation of its Nomination Committee shall appoint the SSC. The appointment of SSC members shall obtain prior written approval of Bank Negara Malaysia. The appointment of a SSC member is valid for a renewable term of 2 years.
Qualification The proposed member of the SSC must at least either have qualification or possess necessary knowledge, expertise or experience in the areas of Islamic jurisprudence (Usul alFiqh); or Islamic transaction/commercial Law (Fiqh alMu'amalat). It should however be noted that paper qualification on the above subjects will not be mandatory as long as the candidate has the necessary expertise or experience in the above areas.
Composition The composition of the SSC shall consist of a minimum of three (3) members. In addition to the SSC, a minimum of one officer should preferably be a person with knowledge in Shariah, who will serve as the secretariat to the SSC.
Restrictions on SSC In line with Section 16B(6) of the Central Bank of Malaysia Act 1958, a Takaful Operator is not allowed to appoint any member of the Shariah Advisory Council to serve in its SSC.
Duties and Responsibilities of SSC Must not be involved in the management of the Takaful Operator. The management and policies are the responsibility of the Board of Directors. To ensure the smooth running of the
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Takaful Operator, the roles and responsibilities of the SSC are as follows: o o o o To submit its annual report and certification of the companies adherence to Shariah in the Annual General Meeting of the Shareholders. Audit and supervise the actual application of contract operation in line with the spirit of the Fatwas. Respond to enquiries from the operator regarding Takaful issues related to Islamic Law and the decision must be by consensus (syura) and not by majority. To provide justification and to advise on matters to be referred to the Shariah Advisory Council. BANK NEGARA MALAYSIA
A6.5
Bank Negara Malaysia as regulator and supervisor of Takaful industry came up with a regulatory framework as a balancing act between the objectives of the: 1. 2. 3. 4. Regulator Operators Consumers Domestic and international stakeholders
The primary purpose is to ensure that a Takaful intermediary obtains sufficient information about a prospective participant before rendering appropriate advice on the suitability of a particular Family Takaful product to the prospective participant. The guidelines are aimed at raising the professional standards and accountability of Takaful intermediaries as well as to protect the participants interests by ensuring that they are in a position to make an informed decision when participating in Family Takaful products.
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6.5.1
Objectives of Supervision Preserve the stability of Takaful Industry Instil public confidence in the Takaful Industry Promote strong governance standards in the management of Takaful Operators Ensure that consumers are well informed for decision making Integrate supervision across borders and sectors
Bank Negara Malaysian plays an important role in: Ensuring that Takaful Operators run their operations in good manner for the benefit of the participants. Ensuring the operations of the Takaful Operators is in accordance to Shariah. Instil the confidence of the public towards Takaful and Islamic finance as a whole. Promoting good marketing practice as well as strengthening the corporate administration. Ensuring effective and suitable channel of economic resources. Maintaining the stability of the financial system as a whole.
BNM as the regulator and supervisor of Takaful industry in Malaysia has issued numerous circulars and guidelines as per Administered Legislation provided by BNM Circulars and Guidelines listing (www.bnm.gov.my). With regards to Market Conduct and Consumer Protection, BNM has identified the following areas of concern: Disclosures to consumers Ensuring that participants have access to accurate, timely and relevant information
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Competency of Intermediaries Greater supervisory oversight is required to ensure proper selling practices in view of non-guaranteed nature of benefits Consumer education Fostering greater awareness and understanding of risks and rights with regard to Insurance and Takaful products Availability of Channels Dispute resolution mechanisms that offer speedy resolution of dispute to resolve disputes TAKAFUL ACT 1984
A6.6
The Takaful Act 1984 is the source of takaful legislation in Malaysia. The Insurance Act 1963 forms the basis of the Takaful Act 1984. The Takaful Act 1984 (the Act) is the Act which provides for the regulation of Takaful business in Malaysia and for other purposes relating to or connected with Takaful. The Main Provisions of the Takaful Act 1984 are: Setting up of subsidiary and branch offices The Act requires a licensee to obtain prior approval of BNM to establish an office in or outside Malaysia. Takaful fund and Shareholder Fund A Takaful Operator must maintain separate funds for Malaysian and foreign policies and Family Takaful and General Takaful business as well as to maintain adequate assets in its Takaful funds to meet its Takaful fund liabilities. Minimum Paid-Up Capital The Act requires a Malaysian incorporated direct insurer to maintain a minimum paid-up capital of:-
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RM35m by 31st Dec 1998 RM50m by 31st Dec 2000 RM100m by 30th June 2001
Minimum Solvency Margin Insurer's Solvency Margin acts as a cushion against unexpected fluctuations in claims, and investment losses. The Regulations prescribes the margin of solvency required of licensed Takaful Operators. The minimum required under the Act of each class of business written (Family Takaful and General Takaful) is: RM40m from 1st January 2000 RM50m from 1st January 2001
Direction and control of defaulting Takaful Operator An early warning system is provided for a Takaful Operator which is just complying with minimum solvency margin but having adverse business results or which is deficient in solvency margin. Examination and investigation powers of the Central Bank, winding-up, transfer of business of licensee The Takaful Supervision conducts regular commercial, actuarial and market conduct examinations on takaful companies and their branches. The examinations also cover an in-depth review and appraisal of Takafuls Earnings, Management, Assets and Solvency (EMAS). Enforcement powers of the Central Bank relating to offences The Act empowers the Governor of BNM to compound an offence under the Act or the Regulations including fines.
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Matters relating to policies and other general provisions The regulations provide for the expeditious payment of policy moneys under a Family Takaful or Personal Accident certificate. It also creates a trust in favour of a nominee who is a spouse, child or parent. To handle complaints and enquiries on takaful matters from the public, BNM has set up the Customer Service Bureau in its Insurance and Takaful Regulating Department. The Insurance and Takaful Mediation Bureau (MB) set up in 1992 serves as an alternative channel to public to assist them in their complaints. Insurance Guarantee Scheme Fund BNM is empowered to establish and maintain a separate takaful guarantee scheme fund (TGSF) for General Takaful business and Family Takaful business in respect of Malaysian policies. The TGSF is for the purpose of partially meeting the liabilities of any insolvent takaful operator. It is funded mainly from levies imposed on licensed takaful operators. A6.7 CONSUMER PROTECTION
Customer Services Bureau On 1 July 1998, BNM Services Bureau (CSB) Department to act as a complaints and enquiries the public. established a dedicated Customer within the Insurance Regulation central point of reference for all on insurance matters received from
Each inquiry or complaint is assigned to an investigator who reviews the case to ensure that the insurance company and/or producer involved in the matter has complied with applicable insurance statutes and regulations and that the consumer has
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been treated fairly. In conducting this review, the investigator will contact the insurer or producer and require that the licensee respond to all aspects of the complaint/inquiry. Once the review is complete, the investigator will prepare and send to the consumer a written report of our findings. In appropriate circumstances, a case will be referred to the Departments Enforcement Unit for further investigation, which may result in the imposition of administrative penalties. The complaints made against insurance companies related mainly to: delay in settling claims dispute in claims amount offered delay in reply to correspondence repudiation to liability with reference to policy condition agency matters cancellation of policies.
Financial Mediation Bureau (FMB) Correspondingly, Bank Negara has set up agencies to cater to consumer needs through the formation of Financial Mediation Bureau (FMB) to serve as an alternative to the courts in settling disputes between consumer and financial services providers. FMB is an independent organization a non-profit organisation, incorporated as a company limited by guarantee, supported by its members by an annual levy, as determined by the Board, to meet all the expenses of the Bureau. The main function of FMB, vis--vis to provide an alternate dispute resolution channel which is independent, convenient, efficient and free for the complainants. Mediation is an alternative to the traditional litigation process. The Mediator facilitates both complainant and the member institutions concerned by first studying and / or investigating the complaint including all the issues and parties involved.
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The Mediator also looks at circumstances, situations and issues beyond the law and industry practices, specific to each particular case. The Mediator may discuss the complaint including his or her findings and observations with either one or both of the parties concerned. In the event both parties agree to an amicable settlement, the matter is considered resolved/mediated. In the event both parties cannot reach an amicable settlement, then the Mediator will make a decision based on the following: o o o o o his/her investigation and study of the case industry practices, the relevant applicable law the responses from the financial service provider the information/documents provided by the complainant mediators other observations that go beyond the law and industry practice for each of the complaint, claim & dispute
The decision made by the Mediator is binding on the relevant member institution but not on the complainant. The complainant has a choice of either accepting the Mediators decision or proceeding with other avenues available to the complainant. It is part of National Consumer Protection Framework that provides mediation service under one roof for the convenience of the consumers. FMB has qualified, experienced and dedicated staff. FMB jurisdiction has been expanded: Claims Expanded jurisdiction Previous Amount amount Motor and Fire Max. RM200,000 Max insurance/takaful RM100,000 Complaints/disputes
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Third party property Max. RM5,000 damage Others Max. RM100,000
-nil- nil-
Exclusion FMB will not consider complaints, disputes or claims relating to: General pricing Product policies Services of members Credit decisions (approvals, rejection & rescheduling of loans) Fraud cases (other than those for which the limit is not more than RM25,000.00) Cases which are time barred or more than 6 years Cases which have been or are referred to the court and/or for arbitration
A6.8
INDUSTRY ASSOCIATIONS
Industry associations are mandatory associations specifically mentioned in the Acts. Insurance Companies and Takaful Operators have to join or subscribe to the association(s) before they can commence business. If the operators are not joining the association, there will be a penalty of RM 80,000 and RM16,000 per day as stipulated in the Section 4(2)d and 4(5) of Takaful Act, 1984. The purposes of the industry association inter-alia are to serve as Self Regulation among industry players. It allows mediation between authority and industry. It would be a common platform to be addressed by regulator.
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Nos. 1.
Industry Main Objectives Association Persatuan To establish a sound insurance Insurans Am structure in Malaysia Malaysia To collect and circulate information (PIAM) and statistics relating to general insurance business To make rules, regulations, tariff and by-laws in consultation with the Director General of Insurance (DGI) for implementation by the members To manage the Unplaced Motor Pool and Fire Protection Association To assist in whatever way within its capacity to reduce losses and / or accidents, and to prevent crime To work closely with Takaful Association in encouraging healthy development of the insurance and Takaful industry. Malaysian Insurance and Takaful Brokers Association (MITBA) To promote and establish a sound brokerage business in Malaysia in co-operation and consultation with the DGI To promote and represent the interests of members To note events, statements and expressions of opinion affecting members, to advise them thereon and to represent their interests by expression of views on their behalf as may be deemed necessary and expedient.
2.
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To co-operate with other similar associations elsewhere in the world To work in conjunction with any legal body or association or any similar body appointed for consideration, training, amendment or alteration of any law relating to insurance To promote the establishment of a sound loss adjusting structure in cooperation and consultation with the authority. To promote and represent the interests of members by all means and methods consistent with the laws and constitution of Malaysia. To cooperate with other similar associations elsewhere in the world. To circulate information likely to be of interest to members and to collate and publish statistics and any other relevant information relating to loss adjusting. To work in conjunction with any legal body or association or any similar body appointed or to be appointed for the consideration, training, amendment or alteration of any law relating to loss adjusting.
Association of Malaysian Loss Adjusters (AMLA)
Life Insurance Association of Malaysia (LIAM)
To promote and represent the interests of the member companies and the life insurance industry To render where possible, to
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member companies such advice and assistance as may be required To circulate information likely to be of interest to member companies, and to collect, collate and publish statistics and other information relating to life insurance. It was set up in 1978 An association for life insurance agents and financial advisors in Malaysia It is concerned with safeguarding the interests of those engaged in life insurance selling and sales management. It promotes professionalism among its members through collaboration with similar organizations. To promote the study and research into the Actuarial subjects and allied aspects of life insurance; employee retirement benefits, finance and investment. To assist the students in the courses for actuarial studies. To develop a Mortality Table based on the mortality experience of insured lives in Malaysia.
National Association of Malaysian Life Insurance and Financial Advisors (NAMLIFA)
The Actuarial Society of Malaysia (ASM)
National It was formed in 1973, comprise 45 Insurance member companies. In order to be be Association of eligibile for full membership, insurance Malaysia company must be at least 51%
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(NIAM)
Malaysian owned.

Cessions and Retrocession Investment in MNRB Statistics and remedial action New areas of Insurance Life Insurance Reinsurance pool for exchange Education Training
Malaysian Takaful Association (MTA)
Malaysian Takaful Association (MTA) was incorporated in 2003 with the objective of promoting the establishment of a sound Takaful (Islamic insurance) structure in Malaysia in co-operation and consultation with the Director-General of Takaful. To promote and represent the interests of the member companies and the takaful industry. To render where possible, to member companies such advice and assistance as may be required To circulate information likely to be of interest to member companies, and to collect, collate and publish statistics and other information relating to takaful. Cooperate with other associations, both domestic and global for common interest MIB was established to create a central fund maintained by insurers, whereby victims of motor accidents would get compensation from the fund if they
Motor Insurers Bureau (MIB)
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were victims of hit-and-run cases. For such cases; the victims could not get any compensation from the driver of the cars as: the driver has no insurance the driver and his insurance is untraced The victims must however establish their claims to the satisfaction of the normal rules of civil law. 10 The Malaysian Insurance Institute (MII) MII is the only full time insurance training institute and it conducts both the basic and advanced level courses and examination in insurance for those engaged in the insurance industry. A full time Islamic finance training institute designated as an industryowned institute dedicated to producing well-trained, high competence personnel and executives with the required talent in the Islamic finance industry. A core strategy of INCEIF is to help develop the Islamic finance industry through the promotion of research studies by both lecturers and students. Research support is also extended through the provision of facilities to analyse and discuss the issues faced by the Islamic finance industry
11
IBFIM
12.
INCEIF
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13.
ISRA
The establishment of the International Shariah Research Academy for Islamic Finance or more commonly known by its acronym, ISRA, is to promote applied research in the area of Shariah and Islamic finance. It will also act as a repository of knowledge for Shariah views or fatwas and undertake studies on contemporary issues in Islamic financial industry. ISRA will contribute towards strengthening human capital development in the areas of Shariah and provide platform for greater engagement amongst practitioners, scholars, regulators, academicians via research and dialogues, both in the domestic and international environment. Through pioneering research and rigorous intellectual dialogue, ISRA aims to promote innovation and dynamism into new boundaries of Islamic finance. It is envisioned that with greater research and dialogues, mutual respect and recognition would emerge within Islamic financial industry global community.
14.
ARIL
Asean Retakaful International (L) Limited (ARIL) was incorporated on the 17th May 1997 (10th Muharram 1418H) and licensed under the Offshore Insurance Act 1990, in the Labuan International Offshore Financial Center (IOFC), Malaysia. ARIL'S
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establishment earmarked as the first Islamic reinsurance company in the region. Since then it has developed into a specialist Retakaful Operator providing both the General and Family Retakaful services 15. Accounting and Auditing Organisation for Islamic Financial Institutions (AAOFI) The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is an Islamic international autonomous non-for-profit corporate body that prepares accounting, auditing, governance, ethics and Shari'a standards for Islamic financial institutions and the industry. Professional qualification programs (notably CIPA, the Sharia Adviser and Auditor "CSAA", and the corporate compliance program) are presented now by AAOIFI in its efforts to enhance the industrys human resources base and governance structures. AAOIFI was established in accordance with the Agreement of Association which was signed by Islamic financial institutions on 1 Safar, 1410H corresponding to 26 February, 1990 in Algiers. Then, it was registered on 11 Ramadan 1411 corresponding to 27 March, 1991 in the State of Bahrain. As an independent international organization, AAOIFI is supported by institutional members (200 members from 45 countries, so far) including central banks, Islamic financial
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institutions, and other participants from the international Islamic banking and finance industry, worldwide. 16 Global Takaful Global Takaful Group (GTG) was Group (GTG) legally incorporated on 21st May 2007. Prior to this, this group is just an informal grouping of Takaful and Retakaful operators under the name of ASEAN Takaful Group (ATG). ATG was formed on 28th October 1995 with the objective of enhancing mutual co-operation among Takaful Operators in Malaysia, Republic of Indonesia, Negara Brunei Darussalam and Republic of Singapore of which the founder members were Syarikat Takaful Malaysia Berhad, Takaful Nasional Sdn Bhd, PT Asuransi Takaful Umum, PT Asuransi Takaful Keluarga, Insurans Islam Taib Sendirian Berhad and Takaful IBB Berhad. 17 Islamic An international standard-setting Financial organisation that promotes and Services Board enhances the soundness and stability of (IFSB) the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders
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CHAPTER A7
RETAKAFUL
OVERVIEW Retakaful, it is an arrangement or a mechanism either by an agreement that enables a direct Takaful Operator, called the cedant, to transfer or cede a part of the risk that it has accepted, to another Takaful or Retakaful Operator. The primary objective of retakaful is to reduce the risk exposure and liability of the cedant in the event of a claim. This concept of sharing would enable a wider distribution of the risks and secure the Takaful Operator the full advantages of the law of large numbers. All in, retakaful would contribute towards reducing the financial strain of the takaful fund. A7.1 DEFINITION OF RETAKAFUL
Retakaful has been defined in several forms. It is a contract whereby one for a consideration agrees to indemnify another wholly or partially against loss or liability by a risk the latter has covered under a separate and distinct contract as operator of a third party. Therefore a contract of retakaful is one by which an operator procures a third party to cover him against loss or liability by reason of such original takaful cover. 7.1.1 Shariah view on Retakaful
In line with the scholars resolution on the permissibility of takaful as a system of Islamic insurance, retakaful likewise has been resolved to be Shariah compliance along with the same principles of takaful. The resolution of the Fiqh Academy (Resolution No.9 December 1985) of the OIC on this subject is as follows:
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Commercial insurance contract commonly used by commercial insurance companies is a contract which contains major elements of risks which is prohibited according to shariah. The alternative for both insurance & reinsurance should be based on the principles of cooperative insurance... A7.2 BASIC PRINCIPLES OF RETAKAFUL
Retakaful is as an arrangement in which a company, the Retakaful Company, agrees to indemnify a takaful operator, the ceding company, against all or a portion of the primary takaful risks underwritten by the ceding company under one or more takaful contracts. Retakaful, however, does not discharge the ceding company from its liability to participants. In this respect: the original participant has no rights against the Retakaful Company whatever the circumstances if the Retakaful Company becomes insolvent, the ceding company still remains liable under the terms of the contract. If the ceding company becomes insolvent, the Retakaful Company is still liable under the terms of his the contract. the Retakaful Company has no contractual rights against any wrong doing of the original participant. Based on these definitions, we can summarize the important elements of retakaful as follows: Retakaful is a type of takaful but is a distinct and separate contract from the original takaful and itself takes the form of a contract of takaful. Retakaful may cover part of the risks, but no more than that. The retakaful contract must cover the same risk as the original takaful coverage. Both takaful and retakaful certificates are to be in existence at the same time.
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7.2.1
Need for Retakaful
Retakaful is a critical risk management mechanism for Takaful Operators to attain the following objectives: Ensuring efficient spreading of risk. By this process, the takaful market inclusive of retakaful would be able to share the development and growth of the market while at the same time protects takaful operators from any adverse exposure on their takaful liabilities. Providing extra and additional capacity for cedants to accept participation of risks which are bigger and complex in nature and may be over and above its financial and technical capability.. Retakaful has the effect of stabilizing or smoothing of income and loss over a period of years, which brings about more stability and sustainability to the takaful fund. With a huge and varied reservoir of risks in their portfolio, retakaful operators are able to analyse, having knowledge and experience on these risks at a birds eye-view or macro level and in most cases spanning across several jurisdictions. This unique information can be shared with takaful operators for the purpose of ensuring efficient management of the risks. This in turn would help Takaful operators to leverage on the data available for the purpose of product design, rating and more importantly, in drawing appropriate underwriting practices. With their extensive R & D facility, retakaful operators would be able to provide expertise in the areas of underwriting, financial risks modelling, actuarial services, IT solutions, alternative risk transfer mechanisms (ART), claims management, marketing, etc to takaful operators. As entrusted by participants, takaful operators are incumbent to protect and safeguard the takaful fund at all times from any adverse claim exposure. To the participant, ability to pay claim by the operator is to be guaranteed. In the same manner, takaful operators must strive to meet its promise as laid down
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in the Certificate its ability to share the surplus of the takaful operation. Retakaful facility would help takaful operators towards attaining this objective. 7.2.2 Shariah Justifications on Retakaful with Reinsurance Company
Reinsurance in takaful business under the Islamic principles is known as retakaful, a Shariah compliant approved concept for reinsurance. In the early stage of Takaful business Reinsurance facilities were provided by conventional insurance companies due to, Limitation of takaful operator. Financial inadequacy of takaful operator. Non availability of retakaful facilities. Limitation of retakaful operator. Lack of capitalized retakaful operator. Lack of A rated retakaful operator. Legal Maxims / Shariah Principles
7.2.3
Some of the Legal maxim that make applicable to the retakaful operation are as follows:
Legal Maxims Al Darurah Tubih Al Mahzurah Description The principle is accepted among jurist as a leeway in a situation when a Muslim cannot abide to the general rule because of darurah. The principle allows Muslims to do what is prohibited in a normal situation or renders an unlawful act lawful. The principle implies that the Takaful Operator can only reinsure the risk with conventional reinsurance for the portion of risk that cannot be retakaful by retakaful companies.
Al Darurah Tuqaddaru Biqadariha
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Ma Ubiha Li Al Darurah Yataqaddaru Biqadariha Ma Jaza Li Uzrin Batala Bi Ziwallihi.
The principle implies that the extent of necessity limits action there under. This means that even though a jurist allows doing what is prohibited, it should not be excessive in the situation of darurah. The principle implies that what is lawful because of darurah will be no more lawful when the darurah is gone. When there is no `darurah` the law will revert back to the original which is reinsurance with conventional operator is prohibited
7.2.4
Guidelines on Takaful Operators to Reinsure with Conventional Reinsurance Companies
The reinsurance cooperation with conventional reinsurer should not cause financial injury destabilizing the financial system of Muslim countries. Preference shall be given to retakaful operators where ever possible. The reinsurance expert of takaful operator should carefully determine the quantum of liability to be recovered. The takaful operator should review its retakaful requirement annually and should progressively reduce dependence on conventional reinsurance. The takaful operator must stipulate a condition exempting it from payment of or receiving interest from the conventional reinsurance companies. In the event of adequate reserve or when numerous retakaful operator are established the dependency of conventional reinsurance must be terminated. no available cover offered by a takaful operator or retakaful operator for a particular risk. or where there is no financially sound takaful operator or retakaful operator accepting such risk.
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A7.3
TYPES OF RETAKAFUL
Basically there are two types of retakaful; facultative and treaty. Treaty retakaful can be further divided into two: proportional and non-proportional. Proportional treaty can be categorized into three types: quota-share, surplus and facultative obligatory. Similarly, non-proportional treaties can be divided into two types; excess of loss and stop loss. Retakaful business is categorised in accordance with the types of business namely, General Retakaful and Family Retakaful. In the case of General, there are operators providing specific classes of retakaful facilities only. For example there are operators offering only retakaful by way of proportional treaty whilst others accept only non-proportional. There are only a few retakaful operators worldwide because of the specialized nature of its business and the massive capital required to start a retakaful company. These operators offer their services on regional as well as international basis with offices located in major commercial and offshore centres. The Lloyds syndicates in London for example, provide significant retakaful capacity for the international market. Another vital component of the retakaful market is the broker. Services of professional retakaful brokers are usually engaged to help the takaful operator source and negotiate the most efficient retakaful programme. The following diagram gives an overview of the types of retakaful available:
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Flowchart of Retakaful and Reinsurance

Retakaful/Reinsurance
Facultative
Treaty
Proportional
Non-Proportional
Surplus
Quota Share
Excess of Loss
Excess of Loss Ratio (Stop Loss)
7.3.1
Facultative Retakaful
Facultative retakaful is a form of retakaful in which a contract is negotiated for a specific takaful certificate or takaful cover. This type of retakaful is participated when takaful cover is unusual or large and the original operator is concerned about the exposure. The ceding company may offer the risk, or any part of it, to any retakaful company and the retakaful company is free to decide whether to accept it or not. This form of retakaful is generally used only to enable the ceding company to dispose of shares of a particularly large risk which is beyond the scope of the treaty facilities available and is also of an extra hazardous nature.
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This refers to a method where a single risk (case by case basis) is ceded to retakaful and a proportionate share of the original takaful contribution shall be payable to the retakaful. Normally a certain commission will be levied on the retakaful operator. The retakaful company has the option to accept or decline such risk. Below is an illustration of a risk placement done using the facultative method of retakaful: Takaful Operator X intends to accept a proposal of RM10 million Takaful Operator X Retention is RM1 million Balance to be ceded to retakaful is RM9 million Original Takaful Contribution RM10,000
Sum Covered / Share of Risk (RM) 1,000,000 2,700,000 4,500,000 1,800,000 10,000,000 % Share 10 % 27 % 45 % 18 % 100 % Share of Contribution (RM) 1,000 2,700 4,500 1,800 10,000
Takaful / Retakaful Takaful Operator X Retakaful Operator A Retakaful Operator B Retakaful Operator C Total
7.3.2
Treaty Retakaful
The treaty is an annual agreement in writing between the direct retakaful company (the ceding office) and a retakaful company, whereby the retakaful company will automatically accept any cessions falling within the terms of agreement. A cession is the amount ceded or given away to a retakaful company. This agreement or treaty will be for a time period and subject to restriction as to the type of risk or value involved. The
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treaty provides automatic facility, wich is arranged in advance and negotiations are normally only necessary at renewal each year. This method of retakaful is usually arranged on a portfolio basis involving a bouquet of risks ceded to the retakaful, over and above the retention limits of the cedant. Usually arranged on an annual basis, all risks within the agreed portfolio will be ceded and automatically accepted by the retakaful. Accounts related to this portfolio will be prepared and accepted between the parties of the treaty on quarterly basis. The difference between facultative and treaty can simply be attributed to facultative as a one-off retakaful arrangement whilst treaty refers to a wholesale retakaful programme over a certain agreed period of time. The treaty retakaful can be divided into proportional and non-proportional. 7.3.3 Proportional Treaty
In proportional retakaful, the amount retained and the amount ceded will represent certain proportions of the original sum insured accepted by the ceding office and the contribution received by the ceding office will be shared in the same proportion. Likewise, the claim payment will be shared by the ceding office and the retakaful company in the same proportion. a. Quota Share Refers to a treaty arrangement where the cedant is bound to cede and the retakaful operator is to accept a fixed share of every risk within the portfolio of risks agreed by both parties. This type of treaty is arranged in percentage. Exmaple, if cedant takes 20%, retakaful company will take the balance of 80%. Retakaful contributions are then shared on proportionate basis of the original takaful contribution and taking into account commission agreed. Likewise the claims liability shall be apportioned accordingly.
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This arrangement is usually applied for new takaful operators with no track record or with adverse claims experience. In this manner, retakaful will be able to share not only the bad but also the good risks thus avoiding adverse selection. The ceding company must cede and the retakaful company must accept the agreed fixed share of every risk undertaken by the ceding company. The ceding company cannot retain all of any risk, no matter how small the sum insured is. This form of treaty is used: where a new business is involved which requires very extensive retakaful protection in its early years due to lack of experience and financial weakness. where the ceding companys surplus has experienced a run of bad results to achieve economy in the handling of retakaful.
b. Surplus The treaty retakaful company are entitled to the share of any surplus risk over the retention of the ceding office up to the limit of the treaty. The limit of treaty's capacity is defined in lines, a line being equal to a ceding company's retention to anyone risks. Therefore, a ten line treaty would provide in total a ceding company with a gross capacity of eleven times its own retention. Under this placement, the cedant will cede to retakaful the surplus of all risks over and above the formers retention limits. By this way, the cedant may retain for its own account risks of small values. Retakaful contributions are proportionate to the original takaful contributions with allowance for commissions payable to the cedant. The objective of this commission is to cover the acquisition cost by the cedant. In a similar manner liability for claims will be
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treated on a proportionate basis. In addition, the sharing of net surplus, termed as profit commission of the retakaful fund is also incorporated in the treaty. 7.3.4 Non-Proportional Treaty
This type of treaty will only participate when claims exceed the limits set by the cedant. The ceding office and the retakaful company do not share each loss in a fixed proportion and may not share some losses at all. The ceding company will be responsible for all losses below the loss retention amount and retakaful will deal with the balance of any loss above the figure with usually an upper limit. It refers to an arrangement whereby a cedant will use a hedging technique to cap its claims exposure, usually against catastrophic losses. Unlike proportional treaty, a non-proportional arrangement will entail the ceding of loss only, as compared with ceding of risks under the proportional. It becomes effective when the total net loss of the cedant due to a single big loss or series of losses exceeding the agreed level under the treaty. Retakaful contributions termed Minimum Deposit Contribution (MDC) charged under non-proportional retakaful are not based on the original takaful contributions but on another pricing structure taking into account the loss experience and annual estimated total contribution income of the class of business for the last three years. The two common types of Non-proportional treaties are as follows: a. Excess of Loss The cedant pays the amount of each claim for each risk up to a limit determined in advance and the retakaful pays the amount of the claim above that limit up to a specific sum. The retakaful is arranged into layers with various limits and
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deductibles. It may be arranged on whole account or separately by class of business. b. Stop Loss Stop Loss treaty is also known as excess of loss ratio. This Cover is designed to prevent wide fluctuations of the claims ratio of particular portfolio over one financial year. Example, if the company's fire account was 60% over a period of years and the company wishes to prevent the ratio from going up to 90% in anyone year, it will buy an excess of loss ratio cover above 90% up to 120%. This cover is designed to prevent wide fluctuations of the claims ratio. It protects a takaful operator against a total aggregate of claims over a period, usually during a treaty year, in excess of a specified percentage of the total takaful contribution. Stop loss retakaful does not cover individual claims. The stop loss arrangement protects the cedant against the possibility of the total loss ratio exceeding a certain fixed amount or specified percentage of the total takaful contribution of a particular class of takaful. For example if the loss ratio of a portfolio of business exceeds the limit agreed say 120%, then retakaful will pay the excess up to another agreed limit say up to 160%. In essence, Stop Loss retakaful aims to protect the takaful operator from the residual net exposures against an adverse claims experience. 7.3.5 Retrotakaful Retakaful risks, similar to takaful risks need to be managed and protected by the retakaful operators through various mechanisms available in the market. In this respect, retakaful operators have in place appropriate retrotakaful programmes on proportional and non-proportional basis. However, currently, due to inadequate retrotakaful capacity, most of the retrotakaful risks are placed in
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the conventional market, until such time when the retakaful market has fully grown and developed. A7.4 FUNCTIONS OF RETAKAFUL
Flexibility Without retakaful, takaful operator would only be able to accept risks in an amount and type that they could handle from their own resources. This would limit the service they could provide to the public and would also cause considerable inconvenience to the customers.
Expansion Retakaful can provide additional expertise to an operator in areas where the operator has limited experience, expertise or knowledge. By providing this assistance and accepting part or all of the risk, the company accepting the risk helps the operator to grow in the number of products it can offer.
Accumulation An operator could not incur losses on business written on a number of different risks which results from a single event. For example, we may cover groups of people working in many different companies located in different parts of the world who, at anyone time, could be traveling on the same aircraft. If the aircraft crashes and all those people killed, the resulting claims could far exceed the maximum losses that were predetermined acceptable. Retakaful assists the operator to limit such losses to an amount which the ceding company can afford.
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A7.5 7.5.1
RISK MANAGEMENT UNDER RETAKAFUL Regulatory Framework for Retakaful (BNM/RH/GL/004-12)
In order to ensure an orderly growth of retakaful business in Malaysia in tandem with the growth of takaful business, Bank Negara Malaysia (BNM) has formulated a regulatory framework (Regulatory Framework for Retakaful (BNM/RH/GL/004-12) for Retakaful operators as follows :
Regulatory Framework for Retakaful Operators Financial strength and financial flexibility Description/Remarks The applicant must be financially sound with strong capital support and good track record of operating profits to ensure that the proposed new retakaful operator provides good security and continued commitment to its retakaful operations in Malaysia; and The applicant should have a combined paid-up capital and surplus of at least USD100 million and good international ranking or rating from well-recognised rating agencies. Related experience in takaful/retakaful The applicant should have the experience of conducting diversified types of retakaful business. Favourable consideration will be accorded to applicant with special technical expertise that benefits the Malaysian takaful market and the region. The applicant must be able to demonstrate that the proposed retakaful operator could contribute effectively to the development of the takaful industry and hence complement the efforts taken by the Government and the Bank in establishing Malaysia as an international Islamic financial centre.
Ability to contribute towards national agenda
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Favourable consideration will be given to applicant intending to establish its retakaful set-up in Malaysia as the centre for its regional or international retakaful business; and Applicants will also be required to provide plans towards transferring technical knowledge to local takaful market and optimising local talents in the management of the company. Viability of the Malaysian operations The business plan of the proposed retakaful operator should demonstrate the viability of its Malaysian office within a 5-year period based on realistic assumptions.
7.5.2
Retention Capacity
All takaful operators must have a limit on its retention, as it is essential it limit its liabilities in order to protect its capital, retained profits, and also continue paying reasonable dividends. Most significantly a steady growth in free assets (capital & retained profits) is necessary to support the increase in contribution growth. The retention can be defined as the limit of liability, usually expressed as a monetary amount, which the takaful operator retains for its net account after retakaful. It can also be defined as the maximum amount that the takaful operator is willing to pay for a loss affecting a certifcate, risk or group of risks". Therefore, the retention may apply to a single risk or a series of risks, or to a single loss or series of losses. The process for fixing retention involves several factors. Retentions are usually fixed based on each class of business separately (family, fire, accident, marine, aviation, etc.), and within each class subject to further sub-division. There may
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also be an overall retention over the combined portfolios of the various classes. Although the factors involved in deciding retention levels are common to all, however takaful operator may attach different weights to each factor and thus arrive at a different decision. As such there is only an optimal retention for each takaful operator rather than a correct retention. The optimal retention will provide the takaful operator a framework in which to achieve its particular corporate objectives. Thus if two takaful operators with similar portfolios but having different corporate aims, it is most likely they have different retentions. The main objective of a takaful operator in fixing its retention level is to control fluctuations in either: (a) its loss ratio, (b) its business results; or (c) its cash flow. Any takaful operator is faced with the choice of underwriting as much as possible or minimizing its risks. By underwriting higher risks, the operator is faced with higher risks; but if the operator does not do that, it will be able to underwrite more. Therefore the operator must fix its retention level or capacity at an optimum level. In determining ones retention capacity, one should also look at ones claims experience. Apart from affecting the retention amount and the proportion of the operators gross contribution income it will also affect the cost and/or amount of retakaful which retakaful operators are prepared to offer. Also the less claim experience the operator has the more conservative should be its retention policy. This is so because the degree of accuracy that one can be achieved in estimating future claims costs is directly related to the amount of data available regarding claims frequency and severities. The simplest measure of claims experience is the claims ratio i.e. the ratio of the cost of claims incurred in a given period divided by the contribution income for the same period. The ratio may be measured either for the gross account or net of
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retakaful contributions and claims recoveries. By calculating its gross or net claims ratios we can observe both the degree of fluctuation over time in claims costs relative to contribution income, and how effective are its retakaful arrangements in reducing the size of those fluctuations on its retained account compared with the gross account. According to a study, the relative size of the fluctuations in gross claims ratios over time will tend to vary with the size of the account as measured by premium (contribution) income. In short, the smaller the gross contribution income, the lower is the retention capacity. Last but not least, the corporate strategy of a takaful operator plays a large part in determining the operators retention capacity. The management of a takaful operator differs in philosophy, outlook, experience, knowledge and also risk attitude & aptitude.
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Takaful Intermediaries
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CHAPTER A8
TAKAFUL INTERMEDIARIES
OVERVIEW A takaful intermediary is someone who solicits takaful business or invites potential customers to enter into takaful contracts with takaful operators. They are also known as takaful agents and takaful brokers. an agent is a Takaful Operator's representative by way of agent-principal legal custom. The agent's primary alliance is with the Takaful Operator, not the takaful participant. A takaful agent represents the Takaful Operator and primarily promotes takaful plans issued by the Takaful Operator it represents. a broker generally has no contractual agreements with Takaful Operators and relies on common or direct methods of perfecting business transactions with Takaful Operators. This can have a significant beneficial impact on takaful negotiations obtained through a broker. Takaful broker provides a comprehensive range of professional takaful broking services to assist prospective clients on how to make their contributions more cost effective and at the same time achieve maximum coverage. A takaful broker on the other hand represents the customer and advises the customer on the most suitable takaful plan. A financial adviser is an independent party that provides financial planning services to the customer based on the customers financial needs. a financial adviser, is a professional who renders financial services to individuals, businesses and governments. This can involve investment advice, which may include pension planning, and/or advice on family takaful and other takaful
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plan, such as income protection takaful, critical illness takaful, and/or advice on mortgages and financiang and loan facilities. a financial planner or personal financial planner is a practising professional who helps people deal with various personal financial issues through proper planning, which includes but is not limited to these major areas: cash flow management, education planning, retirement planning investment planning, risk management and takaful planning, tax and zakat planning, estate and waqf planning and business succession planning (for business owners).
Takaful intermediaries professional such as an agent, broker or financial adviser must be competent and posses the following characteristics: A8.1 Good knowledge of insurance and/or takaful products Understands your customes needs and interest Ensures you understand what you are buying or participating Does not over-promise or over-sell Factual, not pushing or intimidating Delivers quality and timely service DEVELOPMENT OF TAKAFUL INTERMEDIARIES
The Financial System in Malaysia The banking system, comprising commercial banks, investment banks, and Islamic banks, is the primary mobiliser of funds and the main source of financing which supports economic activities in Malaysia. The non-bank financial intermediaries, comprising development financial institutions, provident and pension funds insurance companies, and Takaful Operators, complement the banking institutions in mobilising savings and meeting the financial needs of the economy.
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BNM, is at the apex of the monetary and financial structure of the country. The principal objective of the Bank is to promote monetary stability and financial stability conducive to the sustainable growth of the Malaysian economy. Its primary functions as set out in the newly enacted Central Bank of Malaysia Act 2009 among others are to: formulate and conduct monetary policy in Malaysia regulate and supervise financial institutions which are subject to the laws enforced by the Bank promote a sound, progressive and inclusive financial system act as financial adviser, banker and financial agent of the Government.
To achieve its mandates, the Bank is vested with powers under various laws to regulate and supervise the banking institutions and other non-bank financial intermediaries including takaful related activities. Following the announcement in April 2009 of the liberalisation measures for the financial services sector which includes the issuances of new licences and increase of foreign equity limits, there has been great interest by international financial institutions to establish presence in Malaysia. The liberalisation measures aim to strengthen Malaysia's economic interlinkages with other economies and enhance the role of the financial sector as a key enabler and catalyst of economic growth. Islamic finance refers to a system of finance that include Islamic banking, Islamic Interbank Money Market, Takaful and Retakaful, Islamic Capital market and Islamic Wealth Management that complies with Islamic law. The underlying principles that govern Islamic finance are mutual risk and profit sharing between parties, the assurance of fairness for all and that transactions are based on an underlying business activity or asset.
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These principles are supported by Islamic finances core values whereby activities that cultivate entrepreneurship, trade and commerce and bring societal development or benefit is encouraged. Activities that involve interest (riba), gambling (maisir) and speculative trading (gharar) are prohibited. A8.2 THE IMPORTANCE OF TAKAFUL INTERMEDIARIES
A family takaful agent promotes family takaful products and a general takaful agent promotes general takaful products. All takaful agents represent a Takaful Operator and perform the following functions: Promotes takaful products on behalf of the Takaful Operator; Explains features of takaful plans to potential customers; and Provides services related to the issuance, renewal or continuance of any takaful certificate.
A takaful broker is appointed by a customer and performs the following: Assists the customer in obtaining and renewing a takaful cover from a Takaful Operator; and Recommends and advises the customer on the most appropriate takaful plan coverage and terms being offered by Takaful Operators.
A financial adviser is appointed by a customer and performs the following: Financial advisers help the client maintain the desired balance of investment income, capital gains, and acceptable level of risk by using proper asset allocation.
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Financial advisers use shares or stocks, sukuk and bonds, mutual funds, real estate investment trusts (REITs), options, futures, notes, and takaful products to meet the needs of their clients. Many financial advisers receive a commision payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the financial services industry.
A financial planner is appointed by a customer and performs the following: The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by the financial planning process to create a financial plan; a detailed strategy tailored to a client's specific situation, for meeting a client's specific goals. The key defining aspect of what the financial planner does is that he considers all questions, information and advice as it impacts and is impacted by the entire financial and life situation of the client
Intermediaries are usually paid commissions or fees (such as brokerage fees for brokers, financial advisory or planning fee) for each plan promoted which is based on a percentage of the contributions made by customers who are also called participants. A8.3 RESPONSIBILITIES OF TAKAFUL INTERMEDIARIES UNDER TAKAFUL ACT 1984
Section 36(1) Takaful Act 1984 This section requires all agents or intermediaries who market or promote takaful products for a Takaful Operator is required under the act to inform all his potential customers that he/she is an agent and acting on behalf of a particular Takaful Operator.
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Section 36(2) Takaful Act 1984 This section is in reference to Section 36(1) and if any agent is found to be non-compliant with the provisions of the Act and if found guilty the agent can be fined not exceeding RM4,000 or imprisonment for a period not exceeding six months or both. Section 35(1) Takaful Act 1984 This section requires that no person shall market or promote takaful products or business as an agent or broker for a person or operator other than a licensed Takaful Operator. If any person is found to be non-compliant with the provisions of the Act and if found guilty the person can be fined not exceeding RM20,000 or imprisonment for a period not exceeding twelve months or both. Section 35(2) subsection (3) Takaful Act 1984 This section requires all takaful broker to transact takaful business only with a licensed and authorized Takaful Operator. This section also mentioned that if any takaful broker is found to be noncompliant with the provisions of the Act and if found guilty the takaful broker can be fined not eceeding RM8,0000 or imprisonment for a period not exceeding six months or both. Section 35(3) subsection (2) Takaful Act 1984 This section of the Act mentioned that the contracts as stipulated in the Act refers only to direct takaful business and does not refer to retakaful business. A8.4 APPOINTMENT AND RESPONSIBILITIES TAKAFUL INTERMEDIARIES OF
A takaful intermediary is someone who solicits takaful business or invites potential customers to enter into takaful contracts with
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Takaful Operators. They are also known as takaful agents and takaful brokers. A takaful agent represents a Takaful Operator and primarily promotes takaful plans issued by the Takaful Operator it represents. A takaful broker on the other hand represents the customer and advises the customer on the most suitable takaful plan. A financial adviser is an independent party that provides financial planning services to the customer based on the customers financial needs. Takaful Agent is licensed/registered by Registrar of Takaful Intermediaries Malaysian Takaful Association (MTA). Insurance and Takaful Broker is licensed/registered by Bank Negara Malaysia (BNM) Financial Adviser is licensed/registered by Bank Negara Malaysia. Financial Planner is licensed/Registered by Security Commission. MARKET CONDUCT REGULATION FOR TAKAFUL INTERMEDIARIES Market conduct supervision and enforcement Bank Negara Malaysia supervises the market conduct practices of financial service providers and initiates remedial or enforcement actions for any breach of market conduct requirements Minimum standards of service Takaful intermediaries are required to comply with the specified minimum standards of service set by Bank Negara Malaysia, the Malaysian Takaful Association (MTA) and Malaysian Insurance and Takaful Brokers
A8.5
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Association (MITBA). The minimum standards of service ensure that takaful intermediaries conduct their business with a high degree of responsibility and professionalism. General takaful agents: o o o are governed by the Code of Ethics for Takaful Intermediaries drawn up by the MTA; are required to pass the Takaful Basic Examination and complete a minimum of 20 hours training per year for Continuous Professional Development (CPD); and must comply with the minimum standards of disclosure requirements issued by Bank Negara Malaysia which, among others, require agents at the point of sale, to explain to potential customers on the main features of the product being marketed, details of commissions paid, and procedures on claims and complaints.
Family takaful agents: o o o are governed by the Code of Ethics for Takaful Intermediaries drawn up by the MTA; are required to pass the Takaful Basic Examination and complete a minimum of 30 hours training per year for CPD; and are required to adhere to the minimum standards for proper advice issued by Bank Negara Malaysia which requires agents to obtain adequate information about potential customers. This will enable an agent to analyse a potential customer's personal and financial circumstances and identify his financial needs and priorities so that a suitable and affordable takaful product can be recommended.
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In addition, takaful agents are required to pass the Takaful Basic Examination in their choice of specialization namely Family Takaful or General Takaful or both. Takaful brokers:o o are governed by the Client's Charter on Code of Good Business Practice, and Code of Ethics and Conduct drawn up by MITBA; and must adhere to the rules and regulations specified in the Takaful Act 1984.
In addition, a takaful broker's senior managementand board of directors must be 'fit and proper' and its employees are required to pass the Basic Certificate Course in Insurance and Takaful Broking. A8.6 RESPONSIBILITIES OF TAKAFUL INTERMEDIARIES IN PROMOTING TAKAFUL Basic conduct of takaful intermediaries
8.6.1
Takaful intermediaries should have a certain standard of professional conduct in handling customers. A takaful intermediary should: Present Agent's Authorisation Card upon request (applicable only for takaful agents). An agent whose registration has been approved by the Registrar of Takaful Intermediaries possesses an Authorisation Card which contains information such as the name of the Takaful Operator whom the agent represents and the validity period of the agent's registration. A General Takaful agent can represent a maximum of two General Takaful Operators while a Family Takaful agent can only represent one Takaful Operator.
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A takaful agent who promotes both Family and General Takaful products can represent one Family Takaful and a maximum of two General Takaful operators. A takaful broker must be a member of MITBA and be licensed by Bank Negara Malaysia. The licence is subject to annual review; exhibit good knowledge of the products and services offered by the Takaful Operator and the market, generally; understand customers needs and assist them in the right choice of takaful products and services; explain clearly the nature of information required in the proposal form and also the importance of understanding material facts; explain clearly the terms and conditions of the proposed takaful contract to ensure that customers fully understand the takaful products being considered; draw attention to any restrictions and exclusions applicable under the proposed takaful contract; follow-up and provide continuous service, such as renewal and provide updates on relevant new products; and provides assistance in making claims against the Takaful Operator. Classes of Agent
8.6.2
Every agent falls into one of the following three categories. They are classified in accordance with the authority provided to them: Special Agent A special agent is one who is appointed to do a specific act or transaction, e.g. a person appointed as a proxy to attend an annual general meeting of a company on behalf of the shareholder. General Agent
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A general agent is one who may do anything for the principal within the limits of a general authority conferred upon e.g. the agent who is authorized to canvass for new business but who could not normally grant certificate loans and bind the principal. Universal Agent A universal agent is one who has unlimited authority. The agent may do anything for the principal which the principal was competent to do. 8.6.3 Duties of an Agent
The contract of agency between the principal and agent is normally in writing. However, it may be verbal. It contains the terms and conditions relating to the conduct of the agency and the remuneration payable to the agent. Unlike an employee, the agent is an independent businessman who is not required to devote any specified time to the amount of business has been transacted. Frequently, a considerable portion of time is spent on agency business outside the normal business hours. The agents most important right is the right to receive payment from the services, usually in the form of a commission. The agent is also entitled to reimbursement of moneys which he has expended with the express authority of his principal. However, such expense has to be reasonable and within acceptable limits. The agent has the right to perform his duties in the manner which he considers to be appropriate. He may reject any attempt by his principal to control the manner in which he works.
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An agent is under a duty to perform his work with care, skill and diligence and also to comply with the terms of his agency agreement. Some of the duties imposed on an agent in addition to his express contractual obligations are as follows: o To render accounts to the principal as required. o Not to let his own interest conflict with his obligations to the principal. o Not to disclose confidential information obtained during the course of his duties as an agent to other parties except the principal operator company. o Not to take any secret profit or bribe from any party with whom he deals on behalf of the principal. o Not to delegate his duties to a sub-agent without authority, express or implied. o To comply with his principals instructions and to notify him when compliance becomes impossible. Rights of an Agent
8.6.4
The agent is entitled to receive payment and reimbursement. The agents most important right is the right to receive payment for his services, usually in the form of a commission or a fee. The agent is also entitled to reimbursement of moneys which he has expended with the express authority of his principal within the acceptable limits. The agent has the right to perform his duties in the manner which he considers to be appropriate. He may reject any attempt by his principal to control the manner in which he works. Obligations of the Principal
8.6.5
The principal has always the following duties towards his agents:
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To pay remuneration and expenses as agreed; or, failing agreement, as is customary; or, failing a custom, to pay what is reasonable. Indemnify the agent against consequences of any act lawfully done, within his authority, on behalf of his principal.
8.6.6
Termination of Agency
The relationship of principal and agent may be terminated by act of the parties or by operation of law as follows: By notice of revocation given by the principal to the agent. By notice of renunciation given to the principal by the agent. By the completion of the transaction where the authority was given for that transaction only. By expiration of the period stipulated in the contract of agency. By mutual agreement. Generally, by death, lunacy or bankruptcy of the principal or agent. By operation of any law which renders the contract of an agent illegal. Characteristics of Takaful Agents
8.6.7
The essential characteristic of an insurance agent is that he is vested with legal power to establish contractual relations between the takaful operator and the participants. The fact that the majority of takaful agents are recruited by field supervisors or managers who, in turn, hold agency contracts with takaful operators does not change this basic characteristic as in the ultimate analysis, such takaful agents hold contracts for services with the takaful operator and not with their recruiters.
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8.6.8 Agents of Whom? The legal maxim applicable to agency generally is qui facit per alium facit per se which means he who acts through another is himself performing the act. Thus, a duly appointed insurance agent acting within the scope of his authority binds his principal by his actions just as though the principal had performed them personally. Because of this, it is particularly important in respect of any given action to decide for whom the takaful agent acted at the relevant time. It is, therefore, quite possible for an agent of the Takaful Operator to be legally regarded as agent of the participant for a given act, and vice versa. 8.6.9 Contribution Collections
When payment of contribution is made to an authorised takaful agent, by the participant such payment is deemed to be payment to the operator. Even if the takaful agent does not remit the said contribution to the operator, the participant would still be on cover. On the other hand, if an unauthorized agent receives money from the participant or the general public, he does not make the operator liable for his misdeed. It is important to note that as long as the agent has not deposited the money with the Takaful Operator he continues to be responsible to the participant. 8.6.10 The Creation of the Relationship
The relationship of insurer and insurance agent may be created in the following ways: By express appointment. By implication of the law, which may arise i) from the conduct of the parties, or ii) from the necessity of the case. By subsequent ratification of an unauthorized act. By statute (Section 151, Insurance Act, 1996).
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A8.7
SERVICES AFTER THE POINT OF SALE.
Takaful is not governed under sale contract from Shariah perspective. However, in product campaign and programme awareness activities including collaterals and e-marketing, with intention to create more client-base participant, sales and negotiating techniques are important in this industry. Owing to the emphasis on sales, hard sales techniques are frequently used to stimulate customers interest in the companys policies. Customers who have participated in takaful products from such an operator via agent or broker usually end up having a certificate of takaful coverage which they do not understand, do not meet their needs or cannot afford. 8.7.1 Market-oriented Products Are Developed & Marketed with the Consumers Need in Mind
Owing to important changes in the market environment, many Takaful Operators have become market-oriented. In a marketoriented takaful industry, the role of the sales and marketing departments is to determine the needs of customers and satisfy these needs by developing and distributing appropriate policies. In general, the marketing department of a market-oriented takaful company should undertake the following functions: Pricing This involves the determination of contribution and how it should be paid. Selection of Distribution Channel This involves the identification and selection of suitable channels for distributing takaful plans to customers. The channels of distribution used by operators may include agents,
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brokers, salaried employees, mass mailing, vending machines, banks, credit card companies and discount card companies. Promotion This involves the identification and selection of suitable promotional activities including advertising, sales promotion and personal selling which will support distribution. This is the Functions of the Marketing Department 8.7.2 Agents Can be Helpful in Developing Products That Meet Consumer Needs
Takaful agents are frequently involved with some aspects of marketing. Agents can influence the product design because their views are usually sought by operators before they embark on the development of new takaful products plan. More significantly, agents constitute the most important channel of distribution. While the other marketing factors (marketing plan, market identification, product development, pricing and promotion) may affect how much takaful plan is participated, the agents are the main force behind most takaful marketing incentives. The success of a Takaful Operators marketing efforts therefore depends on the extent to which its agents are market-oriented. In other words, to ensure success in its marketing-efforts, a market oriented Takaful Operator must be complemented with a market-oriented agency force. 8.7.3. After Participation Services The successful transaction of a takaful plan participated or subscribed by a participant does not free the agent from further interaction with his client. In fact takaful contracts, more so in the case of family takaful plan, may require the agent to provide after-sales services on a continuous basis. This is mutually beneficial. Some of the areas in which agent or broker or even operator can help with include:
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Legitimate claims disputes Loss of membership cards or paperwork Concerns over contribution costs Contribution collection problems Researching alternative policies Benefit queries Certificate amendments (such as adding dependants/family members, changes of address) Changes in circumstances The chance of lapse or business flowing elsewhere could be minimized; The clients new needs for takaful coverage could be recognized and a sale quickly made, thus enhancing the agents business; and The reputation of the insurer as a serviceoriented organization is enhanced.
In this respect, an agents service would be greatly required under the following circumstances: Circumstances/ Events Gentle Reminder to the participant on contribution due Description Takaful Contribution constitutes the consideration by the participant to the takaful operator in return for the benefits of takaful coverage provided. In order that the takaful contract may remain in force, the contribution must be paid in the manner provided whenever it falls due or within the grace period allowed for late payments. For various practical reasons, some participants may overlook paying the
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contributions on the due date. Assisting the clients to remember to pay the contributions is one aspect of service that the agents can perform throughout the duration of the takaful plan. Mode and Methods of Payment Except when it is a single contribution certificate, the participant may pay contributions by yearly, half- yearly, quarterly or monthly instalments. These are known as modes of payment. Contributions paid under modes other than yearly are slightly higher per year. There are two reasons for this. First, there is more administrative work involved in the collection and consequently more expenses are incurred. Secondly, since contributions are calculated on the assumption that they will be paid at the beginning of a plan year and invested immediately, the takaful operator suffers a loss of investment earnings whenever contributions are paid by modes other than yearly. Generally, the monthly mode of payment is discouraged unless the contributions are paid by bankers order or under home service or payroll deduction schemes. These methods of monthly contribution payments are outlined below: Bankers Order or Standing Instruction
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In this method of contribution payment, the certificateholder authorizes his banker to remit to the operator the appropriate amount of contribution which is then debited against his account. The bank charges the certificateholder a fee for this service. Obviously, the certificateholder must ensure that there is sufficient balance in his account for regular remittances to be made to the takaful operator. Home Service Home service scheme operates in connection with industrial family takaful which usually provides coverage for those who can afford to participate only low amounts of takaful coverage. The takaful contribution for industrial family takaful are paid weekly, fortnightly or monthly. These are usually collected at the homes of the certificateholders by the authorized collectors who may be takaful agents, but could also be employees of the operator. Payroll deduction Scheme Such schemes are based on an agreement between the operator and the employer whereby the employer deducts the contribution from the employees salary and remits it to the operator every month. The employer can make the deductions only with the written consent (authorization) of the employee. Contribution To ensure that the certificateholder pays
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Notice
contributions on time the operator usually sends out contribution notice three or four weeks prior to the due date. If the contribution is still not paid two to three weeks after the due date, a Contribution Notice Reminder is sent to the participant. There are occasions when participants pay contributions after the expiry of the grace period. Such contributions may still be accepted, under certain conditions (for example submission of Health Warranty form) and a late fee may be charged. Such late fee, however, will be calculated not from the expiry of the days of grace, but from the due date to the date of payment. It should however be understood that the operator undertakes to issue Contribution Notices purely as a matter of courtesy to remind the participant, who is actually under a contractual obligation to pay the contributions regularly as and when they fall due. However, the operator also attaches importance to the issue of contribution notice, since it may actively help realize adequate contribution collection for the company. Hence this has become an established business practice.
Contribution Receipt
The operator will issue an official receipt upon receiving the contributions. An official receipt will often bear the printed reproduction of the signature of the Chief Executive or any other authority, with the counter signature of the cashier etc. The official receipt provides the participant with
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evidence of the contribution payment. Grace Period Generally, it is a term of the contract that a due contribution shall be paid on the date specified in the certificate. However, most contracts provide that such payments can be made within a specified number of days, usually 30 days from the due date. This period is known as the grace period or days of grace. There are two important benefits from this provision. Firstly, contributions received late within the grace period are accepted without any interest charge. Secondly, and more important, if the participant dies during this period whilst the due contribution remains, the claim may be repudiated. It is a legal requirement that every operator shall establish and maintain an up-to-date register of all certificates issued and none of these certificates shall be removed from this register as long as the operator is still liable for these takaful plans. The certificate register serves as an official record of certificates issued by the operator. The certificate register must specify the minimum information which is required to be entered by the Act and the Regulations but could be kept in either a card form, or ledger sheet form or even in computer print out forms, since the Act has not indicated any specific form for this purpose.
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Professional Practice
In addition, to ensuring a prompt and fair claim settlement in the event of claims, Professional Practice schedules regular riskmanagement visits whereby inspection is conducted, advices and claim reports are discussed with the clients in an attempt to provide and ensure a favourable situation to the clients at all times. The purpose of such visits is to reduce the total cost of business risk leading eventually to a reduction in the cost of the takaful plan in which the client participates. Professional Practice operators are fully aware of all the takaful wordings and clauses. They can always provide participant with a free review of the takaful plan cover whereby they will thoroughly study the participants existing cover in order to prepare a report on the suitability of this cover to meet the risks. Should there be gaps in the cover, the underwriting department will provide a report highlighting the gaps that exist in the cover and suggesting an appropriate cover.
A8.8 8.8.1
PROPER ADVICE AND PRACTICES Accounting, Auditing of Islamic Financial Institutions (AAOIFI) Shariah Standards
AAOIFI provides guidelines on the following Shariah matters for a takaful operation: Shariah Standard 26 Takaful Shariah Standard 41 Retakaful
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8.8.2
AAOIFI Accounting, Standards
Auditing
and
Governance
AAOIFI guidelines on auditing, accounting and governance for takaful operations are: 8.8.3 FAS 12 - General Presentation and Disclosure in the Financial Statements of Takaful Operators. FAS 13 - Disclosure of Bases for Determining and Allocating Surplus or Deficit for Takaful Operators FAS 14 - Investment of Funds FAS 15 - Provisions and Reserves in Takaful Operators FAS 19 - Contributions in Takaful Operators Islamic Financial Services Board (IFSB)
IFSB Standards with respect to takaful operation are: IFSB 8 - Guiding Principles on Governance for Takaful Undertakings Scope and Coverage The Guiding Principles shall apply to all Takaful operations or undertakings, irrespective of their legal status. They also apply to all operational models adopted by Takaful undertakings. Takaful undertakings are encouraged to undertake continuous adoption of best practices, consistent with the objectives set out by these Guiding Principles, and to explain this by making relevant disclosures. Their aim should be to implement governance structures and processes so as to be on a par with, if not better than, their conventional counterparts. The Guiding Principles have been formulated for direct General and Family Takaful undertakings. The applicability to Retakaful operators is limited because their operating concepts differ in important respects: for example, the participants are
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direct Takaful Operators (as cedants) rather than members of the public, so that the governance issues that arise are somewhat different. A thorough study of business models of Retakaful operators is required before good governance structures and processes can be recommended. Nevertheless, Retakaful operators and supervisory authorities are encouraged to consider the Guiding Principles in strengthening their governance framework, and to apply them where appropriate. Takaful Operators must duly observe their fundamental obligations towards the participants, particularly with regard to compliance with Shariàh rules and principles. Shariàh governance must remain an inherent feature. Since the raison dtre of Takaful is the offering of a protection product that complies with the requirements of the Shariàh. Therefore, the Guiding Principles shall refer to and adapt the recommendations from the IFSBs Guiding Principles on Shariàh Governance System with regard to all Shariàh governance issues arising in Takaful operators. In the case of the disclosure requirements to promote good practice of transparency in Takaful, the Guiding Principles recommend adoption of the comply or explain approach 6. This approach would enable the implementation of these Guiding Principles to accommodate the diversity of legal frameworks in the respective jurisdictions in which Takaful operates. Furthermore, it would facilitate the adoption of a governance framework that is commensurate with and proportionate to the size, complexity and nature of each Takaful. IFSB 11 - Standard on Solvency Requirements For Takaful (Islamic Insurance) Undertakings Main Objectives
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The overriding objective of this document is to set forth key principles on the solvency requirements for Takaful. It is built around the following premises and objectives: To increase the likelihood that a Takaful would be able to meet all its contractual obligations and commitments; To act as an early warning system for regulatory intervention and immediate corrective action, taking into account that the supervisory authority may sometimes have access only to incomplete information, and that even corrective actions may take time to generate the desired impact; To provide a buffer so that even if Takaful participants were to suffer a loss in the event of failure of a Takaful, the impact can be limited or reduced, especially the systemic effects; and To foster confidence amongst the general public, in particular the participants, in the financial stability of the Takaful industry. Scope of Application This Standard is applicable to all Takaful and Retakaful. However, supervisory authorities may, at their discretion, extend the applicability to Takaful window operations that fall within their jurisdictions. In Malaysia window operation is not permitted by the regulator. This Standard is focused on the Takaful as a single entity and the issues of group-wide supervision are not covered in this Standard. The International Association of Insurance Supervisors is actively developing standards and guidance in this area. The IFSB will monitor these developments and may make further proposals in the future.
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This Standard places particular emphasis on the solvency requirements for a Takaful Participants Risk Fund (PRF) or Participants Special Account (PSA) which is subject to underwriting and the contributions to which are made on the basis of a Tabarru commitment. When considering the solvency requirements for those forms of Family Takaful business which have a savings element in a segregated account, called the Participants Investment Fund (PIF) or Participants Account (PA), normally this latter fund is not taken into account in assessing whether the solvency requirements of a takaful are met as there is typically no recourse to certain surplus amounts in individual PIFs or PAs in order to meet a deficiency in a PRF or PSA. In addition, a PIF or PA is typically a pure investment fund, and the related investment risks are fully borne by Takaful participants with no need for capital backing from the takaful operator in the form of a Qard. 8.8.4 Related Guidelines for Takaful
Bank Negara Malaysia (Central Bank of Malaysia) under the power of the Director General of Takaful provides additional guidelines for takaful operation covering underwriting, investment and filing of returns and statistical data (TOSS Takaful Operators Statistical Submission). BNM also has monitoring function by undertaking an audit on takaful operators. As for the Accounting Standards, the Malaysian Accounting Standards Board (MASB) issued accounting standards for operation of general takaful and family takaful businesses. These standards are in line with the International Financial Reporting Standards which are applicable for entities of public interest. The Malaysian Income Tax Act 1967 provides taxing guidelines for takaful operators that manage takaful funds. There are some uncertain treatments of certain items as the taxing provisions are
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being referred to conventional operation whereas takaful operates on different basis.
Introduction to Medical and Health Takaful
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CHAPTER A9
INTRODUCTION TO MEDICAL AND HEALTH TAKAFUL

OVERVIEW This chapter serves as an introduction to Medical and Health Takaful and will be discussed under the following headings: A9.1 Introduction to Medical and Health Takaful Principles and Practices Applicable to Medical and Health Takaful Legislations and Regulations Applicable to Medical and Health Takaful The Duty of Disclosure Non-Termination of Coverage with Payment of Claims Increase of Risk with Time in Medical and Health Takaful Cost Containment Measures Cashless Hospital Admission INTRODUCTION TO MEDICAL AND HEALTH TAKAFUL
Statistically, a person is very likely to require some form of medical treatment in his or her lifetime. Nobody can predict what their medical bills will be. In the case of an accident or dread diseases, the medical cost could be catastrophic and astronomical. Only a few may be able to afford such cost. Medical and Health Takaful is one way people can reasonably afford to pay for the cost of such treatment by pooling resources in the Takaful fund with other participants. People participate in Medical and Health Takaful for the same reason they participate in other kinds of Takaful plan and that is to
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protect themselves financially. With Medical and Health Takaful, they protect themselves and their family in case they need medical care that could be very expensive. Item 4 of the Guidelines on Medical and Health Takaful Business defined Medical and Health Takaful certificate as a certificate of Takaful that provides specified benefits against risks of persons becoming totally or partially incapacitated as a result of sickness or infirmity. The benefits may take the form of reimbursement of medical expenses incurred by the participant either in the form of a lump sum payment of the sum participated, or payment of an allowance or income stream at regular intervals for a specified period in the event of participants incapacitation and/or hospitalization. A9.2 PRINCIPLES AND PRACTICES APPLICABLE TO MEDICAL AND HEALTH TAKAFUL
The same principles of Takaful that apply to non-Medical and Health Takaful also applicable to Medical and Health Takaful. They are:
1. 2. 3. 4. 5. 6. 7. 8.
Insurable interest Utmost good faith Proximate cause Indemnity Contribution Subrogation Tabarru Warranty
The practice of Takaful involves the following processes:
1. Underwriting 2. Claims administration
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A9.3
LEGISLATION AND REGULATIONS APPLICABLE TO MEDICAL AND HEALTH TAKAFUL Guidelines on Medical and Health Takaful Business
9.3.1
The Takaful industry has experienced a rapid growth and Medical and Health Takaful business has emerged as a fast growing segment of the industry. In line with the rapid growth of the industry, Bank Negara Malaysia has introduced the Guidelines on Medical and Health Takaful Business which takes effect for all Medical and Health Takaful certificates marketed or renewed on or after 2 January 2008. 1. Objectives The objectives of this guideline are:
a. Maintaining the integrity and public trust in order to

ensure development and orderly growth of this industry.
b. To establish efficient and effective private health Takaful

market that would support public policy objectives to expand private health Takaful coverage and complement the existing public healthcare system. With this objectives, this Guideline sets out the minimum standards that broadly aims at the following:-
a. Meeting the needs of individuals to have access to private

healthcare within reasonable commercial means for the average population. b. Setting an appropriate level of protection for participants. c. Ensuring sustainable business through sound underwriting and pricing policies. d. Promote healthy competition within the industry to enable general population access to a wide choice and affordable Medical and Health Takaful coverage.
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2. Scope of this Guideline The scope of this guidelines cover the terms of issue and underwriting of Medical and Health Takaful certificates, benefit limitations that may be applied, pricing and reserving policies, disclosures to consumers and requirements for the marketing of group certificates without permissible Takaful interest. This guidelines shall be read in conjunction with:-
a. Sections 25, 26, 27, 28, 35 and 36 of the Takaful Act

1984. b. Guidelines on Minimum Standard on Product Disclosure and Transparency in Marketing Medical and Health Takaful Plans. c. Guidelines on Prohibitions against Unfair Practices in Takaful Business. 3. Application This guideline is applicable to all types of Medical and Health Takaful products falling within the general definition under Part II, including, but not limited to the following:-
a. b. c. d. e.
9.3.2
Medical Expense or Hospital and Surgical Takaful; Critical Illness or Dread Disease Takaful; Long-Term Care Takaful; Hospital Income Takaful; and Dental Takaful. Minimum Standards on Product Disclosure and Transparency in the Sale of Medical and Health Takaful Plan
Medical and Health Takaful is a complex plan thus it is very important for the consumers to have a reasonable understanding before they make a decision to participate in any of this Takaful
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plan. Takaful operators have the obligation to disclose sufficient and essential information to the prospective participants to ensure the plan meets their needs and resources. This will help them to have a better understanding of the plan and reduce the possibility of lapse cases due to non-payment of contribution. This circular therefore, is issued to set a minimum standard on product disclosure and transparency in marketing of Medical and Health Takaful plans. The minimum standard stipulates the disclosure requirements that all Takaful operators underwriting Medical and Health Takaful business must comply with. It also provides prospective participants some perspective as to the information that should be disclosed to them by Takaful operators before they make a commitment to participate in a Medical and Health Takaful plan. 1. Objectives The objectives of this circular are as follows:a. To ensure that participants are given clear information about the product at the point of marketing to enable them to make informed decisions and ensure that the product adequately meets their needs. b. To facilitate consistency in disclosure of essential information of Medical and Health Takaful business. c. To minimize the instances of mis-marketing of Medical and Health Takaful plans. 2. Application The minimum standard is applicable to all types of individual Medical and Health Takaful plans including riders attached to individual family plans. For group Medical and Health Takaful plans, Takaful operators should ensure that the disclosures are made to the master certificate owners.
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The minimum standard shall also apply to all channels through which Medical and Health Takaful plans are distributed. For the purpose of this minimum standard, marketing materials refers to all promotional materials and any other materials provided at the point of marketing. Announcements or advertisements regarding Medical and Health Takaful plans are not subject to the minimum standard, these announcements or advertisements should provide sufficient information to the prospective participants and the information given should be clear, fair and not misleading. 3. Specific Disclosure Requirements Item 8 of the standard stats that there are particular aspects of Medical and Health Takaful plan features and Takaful certificates that need careful explanation. Takaful operators and their intermediaries should therefore provide sufficient details of the essential features of the Medical and Health Takaful plan to prospective participants. This would mean that the marketing materials shall contain the following minimum information:-
a. Information on the Takaful operator

The marketing materials should include the name and address of the Takaful operator. Where information about the Takaful operator is included, it must be accurate and up-to-date.
b. Product description
The Takaful operator should include a simple statement describing the plan and its main objectives and purposes.
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c. Benefits
The specific information that should be disclosed regarding the benefits of a particular Medical and Health Takaful plan includes: The form and amount of the benefits payable under the certificate; and Details of the events, circumstances or contingencies upon which benefits are payable.
Changes to benefits of Medical and Health Takaful plans can be made on plan anniversary or upon renewal only. All changes to critical benefits of a particular Medical and Health Takaful plan and preferably, the reasons for the changes should be notified to all participants of that product in writing at least one month before the change is made. This is to ensure that participants are aware of the changes made and are given adequate time to reassess their Takaful needs and to look for alternative plans, if necessary.
d. Exclusions and limitations of benefits, pre-existing

conditions, specified illnesses and qualifying period Many participants do not realize that payment of Medical and Health Takaful benefits might be excluded or limited under certain circumstances and is subject to pre-existing conditions, specified illnesses and qualifying period. Therefore, information regarding benefit exclusions and limitations, as defined in the Medical and Health Takaful Underwriting Guide must be adequately disclosed and clearly explained to prospective participants. All possible exclusions or limitations in marketing materials should, as far as practicable, be disclosed. Disclosures should at least cover the following areas:-
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A statement to alert prospective participants to the fact that there are exclusions and limitations in benefits; Highlighting important exclusions and limitations of benefits and circumstances in which the exclusions and limitations apply; Highlighting important pre-existing conditions, specified illnesses and the qualifying periods applicable; Highlighting the waiting period, deductibles, reimbursements, co-Takaful, residence overseas, overseas treatment and the circumstances in which the limitations and exclusions apply; and A statement to alert prospective participants that the exclusions and limitations of benefits highlighted are not exhaustive and they should refer to the Takaful certificate for further information. Takaful operators may use simple examples to illustrate the above disclosures.
e. Contributions
The specific information that should be disclosed regarding contributions of a particular Medical and Health Takaful plan is as follows: The amount, the frequency of payment and the term over which the contributions are payable to secure the benefits; The contribution rates table showing the contributions of the plan for all ages at entry; The possible conditions that would lead to the following scenarios on plan renewals: A certificate is renewed with a level contribution. A certificate is renewed with an increased contribution. A certificate is not renewed.
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A statement should also be made to alert prospective participants that the possible conditions disclosed are not exhaustive and that contribution rates may be reviewed or certificate renewal declined under other justified circumstances. Whether the contributions are level or may vary on renewal. If it has varied before, statistics on the annual increases in the standard contributions for the plan over the last three years for selected sample ages at entry of 30, 40, 50 and 60 should be disclosed. There should also be a statement to alert prospective participants that the past trends on the increase in contribution rates do not necessarily reflect the future trend; The Takaful operators right to revise the contributions on certificate renewals; Implications of ceasing payment of contributions, particularly in the case of other than single contribution certificate; and Where information on the position of the contribution payable for that plan in terms of deduction for income tax is stated, the Takaful operator must ensure that the information is true. Changes in contributions of Medical and Health Takaful plans can be made on certificate anniversary or upon renewals only. All changes in contributions of a particular Medical and Health Takaful plan and preferably, the reasons for the changes should be notified to participants of that plan in writing at least one month before renewal.
f. Others
Other important disclosures regarding the Medical and Health Takaful plan are as follows:-
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Participants are given a free-look period/cooling-off period of 15 days from the delivery date of the certificate to review the suitability of the newly participated Medical and Health Takaful plan. It should be highlighted that participants can return the certificate and deduction of expenses incurred for the medical examination would be made to the contributions if the certificate is returned to the Takaful operator during the period; and The possible implications of switching from one type of Medical and Health Takaful plan to another or from one provider to another. Participants must also be made aware that they would not be able to receive full payment as specified under their Medical and Health Takaful benefits as result of switching.
4. Checklist The checklist indicates confirmation that the intermediary has clearly highlighted important aspects of the product to the proposer. 5. Lodgement of all Medical and Health Takaful products with the Bank Negara Malaysia Item 11 of the standard guidelines state that the terms and conditions, the contribution rates and the marketing materials of all Medical and Health Takaful plans must be approved by the appointed actuary in the case of Family Takaful business and a qualified actuary in the case of a General Takaful business, and lodged with the Bank Negara Malaysia at least 30 days before they are used to market the Medical and Health Takaful plans.
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9.3.4
JPI/GPI 28 - Guidelines on Unfair Practices in Takaful Business
Pursuant to the Recommendation 4.27 of the Financial Sector Master Plan, Bank Negara Malaysia has issued Guidelines on Unfair Practices in Takaful Business. It provides for the strengthening of market conduct regulations in order to promote fair treatment to consumers. Among the measures implemented under this guideline include promoting higher standards of transparency, professionalism and accountability in the conduct of Takaful business. This will further support a strong foundation for the orderly development of the Takaful industry in the increasingly competitive environment emerging within the financial sector. A9.4 NON-TERMINATION OF COVERAGE WITH CLAIM PAYMENT
A Medical and Health Takaful Plan usually provides payment of claims up to the limits stipulated in the Takaful certificate. Such limits could be one or a combination of the following: 1. Per disability limit The maximum amount of benefits available to a participant per disability i.e per admission to the hospital. 2. Overall annual limit The maximum amount of benefits available to a participant in any one certificate year. 3. Lifetime limit The maximum amount of benefits available to a participant during his lifetime.
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The payment of a claim does not result in a termination of the certificate except in the event of a death claim. A9.5 INCREASE OF RISK WITH TIME IN MEDICAL AND HEALTH TAKAFUL
Medical and Health Takaful involves morbidity (probability of a disability resulting from an accident or illness). Generally, risks increase with age. Other external factors such as occupation and environmental factors can also affect the risk. A9.6 COST CONTAINMENT MEASURES
Healthcare costs continue to rise making the Medical and Health Takaful becoming less profitable. To contain costs and abuses arising from inflated claims, various methods are used by takaful operators, which include the following:
1. 2. 3. 4. 5. 6. 7.
A9.7
Inner limits Schedule of surgical procedures Maximum period of compensation Timeframe during which expenses are payable Co-payment for upgraded rooms Deductibles Panel of hospitals CASHLESS HOSPITAL ADMISSION
In Cashless Hospital Admission, when the participant of Medical and Health Takaful is hospitalized, admission to a panel hospital is by the issuance of a letter of guarantee and the hospital deposit may be eliminated. Upon discharge from the hospital, the participant does not have to settle the bill with the hospital. . All the eligible benefits will be taken care of by the takaful operator. The Takaful operator represented by a third party administrator, co-ordinates with the hospital and settles the bill. The claimant only needs to pay for non-reimbursable charges.
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It is important to note that cashless hospital admission arrangements are usually non-contractual unless specifically mentioned in the Takaful contract. Usually, they are merely a value added service provided by the takaful operator to certain eligible certificate owner.
1. Third Party Administrator

Third Party Administrators are the representatives of the Takaful operator who are responsible for settling both reimbursement claims as well as cashless claims. It is the third party administrators who have to approve the claimants request for cashless service and provides the service. The functions of third party administrators are as follow:
a. Cashless Service
Cashless Service is one of the important functions of the third party administrators today which means that if participant is hospitalized in a hospital among the ones listed by the Takaful operator, the bill is paid directly by the Takaful operator and the participant does not have to pay out anything.
b. Claim Settlement
Third party administrators are the ones concerned with dealing with Claims - complete from taking intimations of claims, advising customers on network hospitals, approving cashless and reimbursement claims, to finally disbursing the claims to the customer.
c. Maintaining Database
Once the certificate has been issued, all the records are passed on to the third party administrators and all further
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communication of the participant is with the third party administrators and not with the Takaful operator. It is the responsibility of the third party administrator to maintain databases of the participants and issue identity cards to them with unique identification numbers.
Types of Medical and Health Takaful
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CHAPTER A10
TYPES OF MEDICAL AND HEALTH TAKAFUL

OVERVIEW In this chapter we will look at the following: Types of Medical and Health Takaful Plan Scope of cover Important terms used in Medical and Health Takaful
A10.1 TYPES OF MEDICAL AND HEALTH TAKAFUL PLAN Medical and Health Takaful plan comes in a variety of types and specified conditions. It can be offered as an individual or a group plan. For individual plan, contribution is usually age banded and increase with age while for group plan, contribution is calculated based on the characteristics of the group as a whole, such as average age and degree of occupational hazard. Generally, Medical and Health Takaful Plan comprised of the following:
1. Medical Expenses Takaful which include Hospitalisation and

Surgical Takaful and Major Medical Expenses Takaful 2. Hospitalisation Cash Benefit Takaful 3. Critical Illness Takaful 4. Disability Income Takaful Some Takaful Operators may extend their medical expenses takaful certificate to cover the following:
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1. Clinical expenses (outpatient treatment) 2. Dental expenses 3. Maternity expenses

A10.2 SCOPE OF COVER 1. Medical Expenses Medical Expenses is to cover the treatment cost of a sickness and injury, subject to the limits and conditions stipulated in the certificate. Medical expenses plan generally cover amounts above a pre-agreed deductible. 2. Hospitalisation and Surgical Hospitalisation and Surgical covers the expenses regarding hospitalization treatment cost. The plan is intended primarily to cover expenses incurred by having surgery and hospital stays. Coverage options and costs vary depending on the specific certificate plan. The plan, however, often is not as comprehensive as major medical health Takaful. Generally, benefits provided by a hospital and surgical Takaful plan include the following:
Hospital Room and Board Intensive Care Unit Hospital Supplies and Services Anaesthetists Fees Surgeons Fees Operating Theatre Fees In-hospital Physicians Visits Pre-Hospitalisation Diagnostic Tests Pre-Hospitalisation Specialist Consultation Post-Hospitalisation Treatment
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Emergency Accidental Outpatient Treatment Ambulance Fees
Some plan may be extended to cover the following: Hospital Cash Allowance Outpatient Cancer Treatment Outpatient Kidney Dialysis Organ Transplant
3. Major Medical Expenses Major Medical Expenses are a form of Medical and Health Plan that provides benefits for most types of medical expenses that may be incurred. Major medical expenses cover a much broader range of medical expenses - including those incurred both in and out of the hospital - with generally higher individual benefits and certificate maximum limits. The coverage for medical care charges is wider with few internal limits and a high overall maximum benefit and may take the following forms: a. Supplemental Major Medical Expenses When a Supplemental Major Medical Expenses plan is used, it typically backs up and enhances a basic plan that usually includes hospital, surgical and medical coverage along with an additional plan covering the broader range of medical expenses. Generally, the basic plan will cover expenses with no deductible, up to the certificates limit. Above that limit, the supplemental plan kicks in, operating in exactly the same manner as a comprehensive plan that does not provide first ringgit coverage. In simpler terms, after the basic plan's limits are reached, the participant must absorb a deductible, after which the supplemental major medical coverage will accomodate. Since the deductible actually occurs between the
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basic and supplemental certificate, it's often referred to as a corridor deductible. Like the Comprehensive Major Medical Plan, a supplemental plan is likely to include a stop-loss limit and a maximum lifetime benefit limit. Example: Puan Sakinah participated in both basic Medical Takaful Plan and supplemental major Medical Takaful Plan. She was hospitalised and her medical bill has exceeded the basic medical takaful certificates limit. As she already exhausted the basic plan certificates limit, the supplemental plan will kick in. The plan will pay the medical bill as per the supplemental plan certificates limit minus a deductible. For example, the plan will pay 80% of the bill and the remaining 20% will be borne by Pn. Sakinah. b. Comprehensive Major Medical Expenses Comprehensive Major Medical Expenses Plan is a Medical and Health Plan that provides coverage for most types of medical expenses. It is similar to a basic Hospitalization and Surgical Takaful Plan except for the imposition of a substantial deductible. Most major medical plan begins paying benefits after the deductible is satisfied. The certificate's deductible is considered satisfied as long as the participant individual can show evidence of having incurred and paid the necessary covered expense. Another important feature of major medical coverage is the concept of co-Takaful which is the sharing between the Takaful Operator and the participant of any covered expenses that exceed the deductible amount. The Takaful Operator always carries the bulk of these expenses, usually paying 80% while the participant is responsible for the remaining
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20%. Other proportions (as stipulated in the particular certificate may also be used, such as 75/25. c. Excess Major Medical Expenses Excess Major Medical Expenses is normally offered as a topup of a major medical. Once the claim exceeds the limits of primary major medical plan, the excess major medical plan begins coverage. Basis of Takaful Coverage Comprehensive Hospitalisation and Surgical Takaful is also called As Charged plan in Malaysia. The certificate normally covers the actual amounts charged by the hospital, on top of the room and board. However, Takaful Operator may put a control mechanism by putting a limit of compensation for each benefit. Some of the limits imposed by Takaful Operator are Per Disability Limits, Overall Annual Limits and Overall Lifetime Limit. Group Medical and Health Takaful Plan Group Medical and Health Takaful Plan is similar in cover to individual medical and health plan. It is normally employer-sponsored coverage for business owners, employees and often for dependents. The contribution for Group Medical and Health Plan is calculated based on the characteristics of the group as a whole, such as average age and degree of occupational hazard, unlike individual plan where each persons risk potential is evaluated. There are two types of Group Medical and Health Takaful Plan: a. Contributory Basis Under this type of plan, employees contribute a portion of group Takaful contribution. Normally this kind of plan requires
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participation of at least seventy-five per cent (75%) of the eligible members of the group. b. Non-contributory basis Under this type of plan, no contributions are required of the employees as all group Takaful contributions are paid by employer. However, this plan requires full participation of all eligible members of the group. Hospitalization Cash Benefit Takaful Plan This plan provides participants with daily cash benefit, should the participant be hospitalized due to all causes, subject to the terms and conditions of the Rider. It can be offered as stand-alone certificate or as riders to Family Takaful or Medical and Health Takaful plan. Critical Illnesses Takaful Plan The plan provides protection against any of the specified critical illnesses. It is also known as dread diseases Takaful. Upon being diagnosed with any of the specified critical illness, the plan will cover the participant a lump benefit. This plan is introduce as a stand-alone certificate or as a rider to a Family Takaful certificate. Disability Income Takaful Plan Disability Income Takaful, is a plan that covers the beneficiary's earned income against the risk that a disability will make working, (and therefore earning), impossible. It includes paid sick leave, shortterm disability benefits, and long-term disability benefits
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A10.3 IMPORTANT TERMS USED IN MEDICAL AND HEALTH TAKAFUL

Term Accident Description An event or occurrence which is unforeseen and unintended The tendency of persons who present a poorerthan-average risk to apply for, or continue, Takaful to a greater extent than do persons with average or better-than-average expectations of loss. A form of alternative dispute resolution where an unbiased person or panel renders an opinion as to responsibility for or extent of a loss. More common referred to as medical records, often acquired by a Takaful to determine an applicant's state of health at the time of applying for coverage. The application for Takaful authorizes the Takaful Operator to contact the physicians to obtain the records, either prior to approval or once the certificate has become effective. The maximum amount a person is entitled to receive for services while covered under the certificate. A provision under which an insured who carries less than the stipulated percentage of Takaful to value, will receive a loss payment that is limited to the same ratio which the amount of Takaful to the amount required; a certificate provision frequently found in medical Takaful, by which the participant and the Takaful Operator share the covered losses under a certificate in a specified ratio, for example, 80 percent by the
Adverse Selection
Arbitration
Attending Physician's Statement (APS)
Benefit Level
Co-Takaful
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Takaful Operator and 20 percent by the participant. Comprehensive Major Medical Takaful Conditionally Renewable A plan designed to give the protection offered by both a basic and a major Medical Health Takaful Plan. Continuance provision of a Health Takaful certificate under which the Takaful Operator cannot cancel the certificate during its term but can refuse to renew under certain conditions stated in the contract. A group Takaful plan issued to an employer under which both the employer and employee contribute to the cost of the plan. Hospital, medical, and miscellaneous health care expenses incurred by the participant that entitle to a payment of benefits under a Health Takaful. The amount of money that the participant must absorb each year to cover the medical expenses before the Takaful Plan will accommodate. A physical or a mental impairment that substantially limits one or more major life activities of an individual. It may be partial or total. Takaful against financial losses resulting from sickness or accidental bodily injury. Protection that provides payment of benefits for covered sickness or injury. Included under this heading are various types of Takaful such as Accident Takaful, Disability Income Takaful, Medical Expense Takaful and Accidental Death Takaful. Maximum amount of benefits available to a member during their lifetime.
Contributory
Covered expenses
Deductible
Disability
Health Takaful
Lifetime Limit
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Long-term Care
The continuum of broad-ranged maintenance and health services to the chronically ill, disabled, or retarded. Services may be provided on an inpatient (rehabilitation facility, nursing home, mental hospital), outpatient, or at-home basis. A form of Health Takaful that provides benefits for most types of medical expense up to a high maximum benefit, such as RM250,000 or higher after a substantial deductible, such as RM500 or more. Such contracts may contain internal limits and are normally subject to co-takaful. A form of health Takaful that provides benefits for expenses incurred for medical care. This form of health Takaful provides benefits for expenses of physicians, hospital, nursing, and related health services, and supplies. These benefits may be related to actual expense, specified sums, or services rendered. Such Takaful sometimes includes benefits for prevention and diagnosis as well as treatment. Expenses in connection with hospital takaful, hospital charges other than room and board, such as X-rays, drugs, laboratory fees, and other ancillary charges. (Sometimes referred to as ancillary charges.) A term applied to employee benefit plans under which the employer bears the full cost of the benefits for the employees. One hundred percent of the eligible employees must be covered. A patient who is not in the hospital in which he or she is receiving treatment. A physical and/or mental condition of the participant which first manifested itself prior to
Major Medical Expense Takaful
Medical Expense Takaful
Miscellaneous Expenses
Non-contributory
Outpatient
Pre-existing Condition
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the issuance of the certificate or which existed prior to issuance and for which treatment was received. A physical condition that existed before the effective date of coverage. Waiting Period A period from the certificate date to a specified time, usually 180 days, during which no sickness coverage is effective. It is designed to eliminate a sickness actually contracted before the certificate went into effect. A charge for health care, which is consistent with the going rate or charge in a certain geographical area for identical or similar services. The payment of the expenses actually incurred as a result of an accident or sickness, but not to exceed any amount specified in the certificate.
Reasonable and Customary Charge
Reimbursement
Underwriting Medical and Health Takaful
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CHAPTER A11
UNDERWRITTING MEDICAL AND HEALTH TAKAFUL

OVERVIEW Underwriting is one of the most important functions of the Takaful Operator. In this chapter, we will look into the following: The Purpose of Underwriting Proposal Form Anti-Selection The Risk Selection Process Medical Underwriting Sources of Underwriting Information Underwriting Decisions Adequacy of Contribution Issuing of Certificate Payment of Contribution Termination of Certificate
A11.1 THE PURPOSE OF UNDERWRITING Takaful underwriting is the process of classification, rating, and selection of risks. In simpler terms, it is a risk selection process. This selection process consists of evaluating information and resources to determine how an individual will be classified (whether as a standard or sub-standard risk). After this classification procedure is completed, the certificate is rated in terms of the contribution that the applicant will be charged. The certificate is then issued and delivered to the participant. The primary purpose of underwriting is to analyze risks, evaluate the type of exposures that each risk poses to the Takaful Operator,
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and establish a contribution for those risks and exposures. In doing so, we are able to structure comprehensive Takaful programs that meet the needs of the participant at the most reasonable cost. Once the participant has been accepted into the Takaful plan, they will be required to pay contribution. Certain portion of the contribution will be donated to the Tabarru fund. This fund will then be used to pay for the losses. In order to ensure the fund has a sufficient balance available to pay for the claims, the underwriter has to:
1. Guard against anti-selection; 2. Charge a contribution that commensurate with the risk
assumed. A11.2 PROPOSAL FORM The proposal form is used by a Takaful Operator to determine acceptance whether a risk can be accepted and if so how much of contribution needs to be charged. The form is the most basic requirement for the functioning of the Family Takaful contract between participant and the Takaful Operator. It needs to be completed by the proposer, who may seek the assistance of a Family Takaful agent to fill it up. A proposal form seeks basic information of the proposer. This includes the name, age, address, education and employment details of the proposer. The proposal form also gathers information on the medical history of the life to be covered. There are questions pertaining to the health and family history of family members of the life to be covered. The proposer and the life to be covered have to mention their incomes in the proposal form to satisfy the Takaful operator about their ability to pay the contribution. The proposal form also has questions pertaining to the Takaful bought on the life of both the proposer and the life assured from other Family Takaful Operators and details of those certificates.
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Life assured has to disclose details about their habits pertaining to consumption of tobacco and alcohol. After filling up the form and answering all the questions in it, the proposer has to sign the form. Any overwriting or cancellations on the proposal form have to be validated by the proposer signature or initial. The proposer can choose to attach a sheet of paper to the proposal form if he wants to share with the Takaful Operator any information not sought in the form, which he thinks will help the operator make an informed decision. It is in the proposer's interest to share true information to the family Takaful Operator, which, in turn, helps the Takaful Operator to make a prudent decision. The information is used by the Takaful Operator to ascertain if a certificate can be issued. Family Takaful underwriters use the information regarding the health and family history of the life to be covered to arrive at the contribution to be charged. The Takaful Operator gives a photocopy of the proposal form to the participant, along with the Family Takaful certificate document. The participant should read the entire certificate document thoroughly and also the photocopy of the Family Takaful proposal form. Any discrepancy in the photocopy should be brought to the notice of the Takaful Operator to avoid any fraud. A11.3 ANTI-SELECTION The term adverse selection describes a situation where an individual's demand for takaful is positively correlated with the individual's risk of loss and the takaful operator is unable to allow for this correlation in its pricing. This may be because some private information is known only to the individual, or because of regulations or social norms which prevent the Takaful Operator from using certain categories of known information to set prices (e.g. the Takaful Operator may be prohibited from using information such as gender or ethnic origin or genetic test results). The latter scenario is sometimes referred to as 'regulatory adverse selection'.
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The potentially 'adverse' nature of this phenomenon can be illustrated by the link between smoking status and mortality. Nonsmokers, on average, are more likely to live longer, while smokers, on average, are more likely to die younger. If Takaful Operator does not vary prices for Family Takaful plan according to smoking status, Family Takaful will be favorable for smokers than for non-smokers. So smokers may be more likely to participate in Takaful, or may tend to buy larger amounts, than non-smokers. The average mortality of the combined certificate owner group will be higher than the average mortality of the general population. From the Takaful Operator's viewpoint, the higher mortality of the group which 'selects' to participate in Takaful is 'adverse'. The Takaful operator raises the price of Takaful accordingly. As a consequence, non-smokers may be less likely to participate in Takaful (or may buy smaller amounts) than if they could participate at a lower price to reflect their lower risk. The reduction in Takaful participant by non-smokers is also 'adverse' from the Takaful Operator's viewpoint, and perhaps also from a public viewpoint. A11.4 THE RISK SELECTION PROCESS Underwriting is the method that is utilized to evaluate the current eligibility of a proposer to be accepted as participant of a Takaful plan. In going through this process of evaluation, the Takaful Operator determines if the proposal is a good risk for the Takaful plan. When a Takaful Operator chooses to engage in underwriting, there are two events that are expected to happen. First, the underwriter is indicating a belief in the proposal. Secondly, in underwriting the Takaful proposal, the underwriter is anticipating a return on the investment at some point in the future. The return may take place in incremental payments or as a lump sum at a later date.
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Takaful is an example of one field that utilizes underwriting as a core function of the business. In the case of medical Takaful, underwriters consider the following in risk selection: 1. Current and Past Health Factors The underwriter will thoroughly investigate the current and past health of the applicant, within applicable terms. In some cases, the underwriter may have some reservations due to a past medical incident, but choose to cover the applicant, with some pre-existing conditions omitted from the coverage for a period of time. At other times, the medical history may indicate a degree of risk that is not acceptable to the Takaful Operator, and the underwriter will choose not to underwrite the health coverage. By not covering persons who are highly likely to require extensive medical coverage over the long term, the underwriter is able to maintain a more stable financial base and continue providing services to other clients. 2. Financial Factors The underwriter will also look into the proposers overall financial situation. It is critical to study the proposers overall financial situation to determine the appropriate amount and level of coverage required. This is to guard the fund from the risk of exceptionally high disability income claim. There is tendency of some certificate holders to make profit from Takaful compensation by extending the period of disability. This is known as known as malingering. 3. Occupational Factors Underwriter has to look into occupational factors because different occupations have a different level of hazard. The higher the risk means the higher the likelihood of medical expense claim. Occupation with higher risk such as Class 3
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(factory worker) normally have higher claim ratio compared to Class 1 and 2 (office workers). 4. Age and Gender Statistic shows that age and gender are important considerations in medical and health Takaful underwriting. As a person grows older, he is more likely to experience medical problem. Gender is also an important consideration as both male and female has different level of mortality and morbidity. It has been statistically proven that females generally live longer (i.e. have lower mortality) than males of the same age group. However, for medical and health Takaful, female rates are higher because their morbidity (sickness) rate is higher than males. A11.5 MEDICAL UNDERWRITING Medical underwriting is the process of reviewing a medical and health Takaful proposers medical records and determining the level of risk. Since Takaful operator knows that risky applicants (those with serious medical conditions) are costlier, they often reject such applicants or raise their monthly contribution. As part of the underwriting process, health information may be used in making two related decisions: 1. Whether to offer or deny coverage; and 2. What contribution rate to set for the certificate. To conduct medical underwriting, a Takaful Operator will enquire about pre-existing medical conditions. Takaful Operators are allowed to ask questions about a person's medical history in order to decide whether to offer coverage or not and whether to imposed additional charges.
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Purpose From the Takaful Operators' point of view, medical underwriting is necessary to prevent people from participating in medical and health Takaful coverage only when they are sick, pregnant or need medical care. This tendency is called "adverse selection," i.e., a system which attracts high utilization users while discouraging low risks proposers from participating. Waiting to obtain medical and health Takaful coverage until one needs coverage creates a pool of participants with "high utilization," which will then increase the contributions that Takaful operator must charge in order to pay for the claims incurred. In turn, high contributions further discourage healthy people from obtaining coverage particularly when they realize that they will be able to obtain coverage when they need medical care.
Effects Medical underwriting ensures that individual medical Takaful contributions are kept as low as possible. Critics of medical underwriting believe that it unfairly prevents people with relatively minor and treatable pre-existing conditions from obtaining medical Takaful. Diseases that can make an individual unfavorable include serious conditions, such as arthritis, cancer and heart disease, but also such common ailments as acne, being 20 pounds over or under weight, and old sports injuries. Underwriting criteria are the factors that can be shown to correlate to particular risks for loss that the Takaful Operator uses in evaluating applicants. These criteria not only differ for each type of Takaful plan but they also vary from one operator to another.
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11.5.1 Current Physical Condition Takaful Operator will require the applicant to complete an application form that details the full medical history and current physical condition of each applicant. Applicants statements on an application form and medical examination results (if applicable) are the first indicators of present physical condition. 11.5.2 Medical History The process of evaluation starts with the review of the proposers statement in the proposal form. Takaful Operator will ask questions about, and often request validation regarding, the proposer previous medical history. Treatment for and diagnosis of certain ailments can often be correlated with a statistically increased risk of an early death, as compared to an average person without such conditions. If the medical history contains relevant data about illnesses or diseases, it will make the Takaful Operator believe that the proposer is an increased risk. The cost of Takaful plan will be adjusted accordingly to offset the higher financial liability. Takaful Operators may require further investigation if there are medical histories listed in the proposal form. For example, if the applicant admits receiving treatment for elevated blood pressure, an attending physicians statement will usually be required. This consists of basic physical measurements like height, weight and blood pressure, and also the collection of blood and urine samples. However, in a case of a statement on the application form indicating treatment and subsequent full recovery from a broken arm, no additional information may be required. Takaful Operators review histories of previous conditions to determine the:
1. Possibility of recurrence. Some diseases have a tendency to

recur.
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2. Effect of a medical history on the applicants general health. 3. Complications that may develop at a later date. 4. Normal progression of any impairment that can be considered
indicators of a higher future incidence of impairment.. For example, obesity, and hypertension. 11.5.3 Family History A section of Takaful proposal form asks several questions about the medical history of family members. Clear connections have been made between the presence of certain life-threatening conditions and genetic development, and Takaful Operator will consider the proposers relatives issues as indicators of the participants own risk. Questions clearly detail the conditions, about which the carrier is concerned, and the answers should only apply to relatives genetically related to the proposer. However family history of in-laws, step-parents and adopted siblings are never included in the family history questions on a Takaful application. 11.5.4 Financial Factors The underwriter will also take into consideration the financial factors and coverage need. This helps determine whether an applicant is applying for the appropriate amount of coverage. This requirement tends to screen out those risks who may find contribution payments unduly burdensome resulting in problems in collection of contribution as well as a possibility of fraudulent claims. 11.5.5 Occupation and Hobbies Another important factor to be considered will be the occupation. The proposers occupation plays an important role in determining what kind of coverage will be required and how much contribution will be applicable. Morbidity rates vary considerably according to the proposers occupation. These rates reflect the hazards inherent
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in the occupation, the stability of the occupation and the amount of recovery time usually needed by people in that occupation to resume their normal duties. Some occupations can involve hazardous activities (e.g. flying, working at heights) or working in a hazardous environment (e.g. mining). These kinds of occupations will also increase the contribution. Most Takaful Operator will refuse to issue coverage to people engaged in extremely hazardous occupations such as professional boxers or deep-sea divers. The following chart illustrates a typical occupational classification table.
Class 1 Occupation Physicians, dentists, lawyers, accountants, school teachers, actuaries Remarks Least hazardous occupations, including persons with primarily executive, administrative or clerical duties. Frequently, professional people are taken out from this category and considered as preferred risks, thus qualifying for higher coverage limits. that require more physical activity than Class 1 and certain occupations that may not be hazardous but where the claim experience has not been as good as Class 1 Occupations in which light manual duties or skilled work is involved, including small businesses where the proprietor has specialized skills Occupations that require heavy manual duties or where there are accidental hazards.
General clerical employees, bank tellers, inside salespersons, outside salespersons with limited travel, most building contractors (office duties only) Bartenders, waiters and waitresses, cooks, gas station attendants, salespersons with extensive travel, highvoltage electricians Bridge workers, construction workers, truck drivers, sanitation workers, fire fighters,
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police personnel.
There will also be a lifestyle section which asks whether the proposer engages in any risky activities such as foreign travel, aviation, scuba diving, mountain climbing, sky diving, etc. The Takaful Operator uses the data gathered on the questionnaires to evaluate the risk. The questionnaires will often determine the extent of the physical examination required. Engaging in dangerous hobbies such as skydiving, flying light aircraft or race car driving will also increase the amount of contribution. 11.5.6 Age and Gender Age is a key factor in determining the contribution and will often determine how extensive the underwriting process will be. Contribution increase with age and many Takaful Operators will not issue Family Takaful after a certain age or will limit the amount of coverage. An older person may also be restricted to shorter terms of coverage such as five or 10 years. Older applicants often require a physician's examination, additional medical tests such as an ECG or more specialized blood tests before the proposal can be considered. Gender determines which contribution schedule to use. Since females live longer, they usually contribute a lower contribution than males. However, for medical and health Takaful, female rates are higher because their morbidity (sickness) rate is higher than males. Females may also have additional risk factors such as being pregnant at the time of the application. A11.6 SOURCES OF UNDERWRITING INFORMATION 11.6.1 Family Takaful Application The Family Takaful application form is part of the Takaful contract. The proposer signs the application affirming that all information is true and correct to the best of the proposers
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knowledge, and the Takaful operator issues a certificate based on that information. The application is an absolutely crucial document because it's usually attached to and incorporated as an integral part of the Takaful contract. The producer must therefore take special care with its accuracy in the interests of both the Takaful Operator and the proposer. The application is usually divided into sections, with each section designed to obtain specific information. Although the form of the application may differ from one company to another, most provide for submission of the following data: Part 1 (General Information), Part 2 medical Information), Part 3 Agent's Statement or Report, and Part IV the proper signatures of all contractual parties.
Section 1 - General Information

Personal Data Name Address Date of Birth Occupation Social Security Number Gender Marital Status
Section 2 - Medical Information

Medical History Pre-existing conditions Medications
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The responsibility of the Takaful agent in the application process includes: Making sure the application is completed fully Making sure all questions are answered accurately Making sure contributions are handled correctly
11.6.2 Agent Statement The statement is part of the application, and requires that the Takaful agent provides certain information regarding the proposer. This generally includes information regarding the agent's relationship to the proposer, data about the proposers financial status, habits, general character, and any other information that may be pertinent to the risk being assumed by the Takaful Operator. 11.6.3 Medical Report Before a fully underwritten Takaful certificate can be issued, a medical examination must be completed and submitted along with a blood and urine sample. A medical examination includes questions about the proposers medical history, height, weight, pulse, and blood pressure. The medical examiner will also ask for the name and address of any doctor the proposer has seen or any hospitals he has visited. The medical examiner will also ask about any illness, medication, and any other treatment the proposer may have suffered from. Additional requirements may be needed by the Takaful Operator in addition to the medical exam and will include the following:
An examination by a physician Resting EKG Treadmill stress test Chest x-ray
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11.6.4 Attending Physicians Statement (APS) Takaful Operators often require medical information and attending physicians statements in order to underwrite Takaful applications. An attending physician's statement is prepared by the physician who treats the individual who wants to participate in a takaful plan. The description provided in an APS is evidence of the proposers mortality risk. The physician that prepares the APS may be someone other than a primary care physician. For instance, if an underwriter desires information on an individual's recovery from pancreatic cancer, the underwriter will likely request an APS from that individual's specialist, such as a surgeon or radiologist. 11.6.5 Hospital Medical Record By signing and submitting the application, the proposer is giving the Takaful Operator the right to obtain and review the medical records; both prior to and after become an accepted medical and health plan member. The medical records can be obtained by the Takaful Operator from the current physician, past physicians, medical facilities and pharmacies. In most cases, there is a disclaimer on the Takaful application that authorizes the Takaful Operator to obtain this information through the applicants approval and authority. A11.7 UNDERWRITING DECISIONS Each Takaful Operator has its own underwriting guidelines and standards for who they will and will not provide cover. The underwriting process is the method of determining that the operator continues to function within workable boundaries. Once the analysis of the provided information is complete, the underwriter basically has three options:
Standard - Accept the application
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Sub-standard/Modified - Approve an application with conditions attached Declined - Reject the application
11.7.1 Standard Accept the Application If the proposer is considered an average or typical risk, he will be charged the standard rate without any special exclusion or reductions in benefits. 11.7.2. Sub-Standard/Modified - Approve an Application with Conditions Attached If the proposer pose an above-average risk (perhaps having high blood pressure, smoke cigarettes, or engage in skydiving every weekend), the proposer may be classified as an increased risk and charged a higher contribution. The modifications can be in form of:
Exclusion rider Extra contribution Change in benefits Some combination of these approaches.
11.7.3 Decline - Reject the Application The most drastic underwriting action is to decline acceptance of a risk. If life insured is rated as unfavorable (perhaps due to a serious illness or engaging in extremely dangerous occupations or hobbies), the proposer may be denied coverage entirely. A11.8 ADEQUACY OF CONTRIBUTIONS Takaful is based on mutual help and solidarity thus a Takaful model should strive to be fair. It has to ensure that contribution for participation in Takaful is set at a reasonable level to ensure adequacy, equity and fairness among participants. Takaful
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Operators underwriters will conduct underwriting process to ensure that only appropriate risks are selected and the rates charged are equitable to the risks. Takaful Operator would have to charge the applicant a contribution rate to commensurate with the risk shared. In other words, Takaful Operator will charge a higher contribution rate to an applicant with a more than average loss probability. A11.9 ISSUING OF CERTIFICATE 11.9.1 Exclusion Endorsements Exclusion endorsement is used by Takaful Operators as a way to issue coverage to persons who would otherwise have to be declined. In some cases such as hypertension or thyroid, the Takaful Operator may still offer coverage with exclusion on the said diseases. 11.9.2 Contribution Loadings Loading is the amount a Takaful Operator adds to the basic contribution to cover the expense of securing and maintaining the business. Loading could be primarily in two forms: First method is based on the risk as assessed by the Takaful Operator underwriter. Normally is it linked to an adverse medical history, habit or dangerous hobby. In the case of smoking, the Takaful Operator takes into account the number of cigarettes consumed per day and arrives at the risk as per its underwriting practices. The other is based on the linkage to claims experience. Similarly with the case of certain pre-existing diseases, loading will come into picture if the perceived risk is high. It is generally done in line with the loading parameters filed by the Takaful Operator with regulator. Here, upon renewal post a claim in the previous year, the contribution sees a spike in
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line with the parameters and calculations mentioned in the certificate. Being a yearly contract, the loading policy on claims, is fixed by Takaful Operator as per their discretion in case of an adverse claims experience. 11.9.3 Modified Benefits
Takaful Operator may offer modified benefits to the applicant such as lower annual limit, a larger deductible on a medical expense or sometimes in conjunction with extra contribution or exclusion riders. The Takaful Operator will take this decision when there are some inconclusive factors in the overall desirability of the risk. 11.9.4 Renewal of Medical and Health Takaful
There are four different renewability options that may be practiced in medical and health Takaful:
1. Non-Cancellable and Guaranteed Renewable

Medical and health Takaful plan with guaranteed renewable provides the greatest amount of protection to the. There are two important guarantees:
a. The contribution will not be increased. b. Takaful operator will not refuse to renew the coverage. 2. Guaranteed Renewable
The fundamental difference between non-cancellable and guaranteed renewable coverage and coverage that is just guaranteed renewable lies in the Takaful Operators right to change contribution for the coverage. However, the Takaful Operator cannot just increase the participants contribution because of the claims history. Instead, the Takaful Operator
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can increase the contribution for all of the participants in same age band.
3. Conditionally Renewable
The third type of renewability provision is known as conditionally renewable. The conditionally renewable provision gives the certificate owner a conditional right to renew the certificate, but the Takaful Operator retains the right to refuse to renew the certificate of those participants in a specific class, and rate increases are also possible. As long as the participant meets the conditions of renewability and remits the required contribution on a timely basis, the Takaful Operator guarantees not to cancel the certificate. A conditionally renewable provision is generally offered to the participant in high-risk occupations.
4. Optionally Renewable
The fourth and final type of renewability provision offers the least security for the participants and has little application in modern medical and health coverage. It is known as optionally renewable coverage. Under an optionally renewable provision, contribution may be increased and benefits modified on a class basis. In addition, the Takaful Operator may cancel an individual certificate, but only on a certificate anniversary or on a certificate due date. A11.10 PAYMENT OF CONTRIBUTION
The payment of contribution will depend on the type of the certificate. Some certificates are issued on cash-before-cover basis, whereas other certificate may be subject to the 60 days contribution warranty.
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A grace period maybe allowed in the case of guaranteed renewable certificates, conditional renewal certificates and non-cancellable certificates, to provide the convenience to the certificate owner to make the payment. However, any claim occurring during the grace period is not payable although the Takaful Operator will not consider the certificate as lapsed. The certificate will only be considered lapsed if no payment of contribution is made before the end of the grace period. A11.11 TERMINATION OF COVERAGE
On the happening of following events will automatically terminate a medical and health Takaful.
Death of the participant; Certificate anniversary immediately following the participants maximum eligibility age; Total benefits paid under the certificate exceed the maximum limit specified in the benefits schedule.
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Medical and Health Takaful Certificate Administration
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CHAPTER A12
MEDICAL AND HEALTH TAKAFUL CERTIFICATE ADMINISTRATION

OVERVIEW In this chapter we will discuss issues concerning Medical and Health Takaful certificate administration will be discussed under the following headings: Overview of Medical and Health Takaful Certificate Administration Takaful Certificate Administration The Proposal Form The Certificate Form Endorsements Renewal Notices Documents for Tax Relief for Medical and Health Takaful Contribution Payments
A12.1 OVERVIEW OF MEDICAL AND HELATH TAKAFUL CERTIFICATE ADMINISTRATION Certificate administration involves the exchange and issuance of documents as evidence of the existence of a valid contract of Takaful. Such documents include the following:
1. 2. 3. 4. 5.
Proposal Form Certificate Endorsement Renewal Notice Proof of Medical and Health Takaful contribution payment for tax relief
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Section 27 of the Takaful Act 1984 provides for control by and the lodgement of proposal forms, certificates and brochures of Takaful Operator with Bank Negara Malaysia. In addition, Section 27 of the Act also provides that Bank Negara Malaysia may specify a code of good practice in relation to any description of proposal form, certificate or brochure. A12.2 PROPOSAL FORM The Family Takaful Proposal form is part of the Takaful contract. The proposer signs the proposal affirming that all information is true and corrects to the best of his/her knowledge, and the Takaful Operator issues a certificate based on that information. The proposal is an absolutely crucial document because it's usually attached to and incorporated as an integral part of the Takaful contract. The producer must therefore take special care with its accuracy in the interests of both the Takaful Operator and the participant. 12.2.1 The Purpose of Proposal Forms The purpose of a proposal form is to assist the Takaful Operator to gather the information required for the underwriting. The information will then enable the underwriter to assess the proposal in a speedy and accurate manner. In practice, proposal forms are frequently used in relation to simple risks where information can be furnished in a structured format. 12.2.2 The Structure of a Proposal Form The proposal is usually divided into sections, with each section designed to obtain specific information. Although the form of the proposal may differ from one Takaful Operator to another, most provide for submission of the following data:
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1. Part 1 (General Information), 2. Part 2 (Medical Information), the Agent's Statement or Report,
and the proper signatures of all contractual parties. The questions in the proposal form are not exhaustive and the proposer is obliged to disclose all the material facts even if it is not questioned in the form. Under Section 11 of the Guideline on Medical and Health Takaful Business, Takaful operator is required to take reasonable measures to assist applicants in fulfilling their duty of disclosure in respect of relevant information for underwriting assessments. 12.2.3. The Contents of a Proposal Form In conjunction with the Section 11 of the Guideline on Medical and Health Takaful Business, sub-section 11(a) and 11(b) stated that Takaful operator shall ensure that its proposal forms:11(a) include specific questions that are designed to solicit information that is relevant to the decision of the Takaful Operator as to whether or not to accept the risk, and the contribution rates and terms to be applied expressly request the proposer to disclose any other relevant exceptional circumstance that is not a matter that the Takaful Operator could reasonably make the subject of a specific question under paragraph 11(a) above.
11(b)
Generally a proposal form comprised of the following items:
1. Disclosure statement as required under the Takaful Act 1984

Section 28 of the Takaful Act 1984 requires sufficient disclosure of facts by the proposer. The statement reads as follows: You are to disclose in the proposal form, fully and faithfully all the facts which you know or ought to know, otherwise the certificate issued hereunder may be void.
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2. Basic questions on the proposer

The medical and health Takaful proposal form would contain basic questions on the proposer seeking details on the following:
a. Proposers name for identification purposes. However, the

name may also indicate an aspect of the risk proposed. For example, the name of a company may indicate the nature of their trade. b. Proposers correspondence address c. Risk address. The address will provide the indication of work place of the proposer. This information is important because a high risk location tends to increase not only the chance of loss occurring but also the severity of loss. d. Proposers occupation. Different occupation has different level of risk. For instance, a construction worker is considered a high-risk occupation from a medical and health Takaful perspective compared to office worker.
3. Information of previous and present insurance/Takaful. 4. Specific questions relating to medical and health.
These would include the following:
a. b. c. d.
Family and Medical History Smoking Habits Hazardous Hobbies AIDS-Related Questions
5. Under Section 13 under the same guideline, a proposal form

shall include a statement of declaration, which incorporates the following minimum information:-
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a. The aqad (contract) that binds the participants of Takaful; b. The aqad (contract) that binds the participants and the
Takaful operator; c. The allocation of investment profit and surplus to the participants; and d. The allocation of investment profit, surplus or fees to the Takaful operator.
6. Below the declaration clause, there is a provision for the

signature of the proposer and date. The proposer should always sign the proposal form since it represents the offer in the contract. A12.3 CERTIFICATE Takaful Operator drafts the Takaful certificate which represents the written evidence of the Takaful contract. In order to be accepted as evidence in the court of law, a certificate has to be stamped in accordance with the provisions of the Stamp Act. The forms frequently used by Takaful Operator are of the scheduled type which is divided into several distinct sections with the details of the particular risk covered inserted in one section of the certificate form issued by the Takaful Operator. 12.3.1 The Structure of a Medical and Health Takaful Certificate Form The scheduled certificate form is divided into the following sections: 1. Heading Under this section, the full name and the registered address of the Takaful Operator is placed at the top of the front page.
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2. The Preamble or Recital Clause This clause introduces or recites the parties in the contract the Takaful Operator and the participant. The preamble may make a reference if the Takaful plan is based on a proposal form with declarations. This clause also refers to the contribution as having been paid or agreed to be paid by the participant as consideration. 3. Operative Clause This clause sets out the essence of the contract by specifying the perils covered under the certificate and the circumstances in which the Takaful Operator will become responsible to make payment or its equivalent to the participant. 4. Exclusions Exclusions are restrictions on the scope of the Takaful cover. It is the general practice to place all the exclusions under one distinct section in the certificate. Exclusions are inserted in a certificate because certain perils and losses cannot be covered under the certificate. Before the scheduled certificate form was introduced, exclusions were frequently incorporated in the operative clause and conditions. 5. The Schedule of Benefits This section contains all the typewritten information applicable to the particular contract. The benefits provided by a certificate must be clearly spelled out in a manner that affords the certificates easy reference and understanding. This is customarily done on a separate schedule of benefits or certificate specification page. For example, in a standard individual medical and health Takaful, the schedule of benefit provides for the following information:
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participants name and address contribution certificate number date of issue agency date of birth of the participant period of Takaful occupation of the participant specific exclusion clause various types and amounts of benefits
6. Attestation or Signature Clause

This clause is called the attestation clause because it makes provision for the Takaful Operator to attest the undertakings. The certificate is signed by an authorized official of the Takaful operator.
7. Conditions
In a Takaful contract conditions can be expressed or implied. Implied conditions relate to the following:
Duty of utmost good faith Existence of insurable interest Existence of subject matter of Takaful products, and Identification of subject matter of Takaful.
Takaful Operator will print the express conditions on the certificate and it regulates the Takaful contract. In the absence of express conditions, the contract of Takaful would be subject only to implied conditions. The following are three categories into which conditions can be categorized:-
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Condition Precedent to Contract In order for Takaful contract to be valid, there are conditions that have to be fulfilled before the contract can be valid. This comprise of implied conditions such as utmost good faith and insurable interest
Conditions Subsequent to Contract In order for the contract to remain valid after the issuance, these are conditions that have to be fulfilled. These conditions require the participant to inform the Takaful Operator of any changes or alterations in the risk are conditions subsequent to contract. This comprise of express conditions listed in the policy such as arbitration, contribution, subrogation, etc
Conditions Precedent to Liability These are conditions which must be fulfilled before the Takaful Operator is liable for a claim. The notification condition in a Fire Takaful is a condition precedent to liability.
8. Certificate Register:
Every Takaful Operator registered under the Takaful Act 1984, shall establish a register of Takaful certificates in such form as may be prescribed and shall, other than any prescribed exceptions, keep the Register at its principal place of business in Malaysia. It is a legal requirement Under Section 15 of the Takaful Act 1984 that the Takaful Operator shall maintain an up-todate register of all certificates issued and none of these certificates shall be removed from this register as long as the Takaful Operator is still liable for these certificates. The certificate
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register serves as an official record of certificate issued by the Takaful Operator. The certificate register could be kept in either card form or ledger sheet form or even in the computer, since the Takaful Act 1984 has not indicated any specific form for this purpose. A12.4 ENDORSEMENT Takaful Operator will issue a standard certificate covering certain specific perils and excluding others. However, if there is a need to modify the terms and conditions of the certificate, Takaful Operator will usually attach one or more memorandums or endorsements to the certificate. The endorsements form part of the certificate and constitute the evidence of contract. The alterations to be made may relate to any of the following: o o o o o o variation in amount of benefits change in any maximum benefit period extension of Takaful coverage to cover additional members of the family change in occupation risk cancellation of Takaful change in name and address
A12.5 RENEWAL NOTICE For an annual renewable medical and health Takaful products (normally a stand-alone plan), the Takaful operator usually issue a renewal notice one or two months in advance of the date of expiry, reminding the participant that the certificate expires on a certain date. Although there is no legal obligation on the part of Takaful Operator to advise the participant, this has become a normal practice and is treated as part of the Takaful operators customer service.
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The renewal notice will include all relevant particulars of the certificate including:
Participants name Certificate number Certificate expiry date Annual contribution Revised certificate terms (if any).
The Takaful Operator also includes a note requesting the participant to disclose any material alterations in the risk since the inception of certificate (or last renewal date). For medical and health Takaful that are based long-term contracts, contribution are usually payable based on a pre-agreed payment frequency e.g. monthly, quarterly, semi-annually or annually. In this case, Takaful Operator will send out a contribution notice three or four weeks prior to the due date. If the contribution is still outstanding i.e. not paid two to three weeks after the due date, the Takaful operator will send a Premium Notice Reminder to the participant. A12.6 DOCUMENTS FOR TAX RELIEF FOR MEDICAL AND HEALTH TAKAFUL CONTRIBUTION PAYMENT Tax regulations currently allow an individual tax resident of Malaysia deduction on taxable income as follows:
Deduction from taxable income of up to a maximum of RM 3,000 for the contribution for education and or medical Takaful. Deduction from taxable income of up to a maximum of RM6,000 allowed for contribution in respect of Takaful certificate and contributions to approved retirement schemes.
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Medical and health Takaful plan coverage should be for a period of 12 months or more. Expenses should be related to the medical treatment resulting from a disease or an accident or a disability. The plan can be a stand-alone certificate or as a rider to a Family Takaful. If it is a rider, only the rider contribution can qualify for deduction. Inland Revenue Board requires proof of such contribution payment in order to qualify for the tax allowance. The participant is advised to file away all these documents for future tax auditing and verification purposes.
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Medical Health Takaful Claims
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CHAPTER A13
MEDICAL HEALTH TAKAFUL CLAIMS

OVERVIEW Chapter A13 will deal with the issues concerning Medical and Health Takaful claims: A13.1 Notification of Loss Proof of Loss/Claim Checking Coverage Claim Investigation Medical and Health Takaful Claim Forms Repudiation of Liability by Takaful Operator Disputes NOTIFICATION OF CLAIM
The reason why people entered into Takaful contract is to be indemnified when a loss occur. However, once an event of a possible claim occurred, the Takaful Operator cannot start the claim process and indemnify the certificate owner unless and until been notified of the claim. Thus, the notification of a claim is fundamental to the Takaful contract. The two main reasons why the claim notification is important: firstly, the Takaful Operator must be given the opportunity to investigate the claim and, secondly, the Takaful Operator needs to raise a provision for the cost of the claim. Takaful certificate requires the certificate owner to notify the Takaful Operator in writing of any claim within a reasonable period, is usually between 14 days to 30 days. The claimant need to complete the claim form and submit it to Takaful Operator
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together with all supporting documents such as medical report to substantiate the claim. All these documents are to be provided at the claimants own expense. Should an insurer require further investigations, such additional cost of investigation would be at the insurers expense. A13.2 PROOF OF ILLNESS/CLAIM The claimant is required to submit written proof of loss of claim within a time frame as stipulated in the loss provision. In the case of a claim for hospital or medical expenses benefit, affirmative proof of hospital confinement (original hospitalization bill and claim form) must be furnished within a stipulated timeframe of the date of loss. The claimant must first register their claims with the Takaful Operator within the stipulated time frame and submit all their documents for the easy processing of the claim. The documents that are needed for the making claim are as follows:

Proof of identification, The copy of the certificate document, The original bills of the hospitals in which the insured was admitted, The discharge certificate from the hospital, and The original investigation reports.
Failure to furnish such proof within the time provided shall not invalidate any claim if it can be shown not to have been reasonably possible to furnish such proof and that such proof was furnished as soon as it was reasonably possible. A13.3 MEDICAL HEALTH AND TAKAFUL CLAIM FORM The Medical and Health Takaful is designed to elicit the information needed to determine the Takaful Operator's liability
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under the certificate. Generally it comprised a claimant's statement and an attending physician statement. Some questions are relatively standard such as:

Name Address Date of birth Takaful certificate number and group number Information regarding if the certificate owner is covered under a group plan through his employer Description of the injury or sickness that caused the loss
Expect to provide not only the dates of any medical treatments or doctors visits, but also the date of the injury or illness as well as the exact nature. There may be several additional questions or possibly an additional form if an injury is involved because the Takaful Operator will need to determine if the injury is due to another person's negligence. The claimant also needs to provide the authorization permitting any medical provider, physician, or employer to release records or information concerning the insureds medical history or employment status. This is to enable the Takaful Operator to obtain records for a thorough review of the claim. A13.4 CHECKING COVERAGE When a Takaful operator received the claim notification, the claims department will make a preliminary check to see if the claim is valid.
1. The process begins with a determination of whether or not the

claim is valid. Among other thing, the claims department may check the following:
Is the certificate in force? Has contribution been paid?
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Is the loss caused by an insured peril? Is the subject matter affected by the loss the same as that insured under the certificate? Has notice of loss been given without undue delay?
2. Claim Form
Once the claims department completed the preliminary check and found the claim is valid, a claim form will be given to the claimant. A clear instruction on the procedures and required documents will also be given to the claimant. However, if the preliminary check shows that the claim does not exist, the claim department will inform the claimant and stop the process.
3. Claims Register
All claims must be registered into the claim register once it is notified to Takaful operator. Takaful operator must maintain an up-to date register of all Takaful claims as it serves as an official record of claims. Takaful operator cannot remove any of the record from the register as long as they are still liable for the claims. A13.5 CLAIM INVESTIGATION The next part of the Takaful claims process is the investigation. A thorough investigation will be conducted to determine whether Takaful operator as the insurer is liable for the loss. The extent of the investigation will depend on the complexity and size of the claim. The claim investigation process involves the following:
1. The claims department will investigate to determine the

following:
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The loss exists. The loss is caused by a peril insured under the certificate. The loss does not fall within the scope of an exclusion of the certificate. The person making the claim is the rightful claimant.
2. Claims Documentation
Claim forms are designed to assist the Takaful operator to gather information relevant to assessing claims. The layout of the claim form may vary depending on the insurance company, but there is some information that must be provided no matter who the carrier is.
Participant's name Participan's address Phone number Certificate number Reason for the claim
The Takaful operator makes the position very clear by making a remark that the form is issued without prejudice, which means that issuance of the claim form does not mean liability is admitted under the certificate. A13.6 SETTLEMENT OF MEDICAL AND HEALTH TAKAFUL CLAIMS The Takaful claims process ends with settlement. Once the Takaful operator completed the investigation and decided to pay the claim, it will compute the amount payable and issue claim payment to the claimant.
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A13.7 REPUDIATION OF LIABILITY BY TAKAFUL OPERATOR Takaful operator may be able to repudiate liability on several grounds. These include the following:
Non existence of loss as reported. The loss or damage was due to the peril that is not covered under the certificate. The loss or damage within the scope of an exclusion of the certificate. The certificate has been rendered void as a result of a breach in condition.
Once the claim is rejected, Takaful operator will notify the claimant by:
Issuing letter to the certificate owner informing of the decision. Issuing letter to the Takaful agent, instructing the agent to contact the insured personally and notify the insured of the rejection and explain the reason. DISPUTES
A13.8
A small proportion of many claims settled each year by Takaful operator usually end up in disputes. The disputes between claimants and the Takaful operator generally will involve one of the following two issues:
The question of whether the Takaful operator is liable; The quantum of loss, if the Takaful operator is liable.
When a dispute arises, it may be resolved through the following channels:
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1. Negotiation and Compromise Settlement In the event of dispute, normally the first step taken by a Takaful operator is meeting the claimant to settle the dispute through discussion. The Takaful operator representative, normally the staff of claims department will explain the reason for the rejection of the claim. In the case of dispute on the quantum of loss, the representative may try to negotiate for an amicable compromise, which is acceptable to both parties. This kind of settlement will usually result in the Takaful operator paying something more than its interpretation of the facts would warrant and the claimant accepting payment for less than that claimed. 2. Litigation A claimant may take the Takaful operator to court if he is unhappy with the outcome of his discussion/negotiation with the claim department. However, the Takaful operator normally considers litigation as a last resort. The Takaful operator will use other platform such arbitration or Financial Mediation Bureau unless it involves a huge claim or an important point of principle. 3. Arbitration An arbitration clause which provides that all disputes or disputes relating to quantum only will have to be referred for arbitration is normally included in most of general Takaful certificate. Arbitration is a well-established and widely used means to end disputes. It provides parties to a controversy with a choice other than litigation. Unlike litigation, arbitration takes place out of court: the two sides select an impartial third party,
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known as an arbitrator; agree in advance to comply with the arbitrator's award; and then participate in a hearing at which both sides can present evidence and testimony. The arbitrator's decision is usually final, and courts rarely reexamine it.
Mediation The Financial Mediation Bureau (FMB) is an independent body set up to help settle disputes between the customers and their financial services providers regulated by Bank Negara Malaysia. The FMB serves as a centre that provide free, fast, convenient and efficient avenue for the resolution of a broad range of retail consumer complaints. The scope of complaints mediated by FMB includes complaints from individuals, corporate complainants and third party claims (property damages only). For complaints, disputes or claims involving a financial loss, the limit for cases to be mediated by FMB is set as follow:
RM200,000 for all motor and fire Takaful classes of business RM100,000 for others. Claims by third party claimants are limited to RM5,000.
Award or decision of the FMB is binding on the Takaful operator but not the complainant. Complainants who are not satisfied with FMBs decisions may refer the case to a court of law.
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The address for FMB is; Financial Mediation Bureau Level 25 Darul Takaful 4 Jln Sultan Sulaiman 50000 Kuala Lumpur A13.9 CLAIMS EXAMPLE Fazlina participated in a medical and health Takaful plan on February 10, 2010. The plan provides an annual limit of RM 100,000 and a lifetime limit of RM 500,000. She also includes the hospital allowance rider of RM200 per day. .The plan provisions also stipulate a 10% co-Takaful requirement. She was admitted into hospital on August 20, 2011. This was the second time she got admitted. She was admitted for the first time on January 2011 with a bill of RM10,000. She was discharged three days later. His total hospital bill amounted to RM 5,500. Firstly, the claims department needs to conduct the preliminary investigation to determine the following:
Is the certificate in force? Has contribution been paid? Is the cause of hospitalization included as exclusion in the certificate? Is the subject matter affected by the loss the same as that insured under the certificate? Is the annual and lifetime been breach?
If everything is cleared, this particular claim may be considered by the Takaful operator for reimbursement. In most cases, the Takaful operator will not reimburse the full amount as there are items in the bill that are not covered under the certificate.
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Assuming that, say only RM 5,000 out of the RM 5,500 hospital bill is considered eligible for reimbursement. Taking into consideration the 10% co-Takaful, the reimbursement amount is RM4,500. Fazlina will end up having to pay RM 1,000 out of her own pocket.
Family Takaful Preliminaries
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PART C
FAMILY TAKAFUL
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CHAPTER C1
FAMILY TAKAFUL PRELIMINARIES

OVERVIEW In this chapter we will study and familiarize ourselves with the following topics: Characteristics of Family Takaful Plan Basic Principles of Contract as Applied to Family Takaful Protection Risks Covered By Family Takaful Plan INTRODUCTION
C1.1
Family Takaful is a takaful scheme that provides the participant with both a protection and long-term savings. A participant of a Family Takaful will contribute a certain amount of money to a Takaful fund. A part of the contribution will be apportioned to a fund (Participants Special Account or PSA) under tabarru and the other part will be for savings and investment (Participants Account or PA). The portion that apportioned to the PSA will be used to fulfill the obligation of mutual help, should any of the participants face a misfortune arising from death or permanent disability. The Takaful Operator will invest the participants saving in the PA and the profit will be shared between the participant and the Takaful Operator according to a pre-agreed ratio. If the participant suffers a tragedy, the beneficiary will be compensated with financial benefits from the PSA. However, if the participant survives until the date of maturity of the plan, he will be entitled to share the net surplus from the fund, if any. The
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participant also entitled to personal tax relief when he participates in Family Takaful. C1.2 CHARACTERISTICS OF FAMILY TAKAFUL PLAN
The basic characteristics of Family Takaful plan are as follows: 1. Long-Term Contracts with Usually Level Contribution Family Takaful contracts are a long term contract with usually level contributions. The contribution is calculated based on many factors. Principal amongst these factors are: mortality expenses rate of investment returns tax As the contract is a long term contract, the Takaful Operator has to properly manage the fund to ensure the sufficient reserves are maintained. 2. Observation of The Principle of Utmost Good Faith by Both Parties Each party signing a Family Takaful contract must depend on the good faith of the other party; that the representations and declarations are true; and neither party is attempting to defraud, mislead or conceal information. Each party is assumed to be acting with utmost good faith. Concealment is the wilful failure to disclose a material fact before the contract is concluded. For example failure to disclose pre-existing illness to the underwriter at the time of entering into the contract. Fraudulent misrepresentation is
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when a person knowingly makes a false statement relating to a material fact, does not believe it to be true or make it recklessly without due regard to its accuracy. For example misstatement of actual age. 3. Aleatory Contracts In an aleatory contract, one party provides something of value to another party in exchange for a promise that the other party will perform a stated act if a specified, uncertain event occurs. It is based on unequal bargaining value occurring because of a possible future event. The participant has the potential to receive a payout larger than the total amount of contribution paid should a claim arise in the future. Unlike the General Takaful, the claim amount in Family Takaful is determined at the very beginning of the contract. In General Takaful, the aim is to indemnify the participant i.e. settlement of claim is according to the financial loss by the participant at the point of loss (subject to the maximum limits of the covered amount). 4. Insurable Interest The existence of Insurable Interest is a prerequisite for a Takaful contract. The person that participates in a Family Takaful plan must have an "Insurable Interest" in the participant. It means that he or she must be at risk of a financial loss upon the demised of the person covered. The following will elaborate the situation where the Insurable Interest exists: Every person is considered to have an unlimited interest in his or her own life and his or her spouses life; A parent has an Insurable Interest in the life of a child below the age of majority; A creditor has an Insurable Interest in the life of a debtor to the extent of the debt; An employer has an Insurable Interest in the lives of key personnel, such as a managing director or a manager;
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A partner in a business has an Insurable Interest in his other partner(s), especially if there is an agreement to buy out the share of a deceased partner.
The existence of Insurable Interest is only required at the start of the Family Takaful contract i.e. when the certificate is being affected. The contract will not void if the Insurable Interest is not exist at the claim. 5. Termination of Contract with Payment of A Claim The settlement of a claim in Family Takaful will ceases or terminates the contract. Unlike in General Takaful contract, once the participant receives the claim settlement, the Family Takaful contract will be terminated. The General Takaful contract will not be terminated by the payment of a claim. 6. Unilateral Contracts Family Takaful is a unilateral contract which both the Takaful Operator and the participant have certain rights and obligations. A unilateral contract means exchanges a promise for a specific action. The participant pays contribution in return for the promise that any future claims will be paid. The participant's only responsibility is to pay the contribution while the contract is still in force. Only a Takaful Operator can be sued for breach of contract. In line with this principle, as long as the participant still continues paying the contribution and did not breach the Section 28 of the Takaful Act 1984 i.e. suppression of material facts the Takaful Operator does not have the right to cancel the contract.
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7. Risk to Be Covered Increases with Time In Family Takaful, the covered risk increases with duration of the contract. The longer the duration of the contract, the higher the mortality risk as it increases with age. The older the participant, the higher the possibility he will get contracted with illness or disease. However, in General Takaful the covered risk may decrease with duration as the participant may implement better safety measures (e.g. implementation of risk management). 8. Contract of Adhesion Family Takaful is a contract of adhesion. One party, the Takaful Operator, creates the contract, and the second party, the participant, cannot make changes to the contract. The participant either accepts or rejects the contract. If there is ambiguity or vagueness in the contract, courts will favor the participant. C1.3 BASIC PRINCIPLES OF CONTRACT AS APPLIED TO FAMILY TAKAFUL PROTECTION
Based on the concept of fiqh al-asl fi al-ashya al-ibahah which means all are permitted unless there are rules against it, Takaful contract assimilated the following insurance principles: Insurable Interest, Utmost Good Faith, Indemnity, Subrogation, Contribution, and Proximate Cause.
On top of the above principles, Takaful applies the principle of Tabarru. In the formulation of Takaful product, the principle of
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tabarru' has been the main underlying Shariah principle. "Tabarru" means to donate, to contribute or to give away. Each participant agrees to donate part of his contributions to assist other participants who suffer a defined loss. It fulfills the Islamic injunction which says: Sustain in co-operation among yourselves in righteousness and piety. (Al-Maidah 5:2) However, it is noted that the principles of indemnity, subrogation and contribution are more relevance to the conduct of General Takaful business than to Family Takaful business. C1.4 RISKS COVERED BY FAMILY TAKAFUL PLAN
The risks covered by Family Takaful can be grouped under the following headings:1. Premature Death Death is a sure thing for all the mankind. However, nobody knows when they will die. Everybody is subject to the risk of premature death at all times. The financial impact from the premature death of a breadwinner can be long-lasting. Lot of family felt financially fragile up to many years following the loss of the breadwinner. They have to take measures to meet financial obligations, such as working additional jobs or longer hours, borrowing money, withdrawing money from savings and investment accounts, and moving to smaller, less expensive housing. To make sure that those loved ones can survive at a reasonable standard of living there really needs to be an adequate saving as a replacement income. Family Takaful can be the effective answer to provide some measure of financial security in such a contingency.
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2. Total Permanent Disability Total Permanent Disability mean a complete and continuous inability of the participant at that time and at all times thereafter to engage in any business or occupation or perform any work of any kind for remuneration or profit. The disability can be due to either sickness or injury. This situation will definitely affect the participant and his family as the participant ceases to be a productive force. The participant and his family will face difficulty in meeting the requirement for living expenses and medical attention as he is not able to generate any income. A person can participate in a Family Takaful plan to ensure disablement income or lump sum payment in the event of disability and for relieving the disabled person from the burden of contribution payment subsequent to the event. 3. Old Age Some people looks forward to retirement as a time to relax, travel and enjoy life. For others, it just creates a sense of dread. However, it is depends whether we are prepared for the retirement needs. It is important for the retired individual to be financially self-sufficient and be able to support himself and his wife during the remaining years of their lives. Most of us will have a retirement longer than we ever imagined and it probably will be different from what we expected. Health, financial or family crises may send the retirement plans in a different direction than what have been planned. Family Takaful is a suitable means of providing against the inevitable loss of earning capacity on retirement, while ensuring protection against another economic hazard, i.e. premature death.
Family Takaful Plans
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CHAPTER C2
FAMILY TAKAFUL PLANS

OVERVIEW Events occurring during the span of human life are a concern to the community. Events such as death, disability or prolonged illness and/or old age can create a catastrophic financial strain on individual family members. Each of these situations creates a need for Family Takaful protection and Takaful Operators are finding ways and means to meet these needs mainly by devising many types of coverage for family certificates. Each is designed to meet one or more of the needs created by these contingencies. In this chapter, we will focus on the main forms of Family Takaful plans, and their characteristics offered by Takaful Operators in Malaysia under the following headings: C2.1 INTRODUCTION
The Takaful Operators offers various combinations of these basic Family Takaful plan to suit the varying needs of individuals and corporate alike in respect of the the period of coverage, method of contribution payment, the distribution of benefits and the relevant riders. Currently in Malaysia, the Mortgage Plan forms the bulk of family takaful business written, followed by the Individual Protection Plan. The basic Family Takaful contracts are term takaful, endowment plans and annuities.
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C2.2
TYPES OF FAMILY TAKAFUL PROTECTION
Types of Cover Family Takaful protections designed by respective takaful operator to meet the requirement of individuals as well as corporate participants. Generally Family Takaful protection can be grouped as follows: 1. Individual Family Takaful (individuals) The plans include education, investment-linked, annuity, mortgage, health and riders. Under this type of cover, participants will receive financial benefits arising from death or permanent disability, as well as long-term savings (investment), and investment profits that are distributed upon claim, maturity or early surrender. 2. Group Family Takaful (employers, clubs, associations and societies) The plans include group education, group medical, and retirement. A minimum number of participants are required to qualify as a group under these plans. Participants will receive protection in the form of financial benefits arising from death or permanent disability. Examples of products falling into this category are as follows: a. Mortgage Reducing Term Takaful b. Group Credit Takaful c. Employee Benefit Takaful i. Group Term Takaful ii. Group Immediate Death Takaful iii. Group Hospitalisation & Surgical Takaful iv. Non-Employee Benefits Takaful v. Comprehensive Group Takaful Scheme 3. A Family Takaful Rider is an extension of the basic Family Takaful. The rider provides coverage against personal accident
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and disability, medical and health. The various riders available are given below: a. b. c. d. e. f. g. 2.2.1 Critical Illness Takaful Rider Accidental Death and Disability Takaful Waiver of Contribution Takaful Rider Payor Savings Takaful Rider Term Takaful Rider Hospital and Benefit Takaful Rider Family Income Takaful Rider
Individual Protection Plan Savings Takaful Plan Savings Takaful is a plan which comprises the elements of savings and returns on investment with individual protection. It is an investment type plan that participates in profit, which will be distributed back to participants. This plan is designed to optimize the returns on investment to the participants. Savings Takaful Cover This plan utilises two key elements that will together meet or satisfy the obligation under the savings takaful: 1. Level Term Cover; and 2. Investment Account Salient Terms and Conditions
Benefits This benefit provides financial compensation in the event of death or total permanent disablement to the participant before the certificate matures. The Sum Covered plus the accumulated amount in the Participants
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Account (PA) are payable to the participant, participants beneficiary or next of kin. Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Account (PA) and also be entitled to share the net surplus from the PSA fund (if any). Contribution Amount Partial Withdrawal Contribution amount will depend on the entry age and terms of the certificate. Partial withdrawals from the PA are allowed after the certificate has been in forced for a minimum number of years as stipulated in the certificate. Under normal practice, withdrawals are allowed during the lifetime of the certificate subject to the Takaful operators terms and conditions. Each withdrawal must satisfy a minimum gap period between withdrawals. A nominal transaction fee is charged to the PA for each withdrawal. Top-up contribution is allowed from the commencement of the certificate. The amount of top-up shall be subject to a minimum amount set by the Takaful operator. This topup amount shall be solely allocated to the PA which will earn profit. Participant can opt for any rider contract to be attached to the basic certificate.
Top-up Option
Rider Attachment Option Better Investment Return Exclusion
This plan allows the takaful operator to optimise investment returns to the participants.
The certificate excludes pre-existing conditions.
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Child Education Takaful Plan (CETP) Introduction CETP is a plan which provides protection and long-term savings to finance a childs higher education expenses. The child will be provided with financial benefits in the event the payor suffer a setback covered under the plan. At the same time, the child will avail funds required for his higher education upon maturity of the certificate. Parents participating in a CETP will be eligible for personal tax relief up to RM3,000 per year in a combined medical and education plans. CETP can be grouped as follows: 1. Ordinary Child Education Takaful: The participant and his child will receive financial benefits arising from death or permanent disability, as well as longterm savings (education fund), and investment profits that are distributed upon claim, maturity or early surrender. 2. Investment-linked Child Education Takaful: A portion of the contribution is used to buy investment units, such as units in equity or fixed income securities. In addition to the ordinary takaful protection which covers death and permanent disability, the investment units will be sold upon claim, maturity or early surrender. 3. A Family Takaful rider or an extension of basic coverage for both the participant and his child is also available. The rider provides coverage against personal accident and disability, hospitalisation benefits, funeral expenses and critical illnesses.
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Salient Terms and Conditions of CETP

Benefits Upon maturity and if the child survives, the benefit payable would be the agreed sum covered under the plan (given under the Shariah concept of hibah) plus the accumulated surplus sharing. However, if the CETP comes with an investment-linked feature, the child will receive the value of the investment units in addition to the agreed sum covered under the plan. Upon maturity of the certificate, the child will receive the accumulated amount in the Participants Account (PA) and is also entitled to share the net surplus from the PSA fund, if any. Should the payor die before the CETP matures, the periodical contribution of the plan will be paid by the Takaful Operator on behalf of the participant until the maturity date of the plan. On maturity date, the child will be entitled to receive the amount accumulated in the PA, surplus from the PSA and share of profits from investment (if applicable). However, if all the contribution goes into PSA, depending on the takaful scheme participated, the above treatment applies or the sum covered will be payable directly to an account under the child's name and managed by an appointed trustee. The sum payable is the benefit (on the basis of hibah) together with the accumulated surplus sharing (if any) upon maturity. A lump sum amount of the Sum Covered plus the accumulated amount in the Participants Account (PA) and Participants Special Account (PSA) will be paid to participant next of kin.
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Should the child (as the participant of the plan) die, depending on the takaful scheme participated; the certificate holder will receive the sum covered under the plan (given under the Shariah concept of hibah) plus the accumulated surplus sharing. Alternatively, the certificate holder may terminate the certificate for a surrender value or may nominate his other child as participant. Contribution Amount Contribution amount depending on the entry age and term of the certificate. Waiver of Contribution: In the event of the payors death or payor suffering from total permanent disablement (TPD) within the takaful period, all future contributions will be paid through the fund until the maturity date. Facility for part-withdrawal. Partial withdrawals from the PA are allowed after the certificate has been in force for a minimum number of year as stipulated in the certificate. Under normal practice, withdrawals are allowed during the lifetime of the certificate subject to the Takaful Operators terms and conditions. Each withdrawal must satisfy a minimum gap period between withdrawals. A nominal transaction fee is charged to the PA for each withdrawal. Top-up contributions are allowed from the commencement of the certificate. The amount of top-up shall be subject to a minimum amount set by the Takaful Operator. This topup amount shall be solely allocated to the PA which will earn profit. Participant can opt for any rider contract to be
Partial Withdrawal
Top-up Option
Rider
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Attachment Option
attached to the basic certificate. A Family Takaful rider or an extension of basic coverage for both participant and child is also available. The rider provides coverage against personal accident and disability, hospitalisation benefits, funeral expenses and critical illnesses. This plan allows the takaful operator to optimize investment return to the participants.
Better Investment Return Exclusions
Usually, a CETP will not cover the following: Attempted suicide or self-inflicted injury, while sane or otherwise. Death or injury sustained due to breaching of the law. Provoked assault. Under the influence of drugs or alcohol. AIDS or HIV. Any other causes prohibited by Shariah.
Mortgage Reducing Term Takaful Buying and owning a house is one of lifes achievements, which essentially satisfy one of the basic human needs for shelter. However, unexpected events may lead to loss of income or a decreased ability to fulfill loan obligations or financing facilities. In the event of Death or Total Permanent Disability (TPD) of the participant, the participants surviving family members may have to continue servicing the outstanding financing of the house. With Mortgage Reducing Term Takaful (MRTT) plan, the financial burden arising from this Death or TPD is covered on a long term basis. MRTT is a Shariahcompliant single contribution plan. In the event of Death or TPD the plan provides a reducing Takaful benefit payable from the Risk Fund. The paid amount is expected
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to match the outstanding mortgage/home financing. This plan also has a special feature where the participant or his nominee will be paid the excess from the accumulated Participant's Fund. Types of Cover Guaranteed benefit to settle the mortgage balance based on the table of reducing sum covered plus a consolation benefit, payable upon death or permanent disablement (within accepted terms) Salient Terms and Conditions
Benefits This plan provides protection to the participant on the amount financed by a financial institution. It provides a reducing sum covered, payable on the death or a Total Permanent Disablement (TPD) of the participant prior to the settlement of the financing. Upon the death/TPD of the participant, the Reduced Sum Covered is payable to the Mortgagee. In addition, the accumulated amount in PA account is also payable to the beneficiary. The total permanent disablement can be based on any occupation. Surplus sharing: sharing of net surplus from the takaful operation (if any) as long as no claim was made during the period of takaful.
Contribution Amount
MRTT is a single contribution plan. The contribution amount correlates to the financing amount granted by financial institutions, subject to underwriting approval. The duration and amount of the home financing facility has to equal to the amount
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and duration of the approved housing financing facility amount. Guaranteed Benefit To Settle the Mortgage Balance MRTT simply ensures that the mortgage will be settled and thus securing the payment of the debt in a housing facility. A guaranteed benefit payment (based on the table of reducing sum assured) becomes payable upon death or TPD (subject to standard exclusions on death or TPD). Liberal TPD Definition If a participant cannot perform his own or similar occupation by training, education or experience for a period of six consecutive months, the TPD benefit becomes payable. While, in other MRTT plans offered, the TPD benefit only becomes payable if the participant cannot perform any work to earn a living for the rest of his lifetime. Equally applicable for completed properties and properties under construction (i.e. Full level term coverage during the period of construction). Riders Various Accident riders can be attached to the annual contribution MRTT. Participating in this Takaful plan is a longterm commitment. An early termination of the takaful certificate usually involves high costs and the surrender value payable may be less than the total contributions paid. This is only allowed if the said property is fully paid (early settlement of loan) or the said property been sold and the loan settled in the process.
Termination
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Exclusions
Exclusions to the Takaful coverage: The Death or TPD benefit shall not be payable if the participants death is due to or arising from suicide or attempted suicide and/or other causes prohibited by civil and criminal laws and Shariah. Under such circumstances, only the value of the Participant's Fund at the time of death will be payable. No benefit shall be paid if the TPD is dies due to AIDS, war, aerial activity other than as a fare paying passenger of a scheduled air flight, or under the influence of intoxicants.
2.2.2 Group Protection Plan Group Credit Takaful Introduction These are types of group Takaful plan. They are designed to provide coverage to pay off outstanding financing facility/debt amount owing to any institution in the event of the participants death (who is the applicant/borrower) or if the participant becomes totally and permanently disabled. Types of cover There are four types of coverage under this plan (for example, depending on the method used to calculate the outstanding Sum Cover):
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i) ii) iii) iv)
Level Cover Flat Rate Reducing Cover Compounded Rate Reducing Cover Rules 78 or Sum Digits
Salient Terms and Conditions

Benefits Death Benefit in the event of death of the participant within the term of the certificate, the Sum Covered plus the balance in the Participants Account (PA) will be payable, in one lump sum, to the Grantee. TPD Benefit in the event of TPD of the participant within the terms of the certificate, the Sum Covered plus the balance in the PA will be payable in one lump sum, to the Grantee. Upon death/TPD of the participant, the sum covered is payable to the grantee. In addition accumulated amount in PA account is also payable. Maturity Benefit - Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Account (PA). Contribution Amount It is a term Takaful plan for a group of participants of a financial institution (Grantee), with different types of contribution payment methods. Typical plan designs may include the following : Single Contribution Annual Contribution
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Employee Benefit Takaful Introduction This plan is a yearly renewable plan offered to groups of people under one master certificate: Employer Group Association Group Other groups formed for the purpose other than participating in takaful participating for Employers or
Advantages of Associations:
To portray a caring image of employer/association To boost employees/members morale productivity To attract and retain employees/members To enjoy tax deduction To fulfill demand in labour negotiations
the and
Types of cover The plan offers following coverages:1. Death Benefit in the event of death of the participant within the term of the certificate, the Sum Covered plus the balance in the Participants Account (PA) will be payable, in one lump sum, to the Certificate Holder (employer, association or grouping as the case may be). 2. TPD Benefit in the event of TPD of the participant within the term of the certificate, the sum covered plus
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the balance in the PA will be payable in one lump sum, to the Grantee. 3. Funeral Expense payable to the next of kin upon satisfactory proof of death. Salient Terms and Conditions
Eligibility Minimum limit for participation is subject to the Takaful operators terms and conditions but normally the limit is 10 people per group. Amounts above the non-medical limit (free cover limit) require evidence of insurability eligibility before coverage is effective. Takaful operators reserve the rights to vary these requirements and reserve the rights to extend this limit, subject to maximum age stated in the Takaful operators terms and conditions, as and when applicable. Expiry Age: Subject to the Takaful operators terms and conditions. Takaful operators will allow flexibility on a case to case basis subject to underwriting and retakaful limits. Information Required Information Required:1. Company Name 2. Nature of Business 3. Staff Name and ID 4. Date of Birth 5. Gender 6. Salary (if Sum Covered is based on multiples of Salary) 7. Sum Covered (Fixed or Multiple of Salary) 8. Claims experience for the past 3 years 9. Existing coverage, if any Group Immediate Death Expenses Takaful
The Plan:
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Group Immediate Death Expenses Takaful
Description of Plan This is a Group Plan that is designed to minimize risk selection and provide a common base of takaful for the covered group of participants. Scope of Coverage: Employer or an Organization is the Master Contract Holder. Level Sum Cover: One year term coverage for a group of participants with different types of plan designs. Typical plan designs may include the following: (a) Flat Sum Cover plans, such as RM1,000 for all participants (b) Sum Cover based on employment category, such as: - Senior Manager RM2,500 - Manager RM2,000 - Executive RM1,000 (c) Sum Cover based on membership category, such as: - Principal Member RM2,500 - Spouse Member RM2,000 - Child Member RM1,000 Death due to accidental or natural causes: In the event of death of the participant within the term of the certificate, the Sum Covered plus the balance in the Participants Account (PA) will be payable, in one lump sum, to the Master Participant or the participant's beneficiary or next of kin.
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Comprehensive Group Takaful Introduction This plan is designed to minimize selection of risk and provide a common base of Takaful for the covered group of employees (participants) with saving elements for retirement purposes. This plan is sold on per unit basis based on the value set by the Takaful Operator. Types of cover Death & Total Permanent Disability (TPD) Benefit - In the event of death or TPD of the participant within the term of the certificate, the Sum Covered plus the accumulated amount in the PA are payable to the participants nominees or next of kin. Salient Terms and Conditions
Benefits Death Benefit in the event of natural death of the participant, the Sum Covered plus the balance in the Participants Special Account (PSA) will be payable to his beneficiary or next of kin. In the event of accidental death, takaful operator shall pay twice the value of Sum Covered, payable to participants beneficiary or next of kin. TPD Benefit in the event of TPD (all causes), the Sum Covered is payable in installments or lump sum, starting from the confirmation date of TPD.
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Contribution Amount Top Up Contribution
Contributions are payable until maturity of the certificate. Participant is allowed to top-up their contribution when the certificate has been in force for one year. The amount of top-up shall be subject to a minimum of one time the monthly contribution. This top-up amount shall be solely allocated to PA. Other Supplementary Benefits available: - Group Hospital Benefit Takaful Rider - Group Critical Illness Takaful Rider - Group Accidental Death & Disability Takaful Rider - Group Permanent Partial Disablement Takaful Rider - Group Immediate Death Takaful Rider By taking up the supplementary benefit, it will not increase the sum covered but will reduce the amount in PA.
Riders
2.2.3
Riders
Introduction A rider is something added to the basic certificate to confer additional benefits sometimes requiring an additional payment. One can also combine a set of riders and append it to the main certificate. The contributions will obviously undergo an upward revision, depending on the rider or combination chosen. Related to the above benefit is the permanent accidental total/partial disability benefit. The nature of the disability determines the extent of the
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payout, over and above the basic sum assured. The payout is either in the form of an annuity or a lump sum payment. Even after a claim has been settled against this rider, the other certificate benefits will remain. Another connected benefit is the "waiver of contribution" rider. Should a permanent disability affect the participant's capacity to earn, this rider waives all future contribution payments. The term benefit rider endeavours to provide an additional sum, equivalent to a maximum of the basic sum covered should the participant die during the tenure of the certificate. Takaful Operators also offer a critical illness benefit. Should the participant be afflicted by any of the critical illnesses, as listed by the takaful operator offering this rider, the participant stands to receive compensation. However, once a claim on this ground has been paid, additional claims on the same ground cannot be made at a subsequent date. The other riders offered are the major surgical and hospitalisation benefits. The former entails a payout, depending on the surgical procedure; the latter covers the expenses involved in hospitalisation by paying room charges subject to certain ceiling on both the amount and the number of days in a year that the participant can avail of the benefit. The rider overrides any conflict with the certificate. In other words, if there is a provision in the rider that is different than the same provision that was originally in the certificate, then the rider prevails. Riders may exclude or remove coverage, which can lower the contribution, however in most cases riders will add more coverage to the existing certificate.
Critical Illness Takaful Rider Critical Illness Takaful Rider is an Individual Level Takaful cover for protection purposes. This plan provides protection
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against any of the specified critical illnesses within the term of the plan. Types of cover The rider provides full payment of the Critical Illness Sum Covered upon participant being diagnosed as suffering from any critical illnesses as defined in the plan. This plan is available in two forms: 1. Accelerated Plan This rider provides a lump sum payment of the Critical Illness Sum Covered, which is advanced from the Basic Sum Covered, upon diagnosis. A claim made under this rider will reduce the sum covered of the Basic Plan. 2. Additional Plan The rider provides a lump sum payment of the Critical Illness Sum Covered upon diagnosis. The payment made under this rider will not reduce the Basic Sum Covered, therefore making this option more costly to the earlier. Salient Terms and Conditions
Sum Covered Participant can choose the amount of coverage up to the Basic Plan Coverage. Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA). Upon diagnosis, the Critical Illness Sum Covered is payable subject to the following conditions: The total and permanent disablement is
Benefits
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based on any occupation definition. The disability benefit is payable after satisfying a qualifying period (waiting period) that such disability must last for a continuous period of not less than six (6) months in duration. Additional mortality and/or occupational loadings to be added as appropriate to the participants profile and TPD definition. Extra loadings shall be computed as a multiple factor to the minimum net rate. No discount whatsoever will be given as these are the minimum net rates. Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of plans chosen. This Takaful model allows the takaful operator to optimise investment returns to the participants Pre-existing conditions are excluded from this benefit. Note: Disease diagnosed within three (3) months from issue date of the plan or date of reinstatement, is not covered by this plan.
Accidental Death Takaful Rider Introduction This plan is an Individual Level Takaful cover for protection, which can only be attached to a Basic Plan. This plan provides financial compensation to the participant in the event of death, total and permanent disability (TPD) or partial and permanent disability (PPD) due to accidental causes within the term of the certificate.
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Sum Covered Sum Covered Participant can choose the amount of coverage up to the Basic Plan Coverage, or up to number of times the Basic Plan Coverage, subject to the Takaful Operators terms and conditions. The plan covers: Accidental Death Benefit In the event of accidental death of the participant within the term of the certificate, the Sum Cover plus the balance in the participants PSA will be payable. Accidental TPD Benefit In the event of accidental total and permanent disablement of the participant within the term of the certificate, the sum covered plus the balance in the PSA will be payable to the participant. Accidental PPD Benefit In the event of accidental partial and permanent disablement of the participant within the term of the certificate, the sum covered plus the balance in the PSA will be payable to the participants beneficiary or next of kin. Payment of the sum covered is as per the Schedule of Indemnity. Maturity Benefits Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA).
Benefits
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Upon expiry, the outstanding contributions inclusive of returns will be distributed accordingly to participants. Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of plan chosen. This Takaful model allows the takaful operator to optimise investment returns to the participants.
Pre-existing conditions are excluded from this benefit.
Critical Illness Waiver Of Contribution Rider Introduction The Waiver of Contribution Takaful Rider is a plan which allows for all future contribution (including attaching riders, except Critical Illness rider) to be waived upon participant being diagnosed as suffering from any 39 critical illnesses as defined in the contract (source from Bank Negara Malaysia 2001). Upon diagnosis, the benefit is payable subject to the following conditions: The total and permanent disablement is based on own occupation definition. The disability benefit is payable after satisfying a qualifying period (waiting period) that such disability must last for a continuous period of not less that six (6) months in duration. Pre-existing conditions are excluded from the benefit.
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Sum Covered Sum Covered Participant can choose the amount of coverage up to the Basic Plan Coverage, or up to number of times the Basic Plan Coverage, subject to the Takaful Operators terms and conditions. Benefits Upon diagnosis, the benefit is payable subject to the following conditions: The total and permanent disablement is based on own occupation definition. The disability benefit is payable after satisfying a qualifying period (waiting period) that such disability must last for a continuous period of not less that six (6) months in duration. Pre-existing conditions are excluded from the benefit. Maturity Benefit: Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA). Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of plan chosen. This Takaful model allows the takaful operator to optimise investment returns to the participants. The Waiver of Contribution Takaful Rider is a plan which allows for all future contribution including attaching riders, except Critical Illness rider to be waived upon participant being diagnosed as suffering critical illnesses as defined in the contract.
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Payor Savings Rider Introduction Payor Savings Plan is a Takaful Rider Plan which can only be attached to a Basic Plan. This plan will waive all future nonoutstanding contributions due under the certificate (including attaching riders) in the event of the payors death, total and permanent disability (TPD) and/or being diagnosed as suffering from any critical illnesses (as specified in the contract) prior to the certificates maturity. This plan is uniquely designed to provide protection to the payor as well as to encourage savings/investment. Types of cover 1. Death Benefit In the event of death of the Payor, arising from any causes, all future non-outstanding contributions due under the certificate (including attaching riders, where applicable) are waived.
2. Total and Permanent Disability (TPD) In the event of a total and permanent disablement of the Payor, arising from any causes subject to the terms and conditions of the Rider, all future non-outstanding contributions due under the certificate (including attaching riders, where applicable) are waived.
3. Critical Illness Benefit
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In the event the Payor is diagnosed as suffering from any one of the critical illnesses (as specified in the contract), all future non-outstanding contributions due under the certificate (including attaching riders, where applicable) are waived.

Sum Covered Participant can choose the amount coverage up to the Basic Plan Coverage. of
Conditions
Upon TPD or diagnosis of critical illness of the Payor, the Payor Benefits Sum Covered (PBSC) is payable subject to the following conditions: The total and permanent disablement is based on any occupation definition, The disability benefit is payable after satisfying a qualifying period (waiting period) that such disability must last for a continuous period of not less that six (6) months in duration.
Benefits
Death Benefit: In the event of death of the Payor, arising from any causes, all future non-outstanding contributions due under the certificate (including attaching riders, where applicable) are waived. Total and Permanent Disability (TPD): In the event of a total and permanent disablement of the Payor, arising from all causes subject to the terms and conditions of the Rider, all future non-outstanding contributions due under the certificate (including attaching riders, where applicable)
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are waived.
Critical Illness Benefit: In the event of the Payor is diagnosed as suffering from any one of the critical illnesses (as specified in the contract), all future nonoutstanding contributions due under the certificate (including attaching riders, where applicable) are waived. Maturity Benefit: Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA). Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of them chosen. This Takaful model allows the takaful operator to optimize investment returns to the participants. Pre-existing conditions are excluded from this benefit.
Term Takaful Rider Introduction Term Takaful Rider is a Takaful Rider Plan which can only be attached to a Basic Plan. This is an Individual Level Takaful cover with greater coverage and wider benefit scope. Types of cover
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The plan provides financial protection in the event of death and total disablement of the participant within the term of the certificate. Salient Terms and Conditions
Sum Covered Participant can choose the amount of coverage up to number of times the Basic Plan Coverage subject to the Takaful Operators terms and conditions. Death Benefit In the event of death of the participant within the term of the certificate, the Term Rider Sum Covered (TRSC) plus the balance in the participants Participants Special Account (PSA) will be payable, in one lump sum to the participants beneficiary. Total and Permanent Disability In the event of total and permanent disablement of the participant within the term of the certificate, the TRSC plus the balance in the PSA will be payable, in one lump sum, to the participant. Maturity Benefit Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA). Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of plans chosen. This Takaful model allows the operator to optimise investment returns to the participants. Pre-existing conditions are excluded from this
Benefits
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benefit.
Hospital Benefit Takaful Rider Introduction Hospital Benefit Takaful Rider is an Individual Takaful Rider Plan which can only be attached to a Basic Plan. This plan provides participants with daily cash benefit, should the participant be hospitalized due to any causes, subject to the terms and conditions of the Rider. Types of cover Hospitalisation Benefit Salient Terms and Conditions
Sum Covered Participant can choose the amount of coverage from as low as RM10 per day to the maximum limit set by the Takaful Operator Hospitalisation Benefit In the event the participant is hospitalized due to illness or injury for a minimum duration as set by the Takaful Operator, the hospital benefit is payable from the first day of the hospitalization. The maximum number of days entitled is subject to the plan participated (differs according to the plan and Takaful Operator). Contribution Amount Better Investment The contributions will depend on the rider or a combination of plans chosen. This Takaful model allows the takaful operator to optimise investment returns to the participants.
Benefits
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Return Exclusion No hospitalization benefit shall be payable unless hospitalization takes place after the period stated in the rider certificate (differs according to the plan and Takaful operator). This benefit excludes pre-existing conditions.
Immediate Death Expenses Takaful Rider Introduction Immediate Death Expenses Rider is designed to provide immediate financial assistance to the participant's beneficiary(ies) in the event of death of the participant. Types of cover Hassle-Free and Fast Claim Approval Upon satisfactory proof of death, the participant's beneficiary(ies) or next of kin will receive the Immediate Death Expenses benefit promptly without any other required supporting documents. Salient Terms and Conditions
Benefits Death Benefits: In the event of death of the participant within the term of the certificate, the Immediate Death Expenses benefit plus the balance in the participant's Participants Special Account will be payable to the participant's beneficiary(ies) or next of kin. Maturity Benefit:
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Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA). Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of them chosen. This Takaful model allows the takaful operator to optimize investment returns to the participants.
This benefit excludes pre-existing conditions.
Family Income Rider Introduction Family Income Rider gives the participant and his family a safety net, in the event he is totally and permanently disabled, or diagnosed with a critical illness within the plan period. The scheme allows a bigger portion of the participants account to be utilized for investment purposes, which gives a more optimized rate of return. It also provides for more frequent allocation of investment income and surplus to the participants investment account. Immediate reinvestment of these income and surplus will in turn provide a better total return. Types of cover In the event of death, Total Permanent Disability (TPD) or Critical Illness, covered under the plan, the income benefit amount will be paid to participants nominated beneficiary or next of kin for the remainder of the certificate term. Salient Terms and Conditions
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Sum Covered
Participant can choose the amount of coverage from as low as RM10 per day up to a maximum limit set by the Takaful Operator. Death Benefit: In the event of death arising from any of the causes covered under the plan, the income benefit amount covered will be paid to the participants nominated beneficiary or next of kin for the remainder of the certificate term. Total Permanent Disability (TPD) Benefit: In the event of TPD arising from any of the causes covered under the plan, the income benefit amount covered will be paid to the participant for the remainder of the certificate term. Critical Illness Benefit: In the event that the participant is diagnosed of suffering from any of the critical illnesses covered under the plan, the income benefit amount covered will be paid for the remainder of the certificate term. Maturity Benefit: Upon maturity of the certificate, participant will receive the accumulated amount in the Participants Special Account (PSA).
Benefits
Terms and Conditions
Upon TPD or diagnosis of any of the critical illnesses, the amount covered will be paid according to the following conditions: The total and permanent disablement is based on any occupation definition.
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The disability benefit is payable after satisfying a qualifying period (waiting period) that such disability must last for a continuous period of not less than six (6) months in duration. Contribution Amount Better Investment Return Exclusion The contributions will depend on the rider or a combination of them chosen. This Takaful model allows the takaful operator to optimise investment returns to the participants.
This benefit excludes pre-existing conditions.
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Family Takaful Practices: Certificate Terms and Conditions
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CHAPTER C3
FAMILY TAKAFUL PRACTICES: CERTIFICATE TERMS AND CONDITIONS

OVERVIEW This chapter will discuss in detail, the general terms and conditions normally found in the family takaful certificate. C3.1 DESCRIPTION OF FAMILY TAKAFUL CERTIFICATES
Family solidarity takaful provides cover to the participant with the benefit of financial protection and long-term savings. The participant or his beneficiary will be provided with financial benefits if the participant were to suffer a tragedy. At the same time, the participant will enjoy a long-term personal savings because part of his contribution will be deposited in an account for the purpose of savings and investments. The participant will be able to enjoy investment returns from the savings portion based on a pre-agreed ratio with the takaful operator. It is important to understand that the words certificate and contract are not synonymous. The certificate is the medium (can be in the form of paper or otherwise) on which the agreement is written on. And the contract is intangible, a legally binding agreement between the concerned parties. Incidentally, the Takaful Act 1984 defined takaful certificate as any contract of takaful for family solidarity business or general business whether or not embodied in or evidenced by an instrument in the form of a certificate, and references to issuing a certificate shall be construed accordingly. References to a certificate of a takaful operator include any certificate in respect of
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which the takaful operator is under any liability, whether the certificates were issued by the takaful operator or the liability was transferred to the takaful operator from another. C3.2 CERTIFICATE TRANSACTIONS
Certificate transactions can be considered under the following headings:1. Duplicate certificate, and 2. Assignment of a family takaful certificate. 3.2.1 Duplicate Certificate
When a certificate document is lost or misplaced, a replacement certificate may be issued by the Takaful Operator. The Takaful Operator would normally require from the participant, amongst others items, the following before issuing the replacement certificate:1. a letter of request; 2. an undertaking to indemnify the Takaful Operator against any eventual loss due to the issuance of a duplicate certificate. The replacement certificate would be stamped Duplicate Certificate, and becomes a valid legal document. 3.2.2 Assignment of a Family Takaful Certificate
It should be noted that the Takaful Act 1984 defined participant as the person covered including, where a certificate has been assigned, the assignee for the time being and, where they are entitled as against the Takaful Operator to the benefit of the certificate, the personal representatives of a deceased participant.
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An assignment is the transfer of rights and liabilities by one person to another. In takaful, the transfer of all rights and liabilities of the participant to another person is referred to as an assignment of certificate. An assignee, the person who takes over the assigned rights, will have the same rights as those enjoyed by the assignor. Thus, the legal rights vested under a family takaful certificate may be transferred by an assignment. Assignment can either be absolute or conditional. An absolute assignment is one which does not leave any rights with the assignor except the payment of contributions if the participant chooses to pay. On the other hand, a conditional assignment will give the assignor the rights to revoke the assignment if the assignee dies before the payment of the takaful benefits becomes due or if the participant survives until the maturity date of the certificate. The process of assignment can be carried out by following these procedures: 1. the assignment shall be in writing. In the absence of a written notice, the takaful operator cannot be held liable for payments made to a person other than the assignee; 2. the assignment may be effected by an endorsement or a separate deed; 3. a written notice of the assignment must be served to the principal office of the Takaful Operator; 4. upon receipt of an assignment notice, the Takaful Operator shall register it. This is necessary to establish the order of priority in a claim when a certificate has multiple assignments. It is essential to note that earlier dated assignments rank ahead of later dated assignments. Assignment of Claim Amount In takaful, the term assignment is also used in the context of the assignment of certificate proceeds. An assignment of certificate proceeds arises when the participant instructs the
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Takaful Operator to pay the certificate proceeds to a third party. For example, there is an assignment of certificate proceeds when a participant instructs the Takaful Operator to pay the amount of indemnity to which the participant is entitled to another party. In Family Takaful, assignment of the certificate proceeds occurs when the certificate owner names a beneficiary to receive the death benefit under his certificate. In such an assignment, the participant remains a party to the takaful contract and continues to assume liabilities under it even after the assignment of certificate proceeds. All certificate proceeds are freely assignable unless the contract provides otherwise. Section 6 of Takaful Act provides that only those who has attained the age of eighteen (18) years and above can enter into a contract of takaful, and by virtue of this, may nominate a person to receive the certificate benefits upon his/her demised under the certificate by notifying the Takaful Operator in writing of the following nominee details: 1. Name and date of birth, 2. Identity card number or birth certificate number, and 3. Address. Such nomination shall be witnessed by a person of sound mind who has attained the age of 18 years and who is not a nominee named under the certificate. C3.3 CERTIFICATE ENDORSEMENT/ALTERATIONS
Family Takaful contracts are essentially long-term contracts, often extending over 20 or more years duration. It is possible that during this long period the certificate holders circumstances may change. Flexibility in the structure of the contract is provided by allowing for certain forms of alterations to the certificate.
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The standard certificate documents are often endorsed to take into account the differing aspects of individual circumstances and needs. Endorsements can be done either at: 1. the time of issuance of the certificate, or 2. after issuance of the certificate. Endorsements at the Time of Issuance of Certificate In general, the following four special conditions need endorsements:1. those affecting the contribution, or its frequency of payment. As an example, if instalment contributions are involved, then a suitable condition is necessary to provide for the deduction of any unpaid balance in the year of death; 2. those affecting the sum covered, or its mode of payment. As an example, if a settlement option to leave the certificate proceeds as a deposit with the office is requested, then a special condition is necessary to provide for this; 3. those incorporating special benefits, e.g. options to convert the contracts into a different type; those incorporating special restrictions. Endorsements After Issuance of Certificate These give effect mainly to changes in the 1. mode of contribution payment; 2. alterations to the form of the contract; 3. imposition or removal of extra contributions; The above may broadly be classified into the following groups relating to changes in the:
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1. 2. 3. 4.
name or age of the participant; contributions to be paid - mode and date(s) of payment; sum covered and contributions; types of takaful.
Certificate Alterations The most common form of alterations are: 1. change of address. This form of alteration does not involve a change in the terms of the contract and is readily accepted by the takaful operator. An alteration to the records of the takaful operator would be made and the participant would be duly informed; 2. change of name (same original applicant / participant). The change is effected through an endorsement. Documentary evidence would be required for this; 3. change in the mode of payment; 4. change in the sum covered. Takaful operators usually allow a reduction in the sum covered provided the reduced amount does not fall below the minimum sum covered for that category of business. However, operators are usually reluctant to allow an increase in the sum covered for fear of anti-selection. In this situation, a medical examination proving good health would be required and the contribution would be adjusted upwards to reflect the increase in the sum covered. Alternatively, the participant is encouraged to take up a fresh certificate for the increased sum covered; 5. change in beneficiary; 6. change in the term of cover, e.g. change from ten years to five years; 7. alteration of contract to a paid-up certificate; 8. change of takaful plan
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9. removal of extra contribution when the participant is no longer exposed to an extra risk, like a hazardous hobby, pastime or occupation. Each takaful operator shall have its own procedures for certificate alterations. In general, the certificate and the participants written instructions must be sent to the office, as the alteration is endorsed onto the certificate document. When the office receives the written application, it usually checks its records of notices of assignment to discover whether or not there is a third party who has an interest in the certificate, and whose consent to the alteration is required. The operator then updates its records. C3.4 PRIVILEGES AND CONDITIONS
The payment of the sum covered is subject to fulfilment of certain conditions included in the Family Takaful certificate. The conditions in the certificate can be broadly classified under three groups: 1. Those adding to the benefits of the coverage. Such conditions are also known as privileges; 2. Those limiting the scope of coverage. These are called restrictive conditions and generally involve those risks which are not taken into account in the calculation of contribution rates; 3. Those explaining the nature of the contract. Grace Period for Contribution Payment Thirty days (or one calendar month) are usually allowed as days of grace for the payment of the yearly, half yearly, quarterly and monthly contributions. The cover under the certificate continues during the days of grace for the full sum, but if the renewal contribution is not paid within the days of
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grace, the certificate ceases to have any further cover, subject to any non-forfeiture provisions, if applicable. Surrender Value Surrender value is the value which attaches to a Family Takaful certificate after contributions have been paid for a certain minimum number of years. In a Family Takaful scheme, surrender value is understood as the value or cash money a participant will received when he surrenders or terminate his participation before the certificate matures. Under such circumstances, the participant will be paid all the accumulated balance in his Participants Account, but none will be paid out of the Participants Special Account (tabarru fund) since this part of the contribution has been donated. Partial Withdrawal Participant is allowed to withdraw his own money to be consumed now, rather than kept in the fund for future use. Different operators will have their own set of guidelines on the amount of money that can be withdrawn by participants. Usually up to 50% of the balance available in their Participants Account. Of course, no interest can be charged by the operator for such withdrawal, except for a small onetime fee to administer the transaction. The participant may or may not payback the amount withdrawn, but the returns on investment from the Participants Account will of course depend on the amount that is available in the account. Non-Payment Conditions The non-payment conditions constitute a very valuable privilege to the participant who overlooks the payment of his contribution or is temporarily unable to meet it. The nonpayment provision comes into play only after the certificate has acquired a cash value. It is the cash value built up in the
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Participants Account that is used to provide the non-payment benefit. The following methods are generally used for non-payment provisions: Automatic Advance from Participants Account Under this provision, each contribution is paid automatically as it falls due after the grace period. Contributions may be thus paid until the accumulated cash value has been entirely utilized, at which time the takaful cover ceases. Takaful Operators make this provision in their contracts so as to provide for a continuation of cover in cases where the participant, because of either carelessness or inability, fails to pay his contribution. This provision also allows the participant at any time the right to restore the original status by repaying the amount owed to the takaful operator. No evidence of insurability is necessary in bringing the certificate to its original status. In addition, the use of the Automatic Advance from Participants Account allows continuity of supplementary benefits such as waiver of contribution and accidental death benefits. The object of the non-payment proviso is thus to protect the interests of the participant who has omitted to pay contribution or who is temporarily unable to pay. It is not intended to enable a participant to obtain family takaful cover at minimum cost. Paid-Up Takaful The Paid-Up Takaful option permits the participant to elect to exchange the net amount of the cash value for a paid-up takaful of the same type as the original certificate for a reduced cover amount. Once the cover is converted into paid-
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up takaful, no further contributions are payable, and all riders and supplementary benefits such as disability and accidental death, are cancelled. For some participants, this provision may be particularly attractive, especially if the participant approaches retirement age, where his income would normally be reduced. Extended Term Takaful The option of extended term takaful permits the participant to exchange the accumulated cash value into a paid-up term takaful cover for the full sum covered but with a shorter term/time of cover. The length of the term depends on the available amount of the accumulated cash value applied as a net single contribution at the time of conversion. This option would be more appropriate where the need for takaful cover continues, but where the financial capacity to meet payment of contribution becomes impaired. In the case of endowment certificates, term cover is not generally provided beyond the maturity date of the certificate. Reinstatement Condition The reinstatement condition enables a person to apply for the reinstatement of the contract, notwithstanding that the days of grace and the period of non-payment have both expired. Medical and/or other evidence may be required and the operator usually reserves the right to impose its own terms on which reinstatement of the certificate will be considered. Besides the days of grace and the period of non-payment, there is usually a further period during which reinstatement of the certificate can take place. During the period covered by the non-payment clause, it is normally possible to continue the certificate cover in full by paying the overdue contribution.
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Certificates are reinstated subject to evidence of good health. Reinstatement is normally not allowed for the following situations: 1. A certificate which has lapsed for a specified duration (subject to the terms and conditions of the Takaful Operator). 2. A female participant who is more than eight months pregnant (subject to the terms and conditions of the Takaful Operator). 3. A participant who has attained the maximum (subject to the terms and conditions of Takaful Operator). It is vital to point out here that for any reinstated certificate, the effective date of the i. incontestability clause and suicide provision contained in the Privilege and Conditions of the certificate; and ii. waiting period stipulated in the certificate or riders shall commence from the date of reinstatement. Restrictive Conditions Suicide Clause 1. If a participant commits suicide within a stated period of time, the certificate becomes void and the takaful operator is not liable to pay the claim except to refund all contributions paid from PA (subject to the terms and conditions of the Takaful Operator). . Foreign Travel and Residence Most certificates do not impose any restriction on travel or foreign residence. Occupation and Dangerous Hobbies
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Additional contributions may be charged for occupational or avocation risks, for example motor racing, hang gliding, quarry workers, oil riggers, policemen, etc. Misrepresentation of Age and Incontestability Clause An incontestability clause is commonly included in most takaful certificates, which is in accordance with Section 26 the Takaful Act 1984, stipulates that no family takaful certificate shall be called in question by the Takaful Operator on the grounds of a mis-statement of the age of the participant. Likewise, in the event that a statement made or omitted to be made in the proposal or in a medical report or in a document which led to the issue of the certificate was inaccurate or false or misleading, shall not be called in question unless the takaful operator can show that such statement was made or omitted to be made with fraudulent intention. Replacement of Family Takaful Certificates Replacement of certificates is detrimental to the participants interest and if allowed to perpetuate, will adversely affect the Takaful Operators long-term standing and the image of the takaful industry. Definition of Replacement of Certificates Bank Negara Malaysia, through its circular dated 30 March 2005, Ref No: JPI/03/2005/TO defined Replacement of Certificates as any transaction involving participation of family takaful certificate if within 12 months before or after a new certificate is effected, an existing Family Takaful certificate has been: 1. lapsed or surrendered;
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2. changed or modified into paid-up takaful, continued as extended term takaful or automatic advance from participants account, or under another form of nonpayment provisions or otherwise reduced in value by the use of non-payment provisions, or accumulated contributions of the respective funds, such as Participants Account; or 3. changed or modified so as to effect a reduction in the amount of contributions paid arising from the reduction of sum covered and/or rider or removal of rider, or in the period of time the existing Family Takaful certificate will continue in force. Measure for Detection of Replacement of Certificates In order to effectively detect and curb internal and external replacement of certificates, the same circular require operators to put in place the following: 1. to have an effective control mechanism, preferably an automated system, to detect internal replacement of certificates whereby both the existing and new certificates are issued by the same takaful operator; 2. to include a question in the proposal form whether the proposal is to replace or intended to replace any existing certificate with the current takaful operator or any other takaful operator; and 3. to designate officers within the company to follow-up and advise the certificate owners in writing on the disadvantages of replacing a takaful certificate and the alternative options available, within 7 days from the date a replacement of certificate is detected. In the letter to be issued to the certificate owner on discovery of replacement, the operator is required to show the total cash value accumulated under the existing certificate and the number of years required to build up this amount of
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cash value under the new certificate as well as the net loss to the certificate owner as a result of this replacement. C3.5 EXCLUSIONS
A Family Takaful certificate does not cover: 1. death, disablement or medical expenses caused by: a. b. c. d. e. war, warlike operations, strike, riot, civil commotion; insanity, suicide or any attempt thereat; venereal disease, infection or parasites; intoxication by alcohol or drugs; and childbirth, miscarriage or pregnancy;
2. death, disablement or medical expenses sustained by the participant: a. while travelling in an aircraft as a member of the crew; b. while engaging in motor cycling, hunting, mountaineering, polo playing, steeplechasing, water-ski jumping, underwater activities, or any other extreme sports; and c. while committing or attempting to commit any unlawful act.
Family Takaful Practices: New Business - Rating
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CHAPTER C4
FAMILY TAKAFUL PRACTICES: NEW BUSINESS RATING

OVERVIEW In this chapter, we shall focus on the Family Takaful practices in relation to new business focusing on underwriting and rating. C4.1 INTRODUCTION
Family Takaful contracts are long-term contracts and contributions are fixed at the outset. Thus, unlike in the case of General Takaful contracts, the contributions for Family Takaful contracts cannot be revised during the term of the contract. In addition, the contracts cannot be cancelled unilaterally by the takaful operator. C4.2 RISK MANAGEMENT
For the Family Takaful business, the process of risk management can be considered under the following headings:1. 2. 3. 4. 5. Identifying the risk factors; Selection of the participation; Quantifying risk; Costing risk; Monitoring the takaful fund.
The Risk Factors: Mortality The major factors which influence mortality are:- age, sex, occupation, social status, ethnicity, geographical location, marital status, personal habits, avocation, and foreign residence.
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Age It is a well-known fact that mortality increases with age, especially due to accidents for advanced ages. The rate of mortality increases immediately after birth (the infant mortality rate) and thereafter decreases sharply to a level which remains fairly constant over much of the younger age. This level progression is somewhat disturbed by a rise found around the ages of 18 to 24. This is attributed to the increased number of accidental deaths at these ages. Mortality rates increase sharply at the more advanced ages. The mortality rates of covered participants lives are lower than the population mortality rates. This is due to the fact that takaful operators select the lives to be covered, and lives that have a slim chance of surviving even for a short period would be definitely excluded. However, it is quite obvious that as a persons age advances, the chances of natural death or death due to old age happening to such a person increase tremendously. Therefore, persons who are already at an advanced age will usually find it difficult, or sometimes impossible being readily accepted as participants in a family takaful scheme. Even if they are being accepted, the contribution rate is naturally on the high side, making it uneconomically to join any family takaful scheme for that matter. This is aggravated further if the person has been identified to have suffered certain illnesses. The well-todo generally buy insurance/participate in takaful. Family Takaful is participated by the more affluent sectors of the population who generally have access to better medical and other social amenities.
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Sex Female mortality is lower than male mortality: Population and participant lives mortality statistics reveal that females experience lower rates of mortality than males. This phenomenon is true for all ages. The lower level of mortality experienced by females is reflected in slightly lower Family Takaful contribution rates for females than for males of equal age. The converse, however, is true for annuities. Female morbidity is higher than male morbidity: In the case of morbidity, females experience higher rates of diseases and sickness than males, and accordingly, females are charged higher contribution rates for medical and health related takaful cover.
Occupation Another important factor influencing mortality rates is the occupation. Takaful Operators use broad categories of occupation to arrive at a loading to the normal contribution rates due to the additional risk posed by different occupations. It is obvious that an executive and an oilrig worker are exposed to different levels of occupational risk and thus it becomes essential to categorize participating members according to their occupations. This will enable the Takaful Operator to charge a contribution that commensurate with the risk undertaken. As a simplified example, an operator could adopt the following categories of employment:- Managerial, Executive, Clerical and Manual, and probably load its contributions for the Manual category, the loading for the Manual category being heavier than for the other categories of employees.
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Social Status This factor is closely tied with the occupational factor. A persons social status is largely determined by the earned income. This is largely determined by the persons occupation.
Ethnicity The ethnicity of an individual also has an important bearing on mortality and morbidity, e.g. in the case of aborigines. This can be largely attributed to cultural heritage, eating habits and attitude towards other aspects of life. In Malaysia, for example, it is quite common for more Malays to be down with diabetes compared to the other major races in the country. This may be attributed to eating habits and diet of that particular group. Takaful Operators therefore may want to play an active role to ensure that such incidences be reduced, and hence improved the quality of the risk being undertaken.
Geographical Location The distinction is primarily between rural and urban areas. Those staying in urban areas usually have easy access to better medical facilities, while those in rural areas may not be fortunate to have these facilities readily available.
Marital Status Statistics have shown that single males experience higher mortality rate than married males. This may be due to the fact that married man may purposely want to avoid risk whenever possible, as he has now the extra responsibility to his wife and family. Single males view of risking taking may reflect his adventurous nature and therefore view risk-taking rather differently.
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Personal Habits and Family History Personal habits such as smoking and the consumption of alcohol have a definite influence on mortality and morbidity. In addition, some forms of ailments are hereditary, and to this extent the family medical history is an important factor. Illnesses such as diabetes, hypertension, and asthma conditions are considered hereditary, and therefore takaful operator may take this information into consideration when it is made known that family members of a prospective client is currently suffering from such illnesses.
Hobbies Some forms of hobies, such as motor racing, hang gliding, etc. are dangerous and those involved in such sport can be expected to experience a higher than average mortality rate.
Foreign Residence Residences in unhealthy areas or in areas prone to civil strife naturally have the effect of increasing mortality and morbidity. Travelling or residing abroad may present a particular risk, as the bodys immune system may not be ready when exposed to a foreign land. The locals may have acquired certain immunization when exposed in the same situation, and thus not really affected.
Selection of the Participation The takaful operator has to select the participation to avoid anti-selection. This is principally done through the process of underwriting. Family Takaful contracts are not contracts of indemnity. The full sum covered has to be paid if the covered event occurs. Thus the underwriting process should also identify, besides the usual risk factors associated with a proposers health, cases of over purchase of cover. The
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underwriting for Family Takaful contracts can be considered under two specific headings: Financial Underwriting The proposal form will be scrutinized for the following:1. the existence of insurable interest; 2. whether the amount of takaful applied for commensurate with the financial standing, for example the earning capacity, of the proposer; 3. whether the participant maintains multiple insurance policies / takaful certificates with other insurers / operators; and 4. whether other takaful operators have turned down the proposers application for takaful coverage, and if so, the reasons for this. In brief, financial underwriting seeks to discover the presence of moral hazard. Medical Underwriting If financial underwriting does not reveal any odd features in the application, the next stage in the underwriting process is medical underwriting. The answers provided in the proposal form to questions concerning the proposers height, weight, personal and family medical history, and lifestyle form the starting point of the underwriting process. If the above reveal any unusual features, then the proposer may be required to answer supplementary questions, furnish medical reports or go for a further medical examination. If the answers provided, together with the medical report and examinations, if any, indicate that the proposer is in good health, the process of underwriting ends here, and the proposer would be offered coverage at normal terms.
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If the tests indicate that the proposer is not in good health, it would be considered as a sub-standard risk or as an impaired risk. In this situation, the underwriter has to decide on the extent of the extra risk the takaful operator would be exposed to in accepting the proposal. The takaful operator usually employs any one of the following methods to deal with substandard risks:1. charge an extra contribution; 2. charge a debt or a lien, i.e. reduce the amount payable in the event of death 3. offer an alternate form of contract; or 4. decline or postpone coverage. A good example when dealing with sub-standard live can be found as follows: 1. Charge extra contribution: Example: Normal rate is RM 200/month Percentage loading for sub-standard 50%, New contribution RM 200 + RM 100 = 2. Offer an alternate form of contract: Example: Basic Plan Cover provides for Death/TPD, but underwriter only allows death coverage only, without / excluding TPD. 3. Postpone the coverage temporarily: Example: Pregnancy Certificate can only be affected once delivery has successfully been completed.
RM 300.
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In brief, medical underwriting seeks to assess the extent of physical hazard in connection with the proposed risk, when providing takaful coverage. Non-Medical Underwriting Due to medical advancement there has been great improvement in the medical facilities. This, together with the rising costs of obtaining medical evidence and the need to process increasing volumes of business quickly, led to the issuance of certificates for which medical evidence was not required. The privilege was given only to the permanent forms of takaful, namely term cover and endowment takaful, and agerelated limits on the sums covered were imposed. The limits varied among individual takaful operators and the table below indicates the limits:Age 1 month 16 years 17 40 years 41 50 years Above 51 years Sum Covered (RM) 200,000 350,000 250,000 Medical evidence required
Non-Medical Limit Underwriting for Family Takaful It is important to note that the proposer still has to complete a proposal form which is carefully designed to elicit information on personal and family history, weight, height and habits. If the answers provided show any adverse features, the takaful operator retains the right to request the proposer to go for a medical examination. Prior to the advent of AIDS, there was a trend towards shorter non-medical proposal forms, i.e. limiting the number of health-related questions, which diminished the role of
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underwriting in the selection process. However, the real possibility of anti-selection due to AIDS has reversed this trend and underwriting has been given its due recognition. The Role of the Agent in the Underwriting Process of NonMedical Takaful It is vital to point out that the takaful operators rely on the integrity, loyalty and good judgement of their agents to ensure that the proposers for non-medical coverage disclose all material information honestly. Objective of Selection The main purpose of selection is to decide whether the risk the takaful operator is asked to cover is:1. within normal limits and acceptable to the takaful operator on payment of the standard contribution rates for the participantss age under the table proposed, such a risk being referred to as first-class, select or standard; 2. below average but still acceptable to the takaful operator, subject to some form of restriction to cover the extra risk, the risk being referred to as sub-standard; 3. below average to the extent that it is not acceptable to the takaful operator at the time of consideration, though lapse of time without further incident may allow for acceptance at a later date, i.e. the application is deferred for a specific period; or 4. below average to the extent that the proposer cannot be accepted under any conditions , the risk in this case being declined . Those risks which fall under (2) or (3) would require further information on weight, height, family or personal history, race, occupation or residence before a final assessment can be made.
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Modes of Accepting Sub-Standard Risks Having determined from the evidence submitted that the proposer cannot be classified as standard, it is then necessary for the takaful operator to decide to what extent the degree of extra risks exist (assuming, of course, that the risk is still acceptable) and to determine the cost of this additional risk. Extra risks are classified generally as falling into three main groups: 1. Increasing Extra Mortality: An impairment which causes increasing extra mortality is one which, with increasing duration, becomes an increasingly potent factor in the failure to survive. For example, being overweight places strain on the heart and other organs. 2. Level Extra Mortality: It refers to the type of extra risk that will remain constant from year to year. Some hazardous or unhealthy occupations (for example, liquor trade) are generally assumed to produce this type of extra mortality. 3. Decreasing Extra Mortality: It describes the types of risk which are present at the younger ages but which will lessen in later life. For example, a young person who suffered from tuberculosis but has been pronounced cured may tend to be less liable to a recurrence with the passage of time. The extra risks may be allowed for in several ways according to the group into which the extra mortality falls. 1. Increasing Contribution: This is termed loading or extra contribution. The standard rate of contribution may be increased by a stated amount based on the expected increased rate of mortality, or the loading may be prescribed by charging a contribution appropriate to a life of an age of a number of years greater than the actual age of the proposed. A flat rate of
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extra contribution is usually applied to level extra risks whilst age loading is suitable for some types of increasing extra mortality. A rapidly decreasing extra risk may be acted upon by charging temporary extra contribution. 2. Decreasing Death Benefit: In lieu of a cash loading, the additional risk may be covered by a provision to the effect that the sum covered shall be reduced by a stated percentage should death occur during a period named. This is known as a contingent debt or lien. The contribution charged is the standard rate and should the covered person survive beyond the period during which the debt operates, the certificate is then treated as though it had been issued on a standard life. A contingent debt may be constant or may decrease with time over a named period. Where the debt is constant, it may be called a level contingent debt and where it is decreasing it may be referred to as decreasing contingent debt. 3. Investment Return Adjustment: The adjustment of investment return in a participating certificate is a method seldom used (subject to the model and aqad used by the Takaful Operator). 4. Alternative Certificate Plan: Suggesting another certificate arrangement may provide an acceptable solution. For example, impairment may be met by restricting the term of the contract to be issued. 5. Exclusion of a Particular Hazard: The certificate may carry a clause limiting the liability of the takaful operator if death occurs directly or indirectly as the result of a particular impairment or participation in a specific form of activity. A combination of these methods may be used if necessary to cover the additional risk. Commencement of Risk
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Where a proposal is submitted to the takaful operator without contribution and the proposal is approved by the takaful operator, a letter of acceptance is issued to the proposer requesting him to make the necessary payment of contribution within a certain number of days (often 30 days). If the contribution is not paid within the stated period, the acceptance shall have to be reconfirmed by the takaful operator. The takaful operator may call for a health declaration report on continued good health before reconfirming the acceptance. The letter of acceptance must also mention that the offer stands cancelled if there is any change in the health, occupation and other circumstances of the person since the date of proposal. If there is any adverse change, the proposer is expected to notify this to the takaful operator and they may or may not re-confirm acceptance on getting this information. The takaful operator will be on risk immediately upon receipt of the first instalment contribution after the issuance of the acceptance letter. Where a proposal is submitted together with the initial contribution and a binding contribution receipt is issued, the proposer is covered for accidental death only and only for a short stated period of time. The takaful coverage begins immediately and remains in effect until the takaful operator either rejects the application or approves it and issues a certificate. Within 15 days of receipt of the certificate, the participant can return the certificate without giving any reason and the takaful operator then has to refund the contribution which has been paid, subject only to the deduction of the expenses incurred for the medical examination of the participant. This is known as the cooling off period. Loading Letter In the case when there is an extra loading on the proposal, a letter indicating the loading is issued to the proposer as a counter-offer. If the proposer agrees to the terms and conditions imposed on the proposal, the proposer will be required to return a copy of the signed letter of consent to the takaful operator.
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Backdating of Commencement Date Sometimes, commencement of the certificate may be backdated to an earlier date, usually up to a maximum of six months. The purpose of this exercise is to benefit the proposer by paying the lower contribution applicable to a lower age. C4.3 FAMILY TAKAFUL AND INCOME TAX
Tax Relief on Family Takaful Contributions In order to encourage national thrift and promote individual financial independence, particularly in old age, the government allows some tax relief in respect of contributions paid on Family Takaful certificates and deferred annuities. The contribution is allowable when the Family Takaful or deferred annuity is on the following: 1. Individual participant; 2. on the life of the spouse of the individual participant; 3. on the joint lives of the individual participant and the spouse. The total relief allowable for all insurance and takaful contributions on the life of the individual or his/her spouse and on contribution to approved funds, e.g. to EPF, in the basis year is RM6,000. In the case of combined assessments for married couples, the total relief is the same, i.e. RM 6,000. However, for Education plans, an additional RM3,000 relief is allowable. Effective from the year of assessment 1997, the sum of relief allowable in respect of the payment of family takaful contributions for a family takaful is no longer subject to the limit of 7% of the capital sum covered of the respective certificate.
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Contribution paid by an employer for purposes of purchasing Family Takaful certificates which is expressly for the benefits of the employees or their dependents upon the occurrence of some definite events are usually treated as allowable deductions. Contributions made by an employer towards an approved provident, pension or other funds are allowed as expenses and the necessary tax relief is provided. Employers, however, must write to the Director General of Inland Revenue for prior approval. Allowable Deductions For businesses and those who are self employed, the allowable deductions are generally those items of expenses incurred in the course of running the business. Thus, for an employer contributing to a Group Family Takaful, the contributions towards this certificate will be considered as an allowable deduction. C4.4 QUANTIFYING THE RISK
Pooling of similar risks The basic principle recognized in takaful as that when a large number of similar risks are combined into a group, there will be less uncertainty about the amount of loss likely to be incurred within a certain period. Law of large numbers A takaful operator could safely and confidently determine in advance the approximate amount of probable death claims arising, say in respect of a group of Family Takaful certificates. In order to conduct the business on a sound basis, the experience as to the rate of death in the past needs to be studied. The past forms a guide to the future. The mortality statistics of covered persons give the results of the experience of the past, and these are used as a guide to chart the mortality trend for the future.
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In determining a contribution rate for Family Takaful plan, it is assumed that the deaths among a group of participants of the same age will, in the future, follow a pattern similar to that of an identical known group in the past. The proportion of the participant dying in a year varies as the age of the participant increases and this is termed as the rate of mortality. C4.5 COSTING THE RISK
Mortality The mortality table is the practical tool the takaful operator employs in the estimation of mortality for groups of participants What are Standard Mortality Tables? The takaful operator often uses Standard Mortality Tables, or a modification thereof, for contribution calculation purposes. Standard Mortality Tables are derived from the combined mortality experience of takaful operators operating in a territory and usually different standard tables are prepared for different types of certificates, giving recognition to the fact that mortality rates also vary in accordance with the type of certificate. How Mortality Tables are prepared In the preparation of mortality tables, statistical techniques are used to obtain the rates of mortality, first at each age range, at the youngest age, with an arbitrary figure (e.g. 100,000 people) to derive the other columnar values. Investment Returns
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This is another important factor which has to be taken into consideration for contribution calculation purposes. Basically the balance of the contributions received, after paying for expenses, tax, claims and so forth, are invested in Shariah-compliant income and capital-bearing assets. Though the investment of current receipts of this balance can be made at known investment return rates, the future receipts, however, have to be invested at rates prevailing then. Future investment returns are subjected to a whole host of factors, economic, political and social. These factors are impossible to predict within any degree of accuracy except possibly over the immediate short term. Thus, the operator has to make prudent estimates of the likely rates of returns from investments over the medium to long term, for contribution calculating purposes. Consequences of ignoring investment returns In view of the above fact, it is better for the takaful operator to ignore this factor in the contribution rating exercise. However, if the takaful operator chooses to ignore this factor, the ensuing contribution rates would be higher than those of the competitors who take into consideration the rate of investment returns factor in their calculation exercises. The prudent estimate of this factor is usually expressed as a level per cent per annum figure, say 7 % p.a., and is often referred to as the investment returns rate assumption. Expenses A takaful operator, likes every other business organization, incurs expenses in running its business. Broadly speaking, the expenses that a Family Takaful operator incurs in respect of each certificate will fall into three categories:
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Categories of expenses 1. Initial expenses: Initial expenses, which are high, are expenses incurred in the first year of the certificate in order to place it on the books. These are significantly large in relation to the renewal expenses. Some examples are:a. advertising costs; b. first year commission; c. medical examination expenses; d. certificate issuance expenses, etc. 2. Renewal expenses: These are expenses incurred (not necessarily) every year throughout the duration of the certificate. Some examples are:a. renewal commissions; b. expenses of collecting the contributions; c. expenses of servicing the certificate, etc. 3. Termination expenses: These are expenses incurred when the certificate leaves the office. Some examples are: a. claims payment expenses; b. litigation expenses. Treatment of initial expenses While calculating the contribution, the expense factor has to be taken into consideration. The heavier initial expenses are normally spread over the term of the certificate and, together with the renewal expenses, are added to the net contribution. Tax The takaful operator, like every other business organization, incurs tax liabilities. The subject of takaful operator taxation is a very complex area which is beyond the scope of this book.
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Other Factors The above four factors of mortality, investment returns, expenses and tax are central to the fixing of contribution rates. However, it is sufficient here to mention some of the other relevant factors which go into the contribution calculation process: 1. 2. 3. 4. financing costs; retakaful costs; cost for options and guarantees, if any; cost of maintaining statutory reserves and solvency margins.
The One-Year Pure Contribution or The One-Year Risk Contribution Calculation of the pure or the risk contribution With the introduction of the principle of the Rate of Mortality, it became possible for operators to determine the cost of offering life cover to a person for a period of one year. Taking as an example a participant aged 37 the rate of mortality at age 37 is 4.74 per thousand lives. Let us assume that a takaful operator has 100,000 persons all aged exactly 37 proposing for family takaful cover for one year. An illustration on the above sample is detailed below: Total participants aged 37 years old Mortality rate per lives No of deaths
Beginning of the year 1 2 3 Yearly renewable 23.70 25.10 26.55
= = = =
100,000 4.74 (4.74x100,000/1,000) 474 cases

Level risk contribution 26.67 26.67 26.67
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The operator can expect to have 474 deaths (4.74 x 100,000 / 1,000) in one year. In other words, the operator will receive contributions from 100,000 lives and will have to pay claims for 474 cases. For the sake of simplicity, let us assume that the operator does not incur any expenses nor does it desire to make any profit. If the operator intends to pay the claim amount (called the sum covered) of RM1,000 in each case, it must raise RM474.000 from all the 100,000 persons proposing takaful. In other words, it will have to collect RM4.74 per person as the basic cost of offering takaful cover (called the contribution) for one year. You will notice that the amount required to be collected from each person is identical to the rate of mortality. If each death claim is to be of an amount of RM5,000 the charge for each person would have to be five times RM4.74, i.e. RM 23.70. Risk Contribution Increases with Age The basic cost of death risk is called the Risk Contribution or the Natural Contribution. The Risk Contribution increases with the age of the participant. If the takaful operator decides to charge contributions on the Risk Contribution basis, it would have to charge increasing contributions for the same participating member for each following year. Early insurance contracts were of this nature but it was found that this method led to a lot of practical difficulties in running the business. Disadvantages of a Yearly Renewable Family Certificate Under yearly renewable certificate contracts, both the takaful operator and the participant have the option to renew the contract or not to renew the same. If the contract is renewed the risk contribution charged would be higher than that in the preceding year. If the participant is in bad health, the takaful operator would
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not renew the contract. This will deprive the participant of the benefit of takaful protection when he needs it most. The Level (Uniform) Pure Contribution or Level Risk Contribution Most of the individual takaful certificates nowadays provide for the payment of a level amount of contribution over a predetermined term. The contracts issued now are usually long-term contracts but the contribution remains constant throughout the term of the certificate. However, the basic principle of the Risk Contribution varying with age is behind the concept of level contribution. Let us assume that a level contribution Family Takaful certificate is to be given to a person aged 37 years for a period of five years and the sum covered amount is RM5,000. With the Risk Contribution method, the takaful operator using the mortality table, would have charged the following varying amounts of basic contribution at the beginning of each of the five years.
Beginning of Year 1 2 3 4 5 Total Yearly Renewable Risk Contribution (in RM) 23.70 25.10 26.55 28.10 29.90 133.35 Level Risk Contribution (in RM) 26.67 26.67 26.67 26.67 26.67 133.35
Calculation for Level Contributions In the above example, the participant would have paid a total amount of RM133.35 over a period of five years. Ignoring the investment returns rate and the other relevant factors, if the takaful operator had wanted to charge a uniform contribution, it would levy an amount of RM26.67 (133.35 / 5) per year. The uniform amount of RM26.67 per year which works out to be higher than
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the risk contribution required for the 1st, 2nd, and 3rd years (viz. RM23.70, RM25.10 and RM26.55) and less than the risk contribution required for the 4th and 5th years (viz. RM28.10 and RM29.90). The illustration given above is a simplified one and does not take into account all the factors which usually go into the calculation of level contributions. However, the illustration establishes the basic principle involved in determining the level contribution to cover a risk that increases with the passage of time. Certificates Providing Benefits on Survival The discussion so far has only covered the charge for covering the mortality risk (i.e. the risk of death). Family takaful certificates also provide for survival benefits in addition to the death benefits. Survival benefits usually take the form of payments at specific interval(s) during the term of the certificate, provided that the participant is alive at that time. For example, under an endowment certificate for 10 years the sum covered is payable in the event of death at any time during the 10 years or at maturity. These survival benefits require additional contribution over and above what is required for the provision of death benefits. Such additional contributions would also be in the form of uniform additions to the level contribution levied for covering the death risk. Gross Contribution For the purpose of administrative convenience, takaful operators prepare tables of gross contribution rates varying according to age and term for different types of certificates. The contribution rates quoted in such a table are different from the basic level pure contribution mentioned earlier in this chapter. While determining the gross contribution rates, the takaful operator has not only to take into account the cost of mortality but also other factors, the
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most important of which are the investment returns element and the expense element. We have the following relationship:Gross contribution = Net contribution (see below) + Loading for expenses +Loading for profits and contingencies Investment Returns Rate Factor Revisited Initial Excess is accumulated to Meet Subsequent Shortfalls We have seen earlier that if a level annual contribution is charged instead of a varying risk contribution, the amount per year (known as the annual contribution) works out to a figure higher than what is strictly required to cover the risk in the earlier years of the contract and less in the later years. The excess of the annual contribution in the earlier years is therefore utilized to support the shortfall in the later years. This excess is invested by takaful operators to earn investment income until such time when it is required for making good the shortfall. In computing the level annual contribution, the takaful operators makes an explicit (and conservative) estimate of these future investment earnings, thereby reducing the contribution that has to be paid. Family Takaful certificates nowadays often provide for survival benefits in addition to the death benefits. The additional contribution payable for the survival benefits is also calculated taking into account the future investment income on it. The Net Contribution The charge for covering the cost of mortality alone is called the Risk Contribution. When the charge is computed after taking into account the elements of mortality and investment
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returns, it is called the Net. The net contribution does not provide for expenses.
C4.6
OTHER CONSIDERATIONS
The tabular (gross) contributions calculated, taking into account the elements of mortality, investment returns and expenses, have to be further tested to ensure that they are adequate, competitive, equitable, consistent, and profitable.
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Family Takaful Practices: Monitoring the Takaful Fund
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CHAPTER C5
FAMILY TAKAFUL PRACTICES: MONITORING THE TAKAFUL FUND

OVERVIEW In this chapter, we shall focus on the last element of risk management in the practice of Family Takaful, which will be concerned with the monitoring of the Takaful Fund. C5.1 INTRODUCTION
The contribution charged for a Family Takaful certificate is based on amongst other factors on expected mortality, investment returns and expenses. It is very unlikely that the actual experience in respect of each of these elements would be exactly as expected. It could be better or worse. Whichever the case, it is necessary to monitor the actual experience from time to time. This periodic investigation into the financial position of a Takaful Operators office is in the nature of a stocktaking, the principal feature of which is the actuarial valuation of assets and liabilities. The actuarial valuation of a Family Takaful Operator consists of calculating the present value of the liabilities under all certificates in force on the valuation date and comparing this with the present value of the income and capital gains produced by the assets in the Takaful Fund. If the latter is greater than the former, the Takaful Operator is said to be solvent. Risk-Based Capital Framework for Insurers and Takaful Operators The Risk-Based Capital (RBC) Framework is a capital adequacy framework for all insurers licensed under the Insurance Act 1996.
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The proposed Framework requires each insurer to maintain a capital adequacy level commensurate with its risk profiles. RBC has been effected for conventional insurers since January 2009. However, BNM has not make RBC a compulsory adoption by Takaful Operators, perhaps until 2012. Under RBC Framework, the insurer is required to compute its Capital Adequacy Ratio (CAR), which measures the adequacy of the capital available in the insurance and shareholders funds of the insurer to support its Total Capital Required (TCR). CAR serves as a major indicator of the insurers financial resilience, and will be an input to determine the appropriate progressive supervisory interventions on the insurer by Bank Negara Malaysia. The RBC Framework is applicable to business generated both within and outside Malaysia by all insurers, including a branch of foreign insurers licensed under the Insurance Act 1996. Business generated outside Malaysia by a branch of foreign professional reinsurers may be exempted from the requirements of the Framework if the specified conditions are fulfilled. Insurance companies must implement the RBC Framework by 1 January 2009. Insurers who have the capacity to adapt the framework earlier can migrate to it in 2008. C5.2 BASIC VALUATION OF LIABILITIES An actuarial valuation of a Family Takaful Operator may be conducted for several reasons. The more common of these are to: 1. test whether the Takaful Operator and the funds under its management is solvent; 2. determine the amount of surplus, if any, that is available for profit-sharing between the shareholders/ Takaful Operators and participants; 3. test the adequacy of the existing contribution scales;
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4. determine if any changes in the Takaful Operators operations are necessary; 5. comply with the statutory requirements. The liabilities of a Family Takaful Operator are its contractual obligations to the participants, e.g. under a 10-year endowment certificate, the takaful operators obligation is to pay the sum covered on death or at the end of the 10 year period, whichever occurs first, in return for regular contribution payments by the participant. The present value of the liability under a Family Takaful certificate can therefore be expressed generally as: Liability = The present value of the benefits payable Plus The present value of expenses Less The present value of the future contributions receivable The problem is to find the present values of the benefits payable and the future contributions receivable, on the Takaful Operators valuation date, taking into account any statutory valuation basis that the Takaful Operator may be governed by. C5.3 BASIC VALUATION OF ASSETS The assets of a Family Takaful Operator are the investments that it has made from the contributions it has received after meeting its outgoes in the form of claims and expenses. The assets may consist of some or all of the following: 1. Cash in hand and in the bank; 2. Investments in government and semi-government securities; 3. Shares in corporate bodies; 4. Loans and debentures in corporate bodies; 5. Properties, land and building;
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6. Loans to participant 7. Furniture, fittings, motor cars and other office equipment. The assets may be valued in several ways, depending on the purpose of the valuation. Some of the more common methods of valuing assets are: 1. Cost Price This is the price at which the asset was acquired. 2. Book Value a. This is the value placed on the assets in the takaful operators book of accounts. When an asset is originally acquired its book value will normally be its cost price. However, with time its value may appreciate or depreciate and the original book value may be increased or decreased, depending on the Takaful Operators accounting practices. For example, the Takaful Operator may have invested in a computer system five years ago at a cost of RM1 million. It may now be worth only RM100,000. When purchased, the book value of this asset would have been RM1 million and this value would have been gradually written down over the years to its present book value of RM100,000 if the company had been adopting a prudent accounting practice.
b.
3. Market Value This is the value for which the assets can be sold in the open market. Whichever method is used, the assets of the Takaful Operator have to be valued on the same valuation date as the liabilities. The operating Takaful Operators
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valuation date would normally coincide with the end of its financial year. C5.4 SURPLUS AND PROFITABILITY
Surplus is the difference between the value placed on the assets and the value of the liabilities and it will vary according to the bases chosen for these valuations. It is derived mainly as a result of the actual experience in mortality, investment returns, expenses and asset values being more favourable than the experience assumed in the valuation. Sources of Surplus Under current conditions, the main sources of surplus are: 1. Investment Returns: This represents the excess investment returns (after tax) earned on the takaful fund over and above that assumed in the valuation, and is a major source of surplus, particularly when market rates of returns are high. 2. Mortality: Mortality surplus arises because of the difference between the actual mortality experienced by the Takaful Operator and ones assumed in the valuation. 3. Expense: The excess, if any, of the allowance made for expenses in the valuation over the actual expenses incurred determines the amount of expense surplus.
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4. Miscellaneous: Some surplus arises from sources such as surrenders, lapses, new business and alterations. Further additions to surplus come from margins in the contributions rates, and realized appreciation of assets. Distribution of Surplus The surplus disclosed by an actuarial valuation is not necessarily divisible. It may be felt desirable that a portion of the surplus should be applied to the strengthening of the valuation basis in certain respects. Some of the surplus may be transferred to contingency reserves. It may be deemed prudent to carry forward a small portion of the unappropriated surplus. The amount of surplus that remains is the divisible surplus, to be shared between the participants and the takaful operator in a pre-agreed ratio. Methods of Distributing Surplus The distribution of surplus between the participants and the takaful operators are usually a straight forward matter. The amounts, annually determined, are simply credited into the respective funds, i.e. Participants Account (for savings and investments) and Participants Special Account (Risk Fund). Only at the time of certificate maturity or death claims do the accumulated funds get paid to the claimant / beneficiary.
Family Takaful Practices: Certificate Documents
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CHAPTER C6
FAMILY TAKAFUL PRACTICES: CERTIFICATE DOCUMENTS

OVERVIEW This chapter will detail the various forms and documents employed by Takaful operators in the course of their acquiring Family Takaful businesses. Section 27 of the Takaful Act 1984 has provision for these documents to be lodged with Bank Negara Malaysia (BNM) for the control of the various forms such as proposal, certificates and brochures. Failure to comply with this provision may result in Takaful Operators being fined up to RM4,000.00 on each occasion. C6.1 SOURCE OF INFORMATION FOR RISK ASSESSMENT
Before accepting a participants application for family takaful cover, Takaful Operators are required to do a proper assessment of the risk on both moral and physical hazards aspects of the risk, before cover is granted. The information necessary to do a proper assessment of risk is usually obtained from various sources. These sources would include, but are not limited to: The Proposal Form Medical Report / X-ray, ECG, etc. Attending Physicians Statement Agents Report Previous Records Fact Finding Form
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C6.2 PROPOSAL FORM A major portion of the information relating to the applicant is furnished by the applicant himself in the Proposal Form. The Proposal Form does carry a clear warning that the proposer must disclose truthfully and faithfully all the information that he knows or ought to know, failing which the certificate issued may be void. The Proposal Form, which must be completed by the applicant contains the following information: Personal Particulars:1. 2. 3. 4. 5. 6. name in full; address; occupation or profession; place and country of birth, date of birth; identity card number; whether any other proposal has ever been declined, deferred, withdrawn or accepted on special terms.
Details of Cover:1. 2. 3. 4. 5. type of takaful plan required; terms of certificate; sum covered; additional benefits/riders; frequency and method of payment of contribution.
Occupation, Residence, Travel, and Hazardous Pursuits: 1. any change in occupation in the recent past, or change anticipated in the near future; 2. provision of full particulars of intention as to flying other than as a fare-paying passenger, or other hazardous pursuits;
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3. provision of full particulars of intention as to engaging in sporting activities which involve additional risk of death by accident. Personal and Family History:1. the particulars of medical treatment, names of physicians consulted in recent years; 2. date and reason for last consultation with a doctor; 3. current height and weight; 4. daily consumption of cigarettes, intoxicants, if applicable; 5. any deaths occurred among the applicants parents, brothers or sisters. If so, to state age at death and cause of death; 6. whether the applicant has ever suffered from:i. mental or nervous state, debility or breakdown ii. blackouts, fits or paralysis iii. asthma, bronchitis, tuberculosis or diseases of the chest iv. heart trouble, chest pain, or raised blood pressure v. liver, kidney, or prostate trouble vi. rheumatism or arthritis vii. indigestion, peptic ulcer or abdominal disease viii. growths or glandular trouble ix. any other illness, deformity or injuries; Declaration and Authorization:This section contains the applicants: 1. declaration that the statements provided are, to the best of his knowledge, true and complete and that he has not withheld any material information; 2. permission authorizing the Operator to seek information from any doctor who has ever attended to him and any life or takaful operators office to which he has at any time proposed for insurance/takaful coverage.
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C6.3 UNDERWRITING PROCESS The term Underwriting can be defined as a process of assessment and selection of risks, and the determination of contribution payment, terms and conditions. In any takaful plan, the participant is required to make a payment known as contribution into a common fund which is used to pay claims. To ensure that sufficient funds will be available to pay claims, the operator has to: 1. guard against anti-selection; 2. charge a contribution rate that commensurate with the risk accepted. Anti-selection occurs when more sub-standard risks are accepted for coverage, resulting in less than favorable underwriting results. Usually, contribution rate is based on a sample representing the overall market profile of risks. When anti-selection occurs, it is an indication of operators lacking good underwriting controls, and eventually ending up with a portfolio that contains a higher proportion of less favorable risks. To prevent anti-selection, underwriters should carefully assess all applications and charge an appropriate contribution that commensurate with the risk and impose exclusions, where necessary. In order to be fair to all participants, proposals that are considered sub-standard should rightfully be declined or charged a higher contribution rate compared to a standard risk. This should bring equitable distribution of risks among all the participants in the scheme. For family takaful business, the underwriting process will eventually lead underwriters to evaluate risks into three categories, i.e.:
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1. Standard risk (issued exactly as applied by the proposer) 2. Sub-standard / modified risk (issued with certain modification by the underwriters, subject to proposer accepting such modifications) 3. Declined risk (the risk presented is unfavorable because of ill-health, occupational hazard or hobbies, etc) C6.4 CERTIFICATE AND ITS STRUCTURE The certificate, is the instrument evidencing the contract of takaful, must be clear in its wording and format that it can be easily understood by any person of average intelligence. It is a rule of law that any ambiguity in the document shall be construed against the operator, since the latter is responsible for drawing it up. Two main forms of certificate that are usually used are the narrative type and the schedule type. The narrative form, although formerly used, is now practically obsolete and the schedule type is very simple, readily understood and elastic in adaptability. The Main Sections The main sections found in most certificates are described below: 1. 2. 3. 4. 5. 6. 7. Heading Preamble Operative Clause Proviso Schedule Attestation Conditions and Privileges.
Heading: At the head of the certificate form there usually appears the name of the takaful operator and the address of its registered office, to which all notices of assignment of the certificate must be served.
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Preamble: The preamble is the section which introduces the parties to the contract and states that the proposer has submitted an application for takaful cover including statements concerning the health of the participant and has paid the first contribution payment and agrees to pay subsequent contributions as they fall due. Operative Clause: The purpose of the operative clause is to state the event(s) upon which the certificate becomes operative, i.e. when a claim is initiated. Thus, it usually mentions that the takaful operator agrees to make payment of the sum stated in the schedule (referred to as the Sum Covered) upon the happening of the covered event mentioned in the operative clause, to the proper claimant or beneficiaries. Proviso: This section includes a declaration that the answers given in the proposal and medical report forms shall become the basis of the contract. Further, the conditions endorsed on the certificate are deemed to be incorporated in the contract, and the contract is subject to those conditions. Schedule: The following particulars are usually mentioned in the schedule: 1. 2. 3. 4. 5. 6. 7. 8. 9. Name and address of the participant; Date of commencement of cover; Date of proposal; Sum covered amount, to whom and when payable, the event on which payable; Type of takaful cover; The contribution - amount per annum, how payable, due date, period during which payable, date of final payment; Date of birth/age of the participant whether admitted or not; Date of maturity; Special conditions (if any).
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Attestation: This refers to the final portion of the certificate. The certificate is signed by certain officers of the takaful operator authorized to do so. Conditions and Privileges: The conditions and privileges of a family takaful cover can be divided into the following categories: 1. Conditions limiting the scope of contract, e.g. suicide or incontestability clause. 2. Conditions enlarging the scope of the contract, e.g. days of grace, non-forfeiture conditions, etc. 3. Conditions explaining the scope of the contract, e.g. conditions which avoid the contract if the contributions are not paid in time or there is any misrepresentation of materials facts.
C6.5 ENDORSEMENTS The standard certificate documents are often endorsed to take into account the differing aspects of individual circumstances and needs. Endorsements can be done either at: 1. the time of issue of the certificate, or 2. after issue of the certificate. Endorsements at the time of issue of Certificate In general, the endorsement:following four special conditions need
1. those affecting the contribution, or its frequency of payment. As an example, if instalment contributions are involved, then a suitable condition is necessary to provide for the deduction of any unpaid balance in the year of death;
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2. those affecting the sum covered, or its mode of payment. As an example, if a settlement option to leave the certificate proceeds as a deposit with the office is requested, then a special condition is necessary to provide for this; 3. those incorporating special benefits, e.g. options to convert the contracts into a different type; those incorporating special restrictions. 4. those pertaining to documents submitted by the participant, such as wrong I/C number. Endorsements after issue of Certificate These give effect mainly to changes in the 1. 2. 3. 4. mode of contribution payment; alterations to the form of the contract; imposition or removal of extra contributions; application to reduced / increased sum covered.
The above may broadly be classified into the following groups relating to changes in the: 1. 2. 3. 4. name or age of the participant; contributions to be paid - mode and date(s) of payment; sum covered and contributions; types of takaful.
Family Takaful Practices: Claims and Partial Withdrawal
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CHAPTER C7
FAMILY TAKAFUL PRACTICES: CLAIMS AND PARTIAL WITHDRAWAL

OVERVIEW In this chapter we will discuss on claim settlement procedures which essentially complete the cycle of risk management. C7.1 INTRODUCTION The termination of a Family Takaful contract is usually marked by the settlement of a claim. A claim can arise under any one of the following situations:1. 2. 3. 4. death of the participant; maturity of the takaful certificate; sickness or disability benefit claims; claims arising under supplementary contracts.
It is expected that the agent and the takaful operator jointly service the claim promptly. The reputation of a takaful operator often lies on the promptness with which claims are settled. It is therefore important that the agent is well versed with the procedures and documents needed for a claim to be settled promptly. C7.2 NOTIFICATION OF CLAIMS On the happening of an event that may give rise to a claim, the beneficiary or claimant should notify the takaful operator and provide all of the following details:1. Participants name and identity card number 2. Certificate number and participants address
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3. Date and cause of death, injury or sickness, as the case may be The operator would then advise the beneficiary or claimant on the procedures to be followed and the necessary documentation needed to provide proof of such event. As takaful is essentially based on the tenets and requirements of Shariah, Muslim participants are reminded that proceeds from their takaful certificates (in the event of death claim) has to be distributed to the rightful heirs in accordance to faraid. Therefore, the nomination of a person in his takaful certificate only serves as the trustee to receive the proceeds, which forms part of the deceased estate and subsequently distributing it to the rightful heirs. However, a participant may wish to donate the entire proceeds to non-heirs, such as waqaf, charitable organization and as such, then the act of giving (hibah) must be executed while the participant is still alive. Once this is done, then the proceeds do not form part of his estate, and subsequently do not attract any faraid inheritance distribution. C7.3 DEATH CLAIMS The claimant or beneficiary has to provide the takaful operator with documentary evidence which establishes the death of the participant beyond any doubt. In addition to the three items mentioned above, the takaful operator would accept any one of the following documents as proof of death:1. a death certificate; 2. a coroners report; 3. an order pronouncing a statutory presumption of death, for cases where the participant has gone missing more than 6 years; 4. a certificate evidencing the death of service personnel and war death; 5. a certificate showing that death has occurred at sea; 6. medical certificate by last medical attendant.
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The operator would also request for proof of age of the deceased participant, if this was not done at the commencement of the contract. The takaful operator has to ensure that the claim proceeds on a death are paid to the person entitled to receive them. Section 65 Takaful Act 1984 specifically mentions that such benefits payment can be made by the takaful operator without the production of any probate or letters of administration and the takaful operator shall be discharged from all liability in respect of the sum paid. Nevertheless, BNM has subsequently revised the Section whereby the takaful operator will have to an interim payment to the person entitled up to RMM100,000.00 and the balance will be made subsequent upon the production of a probate or latter of administration. C7.4 TOTAL PERMANENT DISABILITY CLAIMS There are two types of total permanent disability claims; one is due to natural causes or illness and the other is due to accidental causes. 1. Documents required for total permanent disability claim due to natural causes or illness are: a. medical certification to be completed by the attending doctor after the participants disability; b. certified true copy of the participants identification card; c. completed claim form. 2. Documents required for total permanent disability claim due to accidental causes are: a. medical certification to be completed by the attending doctor after the participants accidental disability; b. certified true copy of the participants identification card; c. completed claim form; and d. certified true copy of the police report.
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C7.5 MATURITY CLAIMS In the event that a participant survives the term of his certificate, the maturity amount is payable to the participant. The takaful operator would usually inform the certificate holder of the impending maturity of the certificate and would request the participant to comply with certain claim procedures. The takaful operator would forward an identity form, the survival form and a discharge voucher for completion to be returned together with the original certificate contract. The following are usually required in settling maturity claims: when the the participant is the person covered:1. 2. 3. 4. proof of age; proof of survival; discharge voucher completed by the the participant; and the original certificate document / contract
when the the participant is not the person covered:1. a deed of assignment or any other title document; and 2. a simple statement that the person covered is alive and is unable or not available to sign the survival certificate. C7.6 OTHER CLAIMS The onus on proof of the claim rests with the participant must prove and this proof must satisfy the takaful operator. The participant must comply with all the other conditions of the contract. For personal accident certificates, the principle of proximate cause is important as more than one condition can operate leading to a claim. It is important to note that if the takaful operator considers
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that the claim is brought about by an excluded peril, then the responsibility to prove this will be on the takaful operator. It is customary for takaful operators to issue printed forms which, if properly filled, will supply all the needed information. These forms, in addition to requiring details of the accident or illness, also contain other questions which aim to establish whether or not the original basis of coverage has changed. If the takaful operator is satisfied as to the validity of all the documents furnished and any other inquiries which have been conducted and there is no breach of the various certificate conditions, the takaful operator will then pay the claim amount. However, where anything is in doubt or is subject to special consideration, the takaful operator will have the right to carry out an investigation. C7.7 CLAIMS REGISTER
It is a legal requirement under the Takaful Act 1984 that every takaful operator shall maintain an up-to-date register of all takaful claims immediately upon the takaful operator becoming aware of it. None of these claims shall be closed as long as the takaful operator is still liable for the claims and the claims have not been settled. The claims register serves as an official record of claims notified to the takaful operator. The claims register could be kept in either a card form or ledger sheet form or even in computer. C7.8 PARTIAL WITHDRAWAL Most takaful operators would allow their participants to make partial withdrawal on their Family takaful certificates, subject to certain terms and conditions. This practice is quite similar to the conventional life insurance, but the difference is that no interest
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can be charged for the loan taken by participants, as the money actually belongs to them in the first place. As contribution for Family Takaful is divided into two funds once paid to the takaful operator (Participants Account and Participants Special Account), partial withdrawal is allowable on the Participants Account, but not more than 50% of the amount in this account, as a general practice. Participants may choose to repay or not to repay the amount withdrawn, but calculation of investment return on the Participants Account will be net of amount withdrawn. In the event of a surrender of the takaful certificate, the participant shall be paid all the amount accumulated in the Participants Account, but not the Participants Special Account since this has been donated.
Family Takaful Contribution Computations
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CHAPTER C8
FAMILY TAKAFUL CONTRIBUTION COMPUTATIONS

OVERVIEW In the course of your duty as a Takaful Agent, you may be asked for advice on various matters related to the business. Quite certainly will be the question on the amount of money involved when a prospective customer contemplated to join a particular Family Takaful scheme. C8.1 CALCULATION OF AGE When dealing in Family Takaful business, the participants age plays a critical role in determining the contribution rate. Takaful Operators adopt different bases for arriving at the age of an individual. The most common are:1. Age last birthday 2. Age next birthday 3. Age nearest birthday. We shall illustrate the calculation of the above with reference to a participant born on 21 March 1965: Age last birthday calculations: The technique here is to obtain the date of the last birthday and perform the necessary subtraction as shown in the table below.
Reference Date (Date of submission of the proposal) 20 May 2005 1 January 2005 31 December 2006 Last Birthday 21 March 2005 21 March 2004 21 March 2006 Age Last Birthday 2005 1965 = 40 2004 1965 = 39 2006 1965 = 41
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Age next birthday calculations: The technique here is to obtain the date of the next birthday and perform the necessary subtraction as shown in the table below.
Reference Date (Date of submission of the proposal) 20 May 2005 1 January 2005 31 December 2006 Next Birthday 21 March 2006 21 March 2005 21 March 2007 Age Next Birthday 2006 1965 = 41 2005 1965 = 40 2007 1965 = 42
Age nearest birthday calculations: The technique here is to obtain the date of the nearest birthday and perform the necessary subtraction as shown in the table below.
Reference Date (Date of submission of the proposal) 20 May 2005 1 January 2005 31 December 2006 Nearest Birthday 21 March 2005 21 March 2005 21 March 2007 Nearest Age Birthday 2005 1965 = 40 2005 1965 = 40 2007 1965 = 42
The contributions charged for Family Takaful certificates usually vary in line with the following factors:1. 2. 3. 4. 5. 6. C8.2 the age and sex of the proposer; the current state of health of the proposer; the type of certificate required; the sum covered; the term (duration) of the certificate; the contribution payment mode. USING THE RATE BOOK FOR CONTRIBUTION CALCULATIONS
The contributions to be charged for the various certificates and terms are summarized in tabular form in the Rate Book. It is important to note that these rates are applicable only to standard
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risk, i.e. risks / risks found to be in good health by the underwriting process. Impaired or sub-standard risks may be subjected to extra contributions; and a quotation for this category of risks can only be obtained after detailed underwriting has been done. In this section, we shall show the use of the Rate Book in relation to the calculation of annual installment contributions. The table below shows a section of the tabular contributions in respect of 25-year endowment takaful issued to male risks for sum covered of RM 1,000.
Age (Next Birthday) 25 26 27 28 29 30 31 Contribution per RM1,000 Sum Covered 39.50 40.00 40.50 41.25 42.00 42.80 43.60
Contribution Rates for 25-Year Endowment Takaful on Male Risks (Treat Female Risks As 3 Years Younger) If the takaful operator provides discounts for large sums covered, then this must be taken into account in arriving at the contribution rates. A typical situation might be as suggested by the table shown below.
Sum Covered (RM) 10,000 24,999 25,000 39,999 40,000 54,999 55,000 69,999 Above 70,000 Discount per RM1,000 Sum Covered RM 1.00 RM 2.00 RM 3.00 RM 4.00 Special quotation
Discounts for Large Sums Covered: 25-Year Endowment Takaful on Male Risks
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Example 1:
Proposers Particulars Sex Date of birth Cover to commence Certificate Details Type Sum Covered CALCULATIONS 1) Determination of Age Next Birthday: We have to calculate the age next birthday since the contribution rates are provided on this basis (See table above) Next birthday in relation to 18 March 2007 is 24 October 2007. Age next birthday = 31 years (i.e. 2007 1976) 2) Determination of Unadjusted Contribution rate for age 31 next birthday = RM43.60 per RM1,000 sum covered. For sum covered of RM5,000 the required contribution is RM 5 x 43.60 = RM 218 per annum. 3) Determination of Discounts: No discounts are applicable as sum to be covered is below RM10,000 (see above table) 4) Contribution Payable: Unadjusted Contribution Less Discounts Total = = RM 218.00 Nil RM 218.00 ====== : : : Male 24 October 1976 18 March 2007 25 Year Endowment RM5,000
: :
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Example 2:
Proposers Particulars Sex Date of birth Cover to commence Certificate Details Type Sum Covered CALCULATIONS : : : Female 24 October 1976 18 March 2007 25 Year Endowment RM5,000
: :
1) Determination of Age Next Birthday: We have to calculate the age next birthday since the contribution rates are provided on this basis (See above table) Next birthday in relation to 18 March 2007 is 24 October 2007. Age next birthday = 31 years (i.e. 2007 1976) For the purpose of contribution calculations, this person is assumed to be aged 28 years 2) Determination of Unadjusted Contribution rate for age 28 next birthday = RM 41.25 per RM1,000 sum covered. For sum covered of RM5,000 the required contribution is RM 5000 x 41.25/1000 = RM 206.25 per annum. 3) Determination of Discounts: No discounts are applicable as sum to be covered is below RM10,000 (see table above) 4) Contribution Payable: Unadjusted Contribution Less Discounts Total = = RM 206.25 Nil RM 206.25 ======
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Example 3:
Proposers Particulars Sex Date of birth Cover to commence Certificate Details Type Sum Covered CALCULATIONS 1) Determination of Age Next Birthday: We have to calculate the age next birthday since the contribution rates are provided on this basis (see table above) Next birthday in relation to 18 March 2007 is 24 March 2007. Age next birthday = 29 years (i.e. 2007 1978) For the purpose of contribution calculations, this person is assumed to be aged 28 years 2) Determination of Unadjusted Contribution rate for age 29 next birthday = RM 42.00 per RM1,000 sum covered. For sum covered of RM35,000 the required contribution is RM 35000 x 42/1000 = RM 1,470 per annum. 3) Determination of Discounts: A discount of RM2 per RM1000 sum covered is applicable. Discount = RM 70 per annum. 4) Contribution Payable: Unadjusted Contribution Less Discounts Total = = RM 1,470 70 RM 1,400 ====== : : : Female 24 March 1978 18 March 2007 25 Year Endowment RM35,000
: :
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More Frequent Contributions:If contributions are payable more frequently than annually, further adjustments would be made to the above calculations before arriving at the amount of contributions payable. C8.3 PARTIAL WITHDRAWAL Most takaful operators would allow their participants to make partial withdrawal on their Family takaful certificates, subject to certain terms and conditions. This practice is quite similar to the conventional life insurance, but the difference is that no interest can be charged for the loan taken by participants, as the money actually belongs to them in the first place. As contribution for Family Takaful is divided into two funds once paid to the takaful operator (Participants Account and Participants Special Account), partial withdrawal is allowable on the Participants Account, but not more than 50% of the amount in this account, as a general practice. Participants may choose to repay or not to repay the amount withdrawn, but calculation of investment return on the Participants Account will be net of amount withdrawn. In the event of a surrender of the takaful certificate, the participant shall be paid all the amount accumulated in the Participants Account, but not the Participants Special Account since this has been donated. C8.4 CALCULATION OF SURRENDER VALUE
Certificates which carry the right to a surrender value would normally incorporate a table of such values in their Schedules. It then becomes a straightforward exercise to calculate such values, given a particular duration at which surrender occurs.
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However, when surrender values are not pre-determined, the calculation of such values requires actuarial considerations. It is beyond the scope of this book to deal with such issues.
Key Considerations in Investment Linked Takaful Plan
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CHAPTER C9
KEY CONSIDERATIONS IN INVESTMENT LINKED TAKAFUL PLAN

OVERVIEW Prospective participant has to consider various factors before making the decision whether to participate in an investment linked Takaful plan. They have to understand and consider their investment objective, features of the product, the available funds, investment risk, investment horizon, taxation and investment performance before they can make the decision. In this chapter, we will look at each one of the key considerations before the prospective participant can make the decision to invest/participate in any investment linked Takaful plan. C9.1 INTRODUCTION It is the obligation of the Takaful agent to explain and educate the customers on the product. This module, will help Takaful agents understand the basic knowledge of investment such as how to invest, what kind of investment, when and why to invest. Customers must study and consider all key aspects before making any decision on investment. Among the key considerations that the customers must know and understand are as follow:
1. 2. 3. 4. 5. 6. 7.
Investment Objectives Availability of Funds Risk or Security Investment Horizon Taxation Treatment Performance of the Investment Diversification
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C9.2
INVESTMENT OBJECTIVES
Before investor determines the investment objective the investor should consider what the investment objective objectives are. Knowing the objectives will help the investor choose appropriate investment instruments and asset classes. To simplify one can categorize general purposes of investments as those that will result in capital growth, provide income or both. Certain investments will yield according to the desired purpose. For instance, people buy real-estate properties because of capital appreciation while some people buy them for income purposes. Investment objectives can also change according to ones situation. For example is real estate investment, when people are younger, they buy a piece of real-estate property because they want to have capital growth. Many years after, say during retirement years, capital growth is now overshadowed by the need for regular income and the rental from the said property becomes the objective. If the investor is looking at pooled funds like mutual funds or investment-linked Takaful, it is very important to first know the purpose or objective before investing in them. Just like any other investment instruments or asset class, pooled funds can give capital growth (those invested primarily in equities), income (those invested primarily in bonds) or both (balanced funds). The three fundamental characteristic of the investment objective:
1. Safety: It is a norm that as human, investors will always look

into the safest investment instruments with high returns. One of the foundational financial theories is that expected return and risk are positively correlated. In other words, high risk goes with high expected return.
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2. Income: Investing in low risk such as sukuk or general

investment account are made for income purposes as it provides steady flow of income. Even if the sukuk is sometimes traded for capital growth, the main purpose for it is still income. An asset class or investment instrument can also provide both capital growth and income at the same time. As a general principle, capital growth and income provision would be relatively diminished for instruments that provide both growth and income.
3. Growth: Investments in the stock market are generally

initiated for capital appreciation and although it can also provide income through dividends, the general purpose of investing in the stock market is for growth.
4. Other Investment Objectives a. Retirement b. Children Education c. Medical

C9.3 AVAILABILITY OF FUNDS Investing even small amounts of money can really pay off over time. But the question is how to get the money and invest it. It is a norm if people give a reason that they dont have any money left over at the end of month as a reason for not investing. There are some sources of fund that can be used to for the investment.
1. Income
Income can comes from wages, salaries, profits, interest payments, rents and other forms of earnings received in a given period of time. Keeping track of every income that we received and every penny that we spend and where it goes is critical, especially if we feel that we have no money to invest.
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Proper budget will assist in planning the resources or fund for the investment purposes.
2. Extra Money
Many of us get extra money from time to time, including monetary gifts for birthdays and holidays, money for working overtime, cash bonuses and incentive payments. That "found money" is a prime source of investment spending. Take at least half of any unexpected windfall and send it directly to your savings or investment account. Since your budget is built around your regular income and not this extra cash, this is a relatively painless way to invest.
3. Your Investment "Bill"

Treat the investment account as just another bill that must be paid each month. Set a realistic monthly investing goal, and use the pay yourself first concept to put that money aside month after month. Make the goal a realistic one - can start with as little as RM50 a month. The key is to get started and start instilling the fiscal discipline needed. When just starting out, where to put the investment funds does not matter as much as the fact that we are saving money consistently. C9.4 RISK OR SECURITY
Because of the risk-return trade off, customer must be aware of their personal risk tolerance when choosing investments for their portfolio. Taking on some risk is the price of achieving returns; therefore, if customer wants to make money, he can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night. If he wishes to earn a higher rate of return, he must be willing to assume a higher risk.
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C9.5
INVESTMENT HORIZON
Investment horizon refers to the total length of time that an investor expects to hold a security or portfolio. The investment time horizon is the length of time until the investor need to sell his investment. This is an important concept when an investor is trying to decide what kind of investments he should have in his portfolio. The investment horizon is used to determine the investor's income needs and desired risk exposure, which is then used to aid in security selection. An investor who doesnt need their money for decades can own a riskier portfolio compared to someone who needs the money next week. As investment horizons increase in length, equities represent a higher risk-adjusted return than fixed-income securities and cash. Across shorter investment horizons, equities become the riskier asset class because they carry higher levels of volatility. For example, a young professional should invest in equities because his time horizon could be 30 years or more. For someone nearing retirement, however, preservation of capital becomes much more important, so fixed-income investments become more attractive. Some trading strategies, especially those based on technical analysis, can employ investment horizons of days, hours or even minutes. Generally speaking, the investment time horizon can be called short, medium and long. Here are some very rough definitions of those time horizons and associated risk levels. Keep in mind that these are very arbitrary and the definitions are not standard.
1. Short Term
This time frame is often defined as less than 3 years, and may not be well-suited for stocks, real estate or other types of investments that include a high level of volatility and
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significant risk to the principal invested. Shorter-term bond funds and certificates of deposit are often cited as good choices for short-term investors. The investor normally cannot take any chances with their money and must invest it in guaranteed securities such as a high-dividend savings account or certificates of deposit. Short-term funds should be kept in extremely low-risk investments such as certificates of deposit, savings bonds and Treasury securities. The investor can build a bond ladder so that funds mature every few months, and are either available if needed or reinvested in another short-term bond. This technique also takes advantage of rising interest rates. As funds mature, they are reinvested in securities earning a higher rate.
2. Medium Term
The timeframe for this type of investment might be in the 3-10 year range. Investments looking at this time horizon might consider low-risk, intermediate-term bonds or a welldiversified mix of stocks and bonds weighted heavily toward low-risk bonds. This type of investment can be a conservative mix of equities and sukuks i.e. 70% sukuks and 30% equities.
3. Long Term
This is a ten-year plus time horizon that enables the investor, if they so choose, to seek potentially higher returns by assuming more risk. Stocks, real estate can provide the greatest return, provided the investor is comfortable with the risk involved.
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This time horizon can include most risky investments although one must keep in mind that equities can have very long periods of low returns so it is advisable to also have a component of fixed income i.e. 75% equities and 25% sukuks. This ratio can be adjusted if necessary to allow investor peace of mind. Monies earmarked for long-term goals should be invested in securities offering capital appreciation and growth. Stocks provide both criteria. Investors seeking a one-size-fits-all investment should research balanced mutual funds investing in stocks, bonds, and cash. Fund managers decide the percentage of each group based on market conditions and economic circumstances. A portfolio of stock mutual funds or ETFs, exchange traded funds, contains a blue chip, large cap fund, a small or medium cap fund, and an international fund. A short or medium term investment grade sukuk could also be included. C9.6 TAXATION TREATMENT
One of the factors that need to be considered by the customers is taxation treatment. This is because different type of investment will attract different taxation treatment. It is important for the customer to know the different treatment for a different investment before he makes any decision on the investment. C9.7 PERFORMANCE OF THE INVESTMENT
Investment performance is the return on an investment portfolio. The investment portfolio can contain a single asset or multiple assets. The investment performance is measured over a specific period of time and in a specific currency. Investors often distinguish different types of return. One is the distinction between the total return and the price return, where the former takes into account income (interest and
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dividend), whereas the latter only takes into account capital appreciation. Another distinction is between net and gross return. The 'pure' net return to the investor is the return net of all fees, expenses, and taxes, whereas the 'pure' gross return is the return before all fees, expenses, and taxes. Various variations between these two extremes exist. Which return one looks at depends on what one is trying to measure. For example, if one wishes to measure the ability of an investment manager to add value, then the return net of transaction expenses, but gross of all other fees, expenses, and taxes is an appropriate measure to look at since fees, expenses, and taxes other than transaction expenses are often outside the control of the investment manager. Another important distinction is between the money-weighted return and the time-weighted return. The former is appropriate if the manager determines the timing of inflows in or outflows from the portfolio. The latter is appropriate when the manager is not responsible for the timing of cash inflows into and cash outflows from the portfolio. The performance of the investment is depending on the following factors:
1. 2. 3. 4. 5. 6. 7.
C9.8
The country economy Regional and global economy The competencies and capabilities of the fund manager The invested companys level of costs. Past performance History of the invested company Life cycle of the investment DIVERSIFICATION
Diversification of investment is defined as the process of investing across the following:
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a. Asset classes share, sukuk and cash are all generally not
correlated with each other so owning some of each will help diversify your investment portfolio. b. Industry If you own share either directly or in unit trust fund, then make sure there is adequate representation from different industries. c. Country Most investors tend to own too much equity in their home country which reduces their diversification. It also means that an investor should buy investments that are not concentrated into one company, industry, country or even asset class. The famous saying is Dont put all your eggs in one basket? The same principle applies to investing put the investments into different baskets. If some of the baskets should fail then the losses will still be manageable. It can be tempting to put a large percentage of portfolio into one share or investment type that we are convinced will do well, but what happens if we are wrong? The investment could get wiped out! Spreading the investments into different asset classes, industries, countries and even currencies will help guard against a major loss.
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Types of Investment Linked Fund Takaful
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CHAPTER C10
TYPES OF INVESTMENT LINKED FUND TAKAFUL

OVERVIEW There are various choices of investment vehicles for the Malaysian to choose from. The rapid development in financial industry for the past 15 years has seen the development and emergence of new and innovative product especially for the Islamic financial industry. This is in line with the government aspiration to make Malaysia as the hub for Islamic finance. In this chapter, we will look at the various investment vehicles available to the individual investors. C10.1 INVESTMENT CHOICES
1. Cash and Deposit

Cash and deposit refers to all type of liquid instrument with minimal risk or no risk of losing the principal amount. Cash and deposit is one of the method of funding the investment. It includes the following:
a. Government Investment Issue

Government Investment Issue (GII) is the Islamic version of marketable debt instrument issued by the Government of Malaysia to raise funds from the domestic capital market to finance the Government's development expenditure and working capital. The central bank, Bank Negara Malaysia in its role as banker and adviser to the Government, advises on the details of Government
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securities issuance and facilitates such issuance through various market infrastructures that it owns and operates. GII were issued to allow Islamic financial institutions such as Islamic banks and Takaful operators to hold liquid papers that meet their statutory liquidity requirements. The issuance of these papers also enabled them to invest their liquid funds in instruments that are issued based on Shariah principles as they are unable to purchase or trade in Malaysian Government Securities (MGS), Malaysian Treasury Bill (MTB) or other interest-bearing instruments. It is the safest types of investment and regarded as non risk unless the event of unstable country political situation.
b. Bank Accounts
Islamic bank accounts include general investment account, current account, saving account, investment account and offshore account. The profit rate of these accounts normally low thus did not protect the investment against inflation. i. General Investment Account (GIA) GIA refers to a sum of money deposited with the bank and profit is payable on every interim profit payment date/at maturity (where applicable). The amount of actual profit will only be known on maturity date based on prevailing gross return for the contracted profit sharing ratio.
ii. Current Account

Bank offers the current account facility for safe custody of depositors money. This facility, which is
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based on the wadiah contract, enables depositor to wisely plan their monthly expenditure and allows them to manage your financial needs without involving cash.
iii. Saving Account

Savings Account is a deposit facility offers by the bank based on either wadiah or mudarabah contract. Saving account based on Wadiah will pay hibah while saving account based on mudarabah will pay profit based on the pre-determined ratio. Factors that influence the selection of bank account are: i. The available fund ii. The investment horizon i.e. how long the investor want to keep the fund in the account iii. Whether withdrawal is allowed iv. Current economic situation
2. Sukuk
The word sukuk is the plural of the Arabic word sakk, which means certificate. It is described as certificates of trust for the ownership of an asset, or certificates of usufruct. It is commonly refers to the Islamic equivalent of bonds. However, it differs from conventional bonds in that they do not pay interest since interest is not permissible in Islam. Sukuk securities are structured to comply with the Shariah and its investment principles. Financial assets that comply with the Shariah law can be classified in accordance with their tradability and non-tradability in the secondary markets. The conventional asset securitization process is used in structuring sukuk where an SPV is created for this purpose. The SPV will acquire the assets that will collateralize the
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sukuk and to issue financial claims on those assets over the defined term of the sukuk. The asset collateral must be Shariah compliant. Sukuk returns are tied to the cash streams generated by underlying assets held in the SPV. The cash stream can be in the form of profit from a sale, profit from a rental, or a combination of the two. A sukuk issue can be structured in a variety of ways. It can offer either fixed or variable income options.
a. Sukuk based on concept of spot sale (salam) or a deferredpayment (bai muajjal) and/or deferred delivery (bai salam) sale. These securities are typically short term in nature, ranging from three months to one year, and are used to finance commodity trading. Sukuk based these concepts must be held to maturity because trading these sukuk in the secondary market involves riba; hence, it is prohibited.
b. Sukuk based on concept of ijarah

A combination of rental and principal payments from the cash flows generated by the lease-and-buyback agreement are passed through to investors. Ijarah-based sukuk have medium- to long-term maturities, carry a put option, and can be traded in the secondary market. Sukuk can be issued by governments, as well as companies. In the case of corporate sukuk, the return is higher than government sukuk. However, higher return means higher risk. From a Shariah perspective, certificates of debt are not tradable (although a different view is held by many in Malaysia).
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The most accepted structure, which is tradable, is thereafter the Sukuk Al Ijarah. Debt certificates can be only bought before the finance occurs and then held to maturity from an Islamic perspective, which is critical on debt trading at market value regarding any difference to be like the prohibited Riba (interest on money). As Shariah considers money to be a measuring tool for value and not an asset in itself, it requires that one should not receive income from money (or anything that has the genus of money) alone. This generation of money from money is "Riba", and is forbidden. With sukuk we need to assess the risk associated with the particular issue, rather than the company itself, by looking at the issuer's ability to service its debts, i.e. to make the payment of income when due and to repay the capital at the maturity date. Sukuk have higher priority than equity any winding up, so for sukuk payments to be in jeopardy there would be a serious problem for the company as a whole and, therefore, for its equity shareholders too. Advantages and Disadvantages It provides steady income to the investor. In the case of government sukuk, the risk is almost zero thus making it a very safe investment. However, the downside of the government sukuk is the return is lower than the inflation rate thus eroding the investment.
3. Shares and Investment

Shares, also known as stocks or equities, are the unit of investment in individual companies. They have a nominal value for example RM1.00, which when multiplied by the total number of shares issued forms the issued share capital.
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The nominal value bears no resemblance to the market price, which will rise or fall according to the laws of supply and demand, driven by the attractiveness of the company and its performance. Islamic equities are shares of halal companies that is, securities of companies operating in activities permissible under Shariah principles and approved and periodically reviewed by Shariah scholars through a process known as Islamic stock screening. For a company to be considered halal, the majority of its revenues must be primarily derived from activities other than the trading of alcohol, arms, tobacco, pork, pornography, or gambling or from profits associated with charging interest on loans. The determination of Shariah compliance rests with the judgment of Islamic scholars. With stocks and shares it's possible for investors to create wealth in three different ways:

To receive an income from them in the form of dividend To hopefully see a growth in their value and sell them at a profit A combination of the above, known as balanced
Shares offer as much variety as there are entrepreneurs and companies attempting to create profits in the economy. There are thousands of companies in Malaysian markets, some of which are also listed in foreign markets (dual listed). And there's an entire spectrum of investment possibilities available to investors from high-risk, high-growth shares to steady blue chips companies. Shares are offered in a variety of different ways: you can buy them in individual companies, you can put different ones together and build your own portfolio or you can buy them through collective schemes such as funds or investment trusts.
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a. Ordinary Shares
Ordinary share represents ownership rights to a corporation. Ordinary share can provide many perks, such as voting rights and dividend payments. Each ordinary share owned entitles the purchaser to one vote on certain issues within the company. The board of directors of a company will decide the amount of a dividend that will be paid, and this amount will vary from year to year. Ordinary shareholders are last in line for dividends behind all debtors and preferred shareholders; meaning that they will get what money is left over after all others have been paid. Advantages and Disadvantages The advantages of ordinary share are the ordinary shareholders have the right to vote and to elect the board of director. However, the disadvantage is the dividend is not guaranteed.
b. Preferred Shares
As with ordinary shares, preferred shares give the holder part ownership of a company. The difference is that preferred share pays fixed dividends, before payments to owners of the common stock. The downside is that preferred share does not give its owners voting rights and tends to grow less in value. Advantages and Disadvantages Preferred shareholders are given priority in distribution of income over the ordinary shareholders. Thus, it is a less risky investment with stable market price. However, preferred shareholders do not have the right to vote and elect the board of directors.
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4. Unit Trusts
Funds, such as Unit Trusts are referred to as 'collective' or 'pooled' investments. They are an investment vehicle made up of different types of investments chosen by the fund's manager. It is similar to a conventional unit trust except that the Islamic unit trust invests only in Shariah compliant securities. The unit trust manager gives precedence to securities (stocks or bonds) of Islamic banks and financial institutions, securities of companies operated in accordance with Islamic principles, and securities included in Islamic equity indices. The contract governing the exchange of units between the unit trust manager and the investor usually conforms to the principle of bai al-naqdi (buying and selling on a cash basis). When an investor purchases a unit of the trust, the investor is actually sharing pro rata with other investors in ownership of the assets held by the trust. The manager receives a management fee under the concept of al-ujrah (fee) for managing the unit trust. The main reasons for investing in funds:

Funds help reduce an investors overall level of risk. Funds can lower the cost of building a diversified portfolio yourself. Funds reduce the need to select and manage your investments.
Advantages and Disadvantages The advantages of unit trust are as follow:
a. The first advantage is the management of the fund is

handled by specialists who are expert in the fund management.
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b. Secondly, investors have the flexibility to choose from

many unit trust funds in the market. An investors resources are pooled with other investors, allowing him to make investments impossible as an individual investor. It will also allow diversification of fund and risk. c. Lastly, it also provides economies of scale, such as reduced transaction costs. However, there are costs over and above those investors need to pay compare to investing directly.
5. Real Estate
Real estate investing involves the purchase, ownership, management, rental and/or sale of real estate or profit. Investor purchases real estate with the intent of earning from it either capital gain through selling or income through rental. The usual types of real estate are office building, shopping complex, residential building, etc. Real estate is an asset form with limited liquidity relative to other investments, it is also capital intensive and is highly cash flow dependent. Apart from investing in the original form of real properties, investor can also invest in a new form of real estate investment, Real Estate Investment Trust (REITs).
a. Islamic Real Estate Investment Trust (I-REITs)

An Islamic REIT is defined as an investment vehicle that invest its assets in real estate, whether through direct ownership or through a single purpose company whose principal asset comprises a real asset. It is a new of investment vehicle that provide investor the opportunity to invest in real estate. It is an investment company that invests exclusively in mortgages and various types of
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investment in real estate, in order to earn profits for shareholders. Shareholders receive income from the rents received from the properties and receive capital gains as properties are sold at a profit. I-REITs are similar to conventional REITs. It is typically structured as property trusts except that it must hold investments that adhere to the principles of Shariah. It uses lease financing (ijarah) in lieu of an outright purchase of property. It invests primarily in physical real estate, but it may also hold other kind of investment such as sukuk, private companies whose main assets comprise real estate, Shariah-compliant securities of property and non-property companies, and units of other I-REITS, Shariah compliant short-term deposits, and cash. I-REITs can be publicly or privately held. Public REITs may be listed in Bursa Kuala Lumpur which will provide the investor the ease of buying and selling like a normal equity. Advantages and Disadvantages There are many advantages investing in real estate.
a. Real estate is an investment that can give you steady

income for the rest of life. If an investor buy properties and rent the properties out, it can give him life long income. b. Another advantage of investing in properties is an investor can use a lot of leverage to acquire them. There are many ways the investor can buy properties without using his own money. One way of doing this is seller financing. Seller financing is when the investor agrees to pay the seller over time the down payment and the rest from the bank.
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c. One last advantage of investing in real estate is real estate

has intrinsic value to it. A share that investor buy can lose 99% of its value but it is almost impossible to buy a property and it loses 99% of its value. However, real estate investment also has its disadvantages.
a. One disadvantage of investing in properties is if you buy a

property and can't make the mortgage payments you can lose the property and damage your credit. b. Another disadvantage of investing in properties is, as an investor you depend on a lot of people to do their part. If the people you are renting out to do not pay their rent you will have to use their security money and find new people quickly or it can eat up your profits. c. One last disadvantage of investing in properties is the cost it takes to maintain or repair. Many times when you think you're done with a property something can break or needs to be replaced. Investing in properties does have its advantages and disadvantages. If you use the information you read here you will have some idea of what the advantages and disadvantages are.
6. Derivatives
It is a financial instrument whose value is a function of the value of another asset, typically takes the form of a contract in which the investor promises to deliver, or take delivery of, an asset at a specific date and at a specific price. Conventional derivatives include call and put options, futures, forwards, and swaps and are used for hedging, arbitrage, and speculation. However, in line with Shariah which prohibits their use for speculation or gambling (maisir), Islamic scholars allows derivatives for the purposes of hedging and arbitrage. It must also avoid riba (interest) and gharar (uncertainty). Islamic
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derivatives are based on contracts that are supported by the principles of bai salam, bai istisna, or urbun. Islamic derivative products include:
a. Structured Murabahah Deposit

Literally Murabahah means cost-plus or mark-up sales. Murabahah contract can be used for "cash creation" for the purpose of investment or financing. For deposit product using Murabahah, the following concept:
i. Bai al-Inah which involves purchase and sale of assets

between two (2) parties. ii. Commodity Murabahah contract or Tawwaruq which involves purchase and sale of commodity such as palm oil, metal and the like, but the transaction usually involves three (3) or four (4) parties. Under Tawarruq, the underlying asset is commodity such as palm oil or metal. Some banks use stocks such as halal tin products that are easily identify and touch. Basically, it is a sales of certain specified commodities, through an exchange, on a cost plus profit basis. It should be noted that Commodity Murabahah Deposit is a product that gives the investor a pre-determined rate of return (different but akin to conventional FD pricing) via buying and selling of commodities as the underlying transactions.
b. Islamic Swap Market

The Islamic swap market is a subset of the overall Islamic derivative market. A swap is a derivative instrument that is used to transfer risk. It is a derivative in which counterparties exchange certain benefits of one
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party's financial instrument for those of the other party's financial instrument. The two major Islamic swap structures are the profit rate swap, which is similar to a conventional interest rate swap, and a cross-currency swap. i. Profit Rate Swap. The swap is an agreement to exchange fixed for floating profit rates between two parties and is implemented through the execution of a series of underlying contracts to trade certain assets under the Shariah principles. It can either uses concept of bai bithaman ajil, murabahah or waad. The instrument is used as a hedge against fluctuations in borrowing rates.
ii. Cross-Currency Swap

Islamic Cross Currency Swap is an arrangement between two parties to exchange a series of profit and/or principal payments denominated in one currency for another series of profit and/or principal payments denominated in another currency, based on a notional principal amount, over agreed period. The arrangement uses Commodity murabahah transactions as the underlying transactions. The parties to the swap agree to sell Shariah-compliant assets to each other for immediate delivery but on deferred-payment terms in different currencies. It is a vehicle through which investors can transfer the risk of currency fluctuation that is inherent in their investment or inventory positions.
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c. Options
An option is a financial contract in which one party has the right, but not the obligation, to buy or sell an asset at a specified price in the future. A put is an option giving the right to sell, while a call enables the contract holder to buy at an agreed-upon price. An option is simply granting someone the right to buy or sell something in the future. In the case of Dow index futures options, when someone buys a Dow call option they are buying the right to purchase that underlying Dow future at a specific price, known as the "strike price," at a future point in time, known as the "expiration date." When an investor buys a put, they are essentially selling the market; a call essentially buys the market. Likewise, selling a put essentially buys the market; selling a call essentially sells the market. In order to receive the opportunity to buy an option on this future, investors pay a "premium." If the market does not reach the strike price of the option, then that option will expire worthless on the expiration date. If the market does reach the strike price of the option on the expiration date, then the investor will be assigned the underlying future at that strike price. Advantages and Disadvantages The advantage of options is it can be used in a wide variety of strategies, from conservative to high-risk, and can be tailored to more expectations than simply "the share will go up" or "the share will go down." An investor can gain leverage in a share without committing to a trade. Risk is limited to the option premium (except when writing options for a security that is not already owned). Options also allow investors to protect their positions
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against price fluctuations when it is not desirable to alter the underlying position. However, the downside of the option is the costs of trading options (including both commissions and the bid/ask spread) is significantly higher on a percentage basis than trading the underlying shares, and these costs can drastically eat into any profits. With the vast array of different strike prices available, some will suffer from very low liquidity making trading difficult. Options are also very complex and require a great deal of observation and maintenance.
d. Warant
A warrant is the option given holders to buy a predetermined number of shares of stock at a given price. Warrants may be detachable or non-detachable. A detachable warrant may be sold separately from the bond with which it is associated. Thus, the holder may exercise the warrant but not redeem the bond. To obtain common stock, the warrant must be given up along with the payment of cash called the exercise price. Although warrants usually mature on a specified date, some are perpetual. A holder of a warrant may exercise it by purchasing the stock, sell it on the market to other investors, or continue to hold it. The company cannot force the exercise of a warrant. If desired, the company may have the exercise price of the warrant change over time (e.g., increase each year). If a stock split or stock dividend is issued before the warrant is exercised, the option price of the warrant will be adjusted for it.
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Advantages and Disadvantages Warrant permits the issuance of debt at a low profit rate. It can be used as sweetener for an issue of debt or preferred shares. Other than that it allows for balanced financing between debt and equity. The disadvantages of issuing warrants are when exercised they will result in a dilution of common share which in turn lowers the market price of share.
e. Islamic Exchange Traded Funds

An exchange-traded fund (ETF) is an open-ended fund composed of quoted securitiesstocks or bondsthat are selected to closely mimic a benchmark, rather like an index-tracking mutual fund. ETFs are individual investments that track the performance of an entire index, (investments grouped together based on certain criteria). There are ETFs with Blue Chip shares, mid-cap shares, small company shares, companies based only in certain countries, based on a manufacturing segment, or any one of hundreds or thousands of other criteria. An Islamic ETF is structured exactly like a conventional ETF except that the benchmark used in constructing the fund is an index of Shariah-compliant securities that have passed Islamic filters to ensure that companies are primarily engaged in permissible business activities and do not have high levels of debt. Similar to mutual funds, ETFs allow investors to own a wide variety of many investments (even different kinds within the ETF) by buying just one investment.. However, unlike an index mutual fund ETFs are similar to stocks where it can be bought and sold anytime throughout the trading day on an exchange. The price of an ETF should
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closely track the weighted net asset values of its portfolio of securities throughout the trading day. Advantages and Disadvantages The advantages of ETF are:
a. One major advantage of ETFs is their very low cost of

operation, frequently half the annual expense of an index unit trust fund. b. ETFs is also very flexible as it can be traded like shares thus can be bought and sold any time during market hours, can be margined and sold short. c. The other advantages of ETFs are tax efficiency, transparency and diversification. However, ETFs have a few minor disadvantages.
a. Unlike open-ended unit trust funds, ETFs cannot

reinvest dividends. Dividends are paid out to owners of shares at the end of each quarter. This has a slightly adverse effect on performance and is called "dividend drag." b. Purchasing ETFs also incurs a brokerage commission just as a share does. Prices of ETF trades are based on market forces, so a buyer might buy at a slight premium or discount. This difference between the price of an ETF and the price of the underlying net asset value is usually very small.
7. Capital Protected Fund

There are two main types of capital protected products available in Malaysia. These can be broadly described as:
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a. Passive Type Products.

In such a product, the bulk of the amount invested is used to buy low risk assets that are expected to accumulate in value over the term of the product to protect the full value of the original capital. The rest of the amount invested is then used to buy options, from which the potential upside of the product is expected to be obtained. However, it should be pointed that the influence of profit rates on these types of products. Example: An investor invest RM1,000 to this product. If the projected yields on three-year sukuk were 6.4% per annum (as against 3% per annum), then the manager would only need to invest RM830 in the low risk asset, leaving RM170 to buy option. However, if the projected yield is only 3%, then the investment in the option will only half i.e. RM85. Thus, it will reduce the potential upside of the product.
b. Active Type Products.

In a sense, these are similar in nature to the balanced products offered as normal investment products. The difference is that there is a guarantee given that the eventual return of the product will not be negative. We will now expand on each of these approaches. As indicated above, these products are similar in nature to traditional balanced funds. However, rather than trying to outperform a pre-set benchmark, the manager is focused on maximising absolute returns. The guarantee on maturity of the product is that the return will not be negative.
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However, the guarantee must come from a third party i.e. not the issuer of the product as required by Shariah.
8. Islamic Commodity Funds

An Islamic commodity funds are funds in that have direct holdings in commodities which comply with Shariah principles. For example, a gold fund that holds gold bullion would be a true commodity fund. There are several requirements that must be met to comply with Shariah principles. The commodity must be owned by the seller at the time of sale. Short selling is not permitted but forward sales are allowed under bai salam and bai istisna. The commodity traded must be halal i.e. permissible. The seller must have physical of the commodity to be sold. The price of the commodity must be fixed and known to the parties involved as any uncertainty will renders the sale invalid.
Advantages and Disadvantages
a. Commodity fund acts as a diversifying asset, particularly

when the other assets held are equities and bonds as it is not highly correlated with equity and fixed income asset classes. b. A commodity fund aims to provide investors with regular income over the life of the fund from the potential appreciation in commodity prices.
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C10.2.
TYPES OF INVESTMENT LINKED TAKAFUL PLAN (ILTP)
1. Single Contribution Investment Linked Plan

A single contribution investment linked plan features a single lump-sum contribution payment which will be used to purchase unit in the investment linked and provides certain level of life cover. It provides a death and/or total permanent disability cover of 125% of the lump-sum investment or minimum of RM5,000. In Malaysia the minimum contribution for single contribution plan is RM3,000. Benefit payments will be to the sum assured or the value of the investment units at the time of claim, whichever is higher.
2. Regular Contribution Investment Linked Plan

The regular contribution plan is a plan to provide the investor choice of paying the contribution on regular basis i.e. on monthly, quarterly, half yearly or yearly basis. It is more suitable plan for those dont want to invest a large sum at the start of the plan. The plan provides the investor/participant the flexibility to increase the contribution and coverage when their finances improve in the future. The basic Takaful coverage, in the event of death and/or total permanent disability, is based on multiple of the annual contribution. Based on the latest guideline on investment linked issued by Bank Negara (effective from November 2010), the minimum Sum Assured Multiplier (SAM) for regular contribution plan is 60 times of the annual contribution. The benefit payment will be the total of sum assured plus the value of the investment units.
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3. Investment Linked Individual Retirement Plan

The investment linked individual retirement plan is a Takaful plan that is designed to provide a retirement income for life with the freedom to maximise your investment returns. Retirement plan normally requires high allocation from the contribution to accummulate sufficient fund until reaching the retirement age. Once reached the retirement age, the fund will be used to participate in traditional annuity or investment linked annuity plan. Previously, there was no protection element in this plan. The sole focus of this plan was to provide investment return. However, recently there was an introduction of protection element funded via cancellation of unit.
4. Investment Linked Permanent Health Plan

The investment linked permanent health plan is Takaful plan that is designed to provide a coverage for health or against dread disease.
5. Investment Linked Critical Ilness Plan

The investment linked critical illness plan is a Takaful plan that is designed to provide a lump sum amount if the certificate owner contracted anyone of the critical illness such as heart attack, stroke, coronary bypass, renal failure, etc.
6. Investment Linked Education Plan

The investment linked education plan is a Takaful plan specially designed as a savings tool to provide an amount of money when the child reaches the age for entry into college (18 years and above). The funds can be used to pay for child's higher education
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expenses. Under this plan, the child is the life assured, while the parent/legal guardian is the certificate owner. C10.3. CHARACTERISTICS OF INVESTMENT LINKED TAKAFUL PLAN (ILTP)
1. Multiple Purpose
ILTP has a multiple purpose i.e. it can be used either as an investment, regular saving, protection against total permanent disability and death or health Takaful. The customer can decide based on his needs.
2. Higher Exposure towards Equity Investment

ILTPs exposure towards equity investment is higher compared to the traditional family Takaful.
3. Investment Risk
Investment risk is borne by the certificate owner unlike traditional family Takaful product where investment risk is borne by the Takaful operator.
4. Net Asset Value

The net asset value of the fund is subject to the performance of the investment.
5. Cost of Protection
Cost of protection is funded by caj ternyata that depend on the age and level of protection is done by canceling the unit in the fund.
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6. Cash Value
Cash value is the unit value apportioned to the certificate owner which is calculated on bid price. C10.4. UNIQUE FEATURES OF ILTP
Investment-linked Takaful has the following unique features:
1. Flexibility to choose the level of protection and investment.

Investment-linked Takaful provides the flexibility to choose the sum assured and investment ratio in the annual targeted contribution. It is depends on the needs of the customer. If his needs and objectives are more toward investment, he can choose to lower the protection and increase the investment. Same if he wants more protection then he may increase the protection and lower the investment.
2. Can vary the amount of contribution according to

changing financial circumstances. Investment-linked Takaful also offers the flexibility of one time increase in investment portfolio, through top-ups to avail investment opportunity offered by external environment or own income flows.
3. Can switch current investment fund to other types of

investment funds. Investor can switch his investment out from a sub-fund to another sub-fund, within the same umbrella fund. An umbrella fund comprises a number of sub-funds. Each sub-fund is an independent unit trust and is separately managed with its own investment objectives. An umbrella fund offers investors a wide range of investment opportunities, together with a simple method
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of switching from one sub-fund to another. This allows the investor to take advantage of the market condition.
4. Can redeem part of investment-linked units at any point of

time. To cope with unforeseen circumstances, the company may offer the benefit of partial withdrawal. Investor may make withdrawal from the fund, retaining g only the stipulated minimum amount.
5. Can choose from a variety of investment funds (equities,

bonds or other financial instruments) to invest in. Investment-linked Takaful offers a complete selection of high, medium and low risk investment options under the same plan. Customer can choose an appropriate option according to risk taking appetite, coupled with the opportunity to switch between fund options without any additional expense for specified number of switches.
Structure of Investment Linked Funds
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CHAPTER C11
STRUCTURE OF INVESTMENT LINKED FUNDS

OVERVIEW In this chapter, we will look into the structure of the investment linked funds in order to understand the method of income distribution and types of investment linked funds in Malaysia. C11.1 INTRODUCTION Depending on the structure of the investment linked fund, the contribution paid will be invested according to the written instruction of certificate owners. Investment linked funds can be structured into two ways:
1. Accumulation units 2. Distribution units

C11.2 TYPE OF INVESTMENT LINKED 1. Accumulation Units Units for which dividends accumulate and plough back into the fund i.e. form more units. As a result the net asset value of the fund will increase over the long term. 2. Distribution Units Under this structure, the investment income will be utilized to purchase additional units. The fund will then distribute the
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units to the certificate owners. Certificate owners will have more units but the net asset value will remain unchanged. C11.3 TYPES OF INVESTMENT-LINKED FUNDS The basic feature of investment linked fund is a form of collective investment that allows investors with similar investment objectives to pool their saving, and invest in a portfolio of securities managed by investment professional. We can classify seven mains categories of investment linked funds in Malaysia:
1. Income Funds
An income fund is a fund that is structured to provide maximum income. To achieve this goal, an income fund selects investments that typically provide dividends or profit. These investments include sukuk, especially high-yield sukuk and preferred shares, which guaranteed dividends. Blue-chip stocks often provide income as well, since they are the stocks of large companies that can afford to pay dividends. An income fund is popular among risk-averse investors, including the retired, who want to preserve as much of their assets as possible. An income fund does not grow in value as much as a growth fund; this is the trade-off for the current earning of the income fund. An income fund typically invests in low-growth sectors of the economy. As the name suggests, the aim of an income fund is to provide investor/participant with an income. They can invest solely in share, buying into companies where the dividend payments are good (known as a high yield), or invest in a mixture of share, sukuk or property. High-yielding funds which invest in equity/shares tend to focus on companies in mature markets where the strong
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dividend policy helps compensate for the potential lack of growth in the share price. Of course, fund managers will be looking for companies with strong earnings to fund higher dividend pay outs.
2. Growth Funds
A portfolio in which the primary goal is capital appreciation of the securities represented therein. That is, the investor does not expect dividends and most returns on investments come in higher net asset value. This involves investing in companies with higher risk than other portfolios. For example, a growth fund will likely invest in a promising start up with a great outlook instead of a blue-chip company with a reliable, but not exciting, outlook. In addition to risk, a growth fund requires a relatively long time horizon, as start-ups and similar companies often take time to appreciate. Managers of growth funds are usually willing to take more risk to achieve above average returns. If growth remains strong, these funds reap benefits. However, as growth slows, these funds are likely to fall furthest. The most volatile of the investment styles, growth funds are for long-term investors with enough time to make up for any short-term losses and are likely to invest mainly in shares.
3. Balanced Funds
A balanced fund is a fund that invests in shares, sukuk and deposit investments. The proportion of investments varies by the balanced fund, but the investment goals are similar: to conserve principal, provide a source of income, and provide a level of long-term growth. Thus, a balanced fund must strive to meet more than one investment objective. The stocks in a balanced fund provide growth while sukuk provide income and conservation of principal. A balanced fund has a fairly low risk level due to the varying risk levels of its shares, sukuk
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and cash. However, the trade-off is that the balanced fund will not be a stellar performer: its shares are generally those of larger companies that are not very volatile. The balanced fund is often the fund of choice among the risk-averse. Balanced funds have the advantage of investing in a mixture of income and growth investments. It is common for such a fund to have the majority of its portfolio invested in a mixture of shares and sukuk, with the remainder held in other classes such as property and cash. However, the actual asset classes, and the proportion in each class, will vary according to the objective of the fund.
4. Cash Fund
The cash fund invests in Shariah compliant cash equivalent securities and Shariah compliant unit trust funds whose underlying assets are non-equities such as sukuks and Islamic money markets.
5. Property Fund
Property fund is a fund that hold portfolios of real estate and real estate related financial instruments for the benefit of the investment. Real estate held by property fund includes multifamily residential, retail, office, industrial, health care, and hotel properties and self-storage facilities; the financial instruments held by property fund are construction and development loans, mortgages, and mortgage-backed securities. Property fund is restricted to earning their income mainly from passive sources (that is rents, profit, dividends, and gains from sales)..
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6. Managed Fund
A managed fund is an investment fund that is managed professionally by an expert fund manager who invests in a variety of investments. The actual type and mix of investments within the fund depends on a predetermined mandate communicated by the Fund Manager. Managed fund or unit trust works by pooling money from a number of investors and then using this money to buy a variety of investments. It gives investor greater buying power, allows them to share costs and gives them the benefits of professional management When an investor invests, the investor buys 'units' - and the cost of each unit is the 'unit price'. The unit price moves up and down to reflect the value of the investments in the fund. Many income funds' unit prices stay at $1 as profits or income is distributed. A Unit Trust is constituted by a Trust Deed, a formal document setting out the rules by which the Trust must operate.
7. Specialized Fund
This type of fund is meant to specialize in a certain sector, industry, or area of the world. There is very little diversification with a specialized fund, so it is important that the proper decisions are made for all involved. There is a very high risk involved, since the lack of diversification puts all of the money into one basket, there is also a very high reward if the money is invested into the right sector or industry. A good advisor is needed when getting involved with a specialized fund because a mistake could cause the investors to lose a great deal of money in the end.
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C11.4 RISK-RETURN PROFILE Every investment linked fund has its own risk-return profiles. The higher the return from the fund, the higher the risk. For example, equity fund normally pays higher return thus the investment risk is higher. Vice versa, cash fund normally pays very low return thus the investment risk is high. Below is the risk-return graph that showing the higher the risk, the higher the return.
Risk
Managed Funds
Equity Funds
Bond Funds
Balanced Funds
Cash Funds
Returns
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C11.5 SWITCHING This is an investment activity in which units from one fund are sold and the proceeds from the sale are reinvested in another fund. Fund switching results from an investor's changed perception of investment opportunities. It may also result from an investors change of risk profile. This facility is very useful in financial planning. For example, an investor that started investing at the age of 40 may want to change the asset allocation when he reached age 55. His risk profile at the age of 55 may differ from the age of 40. The practice of switching differs from one Takaful operator to another operator. The practices are as follow:
1. Takaful operator offers free of charge for any switching during

the year.
2. Takaful operator offers free of charge for a limited number of

switches within a given period. For example, free of charge for the first switch each year. The subsequent switches will be charged. 3. Takaful operator charge for each and every switch.
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Benefits and Risks of Investmenting in Investment Linked Funds
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CHAPTER C12
BENEFITS AND RISKS OF INVESTING IN INVESTMENT-LINKED FUNDS

OVERVIEW Investing in investment linked fund has many benefits for the investor. However, the prospective participant must also understand that investment linked fund also come with various risks that may affect their investment. Thus, it is very important for the prospective participant to understand the risks involved when investing in investment linked fund. In this chapter, we will look at both the benefits of investing in investment linked fund and the risks associated with it. C12.1 BENEFITS 1. Diversification of Fund The investment linked funds are actively managed and invested in a diverse range of asset allocation, which individual investors without enough capital can hardly match. There are hundreds of investment linked funds to choose from. Investment linked funds, similar to unit trust funds can be invested in a well-diversified portfolio of assets. The portfolio may consist of wide range of investment such as equity, sukuk, currency, properties, cash and deposits etc. This enables an investor to hold a diversified portfolio irrespective of his invested amount which the investors are unable to construct if they want to invest on their own.
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2. Diversification of Risk As investments are made in well-diversified portfolios, the risk of investing directly in one or two shares or other debt instruments also gets reduced. Any loss in particular company or sector gets off-set by gains made in other companies or sectors. If an investor plan to invest in shares or sukuk market, the investor needs to build a diversified portfolio to reduce the risk. If the investor holds only one or two shares and those shares go down significantly, the investor can lose a great deal of money. But if the investor holds hundreds of shares and one or two suffer a setback, the risk is much less. It is difficult to get the type of diversification needed by purchasing individual shares and sukuk, but it is quite easy when the investor participates in investment linked fund. 3. Dollar Cost Averaging This allows an investor to invest regularly with whatever small amount one can invest, without worrying to time the market. Instead of investing assets in a lump sum, the investor works his way into a position by slowly buying smaller amounts over a longer period of time. This spreads the cost basis out over several years, providing insulation against changes in market price. 4. Professional Management Takaful operators are highly regulated by Bank Negara Malaysia for the protection of the investing public. Their fund managers are professionals who have got the expertise, skills and resources of managing the money as well as technical tools and the much-needed research works behind them. The Takaful operator may also appoint registered investment advisers for its portfolio management.
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5. Reduced Transaction Costs When investor invests directly, the investor has to bear all the costs such as brokerage or custody of securities. However under investment linked fund, the investor will reduce the cost because the funds enjoy Economies of Scale, as the funds pay lesser costs due to large volumes transacted. 6. Liquidity Investment link like unit trust funds are highly liquid. Investors can withdraw their investment anytime. Net asset value (NAV) of the investment linked fund is calculated and announced once at the end of the trading day based on the value of a portfolios underlying securities. Normally prior day NAV is applicable for withdrawal application received before a cut off time. 7. Wide Investment Objectives The investor can opt for growth or dividend options from the same scheme of an investment linked fund. If the investor intends to accumulate wealth, the investor may select the growth option and if the investor needs regular income out of the investment and can choose the dividend option. 8. Various Services Takaful operators normally provide various services such as the following: a. Switching Participants can easily switch their investment from one fund to another depending on the market situation or their risk appetite.
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b. Top Up Option Participants have the option to top-up his investment to increase the investment portion to generate more return. c. Easy Accessibility of Fund Price in Media The participant can access the fund price in media like major daily newspaper, Takaful operators website and financial magazines. C12.2. RISK OF INVESTMENT 1. Market Market risk arises because of factors that affect the entire marketplace and typically include changes in regulations, politics, technology and the economy. These factors are some examples of conditions that have an impact on businesses, whether positive or negative. Market risk can be mitigated through diversification. Diversification of the funds investments into different types (equity or non-equity etc.) and with different investment policies and strategies may help to mitigate its exposure to market uncertainties and fluctuations in the market. It stems from the fact that there are economy-wide perils which threaten all businesses. Hence, investors will be exposed to market uncertainties and no matter how many securities are held, fluctuations in the economic, political and social environment will affect the market price of the investments either in a positive or negative way. 2. Liquidity Liquidity risk is the risk that the security/instrument invested in cannot be readily sold and converted into cash. This can
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occur when trading volume for the security is low and/or when there is a lack of demand for the security. In managing liquidity risk, the fund will employ liquidity or volume-traded analysis on primary and secondary markets for all security types. Where applicable, a fund will look into the historical volume transacted for the securities in question. Thereafter, the appropriate asset allocation can be made for each security with regard to reducing liquidity risk to a comfortable level in relation to the securitys risk-return profile. Liquidity risk is also partially limited by the funds diversification policies. 3. Profit Rate Profit rate risk arises from the potential fluctuating values of profit-bearing assets, such as a financing or a sukuk, due to changes in profit rates, which in turn may affect the unit prices of the funds with sukuks as its underlying assets. In general, when profit rates rise, the price of sukuk will fall. This risk can be reduced by diversifying the durations of the Islamic income investments held at a given time. Continuous monitoring and evaluation of macro-economic variables to ensure the most appropriate strategy is in place for the Funds portfolio. 4. Credit/Default Credit/default risk is the risk of losses from non-repayment of a financing or other line of credit (either the principal or profit or both). Default events include delay in repayments, restructuring of borrower repayments, and bankruptcy. The risk is reduced by investing in high quality securities as these generally have a lower degree of credit risk.
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5. Investment This is the risk associated with investing in a particular asset. All investment assets carry risk albeit different investment assets have different level of risks. The value of an investment depends on its growth and earnings potential, sound management, as well as a myriad of other factors. Failure to achieve the expected earnings would result in declining investment value which in turn affects the performance of the fund. This could be minimized by diversifying a funds portfolio. The manager will employ stringent selection criteria which would effectively filter its investment components to manage downside risk. 6. Reclassification of Shariah Status This risk refers to the risk that arises from potential revision on the status of the the currently held Shariah-compliant securities in the fund may be reclassified to be Shariah noncompliant in the periodic review of the securities. If this occurs, then the value of the fund may be adversely affected where the manager will take the necessary steps to dispose of such securities in accordance with the funds Shariah compliant mandate. This risk may be mitigated by conducting periodic review by Shariah Compliance Department (SCD) and Shariah Committee (SC) of Takaful Operator. 7. Non-Compliance Non-compliance with the provisions of the deeds, prospectus, Guidelines, internal policies and relevant laws in the management of the investments. This risk can be mitigated through internal controls and compliance monitoring.
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8. Currency Adverse movements in currency exchange rates can result in a decrease in return and a loss of capital especially when investing in non-ringgit denominated unit trust funds. To mitigate risks, investments should be limited in a few countries so that the currency risk to a specific country is minimized. In addition, currency hedging may be applied to mitigate the risks. 9. Country If the fund is investment in a specific country, the investments may be affected by risks specific to that country in which investments are made such as changes in a countrys economic fundamentals, social and political stability, currency movements, foreign investment policies and etc. This risk may be mitigated by conducting thorough research on the respective markets, their economies, companies, politics and social conditions as well as minimising or omitting investments in such markets.
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Taxation and Law Covering Investment Linked Takaful Plan
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CHAPTER C13
TAXATION AND LAW COVERING INVESTMENT-LINKED TAKAFUL PLAN

OVERVIEW Taxation is one of the key considerations for the prospective investor before the investor can make any decision on the investment. Participant must also understand the provisions as per provided in the Takaful Act 1984 and the guidelines issued by Bank Negara Malaysia. In this chapter, we would look at both the taxation and law that govern the business in order to be able to advise the customers on the above. C13.1 TAXATION OF INVESTMENT LINKED TAKAFUL PLAN The principal legal document regulating income tax in Malaysia is the Income Tax Act 1967. The rates of tax and relief are stated in the Finance Act after presentation of budget for the year by the Finance Minister. Investment-linked Takaful plans are categorized as Family Takaful products. Thus, the tax aspects of an investment-linked Takaful plan are treated in the same manner as other forms of Family Takaful certificates. The contribution relief is allowable when the Takaful certificate is as follows:-
1. on the individual participant 2. on the life of the spouse of the individual participant 3. on the joint lives of the individual participant and the spouse
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For participation in Family Takaful including investment linked plan, the participant will be eligible for personal tax relief as in life insurance. The maximum amount of relief for an ordinary Family Takaful is RM6,000 per year less any contributions paid to retirement benefit schemes i.e. Employees Provident Fund. For medical and education plans, the tax relief is RM3,000 per year. Contribution paid by the participants are, therefore, deductible against income for the purpose of income tax. Unlike unit trusts, Takaful operators do not have the exemptions on gains of a unit from the realization of an investment. However, Takaful operators are taxed at lower rates i.e. 8% on the chargeable income and realized capital gains of a Family Takaful fund. Since the surpluses generated from writing the Investment Linked Takaful products are already taxed at the Takaful operator level, the proceeds distributed to participants of Investment Linked Takaful are tax-free. When a certificate mature or when it is paid upon occurrence of covered event, it becomes a capital receipt, not an income. Thus, it is not taxable since there is no capital gain. C13.2 LAW COVERING INVESTMENT LINK TAKAFUL PLAN In Malaysia, the regulation of Takaful business is achieved through the administration and its enforcement of the Takaful Act 1984. The enforcement of the Act is carried out by the Governor of Bank Negara Malaysia who is also the Director General of Takaful. The main purposes of regulation include:-
1. Protection of public interest

Ensuring that the Takaful operator is financially solvent and is able to meet its obligations to its certificate owner and claimants.
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2. Promotion of fairness and equity

Ensuring that Takaful operator, brokers and adjusters (collectively known as licensees under the Act) are fair and equitable in their dealings with their clients and claimants.
3. Fostering of competence
Insisting on a high level of professional competence and integrity of Takaful operator, brokers and adjusters.
4. Playing a developmental role

Encouraging the Takaful industry to take an active part in the economic development of the country. The Takaful Act 1984 sets out the broad standards and policies, leaving the detailed requirements to be prescribed by regulations or specified by way of guidelines, circulars and codes of good business practice. Latest guideline on Investment-Linked Insurance/Takaful Business BNM/RH/GL 010-15 issued by Bank Negara Malaysia in 2010 and took effect from November 12, 2010.
1. Definition of Investment-Linked Takaful Business

According to the latest guidelines, Investment Linked Takaful business refers to "the effecting and carrying out of a contract of Takaful on human life or annuity where the benefits are, wholly or partly, to be determined by reference to the value of, or the income from, property of any description or by reference to fluctuations in, or in an index of, the value of property of any description."
2. Requirement for Approval

The guideline further stated that registered Takaful operator shall not carry out Investment Linked Takaful business except with the prior written approval from Bank Negara Malaysia and subject to such conditions as the Bank may specify.
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Applications for approval to conduct Investment Linked Takaful business shall be submitted together with a proper business plan for the business to enable Bank Negara Malaysia to assess the expertise and technical capability of the Takaful operator to market and manage such business in an efficient and sound manner.
3. Separate Funds
Takaful operators shall establish and maintain one or more separate investment-linked funds for the purposes of administering investment linked Takaful business. The assets of such funds shall be kept separate from all other assets of the Takaful operator.
4. Investment Limits
The investments of an investment-linked fund shall be subject to the following limits, for both Malaysian and foreign assets: Counterparty Limit
a. The value of a fund's investments in equity of any single

issuer shall not exceed 10% of the funds net asset value (NAV). b. The total value of a funds investments in securities, OTC derivatives (other than for the purpose of hedging) and structured products of any single issuer/group of related issuers shall not exceed 25% of the funds NAV. Asset Limit
a. The total value of a fund's investments in unlisted

securities shall not exceed 10% of the funds NAV. b. The total value of a funds investments in structured products shall not exceed 15% of the funds NAV.
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c. The total value of a funds investments in any collective

investment scheme (CIS) shall not exceed 10% of the funds NAV. Limit on Class of Securities by a Single Issuer Notwithstanding the above, a funds investments in any class of securities of any single issuer must not exceed 10% of the total value of that class of security, except for securities issued/guaranteed by the Federal Government of Malaysia and Bank Negara Malaysia.
5. Valuation of Assets
The guideline specified that Takaful operators shall comply with the following for the valuation of assets.
a. The assets of an Investment Linked Takaful fund shall be

valued at market value daily. b. For the valuation of immovable property, Takaful operators shall apply FRS 140: Investment Properties and FRS 116: Property, Plant and Equipment, issued by the Malaysian Accounting Standards Board (MASB). The valuation of immovable properties held by Takaful operators shall be certified by an independent professional valuer at least once in every three years for investment properties (other than property purchased not more than 1 year prior to the valuation date), and once in every five years for self-occupied properties. However, takaful operators should make appropriate adjustments where the market value of the assets changes significantly during the inter-valuation period. c. For the following assets, the value should not be in excess of the fair value: i. Unlisted securities; and ii. Listed securities that have been suspended from trading by any stock exchange for 14 or more
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consecutive trading days as at the date for which the value is to be determined. The basis and techniques to be used in determining the fair value of the above assets should be disclosed to and verified by the external auditor. For Islamic debt instruments which have no active market, takaful operators or their independent valuers may use widely accepted valuation techniques that have been demonstrated to provide reliable estimates of the price.
6. Valuation of Liabilities
The basis for calculation of non-unit liabilities for investment linked Takaful certificates is as follow:
a. The appointed actuary shall conduct a valuation of the

non-unit liabilities for each investment linked Takaful certificate using cash flow projections. The liabilities in respect of the non-unit component of an investment linked Takaful certificate is valued by projecting future cash flows to ensure that all future obligations can be met without recourse to additional finance or capital support at any future time during the duration of the investmentlinked Takaful certificate. The appointed actuary shall conduct the cash flow projection using a basis no more favourable than the requirement stipulated in paragraph below. b. The appointed actuary shall conduct the cash flow projection for valuation of the non-unit liabilities for each investment linked Takaful certificate using best estimate basis. The minimum reserve will be the amount that will have to be set aside so that, when accumulated at a best estimate future rate of return, together with future positive cash flows, all negative flows in the future are zerorised. Best estimate assumptions include:
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i. Mortality: The appropriate factors based on actual

experience or a comparable industry mortality table.
ii. Investment return: The expected fund growth rate

should reflect the actual asset mix of the fund and the actuarys best estimate of the future investment yield of the underlying assets of the fund. iii. Expenses An appropriate set of assumptions shall be determined by the appointed actuary based on suitable investigations into the practices of the takaful fund and its experience; and An appropriate allowance for inflation shall be provided for in projecting future expenses. iv. Withdrawal rates An appropriate set of withdrawal rates based on the Takaful funds own experience.
c. The basis used in the valuation should be as reported in

the appointed actuarys actuarial valuation report.
d. The appointed actuary shall assess if appropriate margins

to the best estimate calculations should be included to cater for adverse volatilities. e. The appointed actuary shall assess whether to apply more stringent valuation methods if it is appropriate to do so in his from professional perspective.
7. Age Limit of Certificate Owners

The participant of an investment linked Takaful plan must be at least 18 years old. This is imposed for investment linked Takaful business in view of the need to confine the sale of such plan to individuals who are mature enough to make an evaluation of the investment risks involved and make sound investment decisions.
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8. Free Look Provision

A participant shall have 15 calendar days from the date of delivery of the certificate to examine its terms and conditions. A participant may terminate the certificate within the 15-days free look period and shall be immediately refunded any contribution paid in respect of the certificate.
9. Minimum Death Benefit

Investment Linked Takaful product shall provide for minimum death benefits (excluding riders) as follows:
a. for single contribution certificates - RM 5,000 or 125% of

the single contributions, whichever is higher; and
b. for regular contribution certificates - RM 5,000 or the

prevailing multiple of annual contributions, whichever is higher. Takaful operators may provide death benefits lower than the minimum specified above for older ages and for substandard lives, subject to a minimum of RM 5,000 or 105% of the single contributions, whichever is higher.
10. Minimum Contribution Payment

Single contribution plan must at least have a minimum contribution of RM3,000. This is to ensure a meaningful level of investment outlay for the benefit of the participant.
11. Intermediation
Only agents and other intermediaries of Takaful operators, who have passed the Takaful Basic Examination, or its equivalent, are allowed to market investment-linked Takaful products.
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12. Disclosure of Information a. Sales Materials/Illustrations

The sales/marketing illustration must meet the minimum content and other disclosure requirements specified in the Code and Guidelines on Family Takaful Products. In addition, the sales/marketing illustration for an investment linked Takaful certificate shall also comply with the format provided in the Guidelines.
b. Statement to Certificate Owners

Takaful operators shall provide to each participant a statement on the value of participants certificate at least once a year. The statement shall be distributed within two months after the end of each financial year of the Takaful operator, or the end of the reporting period where more frequent statements are provided. The statement to each participant on the status of the Investment Linked certificates must contain, but is not limited to, the information stipulated in format provided in the guidelines. Each transaction during the period should be reported individually, together with the date on which the individual transaction occurred.
c. Fund Performance Report to Certificate Owners

Takaful operators shall provide to each participant a report on the performance of each Investment Linked fund in which the participant has units at least once a year. The report shall be distributed within four months from the end of each financial year of the Takaful operator, or the end of the reporting period where more frequent reports are
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provided. For closed-end funds, Takaful operators may provide the report based on the funds financial year end. The fund performance report, which includes the audited financial statements and the notes to the accounts, shall contain the minimum information as stipulated in format provided by the Guidelines. C13.3 OTHER LEGAL REQUIREMENTS Investment linked Takaful business is not only subject to the Takaful Act, 1984 and Regulations but also to special legal principles that are embodied in Takaful contracts such as insurable interest, utmost good faith, indemnity, proximate cause, as well as to laws pertaining to the formation of contracts to agencies and to companies which are applied similarly to other classes of Family Takaful.
Identifying and Establishing Customer Needs
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CHAPTER C14
IDENTIFYING AND ESTABLISHING CUSTOMER NEEDS

OVERVIEW In this chapter, we will look at the process of providing advice which would help the agent in conducting their business professionally. We will look at each of the processes and understand what needs to be done. C14.1 INTRODUCTION Takaful agent is facing new challenges which are very different compared to 15 years ago. The new financial landscape whether globally or locally has made everyone become more cautious before getting into any investment portfolio. The financial terms and jargons are confusing and clients also do not have adequate knowledge of how different financial market mechanisms work. In order to identify and establish a customers needs and an agent will required to apply the relevant knowledge and understanding, not only of the technical aspects of Family Takaful coverage and scope, but also the practice of giving financial advice in order to meet the customers needs. The structured process of providing advice involves the following steps:-
1. 2. 3. 4. 5. 6.
Establishing and defining the client-agent relationship. Gathering all relevant financial data, including goals. Analyzing and evaluating the client financial status. Developing and presenting recommendations. Implementing the recommendations. Monitoring the recommendations.
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C14.2 ESTABLISHING AND DEFINING THE CLIENTAGENT RELATIONSHIP The foundation for successful Takaful sales is trust and if the prospect does not trust an agent, it will be very difficult to close the sale. Building a circle of trust is an essential part of client engagement for any successful and profitable Takaful professional. Agents have to begin this process by establishing a relationship with the client. Establishing a trusting relationship is the first step in effectively engaging the client so that they can openly discuss their financial needs with you. Whether you call them customers, clients, or buyers, you must understand and acknowledge that they are all individuals who bring their own biases, opinions, attitudes, and knowledge and perceptions to this exchange The agent has to convince the client that he is in a position to assist the client to fulfill the clients financial goals. This is an important step. The agent must ask the right questions to find out why they are looking, what they are looking for, their current and future needs, and their past experience with insurance and other agents in order to gain the confidence of the client as a trusted advisor who they can rely upon to recommend the right product for the right reasons. The agent has to really focus and gather information. In the end, the agent will have essentially built a group of quality prospects. C14.3 GATHERING ALL RELEVANT FINANCIAL DATA INCLUDING GOALS The next step is for the agent to gather all relevant data that will assist the agent to do an analysis of what is needed in planning for the client. The agent has to conduct a thorough fact-find exercise and obtain all relevant data to enable the agent to move to the next step. The agent should ask for information about the client
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financial situation, personal and financial goals understand the client time frame for results and discuss. All Takaful operators have made it mandatory for their agents to fill up the Customer Fact Find Form before submitting the new business proposal. The Customer Fact Find Form is an important document and it helps the agent obtain all the relevant information about the client to ascertain the clients financial situation and also to establish the clients needs. The Customer Fact Find Form addresses the following areas; Customers Personal and Dependents details Life and Financial Priorities and Goals Risk Profile Net Worth Analysis Cash Flow Analysis Recommendations and Record of Advice
The above information will allow the agent to build a clear understanding of the customers present situation and help the agent to formulate recommendations to achieve the customers financial goals and objectives. C14.4 DEVELOPING PLANS AND STRATEGIES TO MEET THE GOALS The agent should analyze the clients information to assess the current situation and determine what is required to meet the clients goals. The agent has to develop the pertinent plans that will help the client to realize the goals. The analysis will provide recommendations that will satisfy the clients need in areas like; Adequate coverage Planning for childrens education Retirement planning
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Asset accumulation Estate planning
The list above is not exhaustive but these are the main areas that most of us worry about. Developing a constructive plan to meet the clients need is important and this has to be done prudently. C14.5 DISCUSS POSIBBLE RECOMMENDATIONS Once the plan has been developed, the agent will then have to sit and discuss in length, the plan that has been developed for the client. The agent should offer recommendations that address the clients goals, based on the information gathered. The agent should go over the recommendations with the client to ensure the client understands and so that the client can make informed decisions. The agent should also listen to the clients concerns and revise the recommendations as appropriate. Every client is different, so if an agent is thinking of duplicating one strategy or plan for multiple clients, then the agent is wrong. A plan that has been developed is unique only to the particular client and the agent must understand this. C14.6 IMPLEMENTING THE RECOMMENDATIONS The client and agent should agree on how the recommendations will be carried out. The agent may carry out the recommendations and put into effect all the recommendation as per the discussion and any changes to the amount of cover of contribution must be communicated to the client before it is put through. C14.7 MONITORING THE RECOMMENDATION Monitoring the clients certificate is a very important function in an agents scope of work. Regular monitoring must be done and the client should also be informed of the progress of his policies. As we are dealing with Investment-Linked takaful products, the
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product provider will send a quarterly or yearly report to the clients. The agent must be sure that the client gets these reports and also be at hand to help explain the report to the client. The agent also has a moral obligation to ensure that the funds growths are in tandem with the initial objectives established. The agent must assist the client to make the necessary switching and adjustments to ensure that the client gets the best returns from the certificate. Agents must commit themselves to do a certificate review on a half yearly basis or yearly basis. Ad hoc reviews can also be done if there is a special need form the client or if there is a major change that might have happened to the clients investment account. It is good to do these regular reviews as this will also be an avenue for the agent to obtain quality referrals from the clients to further expand their Family Takaful business. It also allows the agent to be in a place to do cross selling of other takaful related products whilst conducting these reviews.
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Family Takaful Practices: Marketing and Services
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CHAPTER C15
FAMILY TAKAFUL PRACTICES: MARKETING AND SERVICES, ETHICS AND CODE OF CONDUCT
OVERVIEW This chapter will touch on the most basic tenets of takaful selling and the ways and means how this should be conducted in a professional manner. It cannot be over-emphasize the importance of ethics and proper conduct of agents in the course of their endeavor to achieve their targeted sales, but for the clients interest utmost in their mind. C15.1 INTRODUCTION The issues about ethics and Code of Conduct for agents have been an on-going concern for all stakeholders since the first takaful operator started operations in Malaysia way back in the late 1980s. But the growth of this industry has been nothing but impressive, out-performing their conventional counter parts consistently in the past ten years. This is evidenced by the Consolidated Takaful Operators Statistics as per the Annual Takaful Statistics 2010 published by BNM (www.bnm.gov.my). As the market is becoming more competitive due to new entrants, takaful operators are finding new ways and means to increase takaful penetration rate in Malaysia. And one of the strategies has been to improve and develop the skills of their agency force through intensive training on Marketing and Services as well as their understanding and observing a higher degree of ethics and Code of Conduct. The impact of a better agency force can create a positive and long term impression, thus making it easier for takaful products and services to flow.
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C15.2 MARKETING Marketing is more arts than science, but beginners need to have their building blocks in place before they can embark on this challenging career as a Takaful Agent. And the following information is indeed a must know in their goody bags when facing their prospective clients: 1. 2. 3. 4. 5. Introduction General Sales Principles Explanation of the Contract Disclosure of Underwriting Information Accounts and Financial Aspects
Introduction The following general terminology must be understood and it means as follows: 1. The term family takaful used in the Code of Ethics and Conduct covers all types of: a. Home Service b. Ordinary Family c. Annuities d. Pension Scheme e. Investment-Linked Takaful and f. Permanent Health Takaful. 2. The Code applies to all intermediaries, i.e. all persons, including staff of a takaful operator who markets any of the family takaful products. Registered insurance brokers and/or takaful brokers are specifically excluded, as they are subject to a separate professional code of conduct. 3. The onus is placed on the member companies of Malaysian Takaful Association to enforce the code and to use their best endeavours to ensure compliance with the various provisions
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of the Code, by all those involved in marketing the certificates. The Audit/Disciplinary Committee of the takaful operator is responsible for monitoring compliance by Family takaful intermediaries. The Committee is also responsible for the submission of the quarterly report to Bank Negara Malaysia on breaches observed in a quarter and the corrective or punitive actions taken. 4. In the case of complaints from the participant that an intermediary has acted in breach of the Code, the intermediary shall be required to cooperate with the takaful operator concerned in establishing the facts. The complainant shall be informed that the complaint can be forwarded to the relevant takaful operator, if not so referred. 5. It is stressed that an overriding obligation of an intermediary is to conduct business at all times with utmost good faith and integrity. General Sales Principles This and the following sections as detailed below are extracted from the Code of Ethics and Conduct to maintain the full spirit of the codes. 1. The intermediary shall: a. when making contact with prospective participant, make it known that the agent is representing which of the takaful operator and produce the Registered Intermediary Authorisation Card; b. ensure as far as possible that the certificate proposed is suitable to the clients need and not beyond the clients financial resources;
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c. give advice only on those matters in which the agent is competent to deal with and seek or recommend other specialist advice if this seems appropriate; d. maintain all information supplied by the prospective participant must be kept completely confidential e. when making comparisons with other types of policies, takaful certificates, or other forms of investment, make clear the different characteristics of each policy / certificate / investment, without specifically mentioning the name(s) of the takaful operator f. render continuous service to the participant. 2. The intermediary shall not: a. make inaccurate or unfair criticisms of any takaful operators; b. attempt to persuade a prospective participant to cancel any existing certificates unless these are clearly unsuited to the participants needs. It has been agreed by all member companies of the Malaysian Takaful Association that all agents and intermediaries are being made fully aware that it is against the interests of a participant and the takaful industry to practise Replacement of Certificate or otherwise known as twisting. The member companies have also agreed to cooperate to eliminate this practice. In the event Replacement of Certificate can be proven, appropriate action can be taken against the said agent. Definition of Replacement of Certificate To discontinue a certificate or to have a certificate made paid-up and then to effect a new one with another takaful operator or the same takaful operator.
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The detriment that arise from Replacement of Certificate are: 1. Every time a participant moves the basic coverage from one takaful operator to another, the participants certificate must commence again the qualifying period (usually two or three years) before the new contract will become eligible for a surrender value and come under the non-forfeiture mode (i.e. the protection being lapsed and/or loss of death benefit should the participant accidentally or deliberately fail to pay a contribution within the grace of period). 2. The amount of the annual contribution under an existing certificate may be lower than the new one with similar benefits. Any replacement of the same type of certificate will normally be at a higher contribution rate based upon the participants then attained age. 3. Since the initial costs of family takaful certificates are charged against the cash value in the earlier certificate years, the replacement of an old certificate with a new one results in the participant sustaining the burden of these costs twice. 4. The suicide clause and the incontestable clause (if any) starts all over again with the new certificate but which would have been paid / eligible under the certificate which was replaced. Explanation of the Contract 1. The intermediary shall: i. explain all the essential provisions of the contract or contracts to the prospective participant; ii. draw attention to any restriction including exclusions under the certificate; iii. draw attention to the long-term nature of the certificate and to the consequence of early discontinuance and/or surrender. 2. Where a certificate offers profit-sharing, or otherwise depending on a number of variable factors such as investment
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performance, descriptions of the benefits distinguished between fixed and projected benefits. In the case of a collateral certificate where the maturity proceeds are for loan settlement but which are dependent on non-guaranteed benefits, the sales illustration should mention that there is no guarantee that the full loan amount will be available on maturity. 3. Where projected benefits are illustrated, it should be made clear that they are based on certain assumptions, and hence are not guaranteed, and these benefits declared in the future may be lower or higher than those presumed, (past performance may not necessarily be repeated in the future). In the case of investment-linked certificates, it should be made clear that unit values may fluctuate up or down depending on the value of the underlying investments. 4. When an intermediary has been supplied with an illustration by the takaful operator, the intermediary shall use the whole illustration in respect of the contract which the intermediary is discussing with the prospective participant, and no other, and shall not add to it or select only the most favourable aspects of it. Disclosure of Underwriting Information The intermediary shall on obtaining the completed proposal form or any other material:i. avoid influencing the proposer and make it clear that all the answers or statements are the proposers own responsibility; ii. ensure that the consequences of non-disclosure and inaccuracies are pointed out to the proposer by drawing attention to the relevant statements in the proposal form and by explaining them to the proposer.
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Accounts and Financial Aspects The intermediary shall:1. acknowledge receipt (which unless the intermediary has been otherwise authorised by the takaful operator shall be on his own behalf) and maintain a proper account of all moneys received in connection with a takaful certificate and shall distinguish such contribution from any other payment included in the moneys; 2. forward to the takaful operator without delay any moneys received for Family takaful. C15.3 GUIDELINES ON THE CODE OF CONDUCT This part deals with the following aspects: 1. 2. 3. 4. 5. Code of Ethics (Statement of Philosophy) Coverage Monitoring Devices Seven Principles of the Guidelines Code of Conduct - Only a Guide
Code Of Ethics (Statement of Philosophy) The guidelines are based on the following statement of philosophy: 1. The Family Takaful Business is based on the philosophy of risk sharing. It is universal that such business be operated and administered with the highest degree of integrity and ethics. 2. It is a business based on trust and honesty, requiring a high degree of responsibility and professionalism. 3. The confidence of participants and members of the public in the integrity and honesty of takaful operators shall be safeguarded and enhanced.
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4. Takaful operators shall at all time see that their business is soundly managed to ensure the safety of participant savings and the credibility of their companies. 5. Takaful operators shall maintain a system efficient and prompt service to participants and, to assist and advise them where necessary, with the aim of promoting goodwill. In pursuance of the above objectives and philosophy, the takaful industry has endeavored to codify the ethics to provide guidance to those employed in the industry to promote and maintain uniform ethical standards, and to uphold the trust and welfare of participants at all times. The sections that follows provide summaries of the codified ethical rules which the employees of the takaful operator are expected to abide by at all times. Coverage The guidelines cover all employees of the takaful operator undertaking business in Malaysia. The guidelines set out the minimum standards of conduct expected of all employees of the takaful operator. Takaful operators, if they so desire, are free to formulate more comprehensive sets of rules for maintaining ethical standards amongst their employees. Monitoring Devices To ensure adherence to the guidelines, the management of a takaful operating company is required to establish the following minimal procedures:1. require all employees (existing and upon appointment in the case of new employees) to sign a declaration to observe the guidelines;
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2. require all intermediaries (existing and upon appointment in the case of new intermediaries) to sign a declaration to observe the guidelines; 3. assign responsibility to the heads of department to ensure compliance with the guidelines on a day-to day basis and to handle enquiries from employees on matters relating to the code of conduct; 4. breaches observed are to be reported to an Audit / Disciplinary committee which reports directly to the Malaysian Takaful Association Management Committee. In addition, the committee is required to submit quarterly reports to Bank Negara Malaysia, on breaches observed and the actions taken on these, during the quarter; 5. maintain centralised records of breaches; 6. report immediately cases of fraud to the Police and Bank Negara Malaysia C15.4 ETHICS AND CONDUCT The Seven Principles Underlying The Guidelines The document on the Code of Ethics and Conduct dwells at length on the following principles. It is sufficient at this juncture to state these; (interested reader is encouraged to refer to the document.) 1. 2. 3. 4. 5. To avoid conflict of interest; To avoid misuse of position; To prevent misuse of information; To ensure completeness and accuracy of relevant records; To ensure confidentiality of communication and transactions between the takaful operator and its participants and clients; 6. To ensure fair and equitable treatment of all participants and others who rely on or who are associated with the takaful operator; 7. To conduct business with the utmost good faith and integrity.
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C15.5 COMMISSION AND COMMISSION DISCLOSURE An efficient and responsible takaful operator is one that conducts its business in a prudent manner which includes the exercise of control over collection of contributions, expenses and its business development strategies. Bank Negara Malaysias guidelines on Operating Costs of Family Takaful Business issued December 2003, amongst others, draws the limit for the amount of commissions payable to family takaful agents. It also sets to limit the agency commission to related expenses and other management expenses. Indeed, the guidelines also set the Agency Structure that the takaful operators will have to adopt in the course of running their sales agencies. Maximum percentage of agency commission payable on a Family takaful certificate with contribution paying duration of 20 years or more is set and limited as follows:
1 2 3 4 Commission to agents Overriding commission to agency leaders Production Bonus and Persistency Bonus to agents Production Bonus to agency leaders TOTAL 110% 41% 15% 5% 171%
Commission Structure for Family Takaful Business Agents are also compelled to disclose commissions received on a particular business transacted whenever requested by the respective client / participant. C15.6 FAMILY TAKAFUL PRACTICE This part deals with the following aspects: 1. Introduction 2. Claims 3. Proposal Forms
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4. Certificates and Accompanying Documents 5. Sales Materials / Advertisements Introduction The aim of this part is to reduce the formalities involved in the issue of new certificates and payment of a claim. BNM came up with a guideline called Proper Advice Practices for Family Takaful Business which was effected in March 2004. In addressing these, the guidelines recognize the problems posed by non-disclosures and improper claims, albeit by a few participants. Due to these and possibly other reasons, the Statement of Practice is not made mandatory. The Audit/Disciplinary Committee of Malaysian Takaful Association is responsible for monitoring compliance with the guidelines by member takaful operators. It is also responsible for submitting reports to Bank Negara Malaysia on the breaches and the corrective or punitive actions taken. Claims 1. The guidelines require that the takaful operator may not unreasonably reject a claim. In particular, a takaful operator may not reject a claim on the grounds of non-disclosure or misrepresentation of a matter that was outside the knowledge of the proposer. The exceptions to this are those circumstances mentioned in the certificate provisions or the provisions of the Takaful Act 1984, together with other related regulations. 2. If there is a time limit for the notification of a claim, the claimant will not be expected to do more than to report a claim and subsequent developments as soon as reasonably possible. 3. On the claimant proving the covered event and the right to receive the claim, the claim has to be settled without undue delay, generally within 60 days. 4. The takaful operator shall not collect any claim processing fees from the participant or the beneficiary.
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Proposal Forms 1. If the proposal form requires the disclosure of material facts, then a statement should be included in the declaration or prominently displayed elsewhere on the form or in the document of which it forms a part. a. drawing attention to the consequences of failure to disclose all material facts. b. warning that if the prospective participant is in any doubt about whether certain facts are material, these facts should be disclosed. 2. A takaful operator shall provide a copy of the signed proposal form to the participant together with the original certificate. Certificates and Accompanying Documents 1. Takaful operators will continue to develop clearer proposal forms and certificate documents taking into consideration the legal nature of takaful contracts. In addition to proposal form, the client/proposer must also sign the Customer FactFinding during the process of concluding the purchase of a Family takaful cover. This is in line with the requirements of the Proper Advice Practice (PAP) Guidelines. 2. The certificate and accompanying documents must indicate whether there are rights to a surrender value. If the certificate carries a right to a surrender value then this right must be indicated. In respect of a proposal for term cover, or endowment takaful, the sales literature should bring out the following features of these contracts: a. that these are long-term contracts; b. surrender values, especially in the early years, are often less than the total contributions paid.
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C15.7 PROMOTION MATERIALS / ADVERTISEMENTS Takaful operators will ensure that information contained in the sales materials and advertisements are correct and truthful and thus not misleading to the public. This will ensure that the business is being conducted in compliance with the requirements of Shariah at all times.
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