Takaful - Proportional Treaty Retakaful: Quota Share and Surplus Treaty

In a proportional treaty Retakaful arrangement, the Takaful operator’s risk pool and the Retakaful operator’s risk pool share the original Takaful business according to an agreed proportion. This means that both the contributions received and the claims paid are generally shared in the same agreed ratio.

Unlike non-proportional Retakaful, the Retakaful operator does not wait for a claim to exceed a certain retention level before participating. Instead, it shares the risk from the beginning according to the agreed treaty arrangement.

There are two common forms of proportional treaty Retakaful:

1. Quota Share Treaty

2. Surplus Treaty

1. Quota Share Retakaful

Under a quota share treaty, the Takaful operator and Retakaful operator share each and every risk according to the same fixed percentage.

The agreed percentage applies to all risks that fall within the treaty.

For example, the parties may agree that:

Takaful operator retains 60%

Retakaful operator accepts 40%

This 60:40 proportion is then applied to both the contribution and the claim.

Example of Quota Share

Suppose a participant pays a Takaful contribution of:

RM10,000

The agreed quota share is:

Takaful operator = 60%

Retakaful operator = 40%

Therefore:

Takaful risk pool keeps RM6,000

Retakaful risk pool receives RM4,000

Now suppose a covered claim of:

RM100,000

occurs.

The claim is also shared in the same proportion:

Takaful risk pool pays RM60,000

Retakaful risk pool pays RM40,000

So the same ratio applies to both:

Contribution: 60% / 40%

Claim: 60% / 40%

Simple Idea

Quota share means:

Every risk is shared in the same fixed percentage.

It does not matter whether the risk is small or large, provided it falls within the treaty.

Easy Formula

Takaful Share = Agreed % × Contribution or Claim

Retakaful Share = Agreed % × Contribution or Claim

2. Surplus Treaty Retakaful

Under a surplus treaty, the Takaful operator does not automatically share every risk in the same fixed percentage.

Instead, the Takaful operator first decides how much of each risk it is willing to retain in its own risk pool.

The portion of the risk that exceeds its desired retention is then ceded to the Retakaful operator, subject to the capacity of the treaty.

Therefore, the proportion shared between Takaful and Retakaful can be different for different risks.

Example of Surplus Treaty

Suppose the Takaful operator is willing to retain:

RM1 million per risk

A property covered under Takaful has a sum covered of:

RM4 million

The Takaful operator retains:

RM1 million

The excess is:

RM4 million − RM1 million = RM3 million

Therefore:

Takaful operator retains 25%

Retakaful operator takes 75%

because:

RM1m ÷ RM4m = 25%

and:

RM3m ÷ RM4m = 75%

Suppose the contribution for this risk is:

RM40,000

The contribution may be shared according to the same proportion:

Takaful operator = 25% × RM40,000 = RM10,000

Retakaful operator = 75% × RM40,000 = RM30,000

If a covered claim of:

RM800,000

occurs, the claim would also be shared proportionately:

Takaful operator = 25% × RM800,000 = RM200,000

Retakaful operator = 75% × RM800,000 = RM600,000

Another Surplus Example

Suppose the Takaful operator still retains a maximum of:

RM1 million per risk

Risk A

Sum covered:

RM1 million

The operator is comfortable retaining the whole amount.

Therefore:

Takaful = 100%

Retakaful = 0%

Risk B

Sum covered:

RM2 million

Takaful retains:

RM1 million

Retakaful receives:

RM1 million

Therefore:

Takaful = 50%

Retakaful = 50%

Risk C

Sum covered:

RM5 million

Takaful retains:

RM1 million

Retakaful receives:

RM4 million

Therefore:

Takaful = 20%

Retakaful = 80%

This shows why a surplus treaty does not use the same percentage for every risk.

The proportion changes according to the size of the original risk and the amount the Takaful operator wishes to retain.

Main Difference Between Quota Share and Surplus Treaty

Quota Share

A fixed percentage is applied to every risk.

Example:

60% Takaful / 40% Retakaful

Every eligible risk is shared using that same ratio.

Surplus Treaty

The Takaful operator first chooses how much of each risk it wants to retain.

Only the surplus above that retention is ceded to Retakaful.

Therefore, the sharing percentage can change from one risk to another.

Very Simple Example

Suppose the operator’s preferred retention is:

RM1 million

For a RM2 million risk:

50% Takaful / 50% Retakaful

For a RM4 million risk:

25% Takaful / 75% Retakaful

For a RM1 million risk:

100% Takaful / 0% Retakaful

That is the key feature of a surplus treaty.

Easy Way to Remember

Quota Share = Same percentage for every risk

Surplus Treaty = Takaful keeps what it wants, Retakaful takes the surplus

Simple Formula

Quota Share

Contribution and Claim × Fixed Agreed Percentage

Example:

60% Takaful + 40% Retakaful

Surplus Treaty

Total Risk − Takaful Retention = Amount ceded to Retakaful

Then the contribution and claim are shared according to the resulting proportion.

One-Line Summary

Proportional Retakaful means the Takaful and Retakaful risk pools share both contributions and claims proportionately; quota share uses a fixed percentage for every risk, while surplus treaty allows the Takaful operator to retain a chosen amount and cede only the excess to Retakaful.