Takaful - Risk of Wakalah Fee Making the Tabarru’ Insufficient

This means that even when the total Takaful contribution charged to the participant appears sufficient, the Participants’ Risk Fund (PRF) can still become financially weak if too much of that contribution is deducted as a Wakalah fee.

The key issue is:

Claims are paid from the PRF, but the whole contribution does not necessarily enter the PRF.

1. Start With the Total Takaful Contribution

Suppose actuaries calculate that the appropriate total contribution for a Motor Takaful participant is:

RM1,000

The RM1,000 may appear actuarially sound and adequate.

This means the contribution has been calculated based on factors such as:

expected claims

risk characteristics

expenses

claims frequency and severity

required financial margins

So at first sight:

RM1,000 looks sufficient.

2. But the Entire RM1,000 Does Not Necessarily Enter the Risk Fund

Under a Wakalah model, the Takaful operator receives a Wakalah fee for managing the Takaful operation.

Suppose:

Total contribution = RM1,000

Wakalah fee = RM300

Remaining tabarru’ = RM700

Therefore:

RM1,000 − RM300 = RM700

Only RM700 goes into the PRF in this simplified example.

So although the participant paid RM1,000:

Participant pays RM1,000

↓

RM300 → Takaful operator as Wakalah fee

RM700 → PRF as tabarru’

3. Where Does the Problem Arise?

Suppose the expected claims cost per participant is:

RM750

But only:

RM700

enters the PRF.

Now there is a problem:

Expected claims = RM750

Tabarru’ available = RM700

Therefore:

RM700 − RM750 = −RM50

The PRF is short by RM50 per participant before considering any other relevant risk-fund obligations.

So:

The total RM1,000 contribution may look adequate, but the portion actually available to bear underwriting risk may be inadequate.

That is the specific risk being described.

4. Example With 10,000 Participants

This becomes much clearer on a larger scale.

Suppose:

10,000 participants × RM1,000

Total Takaful contributions:

RM10 million

Now suppose the operator deducts a 30% Wakalah fee:

Wakalah fee = RM3 million

Remaining tabarru’ entering PRF:

RM7 million

But expected claims are:

RM7.5 million

Therefore:

PRF income = RM7m

Expected claims = RM7.5m

Expected shortfall:

RM500,000

So even though:

RM10 million of total contributions was collected

the fund actually responsible for claims receives only:

RM7 million

That is why the allocation between Wakalah fee and tabarru’ matters enormously.

5. What Does “Actuarially Sound” Mean?

Actuarially sound means the contribution has been calculated using reasonable statistical and actuarial assumptions about the risks and expected costs.

For example, actuaries might calculate:

Expected claims = RM750

Operating expenses = RM150

Financial/risk margin = RM100

Therefore:

Required total contribution = RM1,000

That may be perfectly reasonable as an overall price.

But the Takaful structure creates another question:

After deducting the operator’s Wakalah fee, is enough money actually being allocated to the PRF to support its claims and other obligations?

This question is particularly important in Takaful.

6. The Wakalah Fee Is Not Available to Pay PRF Claims

Once the agreed Wakalah fee is allocated to the operator under the applicable structure, it represents the operator’s remuneration for managing the Takaful arrangement.

It should therefore not simply be assumed that:

RM1,000 participant contribution = RM1,000 available for claims

Instead:

Total Contribution − Wakalah Fee − other applicable allocations = Amount allocated to PRF

The PRF must then be financially adequate based on the amount actually allocated to it.

7. Why Can a High Wakalah Fee Be Dangerous?

Imagine two Takaful arrangements collecting the same contribution:

RM1,000 per participant

Operator A

Wakalah fee = RM150

Tabarru’ to PRF = RM850

Operator B

Wakalah fee = RM350

Tabarru’ to PRF = RM650

Suppose expected claims are:

RM750 per participant

Operator A’s PRF receives RM850 against expected claims of RM750.

But Operator B’s PRF receives only RM650 against expected claims of RM750.

Therefore, Operator B’s PRF could face persistent financial pressure.

The problem is not necessarily that the total contribution is too low.

The problem may be:

too little of the total contribution is reaching the risk fund.

8. This Can Lead to a PRF Deficit

Suppose:

Tabarru’ received by PRF = RM7 million

Claims and relevant obligations = RM8 million

Then:

RM7m − RM8m = −RM1 million

The PRF has a:

RM1 million deficit

Where the applicable Takaful structure requires shareholder support, the operator/shareholder fund may then have to provide qard.

So there can be an undesirable cycle:

High Wakalah Fee

↓

Less Tabarru’ enters PRF

↓

PRF insufficient for claims

↓

PRF deficit

↓

Qard may be required

↓

Future PRF surpluses may need to repay qard

This can weaken the long-term financial sustainability of the mutual risk fund.

9. Connection With Your Previous Question About Surplus

This is directly connected to surplus.

Suppose the PRF receives:

RM10 million tabarru’

and its claims, Retakaful costs and relevant provisions total:

RM8 million

There may be:

RM2 million surplus

But if a large Wakalah fee means only:

RM7 million

reaches the PRF while its obligations are RM8 million:

RM7m − RM8m = −RM1m

Now there is a:

RM1 million deficit

Therefore:

Higher amount entering PRF → greater ability to pay claims and potentially build surplus

whereas:

Insufficient tabarru’ → greater probability of deficit and qard dependence

10. Does This Mean Wakalah Fees Are Bad?

No.

The Takaful operator needs to be compensated for providing services such as:

underwriting

claims administration

staff and systems

distribution

regulatory compliance

Shari’ah governance

and general management.

The issue is not:

“There should be no Wakalah fee.”

The issue is:

The Wakalah fee should be structured so that the operator is appropriately compensated while the remaining tabarru’ is still sufficient to support the PRF.

There must therefore be a balance between:

Operator sustainability

and

PRF sustainability.

11. Very Simple Example

Imagine Ahmad pays:

RM100

into a Takaful arrangement.

If:

RM20 → Wakalah fee

then:

RM80 → PRF

If the expected cost of Ahmad’s risk to the PRF is:

RM70

the RM80 allocation may be adequate.

But suppose:

RM40 → Wakalah fee

then:

RM60 → PRF

Expected claims cost remains:

RM70

Now:

RM60 < RM70

The total contribution is still RM100.

But the risk fund is underfunded.

That is exactly the problem.

Easy Way to Remember

There are two different questions:

Question 1

Is the total contribution sufficient?

For example:

RM1,000

Question 2

After deducting the Wakalah fee, is the remaining tabarru’ sufficient for the PRF?

For example:

RM1,000 − RM300 Wakalah fee = RM700 tabarru’

If expected PRF claims and obligations require RM800:

RM700 < RM800

Then the PRF may be inadequately funded even though the overall RM1,000 contribution initially appeared reasonable.

Simple Formula

Total Takaful Contribution − Wakalah Fee = Tabarru’ Available to PRF

(simplified; other allocations may apply)

Then ask:

Tabarru’ Available to PRF ≥ Expected Claims + Relevant PRF Costs/Provisions?

If YES → PRF is more likely to be adequately funded based on those assumptions.

If NO → there is a risk of underfunding and future deficit.

One-Sentence Summary

A Takaful contribution can be actuarially reasonable in total, but if the Wakalah fee deducted for the operator is too large, too little tabarru’ may remain in the Participants’ Risk Fund to meet expected claims and other obligations, creating a risk of PRF deficit and possible reliance on qard.