Takaful - Proportional vs Non-Proportional Retakaful

The easiest way to distinguish them is:

Proportional Retakaful = Takaful and Retakaful share the risk from the beginning.

Non-Proportional Retakaful = Takaful bears losses first, and Retakaful only steps in when an agreed loss threshold is exceeded.

1. Proportional Retakaful

In proportional Retakaful, the Takaful risk pool and Retakaful risk pool share the original risk, contributions and claims according to an agreed proportion.

Retakaful does not need to wait for a claim to become very large before participating. It already has an agreed share of the risk.

The two main forms are:

Quota Share

and

Surplus Treaty

Example A — Quota Share

Suppose the agreement is:

Takaful = 60%

Retakaful = 40%

A property is covered for:

RM5 million

Therefore:

Takaful retains RM3 million

Retakaful accepts RM2 million

Suppose a claim of only:

RM500,000

occurs.

Even though the claim is relatively small, it is still shared:

Takaful pays 60% = RM300,000

Retakaful pays 40% = RM200,000

Why?

Because Retakaful already accepted 40% of the original risk.

Simple Idea

Risk shared first → Claim shared later in the same proportion

2. Proportional Retakaful — Surplus Treaty

Surplus Treaty is also proportional, but there is no single fixed percentage for every risk.

Instead, the Takaful operator decides how much of the original risk it wants to retain.

Suppose:

Property value = RM4 million

Takaful retention = RM1 million

Therefore:

Takaful retains 25%

Retakaful accepts 75%

Now suppose there is an:

RM800,000 claim

Even though RM800,000 is below RM1 million, the claim is still shared:

Takaful = 25% × RM800,000 = RM200,000

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

This is because the RM1 million retention refers to the original risk, not the individual claim.

Simple Idea

RM4m risk → divided 25:75

Therefore:

Any covered claim → divided 25:75

3. Non-Proportional Retakaful

In non-proportional Retakaful, there is no predetermined percentage such as 60:40 or 25:75 that is automatically applied to every claim.

Instead, the Takaful operator bears losses up to an agreed retention or threshold.

Retakaful only becomes involved when the loss exceeds that level.

Two important forms are:

Excess of Loss

and

Stop Loss

4. Non-Proportional — Excess of Loss

Excess of Loss focuses on an individual loss.

Suppose:

Takaful retention = RM1 million per loss

If there is an:

RM800,000 claim

then:

Takaful pays RM800,000

Retakaful pays RM0

Why?

Because the loss has not exceeded the RM1 million retention.

Now suppose the claim is:

RM3 million

The Takaful operator bears:

First RM1 million

Retakaful may cover:

Next RM2 million

subject to the treaty limit.

So:

RM3m claim → RM1m Takaful + RM2m Retakaful

Notice that this is not a percentage split.

The Takaful operator simply absorbs the first layer, and Retakaful covers the excess layer.

Simple Idea

Takaful pays first → Retakaful steps in after the loss becomes too large

5. Non-Proportional — Stop Loss

Stop Loss works differently again.

Instead of looking at one individual claim, it looks at the total claims of the portfolio over a period, usually one year.

Suppose:

Annual contributions = RM10 million

Stop-loss threshold = 70%

Therefore:

70% × RM10m = RM7 million

The Takaful operator bears annual claims up to RM7 million.

If total annual claims are:

RM6 million

Retakaful pays:

RM0

because the threshold has not been reached.

If total annual claims become:

RM9 million

then:

Takaful bears RM7 million

Retakaful may cover RM2 million

subject to the treaty limit.

Simple Idea

Stop Loss protects against the situation where:

“The total claims for the whole year have become too high.”

The Big Difference

Proportional Retakaful

Think:

“We share the risk together from the beginning.”

The Retakaful operator accepts a proportion of the original risk.

Therefore, when a covered claim happens, Retakaful participates according to its proportion.

For example:

RM4m risk

↓

25% Takaful + 75% Retakaful

↓

RM800k claim

↓

RM200k Takaful + RM600k Retakaful

The claim does not have to cross a loss threshold first.

Non-Proportional Retakaful

Think:

“I will handle normal losses myself. You protect me when losses become too large.”

There is no automatic percentage sharing of every claim.

For Excess of Loss:

RM800k claim

with RM1m retention:

100% Takaful

Retakaful pays nothing.

But:

RM3m claim

with RM1m retention:

First RM1m → Takaful

Next RM2m → Retakaful

Why Are They Called Proportional and Non-Proportional?

It is called proportional because the Takaful and Retakaful pools share the business according to a proportion.

For example:

25% : 75%

or

60% : 40%

That proportion determines how contributions and claims are allocated.

It is called non-proportional because claims are not automatically divided according to a predetermined percentage.

Instead, Retakaful responds when an agreed loss threshold is exceeded.

For example:

First RM1m loss → Takaful

Loss above RM1m → Retakaful

Easy Way to Remember

Proportional

“SHARE with me.”

The original risk is divided between:

Takaful + Retakaful

Examples:

Quota Share → fixed percentage

Surplus Treaty → percentage depends on how much original risk Takaful retains

Non-Proportional

“PROTECT me when losses get too high.”

Takaful bears losses first.

Retakaful comes in after a threshold.

Examples:

Excess of Loss → individual loss becomes too high

Stop Loss → total annual claims become too high

Final Memory Formula

PROPORTIONAL

Share the original risk → Share contributions → Share claims

Quota Share + Surplus Treaty

NON-PROPORTIONAL

Takaful bears losses first → Threshold exceeded → Retakaful responds

Excess of Loss + Stop Loss

So, in one sentence:

Proportional Retakaful shares the risk from the beginning, whereas non-proportional Retakaful provides protection only when losses exceed an agreed level.