Takaful - Underwriting Loss, Underwriting Deficit, Underwriting Gain and Surplus

They are closely related concepts, but the terminology depends on whether we are talking about conventional insurance or Takaful.

The easiest starting point is:

Conventional insurance → underwriting profit or underwriting loss

Takaful PRF → underwriting surplus or underwriting deficit

The underlying calculation is conceptually similar: compare the income available for underwriting against claims and relevant underwriting costs. But who bears the result is different.

1. First, What Does “Underwriting” Mean Here?

Remember that underwriting originally means assessing and accepting risks:

Should we accept this risk, and if yes, at what price and on what terms?

But when we say underwriting result, we are talking about the financial outcome of the insurance/Takaful risk business.

Very simply:

Underwriting Income − Underwriting Claims and Costs = Underwriting Result

The result can be:

Positive → gain/profit/surplus

or

Negative → loss/deficit

depending on the context and terminology.

2. What Is an Underwriting Loss in Conventional Insurance?

Suppose a conventional insurer collects:

Premiums = RM10 million

It incurs:

Claims = RM8 million

Underwriting expenses = RM3 million

Therefore:

RM10m − RM8m − RM3m = −RM1m

The underwriting result is negative.

We call this an:

Underwriting loss = RM1 million

It means the insurer’s insurance operations generated a loss because the relevant premiums were insufficient to cover claims and underwriting expenses.

3. What If the Conventional Insurer Has More Income Than Claims and Expenses?

Suppose:

Premiums = RM10 million

Claims = RM6 million

Underwriting expenses = RM2 million

Then:

RM10m − RM6m − RM2m = +RM2m

Now the underwriting result is positive.

This is generally called an:

Underwriting profit = RM2 million

You could describe it generally as an underwriting gain, but underwriting profit is the more natural conventional insurance term.

So:

Conventional Insurance

Positive underwriting result → Underwriting Profit

Negative underwriting result → Underwriting Loss

4. What Is an Underwriting Deficit in Takaful?

Now consider the Participants’ Risk Fund (PRF).

Suppose:

PRF underwriting income = RM10 million

Claims = RM8 million

Retakaful and other relevant underwriting costs/provisions = RM3 million

Then:

RM10m − RM8m − RM3m = −RM1m

The PRF has a:

RM1 million underwriting deficit

This means the PRF’s relevant underwriting income/resources for the period were insufficient relative to its underwriting obligations/costs.

5. What If the Takaful PRF Has More Income Than Its Underwriting Obligations?

Suppose:

PRF underwriting income = RM10 million

Claims = RM6 million

Retakaful and other relevant costs/provisions = RM2 million

Then:

RM10m − RM6m − RM2m = +RM2m

The PRF has an:

Underwriting surplus = RM2 million

So for Takaful:

Positive underwriting result → Underwriting Surplus

Negative underwriting result → Underwriting Deficit

6. So Is “Loss” the Same as “Deficit”?

Mathematically, they can describe a similar negative underwriting outcome.

But the terminology reflects the structure.

In conventional insurance:

Premiums insufficient relative to claims/underwriting expenses → Underwriting loss

In Takaful PRF:

PRF underwriting income insufficient relative to claims/relevant obligations → Underwriting deficit

Therefore, I would recommend that you keep the terminology separate when studying:

Conventional Insurance

Profit ↔ Loss

Takaful PRF

Surplus ↔ Deficit

That will make the distinction much easier.

7. Why Don’t We Normally Call a Takaful PRF Deficit a “Shareholder Underwriting Loss”?

Because the PRF is separate from the shareholders’ fund.

Remember:

Participants contribute tabarru’ → PRF

and:

PRF bears the participants’ underwriting risk

The Takaful operator manages the arrangement.

Therefore, if the PRF has:

RM10m income

but:

RM12m relevant underwriting obligations

then:

RM10m − RM12m = −RM2m

We say:

The PRF has an RM2 million underwriting deficit.

We should not automatically say:

“The shareholders made an RM2 million underwriting loss.”

Those are not necessarily the same thing.

8. This Explains the Previous Statement

You previously asked about:

“In conventional insurance deliberately underpricing while temporarily increasing turnover will eventually result in underwriting losses and deplete shareholders’ capital.”

Now you can see exactly what it means.

Suppose a conventional insurer underprices:

Premiums = RM10m

Claims + underwriting expenses = RM13m

Therefore:

RM10m − RM13m = −RM3m

Underwriting loss = RM3m

Because the conventional insurer bears the underwriting risk, persistent losses can eventually reduce shareholders’ financial resources/capital.

9. Now Compare the Same Situation in Takaful

Suppose poor pricing means the PRF receives:

RM10m

But claims and relevant PRF costs/provisions are:

RM13m

Therefore:

RM10m − RM13m = −RM3m

Underwriting deficit = RM3m

So:

Conventional insurance → RM3m underwriting loss

Takaful PRF → RM3m underwriting deficit

This is exactly the distinction being made in your material.

10. What About the Word “Gain”?

“Gain” is a general financial word meaning a positive financial outcome.

But for your study purposes, I would use the more precise terminology.

Conventional Insurance

If:

Premiums > Claims + Underwriting Expenses

→ Underwriting Profit

Takaful PRF

If:

PRF Underwriting Income > Claims + Relevant PRF Costs/Provisions

→ Underwriting Surplus

So rather than writing “underwriting gain”, use:

underwriting profit for conventional insurance

and

underwriting surplus for the Takaful PRF.

11. What About “Exceeds”?

Exceeds is not the name of the result.

“Exceeds” simply means:

is greater than

For example:

“Premium income exceeds claims and underwriting expenses.”

Suppose:

Premiums = RM10m

Claims + expenses = RM8m

Then:

RM10m exceeds RM8m by RM2m.

The RM2m positive underwriting result may be called:

underwriting profit in conventional insurance.

Similarly:

“PRF underwriting income exceeds relevant claims and costs by RM2m.”

Then the PRF may have:

RM2m underwriting surplus.

So:

“Exceeds” describes the comparison.

“Profit/surplus” describes the positive result.

12. What About the Word “Excess”?

Be careful here because excess can mean something completely different in insurance.

For example, in Excess of Loss Retakaful:

RM1m retention + Retakaful covers losses above RM1m

Here, “excess” means the part of a loss above a specified level.

So don’t use excess as a substitute for underwriting surplus unless the particular context clearly uses it that way.

For your notes, use:

Surplus, not “excess,” for a positive PRF underwriting result.

13. One Complete Conventional Insurance Example

Suppose a conventional insurer has:

Premium income = RM20m

Claims = RM14m

Underwriting expenses = RM4m

Therefore:

RM20m − RM14m − RM4m = +RM2m

Underwriting profit = RM2m

Now suppose the following year:

Premium income = RM20m

Claims = RM19m

Expenses = RM4m

Therefore:

RM20m − RM19m − RM4m = −RM3m

Underwriting loss = RM3m

So:

Positive = Profit

Negative = Loss

14. One Complete Takaful Example

Now suppose a PRF has:

Relevant underwriting income = RM20m

Claims = RM14m

Retakaful/relevant costs and provisions = RM4m

Therefore:

RM20m − RM14m − RM4m = +RM2m

Underwriting surplus = RM2m

Next year:

PRF underwriting income = RM20m

Claims = RM19m

Relevant costs/provisions = RM4m

Therefore:

RM20m − RM19m − RM4m = −RM3m

Underwriting deficit = RM3m

So:

Positive = Surplus

Negative = Deficit

15. Why “Surplus” Is Particularly Important in Takaful

The word surplus reflects the mutual nature of the PRF.

The PRF belongs to the participants collectively according to the applicable Takaful structure; the operator manages it.

Therefore, if the PRF performs favourably, the positive underwriting result is not automatically treated as ordinary shareholder profit.

It is an underwriting surplus of the PRF.

Its treatment may include, depending on the model, certificate terms and applicable rules:

retention in the PRF,

distribution to eligible participants,

or another approved surplus-sharing arrangement.

16. And Why “Deficit” Is Particularly Important

Similarly, when the PRF has insufficient resources relative to its relevant obligations, we call it a deficit.

For example:

PRF income/resources = RM10m

Relevant claims/costs = RM12m

Therefore:

Deficit = RM2m

Depending on the applicable Takaful model and regulatory framework, the operator/shareholder fund may provide qard to support the PRF.

Remember:

Qard = interest-free loan

It is different from treating the PRF deficit automatically as an underwriting loss belonging to shareholders.

17. But There Is One Important Exception From What You Just Studied

You recently studied the situation where a PRF deficit is caused by the operator’s own failure to discharge its responsibilities properly.

For example:

deliberate improper pricing

↓

excessive sales

↓

insufficient tabarru’

↓

PRF deficit

The approach in your material argues that such a deficit should be funded through an outright shareholder transfer rather than qard, because participants should not ultimately bear the consequences of the operator’s improper conduct.

That is different from a genuine PRF deficit caused by unexpectedly adverse claims despite prudent management.

18. Don’t Confuse Underwriting Result With Overall Profit

This is another very important point.

An underwriting loss does not necessarily mean the conventional insurance company has an overall net loss.

Suppose:

Underwriting result = −RM2m

Investment income = +RM5m

Other items = −RM1m

Simplified overall result:

−RM2m + RM5m − RM1m = +RM2m

So the insurer had:

Underwriting loss = RM2m

but still had:

Overall positive result = RM2m

Therefore:

Underwriting result refers specifically to the result from the underwriting/insurance operation, not necessarily the entire company’s final profit or loss.

The same care is needed when distinguishing a Takaful PRF’s underwriting surplus/deficit from investment results and the operator/shareholder company’s own profit.

Easy Way to Remember

Use this:

Conventional Insurance

Positive → PROFIT

Negative → LOSS

Takaful PRF

Positive → SURPLUS

Negative → DEFICIT

And:

Exceeds = simply means “greater than.”

Simple Formula

Conventional Insurance

Premium Income − Claims − Underwriting Expenses = Underwriting Result

If positive:

Underwriting Profit

If negative:

Underwriting Loss

Takaful PRF

In simplified form:

PRF Underwriting Income − Claims − Retakaful Costs − Relevant Expenses/Provisions = PRF Underwriting Result

If positive:

Underwriting Surplus

If negative:

Underwriting Deficit

The Four Words to Memorise

Conventional Insurance:

PROFIT ↔ LOSS

Takaful PRF:

SURPLUS ↔ DEFICIT

So when you read:

“Conventional insurance underpricing results in underwriting losses.”

think:

Insurer’s underwriting income < claims and underwriting expenses → LOSS

When you read:

“Poor Takaful pricing results in a deficit in the risk pool.”

think:

PRF underwriting income/resources < relevant claims and costs → DEFICIT

The mathematics can be similar, but the structure, ownership of the funds, and who ultimately bears the underwriting result are different.