Takaful - Excess of Loss Retakaful

Excess of loss Retakaful is a non-proportional form of Retakaful protection. Under this arrangement, the Takaful operator first bears losses up to an agreed retention limit. The Retakaful operator only becomes responsible when a covered loss exceeds that retention level.

This means that the Takaful operator uses its own risk fund and protective provisions first. Only the portion of the loss above the agreed retention is passed to the Retakaful operator, subject to the maximum amount of Retakaful cover purchased.

Unlike proportional Retakaful, the Takaful operator and Retakaful operator do not share every risk or every claim according to a fixed percentage. The Retakaful operator only participates when the loss becomes large enough to cross the retention threshold.

Example

Suppose a Takaful operator has an excess of loss arrangement with:

Retention limit = RM1 million

Retakaful cover = RM4 million

This means:

• The Takaful operator bears the first RM1 million of any covered loss.
• The Retakaful operator may cover the amount above RM1 million, up to a maximum of RM4 million.

Situation 1 - Small Loss

A claim amounts to:

RM600,000

Because this amount is below the RM1 million retention:

Takaful operator pays RM600,000

Retakaful operator pays RM0

The Retakaful protection is not triggered.

Situation 2 - Larger Loss

A claim amounts to:

RM3 million

The Takaful operator bears:

First RM1 million

The remaining amount is:

RM2 million

The Retakaful operator may therefore pay:

RM2 million

So:

Takaful operator = RM1 million

Retakaful operator = RM2 million

Situation 3 - Very Large Loss

A claim amounts to:

RM7 million

The Takaful operator bears the first:

RM1 million

The Retakaful cover is limited to:

RM4 million

Therefore:

Takaful operator = RM1 million

Retakaful operator = RM4 million

The remaining:

RM2 million

would depend on whether the Takaful operator has another layer of protection or must bear the excess itself.

Why It Is Called “Excess of Loss”

It is called excess of loss because the Retakaful operator only pays the part of the claim that is in excess of the Takaful operator’s retention.

Simple Idea

Loss below retention → Takaful operator pays

Loss above retention → Retakaful pays the excess, within the agreed limit

No Proportional Sharing

In proportional Retakaful, both parties share every risk and claim according to an agreed percentage.

For example:

Takaful operator = 40%

Retakaful operator = 60%

If the claim is RM10 million, both share it proportionally.

In excess of loss Retakaful, there is no such fixed percentage sharing.

Instead:

Takaful operator bears losses up to the retention

then

Retakaful operator bears the excess

Simple Comparison

Proportional Retakaful

Every claim is shared according to a percentage

Example:

40% Takaful

60% Retakaful

Excess of Loss Retakaful

Claims are not shared by percentage

Instead:

Takaful operator pays first layer

Retakaful operator pays only after retention is exceeded

Easy Formula

If:

Retention = RM1 million

and

Loss = RM3 million

then:

Retakaful Payment = RM3m − RM1m = RM2m

subject to the maximum Retakaful limit.

Easy Way to Remember

Excess of Loss = Retakaful only steps in after the Takaful operator has absorbed the agreed first portion of the loss.