Takaful - Savings Through Family Takaful

Family Takaful can combine protection and savings/investment within the same arrangement.

Instead of the entire gross contribution going into the Participants’ Risk Fund (PRF), the contribution can be divided into different components. One portion provides Takaful protection through tabarru’, while another portion is accumulated and invested for the participant.

The basic idea is:

Family Takaful Contribution = Protection Component + Savings/Investment Component

1. Splitting the Gross Contribution

Suppose Ahmad pays a Family Takaful contribution of:

RM1,000

The contribution may be divided, for illustration, into:

RM200 → Tabarru’ / protection component

RM800 → Savings or investment component

Therefore:

RM1,000 = RM200 Tabarru’ + RM800 Savings/Investment

The two portions serve different purposes.

The tabarru’ portion supports mutual protection against specified covered events.

The savings/investment portion is accumulated and invested for the participant according to the structure of the Family Takaful product.

2. Purpose of the Tabarru’ Component

The tabarru’ portion is allocated to the risk fund to provide protection against covered events, particularly the possibility that the covered person dies before the end of the Family Takaful contract.

For example:

Ahmad enters a 20-year Family Takaful arrangement.

The intention may be to accumulate savings until the end of the 20 years.

However, Ahmad could die in Year 5.

The tabarru’ component helps fund the Takaful protection that responds to this risk.

Therefore:

Tabarru’ → Protection Against Covered Risk

3. Purpose of the Savings Component

The savings component has a different purpose.

It is accumulated and invested over the duration of the Family Takaful contract.

The objective is generally to build an amount that can be paid at the end of the contract period, subject to the product terms and actual investment performance.

Therefore:

Savings Contribution → Investment → Accumulation Over Time

This is why some Family Takaful products combine:

Protection + Long-Term Savings/Investment

4. Two Ways the Savings Component Can Be Managed

The savings component may broadly be structured in two ways.

A. Participants’ Investment Account

The savings portion can be accumulated in a Participants’ Investment Account.

Under this arrangement, the Takaful operator has responsibility for managing how the relevant funds are invested according to the applicable contractual structure.

Therefore:

Participant contributes

↓

Savings portion allocated to investment account

↓

Operator manages investment

↓

Investment results credited according to the applicable arrangement

B. Investment-Linked Account

Alternatively, the savings component may be used to purchase units in an:

Investment-Linked Fund

In this structure, the participant may select from available investment funds according to the participant’s investment preferences and the options provided by the operator.

For example, available choices might differ in their investment strategies and risk profiles.

Therefore:

Participant contributes

↓

Savings portion purchases investment units

↓

Participant selects available investment option

↓

Account value changes according to investment performance

The exact structure depends on the particular Family Takaful product.

5. Investments Must Be Shari’ah-Compliant

The savings/investment component cannot simply be invested anywhere.

The funds must be invested in:

Shari’ah-Compliant Investments

Depending on the product and applicable framework, these may include instruments such as:

Sukuk

Shari’ah-compliant equities

Islamic money-market instruments

and other permissible investments.

Therefore:

Savings → Shari’ah-Compliant Investment → Investment Return or Loss

6. How Does the Takaful Operator Earn Income From Managing Investments?

The operator provides investment-management services.

The arrangement described uses either:

Wakalah

or:

Mudarabah

These concepts determine how the operator is compensated for managing the participant’s investment funds.

7. Wakalah Approach

Under Wakalah, the Takaful operator acts as an:

Agent (Wakil)

The operator manages the investment activities and charges an agreed:

Wakalah Fee

For example, suppose the participant has:

RM100,000

invested.

If the applicable Wakalah investment-management fee were:

1.5% per year

then, in a simplified illustration:

RM100,000 × 1.5% = RM1,500

The operator receives the agreed fee for providing the investment-management service, subject to the actual contractual terms.

8. Mudarabah Approach

Under Mudarabah, the relationship is based on profit sharing.

In simplified terms:

Participant → Provides Investment Capital

Operator → Manages Investment

If investment profit is generated, it is divided according to an agreed profit-sharing ratio.

For example:

Investment profit:

RM10,000

Suppose the agreed operator share is:

30%

Then:

Operator = RM10,000 × 30% = RM3,000

Participant’s share:

RM10,000 × 70% = RM7,000

Therefore:

Investment Profit → Shared According to Agreed Mudarabah Ratio

9. A Mudarabah Percentage Is Not the Same as a Wakalah Fee

This distinction is important.

Under Mudarabah, an operator’s percentage such as:

30%

refers to an agreed share of investment profit in the example.

It does not mean that 30% of the participant’s entire investment capital is automatically taken by the operator.

For example:

Investment capital = RM100,000

Investment profit = RM10,000

30% Mudarabah share applies to:

RM10,000 profit

not:

RM100,000 capital

Therefore:

30% × RM10,000 = RM3,000

10. What Does 150 Basis Points Mean?

The material also refers to a Wakalah fee of:

150 basis points

A basis point (bp) means:

0.01%

Therefore:

100 basis points = 1.00%

and:

150 basis points = 1.50%

For example:

Invested amount:

RM100,000

At 150 basis points:

RM100,000 × 1.5% = RM1,500

So the illustrative Wakalah fee would be:

RM1,500

11. Regulatory Attention to Charges

Charges are important because excessive deductions can reduce the amount available for the intended purposes of the Family Takaful arrangement.

The regulator therefore has an interest in ensuring that fees and charges do not undermine the financial soundness of the arrangement, including the adequacy of amounts supporting expected claims and obligations.

The general principle is:

Contribution

minus

Applicable Fees and Charges

must still leave the relevant funds sufficiently financed to meet their obligations.

This connects directly with the earlier concept of actuarial adequacy.

12. Primary Purpose of Savings-Oriented Family Takaful

Where a Family Takaful product contains a substantial savings component, an important objective may be to accumulate a:

Lump Sum at the End of the Contract Period

For example, Ahmad enters a:

20-year Family Takaful plan

Throughout the 20 years, part of Ahmad’s contributions is invested.

If Ahmad survives until maturity, the accumulated savings/investment value is paid according to the contract terms.

Therefore:

Contributions → Investment → Long-Term Accumulation → Maturity Benefit

13. Why Can the Tabarru’ Portion Be Relatively Small?

In the type of savings-oriented Family Takaful arrangement described, the primary objective is long-term accumulation together with protection.

Therefore, a larger proportion of the contribution may be directed toward savings/investment, while a smaller proportion is allocated as tabarru’ for protection.

The material gives an illustration where tabarru’ may be:

Not more than about 20% of total contribution

However, this should not be treated as a universal rule for all Family Takaful products. Actual allocations depend on product design, age, sum covered, risk, fees, actuarial assumptions, regulation and other factors.

For study purposes, the concept is:

Larger Savings Component + Smaller Protection Component

for the particular savings-oriented structure being described.

14. Simple Contribution Example

Suppose annual contribution is:

RM10,000

For a simplified illustration:

RM2,000 → Tabarru’

RM8,000 → Savings/Investment

Therefore:

20% Protection + 80% Savings/Investment

The RM2,000 supports the mutual risk fund.

The RM8,000 is accumulated and invested according to the product structure.

Again, the percentages are illustrative rather than universal.

15. Why Is Tabarru’ Needed if the Main Objective Is Savings?

Suppose Ahmad intends to save for:

20 years

If Ahmad survives the full 20 years, the accumulated investment can provide the maturity benefit.

But what happens if Ahmad dies in:

Year 5?

Only five years of savings may have accumulated.

Without a protection component, the accumulated savings could be substantially below the intended financial protection amount.

This is where the tabarru’ component becomes important.

It provides protection against:

Premature Death During the Contract Period

16. Example of Death Before Maturity

Suppose the Family Takaful certificate provides a sum covered of:

RM200,000

At the time of death, Ahmad’s accumulated savings are:

RM40,000

If Ahmad dies before the contract expires, the structure described provides:

Sum Covered + Accumulated Savings

Therefore:

RM200,000 + RM40,000

=

RM240,000

would be payable according to the simplified example and relevant certificate terms.

This demonstrates the two components.

Protection Component

RM200,000

plus:

Savings Component

RM40,000

=

RM240,000 Total Benefit

17. What Happens if the Participant Survives Until Maturity?

Suppose Ahmad completes the full contract period.

The savings/investment component has accumulated over time.

At maturity, the applicable accumulated amount becomes payable according to the product terms.

Therefore, the Family Takaful arrangement can provide:

Death Before Maturity → Protection Benefit + Applicable Accumulated Savings

while:

Survival to Maturity → Applicable Accumulated Savings/Maturity Benefit

The exact benefit structure depends on the certificate.

18. Investment Earnings Can Help Build the Savings Component

The savings component is invested rather than simply being left idle.

Suppose:

Annual savings allocation:

RM8,000

Over many years, investment returns may increase the accumulated value.

Conceptually:

Savings Contributions + Net Investment Returns = Accumulated Investment Value

This explains why the eventual accumulated amount may exceed the simple sum of the savings amounts contributed—but that outcome depends on investment performance and is not automatically guaranteed.

19. What Is the Crediting Rate?

The crediting rate refers, in the structure described, to the investment return credited to the participant’s savings component after the applicable operator remuneration.

Under a simplified Mudarabah arrangement:

Investment Return − Operator’s Mudarabah Profit Share = Return Credited to Participant

For example:

Investment profit:

RM10,000

Operator’s Mudarabah share:

30% = RM3,000

Participant’s share:

RM7,000

Therefore, RM7,000 would represent the participant’s share of the investment profit in this simplified example.

20. Under Wakalah

Under a Wakalah investment arrangement, the operator receives an agreed fee rather than a Mudarabah share of profit.

Conceptually:

Investment Assets → Investment Performance

minus:

Applicable Wakalah Fee/Charges

=

Net Investment Result for Participant

The exact calculation depends on the contract and product structure.

21. Investment Profit Is Not Guaranteed

This is extremely important.

Neither a Mudarabah nor a Wakalah investment arrangement automatically guarantees investment profit.

Investments can perform well.

They can also perform poorly.

Therefore:

Investment Return Can Be Positive, Zero, or Negative

For example:

Initial investment:

RM100,000

Good investment performance might increase the value to:

RM108,000

But poor investment performance could reduce the value to:

RM95,000

subject to the actual investment structure, charges and underlying assets.

Therefore:

The savings/investment component should not automatically be treated like a guaranteed bank deposit.

22. Why Can There Be an Investment Loss?

Shari’ah-compliant investment does not mean:

Risk-Free Investment

It means the investment must comply with Shari’ah requirements.

The value of permissible investments can still rise or fall.

For example, Shari’ah-compliant equities may decline in market value.

Therefore:

Shari’ah-Compliant ≠ Guaranteed Profit

This distinction is important when explaining Family Takaful investment products.

23. Tabarru’ and Savings Must Not Be Confused

The two components have fundamentally different purposes.

Tabarru’

Used for:

Mutual Risk Protection

It goes into the relevant risk fund and should not simply be treated as the participant’s personal savings.

Savings/Investment Component

Used for:

Personal Investment Accumulation

It is invested for the participant according to the applicable product structure.

Therefore:

Tabarru’ ≠ Personal Savings

and:

Savings Account ≠ PRF

24. Complete Example

Suppose Sarah pays:

RM12,000 per year

into a savings-oriented Family Takaful arrangement.

For illustration:

RM2,000 → Tabarru’

RM10,000 → Savings/Investment

The RM2,000 contributes toward mutual protection.

The RM10,000 is invested in Shari’ah-compliant assets.

Suppose after several years Sarah’s accumulated savings/investment value reaches:

RM80,000

The certificate provides a death benefit of:

RM300,000

If Sarah dies during the covered period, the structure described could provide:

RM300,000 Sum Covered

• ●

RM80,000 Accumulated Savings

=

RM380,000

subject to the actual certificate terms.

If Sarah instead survives until maturity, the applicable accumulated investment value would form the maturity benefit according to the contract.

25. Full Flow of Savings Through Family Takaful

Gross Family Takaful Contribution

↓

Contribution is allocated between:

Tabarru’ + Savings/Investment

↓

Tabarru’

goes toward:

PRF → Mutual Protection → Covered Claims

while:

Savings/Investment

goes toward:

Shari’ah-Compliant Investments → Investment Performance → Accumulated Value

↓

Operator manages investments under:

Wakalah or Mudarabah

↓

Applicable:

Wakalah Fee or Mudarabah Profit Share

↓

Remaining investment value/return is reflected in the participant’s savings component according to the contract.

Easy Way to Remember

Use:

SPLIT → PROTECT → INVEST → ACCUMULATE → PAY

SPLIT

Gross contribution is divided into protection and savings/investment components.

PROTECT

Tabarru’ supports the PRF and provides protection against covered risks.

INVEST

The savings component is invested in Shari’ah-compliant instruments.

ACCUMULATE

Investment value accumulates over the contract period, depending on performance.

PAY

The applicable accumulated amount is paid at maturity, while death during the covered period can trigger the protection benefit together with applicable accumulated savings according to the certificate.

Simple Formula

Gross Contribution = Tabarru’ Component + Savings/Investment Component + Applicable Fees/Other Allocations

For the investment side:

Savings Contributions + Net Investment Result = Accumulated Investment Value

And, in the death-benefit structure described:

Death Benefit = Sum Covered + Applicable Accumulated Savings

Important Numbers From the Material

The figures such as:

Tabarru’ not more than 20%

30% Mudarabah profit share

and:

150 basis points (1.5%) Wakalah fee

should be understood as illustrative/product-specific figures in the material rather than universal rules for all Family Takaful arrangements.

Actual percentages and charges depend on the product, operator, contract, actuarial design and applicable regulatory requirements.

One-Sentence Summary

In savings-oriented Family Takaful, the gross contribution is divided so that one portion is allocated as tabarru’ for mutual protection while another portion is invested in Shari’ah-compliant assets to build the participant’s long-term savings; the operator manages the investment under arrangements such as Wakalah or Mudarabah, investment profits are not guaranteed, and the accumulated savings may provide a maturity benefit or be paid together with the applicable protection benefit if the covered person dies before the end of the contract period.

Takaful - Tabarru’ as a Unilateral Commitment and Compensation as a Conditional Obligation

The concept of iltizam bi al-tabarru’ helps explain why Takaful is not simply regarded as a bilateral exchange of a contribution for compensation.

The key idea is:

The participant’s tabarru’ is treated as a unilateral commitment to donate, while compensation from the Participants’ Risk Fund (PRF) is a separate conditional obligation that arises only when a specified covered event occurs.

1. Tabarru’ Is a Unilateral Commitment

Under the Maliki concept of iltizam bi al-tabarru’, the participant makes a binding commitment to contribute money to the common risk fund on a tabarru’ basis.

Iltizam means a commitment or undertaking.

Tabarru’ means a donation or gratuitous contribution.

Therefore:

Iltizam bi al-Tabarru’ = Binding Commitment to Donate

It is described as unilateral because the participant’s commitment to donate is treated as an obligation undertaken from one side rather than as the purchase price for a direct countervalue.

For example:

Ahmad contributes:

RM1,000 as Tabarru’

The structure is:

Ahmad → RM1,000 Tabarru’ → PRF

The RM1,000 is therefore contributed to the collective risk fund for mutual protection.

2. Compensation Is Not the Direct Countervalue of Tabarru’

The important point is that the arrangement is not characterised simply as:

RM1,000 Tabarru’ ↔ RM50,000 Compensation

If this were the structure, it could appear that Ahmad was paying RM1,000 to purchase an uncertain amount of money in return.

That would make the arrangement resemble a bilateral exchange contract and could revive concerns regarding gharar and potentially riba.

Instead, the two obligations are distinguished.

First:

Participant → Binding Tabarru’ → PRF

Then, separately:

Second:

Specified Covered Event → Claim Obligation → Applicable Compensation

Therefore:

The compensation is not treated as the price or direct countervalue received in exchange for the tabarru’.

3. Compensation Is a Conditional Obligation

It is more accurate to say:

Compensation is a conditional obligation

rather than simply saying:

“Compensation is a condition.”

The distinction is important.

The condition or trigger is:

Occurrence of the specified covered event

The obligation that arises when that condition is satisfied is:

Payment of the applicable Takaful benefit from the PRF

Therefore:

Covered Event = Condition/Trigger

Compensation = Conditional Obligation

4. Clear Example

Suppose Ahmad contributes:

RM1,000 as Tabarru’

The RM1,000 enters the PRF.

Now consider two situations.

Situation 1 - No Covered Event Occurs

Ahmad remains protected throughout the coverage period, but no covered loss occurs.

Therefore:

Claim Payment = RM0

The PRF does not automatically owe Ahmad compensation simply because Ahmad contributed RM1,000.

Situation 2 - Covered Event Occurs

Suppose Ahmad later suffers a covered accident resulting in an applicable claim of:

RM20,000

The covered accident triggers the claim obligation.

Therefore:

Covered Accident

↓

Claim Obligation Triggered

↓

PRF Pays RM20,000 According to the Certificate

The RM20,000 does not become payable merely because Ahmad contributed RM1,000.

It becomes payable because the specified covered event occurred and the claim satisfies the Takaful certificate terms.

5. Why Is This Different From a Bilateral Exchange?

Consider an ordinary sale.

Ahmad pays:

RM3,000

The seller provides:

Laptop

The two are direct countervalues:

RM3,000 ↔ Laptop

The payment and the laptop are directly exchanged for one another.

In Takaful, the structure under the iltizam bi al-tabarru’ reasoning is different:

RM1,000 Tabarru’ → PRF

and separately:

Covered Event → Claim Obligation → Compensation

Therefore, the structure is not simply characterised as:

Contribution ↔ Compensation

6. But There Is Still a Relationship Between Tabarru’ and Protection

This requires an important clarification.

It would be inaccurate to say that there is absolutely no relationship between making the Takaful contribution and becoming eligible for Takaful protection.

A person generally cannot remain outside the Takaful arrangement and later demand compensation from the PRF.

Participation establishes rights and obligations under the Takaful arrangement.

The more precise point is:

Although participation and eligibility for protection are contractually connected, the tabarru’ and the conditional claim payment are not characterised as reciprocal countervalues exchanged for one another in an ordinary bilateral exchange contract.

That is the important distinction.

7. Why Is the Claim Payment Uncertain?

At the time the tabarru’ is made, nobody knows with certainty whether the participant will actually suffer a covered loss.

For example:

Ahmad contributes:

RM1,000

Possible outcome:

No covered event → RM0 claim

or:

Covered event → Applicable claim becomes payable

Therefore, the compensation is not a definite payment automatically owed after making the tabarru’.

It depends upon:

Occurrence of the Specified Covered Event

This conditional nature is an important part of the argument that the arrangement should not simply be equated with an ordinary bilateral exchange.

8. The Two Commitments in Takaful

The structure can therefore be understood through two commitments.

Commitment 1 - Participant

The participant makes:

A unilateral binding commitment to contribute Tabarru’

The money enters the PRF for mutual protection.

Commitment 2 - Risk-Sharing Arrangement

The PRF is required to provide the applicable financial assistance:

if the specified covered event occurs.

This second obligation is therefore:

Conditional

because payment does not necessarily occur for every participant.

9. Full Structure

The entire concept can be shown as:

Participant Voluntarily Enters Takaful

↓

Binding Commitment to Tabarru’

↓

Contribution Enters PRF

↓

Participants Mutually Share Risk

↓

If no covered event occurs:

No Claim Payment

But if a covered event occurs:

↓

Claim Obligation Is Triggered

↓

PRF Provides Applicable Compensation

10. Why This Matters for Gharar and Riba

If Takaful were simply characterised as:

RM1,000 Certain Payment ↔ Uncertain RM50,000 Payment

the arrangement could look like a monetary exchange involving significant uncertainty.

That could raise concerns regarding:

Gharar

and potentially:

Riba

The iltizam bi al-tabarru’ explanation instead treats:

Tabarru’ = Unilateral binding commitment to donate

while:

Compensation = Separate conditional obligation arising from a covered event

Therefore, compensation is not characterised simply as the monetary countervalue purchased by the tabarru’.

Easy Way to Remember

TABARRU’ = UNILATERAL COMMITMENT

The participant commits to contribute to the common PRF.

↓

COVERED EVENT = CONDITION/TRIGGER

A specified covered event must occur.

↓

COMPENSATION = CONDITIONAL OBLIGATION

The PRF then becomes responsible for the applicable Takaful benefit according to the certificate.

Simple Formula

Participant → Tabarru’ → PRF

Then, if the specified event occurs:

Covered Event → Claim Obligation Triggered → Compensation

Not simply:

Contribution ↔ Compensation

Most Important Point

Tabarru’ is the participant’s unilateral binding commitment to contribute to the mutual risk fund. The covered event is the condition that triggers the PRF’s separate obligation to provide compensation. Therefore, compensation is a conditional obligation rather than the direct countervalue exchanged for the tabarru’.

One-Sentence Summary

Under the Maliki concept of iltizam bi al-tabarru’, the participant’s tabarru’ is treated as a unilateral binding commitment to donate to the Participants’ Risk Fund, while compensation is a separate conditional obligation that becomes payable only when a specified covered event occurs, rather than being the direct countervalue exchanged for the participant’s contribution.

Takaful - Obligatory Nature of Tabarru’ (Iltizam bi al-Tabarru’)

An important Shari’ah discussion in Takaful concerns the obligatory nature of tabarru’.

The main question is:

If a participant makes a “donation” to the Participants’ Risk Fund (PRF), but that participant can later claim compensation from the same fund when a covered event occurs, is it really a donation—or is it actually an exchange contract similar to conventional insurance?

This issue is important because if Takaful were merely an exchange of:

Contribution ↔ Uncertain Compensation

then concerns regarding gharar and potentially riba could arise in the Shari’ah analysis.

The response discussed here relies particularly on the Maliki concept of:

Iltizam bi al-Tabarru’

meaning:

a binding commitment to donate.

1. What Is the Main Objection?

The objection begins with the fact that a Takaful participant does not simply donate money with no further relationship to the arrangement.

Suppose Ahmad contributes:

RM1,000

to the PRF.

If a specified covered loss later occurs, Ahmad may have a contractual right to make a claim against the fund.

For example:

Contribution = RM1,000

Covered accident occurs.

Applicable claim payment = RM20,000

This creates the question:

Was Ahmad really donating RM1,000, or was Ahmad effectively paying RM1,000 in exchange for the possibility of receiving RM20,000?

If the latter characterisation were accepted, the arrangement could begin to resemble a bilateral exchange contract.

2. What Is a Bilateral Exchange Contract?

A bilateral exchange contract involves reciprocal obligations between two parties.

In simplified form:

Party A gives X ↔ Party B gives Y

For example:

Ahmad pays:

RM1,000

and receives a laptop.

The two obligations are connected:

RM1,000 ↔ Laptop

Ahmad is obligated to pay because the seller is obligated to deliver the laptop, and the seller delivers the laptop because Ahmad pays the agreed price.

Therefore, there is a direct contractual exchange.

3. Why Does This Matter for Takaful?

The objection argues that Takaful could also be interpreted as:

Participant Contribution ↔ Right to Compensation

For example:

Ahmad pays:

RM1,000

and if a covered event occurs, the PRF may pay:

RM50,000

Therefore, critics may argue:

The RM1,000 is not really a donation. It is effectively the price paid to obtain an uncertain financial benefit.

If that were the true substance, simply calling the RM1,000:

“Tabarru’”

would not necessarily resolve the Shari’ah issue.

4. Substance Over Form

This objection relies on an important fiqh principle that can be expressed as:

In contracts, consideration is given to intentions and meanings, not merely words and forms.

The idea is simple:

Changing the name does not necessarily change the substance.

For example, if an arrangement is economically an interest-bearing loan, merely changing the word:

“interest”

to:

“gift”

would not automatically make the arrangement permissible.

The actual substance of the transaction must be examined.

5. Applying Substance Over Form to Takaful

Suppose a conventional insurance premium is:

RM1,000

A Takaful arrangement also requires:

RM1,000

If the only difference were that one document says:

“Premium”

while the other says:

“Donation”

there would be a legitimate question:

Has the actual contractual relationship changed, or has only the terminology changed?

Therefore, Takaful cannot be distinguished from conventional insurance merely by replacing the word:

Premium → Tabarru’

The actual legal and economic structure must also be different.

6. The Central Question

The key issue can therefore be expressed as:

How can a commitment to donate qualify a participant to make a claim from the tabarru’ fund?

Normally, a donation means giving something without demanding an equivalent countervalue.

For example:

Ahmad gives Ali:

RM100 as a gift

Ahmad cannot normally say:

“Because RM100 was donated, RM500 must now be returned.”

That would begin to look like an exchange rather than a pure gift.

Therefore, Takaful requires a more careful explanation.

7. The Answer - Iltizam bi al-Tabarru’

The response relies on:

Iltizam bi al-Tabarru’

This can be understood as:

A binding commitment or undertaking to donate.

Under the Maliki approach described here, the commitment to make tabarru’ is treated as a:

Unilateral commitment

rather than a bilateral exchange.

This distinction is central to the Shari’ah structure of Takaful.

8. What Does Unilateral Mean?

Unilateral means that the obligation is undertaken from:

one side

rather than being directly exchanged for another obligation.

The participant makes a commitment:

“A specified amount will be contributed as tabarru’ to the common risk fund for mutual assistance.”

That undertaking is treated on its own basis.

Therefore:

Participant → Commitment to Donate

rather than:

Participant Pays Money ↔ Operator Sells Compensation

9. The PRF Also Has a Commitment

There is another side to the arrangement.

The Takaful risk fund is operated according to rules under which financial assistance is provided when specified covered events occur.

Therefore, there are effectively two commitments:

Commitment 1

Participant commits to:

Tabarru’

Commitment 2

The risk-sharing arrangement provides the applicable benefit when:

A specified covered event occurs

At first glance, this still looks like:

Contribution ↔ Compensation

But the Shari’ah argument described here says that the two commitments are not treated as direct reciprocal consideration in a bilateral exchange.

10. The Two Commitments Are Not Directly Exchanged

This is the most important part.

The argument is not:

“No relationship whatsoever exists between participation and eligibility for protection.”

Clearly, participation under the Takaful arrangement matters.

Rather, the legal characterisation is that the tabarru’ commitment and the conditional payment from the PRF are not treated simply as two countervalues being sold to one another.

Therefore:

Tabarru’ ≠ Price Paid to Purchase Claim Money

Instead:

Tabarru’ → Contribution to Mutual Risk-Sharing Fund

and separately:

Covered Event → Fund provides applicable financial assistance

11. Simple Example

Suppose Ahmad contributes:

RM1,000 tabarru’

to the PRF.

Ahmad does not immediately receive:

RM20,000

in return.

Instead, several possibilities exist.

Situation A

No covered event occurs.

Claim payment:

RM0

Situation B

A covered accident occurs.

Claim payment:

RM20,000

Situation C

Another type of covered event occurs.

Payment is determined according to the certificate terms.

Therefore, the second commitment is:

Conditional

rather than definite.

12. Why Is the Conditional Nature Important?

This point is associated with the explanation attributed to contemporary jurists such as Shaykh Siddiq al-Darir.

Although Takaful involves:

Commitment to Donate

and

Commitment to Provide Financial Assistance

the second commitment is not definite in the sense that a claim payment must always occur.

It depends upon:

the occurrence of the specified covered event.

Therefore:

Participant contributes Tabarru’

↓

But:

Claim payment is not automatically due

↓

A specified covered event must occur

↓

Only then:

Applicable benefit becomes claimable

13. Compare With an Ordinary Sale

Suppose Ahmad buys a laptop for:

RM3,000

Ahmad pays RM3,000.

The seller must provide the laptop.

The reciprocal exchange is definite:

RM3,000 ↔ Laptop

The laptop is not delivered only if Ahmad happens to suffer an accident sometime in the future.

The exchange itself creates the reciprocal obligations.

14. Compare With Takaful

Suppose Ahmad contributes:

RM1,000 tabarru’

The PRF does not automatically pay Ahmad:

RM50,000

merely because the RM1,000 was contributed.

Instead:

RM1,000 Tabarru’

↓

Ahmad receives mutual protection

↓

If no covered event occurs:

No claim payment

If a covered event occurs:

Applicable claim may become payable

Therefore, the claim payment is linked to:

A specified future event

rather than simply being an immediate countervalue purchased with the RM1,000.

15. Why Isn’t the Contribution Simply a Premium?

The objection says:

“If the contribution gives access to compensation, then economically it is still a premium.”

The Takaful response focuses on the different legal and economic structure.

In conventional insurance, the arrangement is generally characterised as:

Policyholder pays premium → Insurer assumes contractual insurance risk

The insurer is the risk bearer.

In Takaful:

Participants contribute tabarru’ → PRF collectively bears participants’ underwriting risk

The Takaful operator primarily:

manages the arrangement

rather than owning the PRF and bearing underwriting risk in the same manner as a conventional insurer.

Therefore, the difference is not merely:

Premium vs Contribution

It also concerns:

Risk Transfer vs Risk Sharing

16. Where Does the Claim Money Come From?

This is another important distinction.

The claim is normally paid from the:

Participants’ Risk Fund

The operator manages that fund.

Therefore:

Participants

↓

Tabarru’

↓

PRF

↓

Covered participant suffers loss

↓

PRF pays applicable claim

This is mutual risk sharing among participants.

The operator itself is not simply selling its own money in exchange for the participant’s contribution.

17. Connection With the Lucky Draw Discussion

This also connects directly with the distinction between Takaful and a participant-funded lucky draw.

A lucky draw can have:

Participant contributes RM100

↓

Random event occurs

↓

Winner receives RM10,000

That is structured around:

Stake → Chance → Prize

Takaful is structured around:

Tabarru’ → Mutual Risk Pool → Covered Loss → Financial Assistance

Therefore, the existence of a conditional future payment by itself does not make the arrangement gambling or a bilateral commercial exchange.

The purpose and contractual structure must be examined.

18. Important Subtle Point - Eligibility Still Depends on Participation

There is an important nuance.

It would be inaccurate to say that the contribution and Takaful protection have absolutely no connection.

A person generally cannot simply refuse to participate in the arrangement and later demand a claim from the PRF.

Participation establishes rights and obligations under the Takaful certificate.

The more precise Shari’ah argument is:

The tabarru’ contribution and conditional benefit are not characterised as reciprocal countervalues in a bilateral exchange contract.

That is different from saying:

“There is literally no contractual relationship between them.”

This distinction helps make the concept much clearer.

19. Why the Second Commitment Is Not Definite

Suppose Sarah contributes:

RM1,000

At that moment, Sarah does not acquire an unconditional right to:

RM50,000 cash

The right to a claim payment depends on whether the specified covered event occurs.

If no covered event occurs:

Claim = RM0

If a covered event occurs:

Claim becomes payable according to the certificate terms

Therefore:

Contribution is made now

while:

Claim payment remains conditional upon a specified event

This conditional nature supports the argument that the arrangement is not simply equivalent to an ordinary bilateral sale.

20. Connection With Gharar

The objection also raises:

Gharar

because the participant does not know whether a claim will occur or how much may ultimately be received.

However, as discussed earlier, the Takaful response relies on the fact that:

Tabarru’ is gratuitous in nature

and under the cited Maliki approach:

uncertainty in gratuitous arrangements is more tolerable.

Therefore:

Future claim is uncertain

↓

Gharar exists in some sense

↓

But:

Tabarru’ is not treated as an ordinary bilateral commercial exchange

↓

Hence the relevant uncertainty is treated differently.

21. Connection With Riba

The objection also argues that if the arrangement were actually:

Money exchanged for uncertain money

then questions of riba could arise.

For example, the participant might contribute:

RM1,000

and later receive:

RM50,000

If this were simply characterised as a monetary exchange between two parties, the Shari’ah analysis would be very different.

The Takaful response is that this is not the proper characterisation.

Instead:

RM1,000 = Tabarru’ to collective risk fund

while:

RM50,000 = Financial assistance arising from the mutual protection arrangement when the specified covered event occurs

Therefore, the two amounts are not simply treated as money being sold for money.

22. The Importance of the PRF

The separate PRF is therefore extremely important.

It helps demonstrate that:

Participants collectively share underwriting risk.

The structure is:

Participant A contributes

Participant B contributes

Participant C contributes

Participant D contributes

↓

Common PRF

↓

One participant suffers covered loss

↓

PRF provides assistance

This is fundamentally the mutual-risk-sharing concept behind Takaful.

23. What Makes Tabarru’ “Obligatory”?

The word obligatory can initially sound contradictory.

A donation normally sounds voluntary.

The important idea is:

Entering the arrangement is voluntary

but once the commitment has been validly undertaken:

the commitment to contribute becomes binding according to the applicable structure.

For example, Ahmad voluntarily chooses to enter the Takaful arrangement.

Once Ahmad enters and undertakes the commitment:

the agreed tabarru’ obligation becomes binding.

Therefore:

Voluntary Entry → Binding Commitment

This is the essence of:

Iltizam bi al-Tabarru’

24. Simple Analogy

Consider a person voluntarily making a binding undertaking.

Before making the undertaking:

No obligation exists.

Once the valid undertaking is made:

The obligation arises.

Therefore, “voluntary” and “binding” are not necessarily contradictory.

The decision to enter can be voluntary while the resulting commitment becomes obligatory.

25. Two Commitments in Takaful

The structure can therefore be understood as involving:

Commitment 1 - Participant

Commitment to contribute tabarru’ to the common risk fund.

and:

Commitment 2 - Mutual Risk Fund Arrangement

Commitment to provide the applicable financial assistance when the specified covered event occurs.

The argument is that:

each commitment is treated on its own basis

rather than as a direct sale of one commitment for the other.

26. Why This Matters for Shari’ah

If the arrangement were characterised as:

RM1,000 certain payment ↔ uncertain RM0/RM50,000 monetary return

it would raise significant questions regarding:

Gharar

and potentially:

Riba

because it could resemble a commercial exchange of money involving uncertainty.

But under the iltizam bi al-tabarru’ approach:

Participant’s payment = binding donation commitment

and:

Claim payment = conditional mutual assistance from PRF

Therefore, the arrangement is not characterised simply as a bilateral sale of uncertain compensation.

27. Substance Over Form Still Matters

The concept of iltizam bi al-tabarru’ does not mean that merely inserting the word:

“Tabarru’”

into a contract solves every Shari’ah problem.

The actual operation should reflect:

genuine mutual risk sharing

proper separation of the PRF

appropriate management by the operator

Shari’ah-compliant contractual relationships

and:

claims paid according to the mutual protection arrangement.

Therefore:

Correct Label + Wrong Substance = Still a Problem

The Takaful structure must exist in:

substance as well as form.

28. Full Logic of the Objection

The objection can be remembered as:

Participant Pays Contribution

↓

Participant Becomes Eligible for Compensation

↓

Contribution and Compensation Appear Connected

↓

Therefore:

Could this really be an exchange contract?

↓

If yes:

Gharar and Riba Concerns May Reappear

↓

Simply calling the payment “Tabarru’” would not solve the problem because:

Substance > Label

29. Full Logic of the Response

The response is:

Participant voluntarily enters Takaful

↓

Makes binding commitment to Tabarru’

↓

Iltizam bi al-Tabarru’

↓

Tabarru’ enters common PRF

↓

Participants collectively share risk

↓

Claim payment is not automatically due merely because contribution was made

↓

Specified covered event must occur

↓

PRF then provides applicable financial assistance

↓

Therefore:

The arrangement is not characterised simply as a bilateral exchange of contribution for compensation.

Easy Way to Remember

Use:

COMMIT → DONATE → POOL → EVENT → ASSIST

COMMIT

The participant voluntarily enters and makes a binding commitment.

DONATE

The amount is contributed as tabarru’.

POOL

The contribution enters the common Participants’ Risk Fund.

EVENT

A specified covered event must occur before a claim becomes payable.

ASSIST

The PRF provides the applicable financial assistance.

Simple Formula

Conventional bilateral exchange:

Payment ↔ Countervalue

For example:

RM3,000 ↔ Laptop

Both are directly reciprocal.

Takaful structure under the iltizam bi al-tabarru’ reasoning:

Participant → Binding Tabarru’ → PRF

and, conditionally:

Covered Event → PRF → Financial Assistance

Therefore:

Tabarru’ is not characterised simply as the purchase price of an uncertain claim payment.

Most Important Point

The difficult question is:

If making a tabarru’ qualifies a participant to receive compensation, why is it not simply an exchange?

The answer under the approach described is:

The participant’s contribution is structured as a unilateral binding commitment to donate, while the PRF’s obligation to provide financial assistance is a separate and conditional commitment triggered only by a specified covered event; the two are therefore not characterised as reciprocal countervalues in an ordinary bilateral exchange contract.

One-Sentence Summary

Iltizam bi al-tabarru’ explains the obligatory nature of Takaful contributions by treating the participant’s contribution as a unilateral binding commitment to donate to the common risk fund, while any claim payment is a separate and conditional obligation arising only when a specified covered event occurs, so the arrangement is not characterised merely as a bilateral exchange of a contribution for uncertain compensation.

Takaful - Is Takaful Similar to a Lucky Draw?

Takaful may appear superficially similar to a participant-funded lucky draw because many people contribute money into a common pool while only some eventually receive payments.

However, the purpose, contractual structure, and reason for receiving money are fundamentally different.

This comparison is particularly useful for understanding the difference between:

Takaful and Maysir (Gambling)

1. How Does a Participant-Funded Lucky Draw Work?

Imagine 100 people each contribute:

RM100

Total money collected:

100 × RM100 = RM10,000

One person’s name is then randomly selected, and that person receives:

RM10,000

Such an arrangement can involve maysir because participants put their money at stake for the possibility of winning money contributed by the other participants.

For example:

Ahmad contributes RM100 → does not win

Ali contributes RM100 → does not win

Sarah contributes RM100 → wins RM10,000

The participants entered the arrangement for the possibility of obtaining the pooled money.

Therefore, the basic structure is:

Stake Money → Chance → Winner → Prize

2. Why Can This Be Considered Maysir?

Maysir generally refers to gambling or an arrangement where financial gain or loss depends substantially on chance in a prohibited wagering structure.

In the lucky draw example, participants put money at risk.

Some participants lose their contributions, while a randomly selected participant receives the pooled money.

Therefore:

Many participants contribute money

↓

Outcome depends on chance

↓

One or several participants win

↓

Other participants lose their stakes

This creates the basic:

Winner-Loser Structure

3. Takaful Works Differently

Now suppose 100 participants each contribute:

RM100 as Tabarru’

Total Participants’ Risk Fund:

RM10,000

The participants establish the fund for:

Mutual Financial Protection

Suppose Ahmad subsequently suffers a covered accident resulting in a:

RM5,000 covered loss

The PRF pays Ahmad according to the terms of the Takaful certificate.

At first glance, there appears to be a similarity:

Ahmad receives money that came from contributions made collectively by the participants.

However, the source of the money alone does not determine whether the arrangement is gambling.

The important question is:

Why is Ahmad receiving the RM5,000?

4. The Fundamental Difference

In a lucky draw:

A participant receives money because that participant wins through chance.

In Takaful:

A participant receives financial assistance because a specified covered loss has occurred.

Therefore:

Lucky Draw → Payment because of winning

Takaful → Payment because of a covered loss

This is one of the most important distinctions.

5. Winning vs Financial Compensation

Suppose Sarah contributes:

RM100

to a participant-funded lucky draw.

Sarah hopes to be selected and receive:

RM10,000

If Sarah wins, she receives a financial gain without having suffered a corresponding covered financial loss.

The objective of participation is the possibility of:

Winning the Prize

In Takaful, suppose Ahmad contributes:

RM100 as tabarru’

Ahmad later suffers a covered financial loss of:

RM5,000

The PRF provides the applicable financial assistance.

The objective is not to make Ahmad richer simply because of a random event.

Instead, the purpose is to:

Reduce the financial impact of the covered loss.

Therefore:

Lucky Draw = Financial Gain

while:

Takaful = Financial Protection Against Loss

6. Clear Example

Suppose Ahmad owns a car worth:

RM50,000

Lucky Draw Situation

Ahmad contributes:

RM1,000

to a lucky draw.

Ahmad’s name is randomly selected.

Prize:

RM50,000

Ahmad has gained RM50,000 because of being selected as the winner.

There was no requirement for Ahmad to suffer a RM50,000 financial loss.

Takaful Situation

Ahmad participates in a Motor Takaful arrangement.

The RM50,000 car is later destroyed in a covered event.

The applicable Takaful benefit provides financial protection according to the certificate terms.

Ahmad has not simply:

“won RM50,000.”

A real covered loss has occurred.

Therefore:

Loss Occurs → Takaful Benefit Responds

rather than:

Chance Selects Winner → Prize Is Paid

7. But the Accident Is Also Uncertain

This creates an important question.

An accident cannot normally be predicted with certainty.

Therefore, both the lucky draw and Takaful contain some form of:

Uncertainty

However:

Uncertainty by itself is not the same thing as gambling.

The fact that a future event is uncertain does not automatically make an arrangement maysir.

Otherwise, many ordinary activities involving uncertain future outcomes would have to be treated as gambling.

The important issue is the:

Purpose + Structure + Economic Substance

of the arrangement.

8. Connection With Gharar

The uncertainty surrounding whether a covered loss will occur relates to the concept of:

Gharar

For example, when Ahmad contributes to a Takaful arrangement, the exact future outcome is unknown.

Ahmad may:

make no claim

or:

suffer a covered loss and make a claim.

Therefore:

Future Claim Outcome = Uncertain

The Shari’ah justification discussed in Takaful focuses on the fact that the arrangement is structured around:

Tabarru’ + Mutual Assistance + Joint Guarantee

rather than a commercial wager.

9. Purpose of a Participant-Funded Lucky Draw

The participant enters because of the possibility of:

Winning Money

The structure is:

Participant contributes money

↓

Money is placed at stake

↓

Chance determines the winner

↓

Winner receives prize

Therefore:

Money → Chance → Winner → Prize

10. Purpose of Takaful

The participant contributes for:

Mutual Financial Protection

The structure is:

Participant makes Tabarru’

↓

Contribution enters common PRF

↓

Participants mutually share risks

↓

A participant suffers a covered loss

↓

PRF provides financial assistance

Therefore:

Tabarru’ → Risk Pool → Covered Loss → Financial Assistance

11. The Difference Is Not Simply Where the Money Comes From

In both arrangements, money may come from many participants.

Therefore, this question alone is insufficient:

“Did the money come from the participants?”

A more important question is:

“Why was the money pooled, and why is a particular person entitled to receive payment?”

In the lucky draw:

Money is pooled to create a prize.

In Takaful:

Money is pooled to provide mutual protection against specified covered losses.

That difference is fundamental.

12. What Happens to Participants Who Never Claim?

This is where Takaful may appear most similar to a lucky draw.

Suppose Sarah participates in Takaful for 10 years and:

never makes a claim.

Ali participates for one year and suffers a serious covered accident.

The PRF pays Ali:

RM100,000

It may appear that:

Sarah lost while Ali won.

However, that is not how the Takaful arrangement is structured.

Sarah contributed for:

Mutual Protection

During the entire coverage period, the PRF was available to provide the applicable financial assistance if Sarah had suffered a covered loss.

Therefore, Sarah’s contribution was not a stake made for the chance of winning a prize.

It was a:

Tabarru’ contribution supporting mutual financial protection.

13. No Claim Does Not Mean No Benefit

Suppose Sarah contributes:

RM1,000

and makes no claim.

It would be incorrect to interpret the situation simply as:

“Sarah lost RM1,000.”

Sarah participated in a mutual protection arrangement during the coverage period.

If a covered event had occurred, the PRF would have responded according to the certificate.

Therefore, the benefit includes:

Financial protection during the coverage period

rather than only actual claim payments.

14. A Claimant Is Not a “Winner”

Suppose Ali contributes:

RM1,000

and later receives:

RM50,000

following a covered accident.

Calling Ali the:

“winner”

would be misleading.

Ali received RM50,000 because Ali suffered the covered event.

The payment is intended to respond to the financial consequences of that loss.

Therefore:

Claimant ≠ Lucky-Draw Winner

15. Connection With the Non-Zero-Sum Idea

This connects with the argument that Takaful is not intended to operate as a simple:

Winner-versus-Loser Arrangement

In a participant-funded lucky draw:

The winner receives the prize because other participants’ stakes form the prize pool.

The purpose is redistribution based on chance.

In Takaful:

Participants collectively establish a fund to provide protection against specified covered losses.

The participant receiving a claim has normally suffered the covered event against which the mutual fund was established.

Therefore:

Lucky Draw → Winning and Losing

while:

Takaful → Mutual Risk Sharing and Financial Protection

16. Role of Tabarru’

Another major difference is:

Tabarru’

In Takaful, participants contribute money into the PRF on a tabarru’ basis for:

Mutual Assistance

The participant is not simply placing money at stake with the objective of receiving more money if fortunate.

Instead:

Many participants contribute

↓

Common PRF is created

↓

Risks are collectively shared

↓

Covered losses of participants are supported

This changes the nature of the arrangement.

17. Calling Something “Tabarru’” Is Not Enough

An important qualification must be made.

Merely describing money as:

“Tabarru’”

does not automatically make every arrangement Shari’ah-compliant.

For example, suppose an arrangement states:

“Every participant contributes RM100 as tabarru’. At the end of the month, one participant is randomly selected and receives the entire fund.”

Although the contribution is labelled:

Tabarru’

the actual economic structure still resembles:

Participants contribute money

↓

Random selection

↓

Winner receives pooled money

Therefore, the substance of the arrangement must be examined.

18. Substance Is More Important Than the Label

The important questions are:

What is the purpose of the contribution?

Why is the common fund being established?

What triggers payment from the fund?

Is payment triggered by a covered loss or simply by chance?

Is the objective mutual protection or winning money?

Therefore:

Simply changing the name of a gambling stake to “tabarru’” would not necessarily change the economic substance of the arrangement.

19. Lucky Draw Example

Suppose:

100 participants × RM100 = RM10,000

One person is randomly selected.

Winner receives:

RM10,000

The winner does not need to suffer any financial loss.

The payment exists because:

The person won the draw.

Therefore:

Contribution → Chance → Winner → Prize

20. Takaful Example

Suppose:

100 participants × RM100 = RM10,000 PRF

Ahmad suffers:

RM5,000 covered loss

The PRF pays the applicable:

RM5,000

The payment exists because:

A covered loss occurred.

Therefore:

Tabarru’ → PRF → Covered Loss → Financial Assistance

21. The Key Difference Is the Trigger

A simple way to distinguish the two arrangements is to examine:

What triggers the payment?

In a lucky draw:

Random selection triggers payment.

In Takaful:

Occurrence of a specified covered event triggers the claim process.

This is one of the clearest distinctions.

22. Another Important Difference - Purpose of the Pool

The common fund itself serves a different purpose.

Lucky Draw Pool

Created primarily to:

Provide a prize to a winner

Takaful Risk Pool

Created primarily to:

Provide mutual financial protection against covered losses

Therefore, even though both involve pooling money:

Pooling Money ≠ Automatically Gambling

The purpose and structure of the pool matter.

23. Why Takaful Is Not Simply “Paying to Take a Chance”

A participant does not make tabarru’ merely for the possibility of receiving a larger amount.

Instead, the participant enters a collective protection arrangement.

The desired outcome is generally:

No loss occurs.

For example, a participant with Family Takaful does not desire death merely so beneficiaries can receive the Takaful benefit.

Similarly, a participant with Motor Takaful does not desire a serious accident merely to receive a claim payment.

This is very different from a lucky draw, where participants generally desire the event that produces the prize:

being selected as the winner.

24. The Comparison in One Simple Illustration

Participant-Funded Lucky Draw

Ahmad contributes RM100.

Desired event:

“Ahmad’s number is selected.”

Result:

Ahmad gains a prize.

Takaful

Ahmad contributes tabarru’.

Undesired event:

“Ahmad suffers a covered accident.”

Result:

PRF provides financial assistance for the covered loss.

Therefore:

Lucky Draw → Desired chance event produces gain

Takaful → Undesired covered event produces financial protection

25. Full Comparison

The easiest conceptual comparison is:

Lucky Draw

Participants contribute money

↓

Money forms prize pool

↓

Outcome determined by chance

↓

Winner selected

↓

Winner receives financial gain

Takaful

Participants contribute Tabarru’

↓

Money forms PRF

↓

Participants collectively share risk

↓

Covered loss occurs

↓

Affected participant receives financial assistance

Easy Way to Remember

LUCKY DRAW

STAKE → CHANCE → WINNER → PRIZE

The objective is the possibility of winning.

TAKAFUL

TABARRU’ → PRF → COVERED LOSS → FINANCIAL ASSISTANCE

The objective is mutual financial protection.

Most Important Distinction

The superficial similarity is:

Many people contribute money, while only some people may eventually receive payments.

But the fundamental difference is:

In a participant-funded lucky draw, participants put money at stake for the chance of winning the pooled money, whereas in Takaful, participants contribute on a tabarru’ basis to establish mutual financial protection, and payments are triggered by specified covered losses rather than by selecting a winner.

One-Sentence Summary

Takaful is fundamentally different from a participant-funded lucky draw because the lucky draw involves staking money for the chance of obtaining a prize, whereas Takaful involves tabarru’ contributions to a common risk fund for mutual protection, with payments made because a participant suffers a specified covered loss rather than because that participant wins by chance.

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Takaful - Distribution of Underwriting Surplus Is Not Allowed

Another approach to the treatment of underwriting surplus is that the surplus should not be distributed at all.

Under this approach, neither the participants nor the Takaful operator receives the underwriting surplus as a distribution.

Instead:

The entire surplus remains within the Participants’ Risk Fund (PRF) and strengthens the fund for the benefit of the risk-sharing arrangement.

The main reasoning is based on the nature of tabarru’. Once participants contribute their tabarru’ to the risk pool, they are considered to have relinquished their individual rights to the amount donated.

1. What Does “Distribution Is Not Allowed in Totality” Mean?

It means:

No underwriting surplus is distributed out of the PRF.

Therefore:

Participants → No surplus distribution

and

Takaful operator → No surplus distribution

Instead:

Surplus → Remains in the PRF

The accumulated surplus can then be used to strengthen the fund and support future claims.

2. Why Is the Surplus Not Distributed?

The reasoning begins with the concept of:

Tabarru’

Tabarru’ means a contribution made on a donation basis for the purpose of mutual assistance.

When participants contribute tabarru’ into the PRF, they are not simply depositing personal savings into an individual account.

Instead, they relinquish their individual ownership claim over the donated amount so that it can be used collectively to help participants who suffer covered losses.

Therefore:

Participant makes Tabarru’

↓

Money enters PRF

↓

Individual right over donated amount is relinquished

↓

Money becomes available for collective risk sharing

This leads to the argument that participants cannot later automatically claim:

“There is money left in the PRF, so part of it must be returned to me.”

3. What Does “Relinquished Any Rights” Mean?

To relinquish means to:

give up or surrender a right or claim.

Suppose Ahmad contributes:

RM1,000 tabarru’

into the PRF.

Once the contribution is made on a genuine tabarru’ basis, Ahmad cannot treat that RM1,000 as though it remains his personal savings.

For example, he cannot normally say:

“I made no claim this year, so return my RM1,000.”

The contribution has already been committed to the collective risk-sharing arrangement.

Therefore:

Tabarru’ ≠ Personal Savings Deposit

4. Legal Right and Beneficial Right

The reasoning goes further by saying participants hold neither a:

Legal right

nor a:

Beneficial right

over the amounts they donated.

A legal right would mean the participant has an enforceable ownership claim over that donated amount.

A beneficial right, in this context, would mean the participant continues to have an individual economic ownership interest in that particular donated amount.

Under the non-distribution approach, the argument is:

Once tabarru’ has been donated to the risk fund, the participant no longer individually owns or controls that donated amount.

5. But Participants Can Still Receive Claims

This distinction is extremely important.

Saying that Ahmad no longer owns his RM1,000 tabarru’ does not mean Ahmad loses his Takaful protection.

Ahmad can still receive a valid covered claim according to the Takaful certificate.

For example:

Ahmad contributes:

RM1,000 tabarru’

Later, Ahmad suffers a valid covered loss:

RM50,000

The PRF may pay the RM50,000 according to the certificate terms.

Therefore:

The participant gives up individual ownership of the tabarru’ contribution but receives the benefit of mutual protection from the collective risk pool.

6. Why Is the Donation Nature Important in Takaful?

The tabarru’ structure supports the mutual assistance nature of Takaful.

Participants are effectively saying:

“I contribute this amount to the common fund so that it can be used to assist participants who suffer covered losses, including myself if I later suffer such a loss.”

Therefore:

Individual Contribution

↓

Donation to Common Fund

↓

Collective Risk Pool

↓

Mutual Financial Protection

The contribution is not simply:

“My money waiting for me to take it back.”

7. Why Does This Lead to No Surplus Distribution?

Suppose:

Participants collectively contribute = RM10 million

Relevant claims and obligations = RM8 million

Simplified surplus:

RM2 million

Under the non-distribution approach, participants cannot simply say:

“The RM2 million came from our contributions, so give it back to us.”

The argument is that participants already relinquished their individual rights over the tabarru’ contributions.

Therefore:

RM2 million remains within the PRF

rather than being distributed.

8. What Happens to the Surplus?

The surplus is retained as part of the financial resources of the risk fund.

For example:

Year 1 surplus retained = RM2m

Year 2 surplus retained = RM3m

Year 3 surplus retained = RM1m

Simplified accumulated amount:

RM2m + RM3m + RM1m = RM6m

The PRF now has additional accumulated financial strength that can help support future claims.

9. First Benefit - Strengthens the PRF

One major benefit of retaining the surplus is that it:

Consolidates and strengthens the risk fund.

Instead of distributing the money and removing it from the PRF, the surplus remains available to support the fund.

Therefore:

Underwriting Surplus

↓

Not Distributed

↓

Retained in PRF

↓

PRF Financial Strength Increases

This creates a stronger fund for future periods.

10. Second Benefit - Helps Pay Claims in Future Years

Claims do not necessarily remain stable every year.

For example:

Year 1

Claims = RM5m

Year 2

Claims = RM6m

Year 3

Claims = RM12m

Year 3 may experience unexpectedly high claims.

If the surplus from Years 1 and 2 was retained, the accumulated amount can help the PRF absorb the higher claims in Year 3.

Therefore:

Good Years Help Support Bad Years

This extends risk sharing across different periods.

11. Simple Multi-Year Example

Suppose:

Year 1

PRF surplus = RM2m

The entire RM2m is retained.

Year 2

PRF surplus = RM3m

Again, it is retained.

Accumulated surplus:

RM5m

Then in Year 3, claims are unexpectedly:

RM4m higher than expected

The accumulated financial strength from earlier years can help absorb the adverse claims experience.

So:

Earlier Surplus

↓

Accumulated Reserve/Financial Strength

↓

Later High Claims

↓

PRF Better Able to Absorb the Loss

12. Connection With Financial Buffer

The retained surplus effectively strengthens the PRF’s:

Financial Buffer

Remember:

A financial buffer is additional financial strength available to absorb unexpected adverse experience.

Therefore:

Surplus Retained

↓

Financial Buffer Becomes Stronger

↓

Unexpected Claims Occur

↓

PRF Has Greater Loss-Absorbing Capacity

This can reduce the likelihood that a bad claims year immediately creates severe financial difficulty.

13. Connection With Qard

A stronger PRF may also reduce reliance on:

Qard

Suppose the PRF has no accumulated surplus.

Unexpected claims produce:

RM3m deficit

Depending on the applicable Takaful framework, the shareholder/operator fund may need to provide qard.

Now suppose the PRF had accumulated:

RM5m

from earlier surpluses.

That accumulated financial strength may help absorb the adverse experience before external financial support becomes necessary.

Therefore:

Retained Surplus → Stronger PRF → Lower Potential Dependence on Qard

14. Third Benefit - Future Contributions May Be Lower

Another potential benefit is that accumulated reserves can reduce the amount of new funding that needs to be collected from participants in future periods, if actuarially and regulatorily appropriate.

Suppose the PRF has:

No accumulated surplus

The actuary estimates that the fund needs:

RM10m

from participants to support the coming year’s risk.

Now suppose the PRF already has substantial accumulated financial strength.

Depending on the pricing framework and the risks being accepted, this may allow the required future contribution burden to be reduced.

Therefore:

Accumulated Surplus

↓

Stronger Existing PRF Resources

↓

Potentially Less Need for Additional Funding

↓

Potentially Lower Future Contributions

This is not automatic: contributions still need to remain actuarially adequate for the risks and obligations of the fund.

15. Simple Contribution Example

Suppose 10,000 participants are expected to enter the pool.

Without sufficient accumulated reserves, assume the required contribution is:

RM1,000 each

Total:

10,000 × RM1,000 = RM10m

Now suppose the PRF has built substantial accumulated financial strength from previous years.

After actuarial assessment, assume the required new contribution can prudently be reduced to:

RM900 each

Participants now pay:

RM100 less each

For 10,000 participants:

RM100 × 10,000 = RM1m

less in new contributions.

This illustrates how retaining surplus today can potentially benefit participants indirectly through lower future funding requirements.

16. Participants Can Benefit Without Receiving Cash Surplus

This is an important concept.

A participant might think:

“If the surplus isn’t distributed to me, I receive no benefit.”

That is not necessarily true.

Participants can benefit indirectly through:

a financially stronger PRF

greater ability to pay future claims

lower likelihood of financial distress

less potential reliance on qard

and potentially:

lower future contributions

Therefore:

No Cash Distribution ≠ No Participant Benefit

The benefit can remain inside the collective arrangement.

17. Fourth Benefit - Takaful Can Become More Competitive

If accumulated surplus allows future contributions to be priced lower while remaining financially adequate, the Takaful product may become more attractive.

Suppose:

Takaful contribution = RM1,200

After sufficient accumulated financial strength and actuarial assessment:

New contribution = RM1,000

The participant saves:

RM200

A lower but still financially sound contribution can make the product more competitive in the market.

Therefore:

Retained Surplus

↓

Stronger PRF

↓

Potential for Lower Future Contribution Requirements

↓

More Attractive Pricing

↓

Greater Competitiveness

18. Lower Pricing Must Still Be Actuarially Sound

This qualification is very important.

The operator should not reduce contributions merely because the PRF has accumulated some surplus.

Suppose expected future claims require:

RM900 per participant

but the operator reduces tabarru’ to:

RM500

simply to attract more customers.

The PRF could become underpriced.

Therefore:

Accumulated surplus may support lower future contributions, but pricing must still reflect the expected risks and maintain the financial soundness of the PRF.

The objective is:

Lower but Adequate Pricing

not:

Unsustainably Cheap Pricing

19. Why Not Distribute Surplus and Then Charge More Next Year?

Suppose the PRF distributes:

RM5m

to participants this year.

Next year, the fund needs more financial resources and therefore increases contributions.

Participants receive money today but may have to pay more later.

Under the non-distribution approach, the argument is that it can be more sustainable to:

retain the RM5m inside the PRF

so that the money continues supporting the collective risk-sharing arrangement.

Therefore:

Retain Surplus Today

↓

Build Long-Term PRF Strength

↓

Support Future Claims

↓

Potentially Stabilise Future Contributions

This emphasises the long-term sustainability of the fund rather than immediate cash distribution.

20. Risk Sharing Across Different Years

This approach also highlights an important idea:

Risk sharing does not have to occur only among participants in the same year.

Surplus accumulated from participants in earlier periods can strengthen the PRF for participants in later periods.

For example:

Year 1 participants generate surplus

↓

Surplus remains in PRF

↓

Year 2 fund remains strong

↓

Year 3 experiences unexpectedly high claims

↓

Accumulated resources help meet those claims

Therefore, the PRF creates a form of:

Intergenerational / Interperiod Risk Sharing

meaning financial strength built in one period can help support the risk pool in later periods.

21. Non-Distribution vs Participants-Only Distribution

It is useful to distinguish the two approaches.

Participants-Only Distribution

A distributable surplus may be paid to:

Eligible participants

but:

not the operator.

No Distribution at All

Surplus is paid to:

Participants → No

Operator → No

Instead:

100% remains in the PRF

Therefore:

Participants-only distribution gives participants a direct cash benefit, while non-distribution seeks to provide participants with an indirect long-term benefit through a stronger PRF.

22. Non-Distribution vs Operator-Sharing Approach

There are therefore three broad approaches you have studied:

Approach 1 - Participants and Operator

Where permitted, distributable surplus may be shared between:

participants + operator

according to the applicable arrangement.

Approach 2 - Participants Only

Distributable surplus goes to:

eligible participants

and:

operator receives no underwriting-surplus share.

Approach 3 - No Distribution

Surplus goes to:

neither participants nor operator.

Instead:

Surplus remains in PRF

The third approach prioritises accumulation and long-term financial strength.

23. Why the Actuary Is Still Important

Even under a policy of retaining surplus, the actuary remains important.

The actuary can assess:

expected future claims

claims volatility

technical provisions

financial strength

appropriate contribution levels

and the effect of accumulated resources on future pricing.

Therefore, the actuary can help answer:

“Given the financial strength already accumulated in the PRF, what level of future contribution remains actuarially appropriate?”

24. Full Process

The whole idea can be understood as:

Participants Pay Tabarru’

↓

Tabarru’ Enters PRF

↓

Participants Relinquish Individual Rights to Donated Amount

↓

PRF Pays Covered Claims

↓

Underwriting Surplus Arises

↓

Do Not Distribute Surplus

↓

Retain It in PRF

↓

Build Financial Strength

↓

Support Claims in Future Years

↓

Reduce Potential Dependence on Qard

↓

Potentially Reduce Future Contribution Requirements

↓

Potentially Improve Takaful Competitiveness

Easy Way to Remember

Use:

RETAIN → STRENGTHEN → SUPPORT → REDUCE

RETAIN

Do not distribute the underwriting surplus.

STRENGTHEN

Keep it inside the PRF to build financial strength.

SUPPORT

Use the stronger fund to support claims in future years.

REDUCE

A stronger reserve position may allow future contributions to be reduced where actuarially appropriate.

Simple Example

Suppose:

PRF underwriting surplus = RM5m

Under the non-distribution approach:

Participants receive = RM0

Operator receives = RM0

PRF retains = RM5m

The RM5m then strengthens the fund.

If a later year produces unexpectedly high claims of:

RM3m above expectation

the accumulated resources can help absorb the additional claims.

Therefore:

RM5m Retained Surplus → Absorb RM3m Adverse Experience → PRF Remains Stronger

Key Concept to Remember

The argument is not:

“Participants should receive no benefit from the surplus.”

Rather, it is:

“The benefit should remain collective within the PRF instead of being individually distributed.”

Participants may therefore benefit through:

Stronger Claims-Paying Capacity + Greater Stability + Potentially Lower Future Contributions

One-Sentence Summary

Under the non-distribution approach, participants are regarded as having relinquished their individual rights to the tabarru’ donated to the risk pool, so any underwriting surplus is retained entirely within the PRF rather than distributed to participants or the operator; this strengthens the fund for future claims, builds financial resilience, may reduce dependence on qard, and can potentially support lower future contributions and greater Takaful competitiveness.

Takaful - Distribution of Underwriting Surplus Only to Participants

Another approach to the treatment of underwriting surplus is that the surplus may be distributed to the participants only, rather than being shared with the Takaful operator.

Under this approach:

The Takaful operator manages the Participants’ Risk Fund (PRF), but the operator does not receive a share of the underwriting surplus.

The operator acts as the custodian and manager of the Takaful fund and determines the appropriate way to manage and distribute the surplus in accordance with the Takaful contract, Shari’ah requirements and applicable regulatory rules.

1. What Does “Distribution Only to Participants” Mean?

Suppose the PRF produces an underwriting surplus of:

RM2 million

Under this approach, the RM2 million is not divided between the participants and the operator.

Instead, after considering the PRF’s obligations and any amounts that must first be retained or repaid, the amount that is actually distributable may be distributed:

Only to eligible participants

The Takaful operator does not receive part of that distributable underwriting surplus.

2. Why Does the Operator Not Receive the Surplus?

The reasoning is connected to the nature of the PRF.

Participants contribute tabarru’ into the common risk fund.

Therefore:

Participants contribute Tabarru’

↓

Tabarru’ enters PRF

↓

Participants collectively bear underwriting risk

↓

PRF pays covered claims

↓

Underwriting surplus may arise

Under this approach, because the underwriting risk is collectively borne through the participants’ fund, the resulting underwriting surplus should remain associated with the:

Participants / PRF

rather than being treated as income belonging to the Takaful operator.

3. Role of the Takaful Operator as Custodian

Although the operator does not receive the underwriting surplus, it still has an important role.

The operator acts as the:

Custodian and manager of the Takaful fund

This means the operator is responsible for administering the PRF appropriately.

The operator may therefore be responsible for implementing the appropriate method of surplus distribution within the applicable contractual, Shari’ah and regulatory framework.

In simple terms:

The operator manages the surplus, but that does not necessarily mean the operator owns the surplus.

This distinction is very important.

4. Management Is Different From Ownership

Suppose Ahmad asks another person to manage:

RM100,000

on his behalf.

The manager may have authority to:

administer the money

invest it according to agreed rules

and

make authorised payments.

But the fact that the manager controls and administers the money does not automatically mean:

the money belongs to the manager.

The same basic distinction helps explain the PRF:

Operator → Manages the fund

Participants/PRF → Bear the underwriting risk

Therefore:

Control or management of the fund does not automatically create ownership of its underwriting surplus.

5. Distribution Through Hibah

Under the approach described, surplus may be distributed to eligible participants using the concept of:

Hibah

Hibah means:

A voluntary gift or transfer made without requiring an equivalent consideration in return.

In this context, the surplus distribution to eligible participants is structured using the concept of hibah rather than treating each participant as having an automatic individual ownership claim over a predetermined portion of every surplus that arises.

6. Why Is Hibah Important?

When participants make tabarru’, they contribute money into the collective risk fund for mutual protection.

The contribution is not simply a personal savings deposit that remains individually withdrawable.

Therefore, if a surplus later arises, the participant should not automatically think:

“Part of the surplus must be my personal money because I originally contributed to the PRF.”

Instead, under this approach, the distribution is made according to the agreed surplus mechanism, using the concept of:

Hibah

So:

Tabarru’ Contribution

↓

Money enters collective PRF

↓

Claims and obligations are met

↓

Surplus may remain

↓

Eligible surplus may be distributed

↓

Hibah to eligible participants

7. Usually Distributed to Participants Who Did Not Make a Claim

The approach described states that surplus distributions are usually made to participants who:

did not make a claim

during the relevant period.

Suppose four participants contributed to the PRF:

Ahmad

No claim

Ali

RM10,000 covered claim

Sarah

No claim

Fatimah

RM5,000 covered claim

If the applicable surplus-distribution method provides that only participants who did not make claims are eligible, then:

Ahmad → Eligible

Ali → Not eligible

Sarah → Eligible

Fatimah → Not eligible

Therefore, the distributable surplus would be allocated among the eligible participants according to the applicable method.

8. Why Might Participants Who Made Claims Not Receive Surplus?

The reasoning is that participants who made covered claims have already received financial assistance from the common risk pool during the period.

For example:

Ahmad contributes = RM1,000

No claim.

Ali contributes = RM1,000

Ali receives a covered claim payment of:

RM20,000

Both participated in the mutual protection arrangement, but Ali has already received a significant financial benefit from the PRF through the claim payment.

Under a surplus-distribution method based on claim-free eligibility, Ahmad may therefore qualify for a surplus distribution while Ali does not.

This is a distribution rule, not a statement that Ali’s claim was improper or that Ali is no longer a participant.

9. Not Every Surplus Must Immediately Be Distributed

The existence of an underwriting surplus does not automatically mean that the surplus can immediately be paid to participants.

Before distribution, the financial position of the PRF must be considered.

For example:

PRF surplus = RM5 million

But the PRF may have:

outstanding obligations

required technical provisions

financial-strength requirements

or:

Outstanding Qard

These matters must be addressed before determining the amount actually available for distribution.

Therefore:

Underwriting surplus arising does not necessarily equal distributable surplus.

10. What Is Qard?

Qard is an interest-free loan that may be provided by the shareholder/operator fund to support the PRF when the PRF experiences a deficit, depending on the applicable Takaful framework.

Suppose:

PRF experiences deficit = RM3 million

The shareholder fund provides:

RM3 million Qard

This allows the PRF to receive financial support.

However, qard is:

A loan, not a donation.

Therefore, the PRF has an outstanding amount that must be repaid according to the applicable rules.

11. What Happens When the PRF Later Generates a Surplus?

Suppose:

Year 1

PRF deficit = RM3 million

Qard provided = RM3 million

Outstanding qard:

RM3 million

Then:

Year 2

PRF generates surplus = RM4 million

Can the PRF immediately distribute the RM4m to participants?

Under the IFSB approach described:

No.

The outstanding qard must first be fully repaid.

12. Qard Has Priority Over Surplus Distribution

Using the same numbers:

Year 2 surplus:

RM4 million

Outstanding qard:

RM3 million

First:

RM4m − RM3m = RM1m

The RM3m is used to fully repay the outstanding qard.

Only after the qard has been fully settled can the remaining:

RM1 million

potentially be considered for distribution, subject to all other applicable requirements.

Therefore:

Surplus → Repay Qard First → Then Consider Participant Distribution

13. Why Must Qard Be Repaid First?

Suppose the PRF owes:

RM3m qard

but distributes:

RM4m surplus

to participants instead.

The PRF would be giving money away while still owing money that was previously advanced to support it.

That would weaken the logic of qard as a temporary financial support mechanism.

Therefore, the priority is:

Restore the PRF’s financial position by settling the outstanding qard before distributing surplus.

14. Simple Qard Example

Suppose:

PRF surplus = RM2 million

Outstanding qard = RM2 million

Then:

RM2m surplus − RM2m qard = RM0

Therefore:

Qard fully repaid = RM2m

Surplus available for participant distribution = RM0

Participants receive no surplus distribution for that period under this simplified illustration because the entire surplus is required to repay the outstanding qard.

15. What If Surplus Is Smaller Than the Outstanding Qard?

Suppose:

PRF surplus = RM2 million

Outstanding qard = RM5 million

The RM2m is applied toward the qard.

Remaining qard:

RM5m − RM2m = RM3m

Therefore:

Participant distribution = RM0

Remaining qard = RM3m

The PRF would need future amounts to settle the remaining qard according to the applicable framework.

16. What If Surplus Is Greater Than the Qard?

Suppose:

PRF surplus = RM8 million

Outstanding qard = RM3 million

First:

RM8m − RM3m = RM5m

Therefore:

RM3m → Repay qard

RM5m → Remaining surplus

The remaining RM5m may then be considered for participant distribution, subject to the applicable actuarial, regulatory, contractual and financial requirements.

It does not necessarily mean the entire RM5m must automatically be distributed.

17. What If There Is No Outstanding Qard?

Suppose:

PRF surplus = RM5 million

Outstanding qard:

RM0

There is no qard that needs to be repaid.

Therefore, the surplus may be considered for distribution to:

Eligible participants

subject to the applicable rules.

Under the IFSB position described:

The Takaful operator does not receive the underwriting surplus.

18. The Order Is Very Important

The easiest way to understand the process is:

Step 1

Determine whether a genuine underwriting surplus exists.

↓

Step 2

Check whether the PRF has an outstanding qard.

↓

Step 3

If qard exists:

Repay the outstanding qard first.

↓

Step 4

Once qard is fully settled, determine what surplus remains.

↓

Step 5

Assess whether the remaining amount is appropriate for distribution.

↓

Step 6

Distribute the permitted amount to:

Eligible participants

not the operator, under this approach.

19. Full Numerical Example

Suppose the PRF has:

Total relevant income = RM20m

Claims, expenses and technical provisions = RM14m

Therefore, simplified surplus:

RM20m − RM14m = RM6m

But there is an outstanding qard of:

RM2m

First:

RM6m − RM2m = RM4m

So:

RM2m → Repay qard

Remaining surplus:

RM4m

Suppose the actuary determines that:

RM1m should be retained

to strengthen the PRF.

Then:

RM4m − RM1m = RM3m

Potential distributable surplus:

RM3 million

Under the participants-only approach:

RM3m → Eligible participants

RM0 → Takaful operator

This clearly shows why:

The initial surplus is not necessarily the same as the final amount distributed.

20. Why Might Some Surplus Still Be Retained After Qard Is Repaid?

Repaying qard does not automatically mean every remaining ringgit should be distributed.

The PRF may still need financial strength against:

claims volatility

unexpectedly large claims

future obligations

and other adverse financial developments.

Therefore:

Surplus

↓

Repay Qard

↓

Assess Financial Strength

↓

Retain Appropriate Amount if Necessary

↓

Distribute Appropriate Remaining Amount

This helps protect future participants and the continuing claims-paying ability of the PRF.

21. Participants-Only Distribution vs Operator Sharing

There are two distinct approaches worth keeping separate.

Participants-Only Approach

Distributable underwriting surplus:

Participants → Yes

Operator → No

The operator manages the PRF but does not receive part of its underwriting surplus.

Operator-Sharing Approach

In jurisdictions and structures that permit it, distributable surplus may be allocated between:

Eligible participants

and

Takaful operator

according to an agreed and permitted mechanism.

Therefore, the difference is essentially:

Can the operator receive part of the PRF underwriting surplus?

Under the participants-only approach:

No.

22. Connection With the IFSB Position

The IFSB position described here is that where there is an outstanding qard:

Surplus should first be used to fully repay the qard.

Where there is no outstanding qard, an appropriate surplus may be distributed:

to participants

but:

not to the Takaful operator.

This reflects the view that underwriting surplus belongs within the participants’ risk-sharing arrangement rather than serving as additional operator remuneration.

23. Why Is This Different From the Operator’s Wakalah Fee?

The operator can still receive remuneration.

Under a Wakalah arrangement, the operator receives its agreed:

Wakalah Fee

for managing the Takaful operation.

Therefore, saying:

“The operator does not receive underwriting surplus”

does not mean:

“The operator receives no income.”

The operator’s remuneration comes through the agreed Wakalah fee and other permissible sources under the applicable structure.

So:

Wakalah Fee = Operator’s agreed management remuneration

while:

Underwriting Surplus = Positive result arising in the PRF

These should not be confused.

Easy Way to Remember

Use:

QARD FIRST → PARTICIPANTS SECOND → OPERATOR NO SHARE

If there is an outstanding qard:

Surplus → Repay Qard First

Once qard is fully settled:

Remaining Distributable Surplus → Eligible Participants

Under this approach:

Operator → No Underwriting Surplus Share

Simple Formula

Suppose:

PRF Surplus = RM7m

Outstanding Qard = RM2m

Then:

RM7m − RM2m = RM5m remaining

If:

RM1m must be retained for financial strength

then:

RM5m − RM1m = RM4m potentially distributable

Therefore:

Qard repayment = RM2m

Retained in PRF = RM1m

Potential participant distribution = RM4m

Operator underwriting-surplus share = RM0

One-Sentence Summary

Under the participants-only approach, the Takaful operator acts as the custodian and manager of the risk fund but does not receive a share of its underwriting surplus; where an outstanding qard exists, the surplus must first be used to repay the qard fully, and only after the fund’s obligations and financial needs have been addressed may an appropriate remaining surplus be distributed to eligible participants, commonly through a hibah-based mechanism.

Takaful - Distribution of Underwriting Surplus to Participants and the Takaful Operator

An important issue in Takaful is determining who is entitled to receive the underwriting surplus that arises in the Participants’ Risk Fund (PRF).

One approach allows the surplus to be distributed to:

1. Eligible participants

and

2. The Takaful operator

However, allowing the Takaful operator to receive part of the PRF surplus is a Shari’ah issue on which different approaches exist.

In Malaysia, the Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM) permits the operator to receive an agreed share under specified conditions.

1. First, What Is the Surplus?

The surplus being discussed is the underwriting surplus arising from the Takaful risk fund, rather than simply the operator’s own business profit.

In simplified form:

Underwriting Surplus = PRF Income − Claims − Relevant Expenses − Required Provisions/Obligations

Suppose:

PRF income = RM10 million

Claims and other relevant obligations = RM8 million

Simplified underwriting surplus:

RM10m − RM8m = RM2m

The question then becomes:

What should happen to this RM2 million?

Depending on the applicable Takaful framework, the surplus might be retained in the PRF, distributed to eligible participants, or dealt with through another permitted mechanism.

A more controversial question is:

Can some of the surplus also be given to the Takaful operator?

2. Malaysian SAC-BNM Position

The SAC-BNM permits surplus to be distributed to the Takaful operator provided the method of distribution has been clearly disclosed and agreed upon by the participants when entering into the Takaful contract.

This condition is very important.

The operator should not simply decide at the end of the year:

“There is a surplus, so we will take 30%.”

Instead, the surplus-sharing arrangement should already form part of the contractual arrangement agreed by the parties.

Therefore:

Clear Surplus-Sharing Method + Participant Agreement at Contract Formation → Operator May Receive Agreed Share under the Malaysian approach

3. Why Is Participant Agreement Important?

The reasoning refers to the importance of mutual consent between contracting parties.

The relevant fiqh principle can be understood as:

Contractual arrangements are fundamentally based on the consent of the contracting parties, provided the agreed terms do not contradict Shari’ah principles.

Therefore, if the participant knowingly enters a Takaful arrangement that clearly states how surplus will be allocated, that agreement provides the contractual basis for the agreed distribution under this approach.

However, consent does not mean:

“Anything agreed between the parties automatically becomes Shari’ah-compliant.”

The contractual term must still be consistent with applicable Shari’ah requirements.

4. Surplus Distribution Under the Wakalah Model

Under a Wakalah model:

Participants = Principals

Takaful Operator = Wakil/Agent

The operator manages the Takaful arrangement and normally receives a:

Wakalah fee

for performing its management role.

Under the Malaysian approach described here, the operator may additionally receive an agreed share of underwriting surplus as a:

Performance Fee

provided this arrangement has been appropriately agreed upon.

5. What Is a Performance Fee?

A performance fee is an additional reward linked to the financial performance of the Takaful risk fund.

The basic idea is:

If the operator manages the Takaful operation effectively and a surplus arises, the operator may receive an agreed percentage as an incentive or performance-related reward.

This is separate conceptually from the ordinary Wakalah fee.

6. Simple Wakalah Example

Suppose the PRF produces:

RM1 million underwriting surplus

The Takaful contract states that:

20% of distributable surplus → Operator as performance fee

80% → Eligible participants

Then:

Operator:

20% × RM1m = RM200,000

Participants:

80% × RM1m = RM800,000

Therefore:

Operator receives = RM200,000

Eligible participants collectively receive = RM800,000

This is only a simplified illustration. Before any distribution, applicable actuarial, regulatory, contractual and financial requirements would still need to be satisfied.

7. Wakalah Fee vs Performance Fee

Do not confuse these two.

Wakalah Fee

The normal fee paid to the operator for:

managing the Takaful business.

It is part of the operator’s remuneration for acting as the:

Wakil

Performance Fee

An additional amount that may be linked to:

the emergence of an underwriting surplus

under a structure that permits such an arrangement.

Therefore:

Wakalah Fee = Payment for management

while:

Performance Fee = Additional incentive linked to performance/surplus

8. Why Use a Performance Fee?

One possible objective is to align the interests of the operator with the participants.

If the operator benefits when the PRF performs well, the operator has an incentive to:

price appropriately

underwrite prudently

manage claims efficiently

control relevant costs

and

manage the PRF carefully.

The intended chain is:

Better PRF Management

↓

Better Financial Experience

↓

Surplus Emerges

↓

Participants and Operator May Both Benefit

However, this incentive structure must be carefully governed because it can also create conflicts of interest.

9. Potential Conflict of Interest

Suppose the operator receives:

20% of surplus

The operator now has a financial incentive to increase the amount of reported surplus.

That can be positive if surplus results from genuine:

efficient management

and

prudent underwriting.

But it could become problematic if the incentive encouraged inappropriate actions such as:

under-provisioning for future claims

or

excessive restriction of valid claim payments.

For example:

Proper technical provisions = RM10m

Suppose only RM7m were recognised.

Liabilities could appear:

RM3m lower

and surplus could appear:

RM3m higher.

That could improperly increase the operator’s performance fee.

This is one reason why:

Actuarial oversight + Shari’ah governance + regulatory supervision

are important.

10. Why the Actuary Is Important Here

The operator should not be able to create a larger distributable surplus simply by underestimating the PRF’s obligations.

The actuary assesses matters such as:

technical provisions

claims liabilities

claims volatility

future claim-paying capacity

and

whether surplus distribution is financially prudent.

Therefore:

Calculate Proper Liabilities

↓

Determine Genuine Surplus

↓

Assess Whether Distribution Is Safe

↓

Only Then Consider Surplus Allocation

This protects participants from excessive distributions that could weaken the PRF.

11. Surplus Sharing Under Mudarabah

A different arrangement may apply under a:

Mudarabah model

In Mudarabah:

one party provides capital/funds

while:

the Mudarib manages the activity

and profits are shared according to an agreed:

Profit-Sharing Ratio

The material describes an approach under which surplus may be shared with the Takaful operator according to an agreed percentage or profit-sharing ratio.

The important point for your notes is:

The contractual basis for the operator’s remuneration differs between Wakalah and Mudarabah structures.

12. Simple Mudarabah Illustration

Suppose the relevant amount available for sharing is:

RM1 million

and the agreed sharing ratio is:

Participants = 70%

Operator = 30%

Then:

Participants:

70% × RM1m = RM700,000

Operator:

30% × RM1m = RM300,000

The precise Shari’ah characterisation and permissible treatment of underwriting surplus under Mudarabah is one of the areas where standards and practices can differ, so this simplified illustration should not be treated as a universal rule for every Takaful operation.

13. Wakalah and Mudarabah - Easy Distinction

For study purposes:

Wakalah

Operator acts as:

Agent/Wakil

Normal remuneration:

Wakalah Fee

Where permitted and agreed, an additional:

Performance Fee

may be linked to surplus.

Mudarabah

Operator acts as:

Mudarib/Manager

Remuneration is associated with an agreed:

Profit-Sharing Ratio

The exact treatment must follow the applicable Shari’ah, contractual and regulatory framework.

14. Why Is Operator Sharing of Underwriting Surplus Controversial?

The key issue is:

Who does the underwriting surplus actually belong to?

The underwriting risk in Takaful is borne collectively through the:

Participants’ Risk Fund

The operator manages the arrangement but does not bear the underwriting risk in the same way that a conventional insurer does.

This leads to the argument:

If the participants collectively bear the underwriting risk, why should the operator receive part of the underwriting surplus?

This is one reason operator participation in underwriting surplus is debated from a Shari’ah perspective.

15. The Argument Against Operator Surplus Sharing

The reasoning can be understood as:

Participants contribute Tabarru’

↓

Participants collectively bear underwriting risk through PRF

↓

PRF pays participants’ covered claims

↓

Any underwriting surplus arises in PRF

Therefore, some Shari’ah approaches conclude that:

The operator should not share in the underwriting surplus merely because it manages the fund.

The operator already receives its agreed remuneration under the applicable management arrangement.

16. The Argument Permitting Operator Surplus Sharing

The alternative position allows an operator share where:

the arrangement is clearly disclosed

participants agree to it when entering the contract

and

the arrangement satisfies the applicable Shari’ah requirements.

Under this reasoning, an operator’s agreed share can function as a:

Performance incentive

The Malaysian SAC-BNM approach described here permits such an arrangement.

17. Different Shari’ah Approaches

This is therefore an area where there is not complete uniformity across Takaful jurisdictions and standard-setting approaches.

The material identifies Malaysia and Brunei as jurisdictions where operator surplus sharing has been practised.

By contrast, it reports that the Islamic Financial Services Board (IFSB) describes a “near-consensus” against sharing underwriting surplus with Takaful operators, including through performance-related or incentive fees.

Therefore, for study purposes, remember:

Malaysian SAC-BNM Approach

Operator surplus sharing can be permitted subject to the applicable contractual and Shari’ah conditions.

Broader IFSB Position Described

There is strong support for the view that underwriting surplus should not be shared with the operator.

18. Why Do These Views Differ?

The disagreement mainly concerns the nature and ownership of the underwriting surplus.

One approach emphasises:

Contractual Consent

If participants knowingly agree to an operator performance fee and it does not contradict Shari’ah requirements, it may be permissible.

The other approach emphasises:

Nature of the PRF

Because underwriting risk belongs collectively to the participants’ fund, the resulting underwriting surplus should remain associated with participants/the fund rather than becoming operator remuneration.

Therefore, the disagreement can be simplified as:

Contractual Consent and Incentive

versus

Ownership and Nature of Underwriting Surplus

19. Surplus Does Not Have to Be Distributed

There is another important distinction.

Even if the rules allow participants or an operator to receive surplus, it does not mean every surplus must be distributed.

Suppose:

PRF underwriting surplus = RM5m

The actuary determines that:

RM3m should be retained

to strengthen the PRF against future claims volatility.

Only:

RM2m

may be considered available for distribution, subject to applicable rules.

Therefore:

Surplus arising ≠ Surplus automatically distributable

20. Why Retain Surplus?

Retained surplus can strengthen the PRF’s:

Financial Buffer

For example:

Total surplus = RM5m

Retained = RM3m

Potentially distributable = RM2m

The RM3m remains available to strengthen the fund against:

unexpected claims

claims volatility

and other adverse financial experience.

Therefore:

Surplus

↓

Assess Financial Position

↓

Retain Necessary Amount

↓

Determine Distributable Surplus

↓

Apply Permitted Distribution Method

21. Full Surplus Distribution Process

The process can be understood as:

PRF Receives Tabarru’

↓

Covered Claims and Relevant Obligations Arise

↓

Technical Provisions Recognised

↓

Financial Result Determined

↓

Underwriting Surplus Exists

↓

Actuary Assesses Whether Distribution Is Prudent

↓

Necessary Amount Retained for Financial Strength

↓

Distributable Surplus Determined

↓

Depending on the applicable framework:

Participants

and, where permitted:

Operator

may receive the agreed allocation.

Easy Way to Remember

Use:

AGREE → EARN → ASSESS → DISTRIBUTE

AGREE

The surplus-sharing method must be properly established in the contractual arrangement where operator sharing is permitted.

EARN

A genuine underwriting surplus must actually arise.

ASSESS

The financial position and future claim-paying ability must be considered.

DISTRIBUTE

The distributable amount is allocated according to the applicable contractual, regulatory and Shari’ah requirements.

Key Shari’ah Issue to Remember

The debate can be reduced to one question:

Should an operator that manages the PRF but does not itself bear the participants’ underwriting risk be entitled to part of the PRF’s underwriting surplus?

Different Shari’ah and regulatory approaches have answered this differently.

Therefore, do not memorise:

“The operator always receives surplus.”

or:

“The operator can never receive surplus.”

Instead remember:

The treatment depends on the applicable Shari’ah standard, jurisdiction, Takaful model and contractual arrangement.

Simple Formula

If operator sharing is permitted and the distributable surplus is:

RM1,000,000

and the agreed performance fee is:

20%

then:

Operator Share = RM1,000,000 × 20% = RM200,000

Remaining amount:

RM800,000

would be dealt with according to the applicable surplus-distribution arrangement.

One-Sentence Summary

Under the Malaysian SAC-BNM approach, a Takaful operator may receive an agreed portion of distributable underwriting surplus where the arrangement is clearly established and accepted by participants—such as a performance fee under Wakalah—while other Shari’ah approaches, including the near-consensus described by the IFSB, oppose operator participation in underwriting surplus because the underwriting risk and resulting surplus are associated with the participants’ risk fund.

Takaful - Role of an Actuary in Takaful

An actuary plays an important role in ensuring that a Takaful operation is financially sound, properly priced, adequately provided for, and fair to participants.

Actuaries are specialists in:

Risk Management + Mathematics + Statistics + Financial Analysis

Their main task is to use information available today to understand uncertain events that may happen in the future and estimate their possible financial consequences.

In simple terms:

An actuary studies past and present data to estimate future risks and determine their possible financial impact.

1. What Is an Actuary?

An actuary is a professional who specialises in analysing and managing financial risk and uncertainty.

Future events are uncertain.

For example, a Takaful operator does not know exactly:

who will make a claim

when a claim will occur

how many claims will occur

or

how much those claims will cost.

The actuary uses mathematics, statistics and financial techniques to estimate these uncertain outcomes.

Therefore:

Past and Present Data

↓

Mathematical and Statistical Analysis

↓

Estimate Probability of Future Events

↓

Estimate Financial Impact

↓

Support Better Financial and Risk Decisions

2. Why Are Actuaries Important?

Many financial decisions must be made before the future is known.

For example, a participant pays a Takaful contribution today.

But the operator does not yet know whether that participant will make a:

RM1,000 claim

RM20,000 claim

or

no claim at all.

The actuary helps estimate the expected financial consequences of these uncertain future events.

Without appropriate actuarial analysis, a Takaful operator could:

charge inadequate contributions

underestimate future claims

overstate surplus

or

maintain insufficient financial resources.

3. Actuaries Are Experts in Risk Management

One of the most important ideas is:

Actuaries do not eliminate risk. They measure, estimate and help manage it.

Suppose 10,000 participants enter a medical Takaful pool.

The actuary cannot say exactly:

“Ahmad will make a RM15,000 claim next March.”

But by analysing a sufficiently relevant group, the actuary may be able to estimate:

expected number of claims

expected average claim size

and therefore:

expected total claims

This information helps the Takaful operator manage the PRF appropriately.

4. Actuaries Use Past and Present Data

Actuaries analyse information from:

The Past

For example:

historical claims

previous claim frequency

previous claim severity

historical mortality or morbidity experience

past expenses

and relevant financial experience.

The Present

They also consider current information such as:

current participant characteristics

current economic conditions

current medical costs

current portfolio composition

and other relevant information.

The purpose is to make reasonable estimates about:

The Future

5. Simple Example

Suppose historical data shows that among:

10,000 similar participants

approximately:

500 participants make claims each year.

Expected claim frequency:

500 ÷ 10,000 = 5%

Suppose the expected average claim is:

RM10,000

Then a simplified expected claim cost per participant is:

5% × RM10,000 = RM500

The actuary can use this information, together with other relevant assumptions and risk factors, when determining an appropriate risk contribution.

This illustrates how:

Historical Data → Probability Estimate → Financial Estimate

6. Actuaries Work in More Than Insurance

Actuaries are commonly associated with insurance because insurance involves significant uncertainty about future financial events.

However, actuarial work also extends to areas such as:

Takaful

pensions

social security

investments

and other areas involving long-term financial risk.

The common feature is:

There is uncertainty about future events that have financial consequences.

7. Traditional Role of an Actuary in Insurance and Takaful

Two traditional actuarial responsibilities are particularly important:

1. Pricing

and

2. Determining appropriate technical provisions

In Takaful, another important responsibility is:

3. Assessing and determining surplus

Therefore, three major areas are:

PRICING → PROVISIONS → SURPLUS

8. First Role - Pricing

The actuary helps determine how much should be charged for the risk being covered.

This is necessary because contributions are normally determined before the claims occur.

The actuary considers factors such as:

expected claim frequency

expected claim severity

risk characteristics

sum covered

historical experience

and other relevant assumptions.

A simplified starting point is:

Expected Claim Cost = Expected Claim Frequency × Expected Claim Amount

The objective is to ensure that the contribution appropriately reflects the expected risk.

9. Why Is Appropriate Pricing Important?

Suppose the PRF should actuarially receive:

RM1,000 per participant

to support a particular level of risk.

But participants are charged only:

RM700

Shortfall per participant:

RM300

For 10,000 participants:

RM300 × 10,000 = RM3 million

This can create significant financial pressure on the PRF.

Therefore:

Underpricing

↓

Insufficient Tabarru’

↓

PRF Underfunding

↓

Higher Risk of Deficit

The actuary helps reduce this risk by determining appropriate pricing.

10. Second Role - Calculating Technical Provisions

Another major actuarial responsibility is determining the appropriate technical provisions that should be recognised in the financial accounts.

Technical provisions reflect obligations associated with:

remaining coverage

and

claims that have already occurred.

Two important concepts are:

LRC - Liability for Remaining Coverage

and

LIC - Liability for Incurred Claims

LIC may include actuarial estimates associated with:

IBNR - Incurred But Not Reported

and

IBNER - Incurred But Not Enough Reported

11. Why Are Technical Provisions Important?

Suppose the PRF appears to have:

RM10 million surplus

before all relevant future and outstanding obligations are properly recognised.

The actuary determines that another:

RM6 million

of appropriate technical provisions must be recognised.

Simplified remaining surplus:

RM10m − RM6m = RM4m

Without the actuarial calculation, the Takaful operation might incorrectly believe it has RM10m available.

Therefore:

Technical provisions help prevent liabilities from being understated and surplus from being overstated.

12. Third Role - Determining Surplus

The actuary also plays an important role in determining whether a surplus exists and whether it is appropriate for that surplus to be distributed.

Suppose the PRF produces:

RM5 million surplus

This does not automatically mean:

RM5 million should be distributed.

The actuary needs to consider the future financial strength of the PRF.

13. Why Might the Actuary Recommend Retaining Surplus?

Suppose claims are highly volatile.

One year:

RM5m claims

Next year:

RM15m claims

Next year:

RM7m claims

Then:

RM20m claims

The large fluctuations create uncertainty.

The actuary may therefore recommend retaining some surplus within the PRF.

For example:

Total surplus = RM5m

Distribute = RM2m

Retain = RM3m

The retained RM3m can strengthen the PRF’s:

Financial Buffer

and help absorb unexpectedly high future claims.

14. Actuary and Fair Treatment of Participants

The actuary’s role can extend beyond calculations.

The actuary may also have an important professional and governance role in helping ensure that:

participants are treated fairly.

This is especially important because Takaful can involve an agent-principal relationship.

Under a Wakalah structure:

Participants = Principals

Takaful Operator = Agent/Wakil

The operator manages the Takaful arrangement on behalf of participants.

15. Why Can the Wakalah Relationship Create a Conflict?

The participants and operator do not necessarily have identical financial interests.

Participants want:

appropriate protection

fair contributions

proper management of the PRF

and

fair treatment.

The operator needs:

sufficient Wakalah fees

operating income

and

a sustainable return for shareholders.

These objectives can coexist, but poorly designed incentives can create conflicts.

16. Simple Agent-Principal Problem

Suppose:

Gross contribution = RM1,000

Wakalah fee = RM200

Tabarru’ available to PRF = RM800

Assume RM800 is actuarially adequate for the risk.

Now suppose the operator increases its fee to:

RM400

while the participant still pays:

RM1,000.

Only:

RM600

remains for the PRF in this simplified illustration.

But if the risk still requires:

RM800

then the PRF could be inadequately funded.

Therefore, an actuary may identify that the structure creates a problem for participants even though the operator itself receives more fee income.

17. The Actuary Can Advise Management

If the actuary identifies a problem that could adversely affect participants, the actuary may advise:

Management

For example, the actuary may identify:

inadequate pricing

insufficient technical provisions

inappropriate surplus distribution

or other actuarial matters that could weaken participants’ interests or the PRF.

The objective is not merely to perform calculations but also to communicate the implications of those calculations.

18. The Actuary and the Shari’ah Committee

The actuary may also provide relevant advice to the:

Shari’ah Committee

This is important because Shari’ah governance decisions can have financial and actuarial consequences.

The Shari’ah Committee specialises in assessing Shari’ah matters, while the actuary provides expertise regarding:

risk

pricing

financial sustainability

claims expectations

technical provisions

and other actuarial consequences.

Therefore, their expertise can complement each other.

19. The Actuary and the Regulator

In some regulatory frameworks, actuaries also have responsibilities connected directly to the regulator.

The material gives Malaysia as an illustration where an actuary may have reporting obligations if important actuarial advice is not acted upon and participants’ interests could be harmed.

The underlying governance principle is:

The actuary’s professional responsibility is not limited to helping management produce desirable financial figures.

The actuary must exercise appropriate professional judgment and comply with applicable regulatory and professional requirements.

20. Why Is Independence Important?

Imagine management wants to distribute:

RM10m surplus

because a large distribution may look attractive to participants.

But actuarial analysis indicates that:

RM8m should remain in the PRF

because future claims are highly uncertain.

If the actuary simply agrees with management despite the actuarial evidence, participants could be exposed to unnecessary financial risk.

Therefore, the actuary needs sufficient:

Professional Independence

to provide an objective assessment.

21. Why Must the Actuary Understand Takaful?

An actuary working in Takaful cannot simply understand mathematical calculations.

The actuary must also understand:

how the Takaful model operates

who bears the underwriting risk

how the PRF operates

how tabarru’ is allocated

how Wakalah fees work

how surplus and deficit are treated

and

how the contractual structure affects participants and the operator.

This is because the actuarial calculations depend on the actual economic and contractual structure.

22. Knowing the Model’s Name Is Not Enough

A Takaful operation may be described as:

Wakalah

But two operators using a Wakalah model may not operate in exactly the same way.

Differences may arise from:

Takaful certificate/contract terms

fee structures

fund arrangements

surplus arrangements

distribution methods

and

sales processes.

Therefore:

The actuary must understand how the model actually works in practice, not merely what the model is called.

23. Simple Illustration

Suppose:

Operator A

Uses a Wakalah model with:

20% Wakalah fee

and a particular surplus-sharing arrangement.

Operator B

Also calls its structure Wakalah but uses:

30% Wakalah fee

and a different surplus arrangement.

Although both are called:

Wakalah

their financial outcomes may differ.

Therefore, actuarial analysis must reflect:

The actual operational structure

rather than simply assuming all Wakalah models behave identically.

24. Why Does the Sales Process Matter?

How a Takaful product is sold can influence:

who joins the pool

what risks enter the pool

anti-selection

participant expectations

and

acquisition costs.

For example, if a product is marketed particularly strongly to people who already expect to make high claims, the actual risk composition may be worse than the actuary originally assumed.

Therefore:

Sales Process

↓

Type of Participants Entering Pool

↓

Risk Composition

↓

Claims Experience

↓

Financial Performance of PRF

This is another reason why the actuary needs to understand the Takaful operation as a whole.

25. The Actuary’s Three Major Responsibilities

The main actuarial responsibilities can be remembered as:

1. PRICE

Determine an appropriate contribution/tabarru’ based on expected risk.

2. PROVIDE

Calculate appropriate technical provisions for existing obligations.

3. PROTECT SURPLUS

Determine whether surplus exists and whether it can prudently be distributed without weakening the PRF’s ability to meet future claims.

26. How the Three Roles Work Together

These responsibilities are closely connected.

Step 1 - Pricing

The actuary estimates:

How much should participants contribute for the risks accepted?

↓

Step 2 - Technical Provisions

The actuary estimates:

How much liability must be recognised for remaining coverage and claims obligations?

↓

Step 3 - Surplus

The actuary considers:

After recognising the appropriate obligations, is there a genuine surplus, and can any of it prudently be distributed?

Therefore:

Pricing → Provisions → Surplus

27. Full Takaful Actuarial Cycle

The overall process can be understood as:

Analyse Historical and Current Data

↓

Estimate Future Risk

↓

Determine Appropriate Pricing

↓

Participants Pay Contributions

↓

PRF Accepts Risks

↓

Claims Occur

↓

Actuary Estimates Outstanding and Future Obligations

↓

Calculate Appropriate Technical Provisions

↓

Determine More Accurate Financial Position

↓

Surplus or Deficit

↓

If surplus:

Assess Whether Distribution Is Prudent

If deficit:

Assess financial implications and any required support under the applicable framework

Easy Way to Remember

ACTUARY = LOOK BACK → MEASURE TODAY → ESTIMATE TOMORROW

LOOK BACK

Analyse historical experience.

MEASURE TODAY

Understand the current risk pool and financial position.

ESTIMATE TOMORROW

Estimate future claims and financial obligations.

Then use these estimates to support:

Pricing + Provisions + Surplus Decisions

Simple Formula

The broad actuarial process is:

Past Data + Present Information + Mathematical/Statistical Analysis → Estimate Future Risk and Financial Impact

In Takaful:

Actuarial Analysis → Appropriate Pricing + Adequate Provisions + Prudent Surplus Assessment

One-Sentence Summary

An actuary in Takaful uses mathematical, statistical and financial analysis to estimate uncertain future risks and their financial impact, with major responsibilities including determining appropriate pricing, calculating adequate technical provisions, assessing surplus and its possible distribution, and providing independent professional advice that helps protect participants and maintain the financial sustainability of the Takaful arrangement.

Takaful - Role of an Actuary in Pricing

Pricing is an important part of Takaful because participants normally pay their contributions in advance, at the beginning of the coverage period, before anyone knows exactly what claims will occur during that period.

This creates an important problem:

The contribution must be determined today, even though the actual claims will only be known in the future.

Therefore, the actuary uses available information and assumptions about future claims to determine an appropriate contribution.

Two broad approaches to determining the risk contribution are:

Collective pricing

and

Risk-weighted pricing.

1. Why Is Pricing Necessary in Takaful?

Suppose Ahmad purchases medical Takaful on:

1 January

He pays his contribution at the beginning of the year.

However, the Takaful operator does not know whether Ahmad will:

make no claim

make one small claim

or

make several large claims

during the year.

Therefore:

Contribution is collected first

↓

Claims occur later

This means the contribution has to be determined based on an estimate of future risk.

2. The Actuary Cannot Know Future Claims Exactly

The actuary cannot predict exactly:

who will become sick

who will make a claim

how many claims will occur

or

how much each claim will cost.

Instead, the actuary uses:

historical claims data

statistical information

claim frequency

claim severity

participant characteristics

and other relevant risk information

to estimate the expected cost of claims.

Therefore:

Actuarial pricing is based on expected future claims, not known future claims.

3. What Does the Actuary Try to Achieve?

The actuary tries to determine an appropriate amount of tabarru’ so that the PRF has sufficient resources to support the risks accepted into the pool.

In simple terms:

Expected Risk → Appropriate Tabarru’ → PRF → Future Claims

If tabarru’ is too low relative to the risk:

Insufficient Tabarru’

↓

Claims may exceed PRF resources

↓

Greater risk of PRF deficit

Therefore, appropriate pricing is important for the financial sustainability of the Takaful arrangement.

4. What Is Collective Pricing?

Under collective pricing, participants in the relevant group pay the same or common tabarru’ amount, even though their individual risk levels may be different.

In simple terms:

Different risks → Same tabarru’

The contribution is based on the collective or average characteristics of the group rather than being individually adjusted for each participant’s specific risk.

5. Medical Takaful Illustration

Suppose four people want medical Takaful protection.

Risk 1

A 30-year-old in good health

Risk 2

A 50-year-old with high blood pressure

Risk 3

A 60-year-old with diabetes

Risk 4

A 20-year-old in very good health

These four people do not necessarily have the same probability of making a medical claim.

Within this simplified illustration, Risk 3 is assumed to have the highest expected claims risk, while Risk 4 has a much lower expected claims risk.

6. Different Participants Bring Different Risks

The important idea is:

Risk 1

Relatively lower expected risk.

Risk 2

Higher expected risk because of the assumed health characteristics.

Risk 3

Highest expected risk in this illustration.

Risk 4

Lowest expected risk in this illustration.

Therefore:

The participants do not bring equal expected claims risk into the PRF.

However, collective pricing does not necessarily distinguish between these different individual risk levels.

7. Same Tabarru’ Under Collective Pricing

Suppose the common tabarru’ is:

RM100 per participant

Therefore:

Risk 1 pays = RM100

Risk 2 pays = RM100

Risk 3 pays = RM100

Risk 4 pays = RM100

Total tabarru’ collected:

RM100 × 4 = RM400

Therefore, the PRF receives:

RM400

8. But Their Risks Are Not the Same

Although everybody contributes:

RM100

their expected claims risks differ.

For instance, within this simplified illustration:

Risk 4 may have a relatively low probability of making a claim.

Risk 3 may have a considerably higher probability of making a claim.

Yet:

Risk 4 pays RM100

and

Risk 3 also pays RM100.

Therefore, the tabarru’ does not directly reflect the individual risk each participant brings into the pool.

9. Why Might RM400 Be Insufficient?

Suppose the RM100 common tabarru’ was determined based on an assumed mixture of:

lower-risk participants

medium-risk participants

and

higher-risk participants.

If the actual group develops exactly as expected, the pricing may be more likely to work as intended.

But suppose the actual participants who join are mostly:

higher-risk participants

.

Then:

Total expected claims may be much higher

while:

Each person still pays only RM100.

Therefore, the:

RM400 total tabarru’ may be insufficient to meet total claims.

10. Simple Numerical Illustration

Suppose the actuarial expected claims costs are:

Risk 1 = RM60

Risk 2 = RM120

Risk 3 = RM180

Risk 4 = RM40

Total expected claims:

RM60 + RM120 + RM180 + RM40 = RM400

If all four participate and each pays RM100:

Total tabarru’:

RM400

Expected claims:

RM400

So the collective price appears to work.

But this depends on the expected mixture of risks actually remaining in the pool.

11. What If the Healthy Participants Do Not Join?

Suppose Risk 4 is very healthy and believes:

“RM100 is too expensive for the amount of risk I bring.”

Risk 4 decides not to participate.

Risk 3, however, has much higher expected medical costs and may think:

“RM100 is attractive for the protection I receive.”

Risk 3 therefore remains in the pool.

This creates a serious problem because the actual pool begins to contain a larger proportion of:

Higher-risk participants

than the actuary originally assumed.

12. This Is Called Anti-Selection

This situation is called:

Anti-selection

or:

Adverse selection

It occurs when participants have information about their own risk and the pricing structure makes the Takaful arrangement relatively more attractive to higher-risk participants than to lower-risk participants.

In simple terms:

The people who expect to claim more are more attracted to the common price, while people who expect to claim less may find the same price unattractive.

13. Why Would a Healthy Participant Leave?

Suppose:

Healthy participant

Expected claim cost = RM40

Tabarru’ = RM100

The participant may feel RM100 is expensive relative to their expected risk.

But consider:

Higher-risk participant

Expected claim cost = RM180

Tabarru’ = RM100

The RM100 contribution appears relatively attractive.

Therefore:

Lower-risk participant

Expected cost RM40 → Pays RM100 → May not join

while:

Higher-risk participant

Expected cost RM180 → Pays RM100 → More likely to join

This is how common pricing can affect the composition of the risk pool.

14. Why Is Anti-Selection Dangerous?

The original RM100 contribution may have been calculated assuming a balanced mixture of:

low risk + medium risk + high risk

But if many lower-risk participants do not join, the pool changes.

The new pool may contain:

More high-risk participants

Therefore:

Average expected claims increase

but:

Tabarru’ remains RM100

This creates a mismatch.

15. The Anti-Selection Process

The process can be understood as:

Same Tabarru’ for Different Risks

↓

Low-Risk Participants Find Price Relatively Expensive

↓

Some Low-Risk Participants Do Not Join

↓

High-Risk Participants Find Price Relatively Attractive

↓

Higher-Risk Participants Become a Larger Proportion of the Pool

↓

Average Expected Claims Increase

↓

Original Tabarru’ Becomes Inadequate

↓

Greater Risk of PRF Deficit

16. Why Is the Actuary’s Original Assumption Important?

Actuarial pricing depends on assumptions.

Suppose the actuary expects:

40% low-risk participants

40% medium-risk participants

20% high-risk participants

The RM100 tabarru’ may have been determined based on this expected mixture.

But suppose the actual pool becomes:

10% low-risk

30% medium-risk

60% high-risk

The actual risk profile is now much worse than assumed.

Therefore:

A collective price calculated using one expected risk mixture may become inadequate if the actual participants have a significantly different risk profile.

17. Collective Pricing Depends on the Composition of the Pool

This is the key weakness of collective pricing.

The common contribution may be adequate only if the actual composition of participants is reasonably consistent with the assumptions used when determining the price.

If the actual pool becomes much riskier:

Expected Claims ↑

while:

Tabarru’ per Participant stays the same

Therefore:

Probability of insufficient PRF funding ↑

18. Why Does Voluntary Participation Matter?

If participation is compulsory, lower-risk participants cannot simply leave because they consider the common contribution too high.

Therefore, the expected mixture of:

low-risk

medium-risk

and

high-risk

participants may be easier to maintain.

But if participation is voluntary:

Participants can decide whether the common contribution represents good value for their own circumstances.

This creates greater potential for anti-selection.

19. Collective Pricing Can Create Cross-Subsidisation

When everyone pays the same tabarru’ despite having different expected risk:

Lower-risk participants may contribute more relative to their expected claims

while:

Higher-risk participants may contribute less relative to their expected claims.

This creates:

Cross-subsidisation

For example:

Low-risk expected cost = RM40

Contribution = RM100

Higher-risk expected cost = RM180

Contribution = RM100

The lower-risk participant is effectively contributing relatively more toward the collective risk cost.

20. Is Cross-Subsidisation the Same as Risk Sharing?

No.

This distinction is important.

Risk Sharing

Means participants contribute to a common PRF and the fund collectively pays valid covered losses.

Cross-Subsidisation

Means one category of participants is systematically paying relatively more compared with its expected risk while another category pays relatively less.

Therefore:

Risk sharing is the fundamental pooling mechanism, while cross-subsidisation concerns how the cost of that pool is allocated among participants.

21. The Alternative - Risk-Weighted Pricing

One way to address the problem is:

Risk-Weighted Pricing

Under this approach, the amount of tabarru’ depends more directly on the risk that each participant brings into the pool.

Therefore:

Lower expected risk → Lower tabarru’

Higher expected risk → Higher tabarru’

The objective is to make contributions better reflect expected claims costs.

22. Simple Risk-Weighted Illustration

Suppose actuarial assessment produces:

Risk 1 expected risk cost = RM60

Risk 2 = RM120

Risk 3 = RM180

Risk 4 = RM40

Instead of charging everyone RM100, a simplified risk-weighted structure could charge amounts more closely related to those risks.

Therefore:

Risk 1 → Lower tabarru’

Risk 2 → Higher tabarru’

Risk 3 → Highest tabarru’

Risk 4 → Lowest tabarru’

The total contributions can then respond more directly to the actual risk composition of the pool.

23. Why Can Risk-Weighted Pricing Reduce Anti-Selection?

Suppose a lower-risk participant has an expected risk cost of:

RM40

Instead of charging RM100, the contribution is priced closer to the participant’s actual expected risk.

The participant is therefore less likely to feel that they are paying excessively relative to their risk.

At the same time, a higher-risk participant with an expected cost of:

RM180

would pay a higher tabarru’.

Therefore, the higher-risk participant is less likely to be severely underpriced.

So:

Risk-Based Contribution

↓

Less Underpricing of High Risks

• ●

Less Overpricing of Low Risks

↓

Reduced Anti-Selection Pressure

24. Contributions Are Paid Before Claims Are Known

The most important timing issue is:

At the beginning of coverage

The participant pays the contribution.

But:

During the coverage period

Claims emerge.

Therefore:

Time 0

Contribution determined and collected.

↓

Future period

Claims occur.

↓

Actual claims become known

The actuary must therefore estimate future claims before they happen.

25. Why Can’t the Operator Wait Until Claims Occur?

Suppose the operator said:

“We will wait until the end of the year, see who claimed, and then decide how much everyone should contribute.”

That would undermine the normal advance-funding structure of the Takaful arrangement.

The PRF needs resources available to pay claims when they arise.

Therefore:

Contributions must be collected before the actual claims experience is fully known.

This is why actuarial pricing is necessary.

26. Expected Claims vs Actual Claims

The actuary determines contributions based on:

Expected claims

But the PRF eventually experiences:

Actual claims

These will not necessarily be identical.

For example:

Expected claims = RM1 million

Actual claims could be:

RM800,000

RM1 million

or

RM1.3 million

Therefore:

Pricing is based on expectations, while the eventual financial result depends on actual experience.

27. Why Is There Uncertainty?

Future claims are affected by:

how many participants make claims

how severe the claims are

unexpected illnesses or accidents

medical-cost inflation

changes in participant behaviour

and other uncertain events.

Therefore, even a well-calculated contribution cannot guarantee:

Total Tabarru’ = Total Actual Claims

The objective is to set contributions on a financially sound basis given the information available.

28. What Happens If Tabarru’ Is Too Low?

Suppose:

Total tabarru’ collected = RM1 million

Actual claims and relevant obligations = RM1.3 million

Simplified shortfall:

RM1.3m − RM1m = RM300,000

This creates financial pressure on the PRF and may contribute to:

PRF deficit

Therefore, underpricing can threaten the financial sustainability of the risk pool.

29. What Happens If Claims Are Lower Than Expected?

Suppose:

Total relevant PRF income = RM1 million

Relevant claims, expenses and provisions = RM800,000

Simplified positive result:

RM1m − RM800,000 = RM200,000

This may contribute to an:

Underwriting surplus

However, the existence of surplus does not automatically mean the entire RM200,000 should immediately be distributed.

The PRF’s future obligations and financial strength still need to be considered.

30. The Actuary’s Main Pricing Responsibility

The actuary needs to consider questions such as:

What risks are entering the pool?

How frequently are claims expected?

How severe are those claims expected to be?

What participant characteristics affect the risk?

What total claims are expected?

What tabarru’ should be collected?

and

Could the pricing structure create anti-selection?

Therefore, actuarial pricing is not simply:

“Choose a contribution amount.”

It is about ensuring that the contribution structure appropriately reflects the expected risk of the pool.

Easy Way to Remember

PRICE TODAY → CLAIMS TOMORROW

The contribution is determined:

Before claims occur

Therefore, the actuary must:

Estimate Risk

↓

Estimate Future Claims

↓

Determine Appropriate Tabarru’

↓

Collect Contributions

↓

PRF Pays Future Covered Claims

Collective Pricing - Easy Formula

Different Risks → Same/Common Tabarru’

For example:

Risk 1 → RM100

Risk 2 → RM100

Risk 3 → RM100

Risk 4 → RM100

Total:

RM400

The problem arises if the actual risk composition is worse than the assumptions used to determine RM100.

Anti-Selection - Easy Formula

Same Price + Voluntary Participation

↓

Low-Risk Participants May Find Price Too High

↓

High-Risk Participants May Find Price Attractive

↓

Pool Becomes Higher Risk

↓

Expected Claims Increase

↓

Original Contribution May Become Inadequate

Risk-Weighted Pricing - Easy Formula

Different Risks → Different Tabarru’

Therefore:

Lower Expected Risk → Lower Tabarru’

and:

Higher Expected Risk → Higher Tabarru’

The objective is:

Tabarru’ More Closely Reflects Expected Risk

Most Important Concept

The main problem is not simply that participants have different risks.

The real problem occurs when:

A common contribution is calculated using an assumed mixture of low-risk and high-risk participants, but voluntary participation causes the actual pool to contain disproportionately more high-risk participants.

Then:

Actual Pool Risk > Expected Pool Risk

while:

Tabarru’ remains based on the original assumptions

which can lead to:

Insufficient PRF Funding

One-Sentence Summary

The actuary determines Takaful pricing before actual claims are known by estimating the expected risk of participants; under collective pricing, participants with different risk levels pay a common tabarru’ amount, which can encourage anti-selection when lower-risk participants find the price unattractive while higher-risk participants are attracted to it, potentially making the actual risk pool more expensive than assumed and causing the tabarru’ collected to become insufficient for future claims.