Takaful - What Is Underwriting Surplus?

Underwriting surplus in Takaful is the amount remaining in the Participants’ Risk Fund (PRF) after the fund has received contributions and paid all relevant risk-related obligations for the period.

In simple terms:

Money collected for risk protection − Claims and related costs = Underwriting surplus

Suppose a Takaful operator receives RM10 million in tabarru’ contributions into the PRF.

During the year:

• Claims = RM6 million
• Retakaful cost = RM1 million
• Claims-related expenses and reserves = RM1 million

The remaining amount is:

RM10m − RM6m − RM1m − RM1m = RM2 million

The RM2 million is the underwriting surplus.

The important point is that underwriting surplus arises from the risk protection activities of the PRF, not from the operator’s shareholders’ fund.

It may arise because:

• Claims were lower than expected
• Contribution income was sufficient
• Retakaful costs were manageable
• Expenses were controlled
• Loss experience was favourable

What Happens to the Surplus?

The treatment of underwriting surplus depends on the Takaful model, regulations, and contract terms.

It may be:

• Retained in the PRF to strengthen reserves
• Distributed partly to participants
• Used to reduce future contributions
• Shared according to an approved surplus-sharing mechanism

It does not automatically belong entirely to the shareholders.

Example

Suppose the PRF produces a surplus of RM5 million.

The operator may decide, according to the applicable rules, to:

RM3 million → Retain in the PRF

RM2 million → Distribute to eligible participants

The exact treatment varies between Takaful arrangements.

Underwriting Surplus vs Investment Profit

These are different.

Underwriting surplus

= Comes from the risk side of the business

Example:

Contributions exceed claims and related expenses

Investment profit

= Comes from investing the PRF or other funds in Shari’ah-compliant investments

Example:

Sukuk investment earns RM500,000

So:

Underwriting surplus ≠ Investment profit

Underwriting Surplus vs Shareholder Profit

They are also not the same.

Underwriting surplus

= Belongs to the risk fund according to the Takaful structure

Shareholder profit

= Income earned by the operator from sources such as:

• Wakalah fees
• Mudarabah profit share
• Investment return on shareholders’ own funds
• Other permitted operator income

Easy Way to Remember

Underwriting surplus = Extra money left in the Participants’ Risk Fund after paying claims and other risk-related obligations

Simple Formula

PRF Contributions

− Claims

− Retakaful Costs

− Expenses

− Required Reserves

= Underwriting Surplus

If the result is negative:

PRF Contributions < Claims and obligations = Underwriting Deficit