Takaful - What Is Underwriting?

Underwriting is the process used by a Takaful operator to evaluate a risk before deciding whether to accept it, how much protection to provide, and how much contribution to charge.

In very simple terms, underwriting asks:

“Should we accept this risk, and if we accept it, on what terms?”

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Simple Example — Motor Takaful

Suppose Ahmad wants Motor Takaful for his car.

Before providing coverage, the Takaful operator may consider:

Value of car = RM100,000

Age of car = 3 years

Driver’s age = 30

Past accident history = 1 accident

Type of vehicle = normal passenger car

The underwriter evaluates these factors to estimate the likelihood and potential size of future claims.

After assessing the risk, the operator might decide:

Accept the risk

Contribution = RM1,500 per year

Coverage = RM100,000

with certain terms and conditions.

That entire assessment and decision-making process is called underwriting.

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Another Example — Factory Takaful

Suppose a company wants Takaful protection for a factory worth:

RM100 million

The underwriter may examine factors such as the type of factory, construction materials, fire protection systems, location, previous fire history, machinery used, hazardous materials, and maximum possible loss.

Imagine the operator concludes:

“We are willing to cover this factory, but RM100 million is too much risk for our Takaful risk pool to retain by itself.”

The operator might then:

Retain RM20 million

and arrange:

RM80 million Retakaful protection

This is why underwriting and Retakaful are closely connected. Underwriting determines how much risk the Takaful operator can safely accept and retain.

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What Does an Underwriter Actually Decide?

An underwriter generally considers questions such as:

1. Should we accept the risk?

The operator may accept or reject the application.

2. How risky is it?

Higher-risk participants or properties may have a greater probability or severity of claims.

3. How much contribution should be charged?

Higher expected risk may require a higher contribution.

4. What conditions should apply?

The operator may impose exclusions, limits, deductibles, or other conditions.

5. How much risk should the Takaful fund retain?

If the risk is too large, part of it may need to be protected through Retakaful.

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Underwriting Is NOT the Same as Paying Claims

This distinction is important.

Underwriting happens mainly when deciding whether and how to accept a risk.

Claims management happens after a covered loss occurs.

For example:

Ahmad applies for Motor Takaful.

Before coverage → Underwriting evaluates Ahmad’s risk.

Six months later Ahmad has an accident.

After accident → Claims department assesses and handles the claim.

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Why Is Underwriting Important?

If a Takaful operator accepts too many high-risk participants while charging contributions that are too low, claims could become much higher than expected.

For example:

Contributions collected = RM10 million

but:

Claims = RM15 million

This could create serious pressure on the Takaful risk pool.

Good underwriting therefore helps ensure that the risks accepted are appropriate for the pool and that contributions are reasonably matched to the expected risk.

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Easy Way to Remember

Think of underwriting as the Takaful operator asking:

“What risk am I taking?”

“How likely is a claim?”

“How large could the claim be?”

“How much should I charge?”

“How much can I safely retain?”

“Do I need Retakaful?”

Simple Formula

Underwriting = Assess Risk → Decide Whether to Accept → Set Terms & Contribution → Decide Retention/Retakaful

So when your textbook says a Takaful risk pool has the “capacity to underwrite such risks,” it basically means:

The Takaful risk pool has the financial ability to accept and carry those risks safely.