mudarabah takaful model works on the following basis: takaful operators (known
as shareholders) bear all expenses incurred in operating the business and as a
reward, takaful operators are entitled to share underwriting excess and investment
profits. This is an adjustment of mudarabah Islamic commercial contracts
between takaful operator and participants (or policyholders) who provide (contribute)
the capital. The biggest dissent of this model is underwriting excess is
non-profit. It is excess of premium over claims known as surplus. This business
model is difficult to manage where expenses are fixed but income (surplus) is
not. However, this is a very good model from the perspective of participants because
they do not directly contribute to the operator’s cost. All their contributions
are available to meet claims. Only when there is any excess of contribution to
the claim, the operator will be compensated for the expenses incurred, and even
if only to the extent that the surplus is sufficient to meet this expense.


  Contribution into the takaful risk pool is
deemed as donation which under the Islamic contract of tabarru’, towards the
expected increase in claims. The adoption of tabarru’ and the risk-sharing
concept in this risk pool address the Shari’ah’s fundamental concerns about
conventional insurance. However, the tabarru’ will not be exactly equal with
the claim. If tabarru’is inadequate, there will be a deficit; if it is excessive,
there will be surplus. Surplus under the mudarabah takaful model is crucial for
companies to commercially viable. If take away the surplus sharing then the
whole model will collapse.


         However, the mudarabah takaful model
is an unpopular choice. In Malaysia, only two of takaful operators practice
this mudarabah model.

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Wakalah Model


  Under wakalah model, the surplus is referred
to the surplus contributed by the participant into the Risk Fund based on
tabarru’ contract. Upon reaching a financial period, the sum of tabarru’ will
not be equal with the amount the claim. If the tabarru’ amount is less than the
sum of claims then the Risk Fund will be deficit, otherwise the tabarru’ amount
exceed the claim then the Risk Fund will have a surplus.


  The wakala model is the default standard for
takaful. Operators charge and carry out takaful operations. For takaful
operators, he makes a profit if wakala fee exceed expenses.


  The surplus is actually the excess premium
paid by the participants, so the surplus refund can be explained as a
experience refund. Once this is accepted, then the surplus is belongs of the


  In Malaysia, several takaful companies
provide shareholders to share in experience refund. Given that the participants
are responsible for the deficit in the risk pool, it may seem odd that
participants should share any excessive contribution to the shareholders. Many
see this as an incentive compensation to the operator to manage the portfolio
well, as evidenced by the surplus. However, whether this incentive is necessary
given since the operators have already received a fee for underwriting
services. As practised in Malaysia, wakala models is a model where operators
only impose their management and distribution costs through wakala fees, while
the profits are from the sharing of any underwriting surplus. There is also a
wakala model where even management expenses and distribution costs are met from
underwriting surpluses and zero fees are charged. This last extreme wakala model
is similar to the mudarabah model. Even some Shari’ah scholars will also
describe mudarabah model as a wakala model with zero fees


  We can explain this wakala model from the
perspective of both participants and operators. From a participant’s
perspective, the decision on the use of a wakala model whether operators share
in excessive premiums or not will depend on how much higher is the wakala fee
he has to pay. It is not always clear that having a share of the operator in
the the underwriting surplus gives the participants the best value proposition.


operator’s perpective, the wakala fee is determined as the sum of:

Management expenses;

Distribution costs include commissions; and

Benefits to the operator


Given a scenario where the
surplus and deficit are in the participant’s account and where the operator’s
solvency requirements, hence the capital requirements are not excessive. It is
possible to impose a low wakala fee, thereby benefiting the participants. If
the operator’s profit depends solely on the underwriting surplus, then such as
the mudarabah model, this wakala model will not be commercially sustainable in
the long run.



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