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.