ISRA RESEARCH PAPER 109/2019
Pricing of Family Takāful
Products:
A Sharīʿah Perspective
©2019 International Shari’ah Research Academy for Islamic Finance (ISRA)
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Disclaimer
The views and opinions expressed in this research paper are solely those of the authors and do not represent the
official views of the International Shari’ah Research Academy for Islamic Finance.
2
Pricing of Family Takāful Products:
A Sharīʿah Perspective
Prof. Dr. Younes Soualhi
Senior Researcher | younes@isra.my
Dr. Fares Djafri
Researcher | fares@isra.my
International Shari’ah Research Academy for Islamic Finance (ISRA)
EXECUTIVE SUMMARY
The research investigates the Sharīʿah compliance of the pricing elements used in
family takāful products. The reviewed literature has revealed a great deal of emphasis
on the Sharīʿah aspects of the takāful contract, distribution of surplus, models used,
incorporating waqf in takāful, and the relationship among the parties. Other research
has focused on the operational and technical aspects of takāful such as underwriting,
pricing, reserving and risk management. None of these references has addressed the
Sharīʿah compliance of the pricing elements of family takāful products. That is the
research gap addressed in this paper.
In addressing it, the paper builds a fundamental framework based on the following
three notions:
1
The pricing methodologies of insurance and takāful are similar despite the
differences between their contracts and objectives.
2
The pricing elements need Sharīʿah investigation and substantiation in view of some
concerns raised by industry experts and Sharīʿah scholars about the unfairness of
certain underwriting and pricing elements.
3
The price in insurance and takāful is commensurate with the nature of the risk, the
sum covered and the estimated time of the risk occurrence.
The research finds that since insurance and takāful cross in the area of pricing, takāful
has adopted actuarial practices that use assumptions based on best estimate. All
jurisdictions of insurance and takāful emphasize that pricing should be adequate, fair
and responsive to the economic environment. However, the regulatory framework for
pricing is still lagging in the takāful market.
The research deciphers the components of pricing, focusing only on the assumptions
of mortality, morbidity, investment return, interest rate and time value of money. The
remaining pricing elements such as risk discount rate, lapse basis and profit loading
are beyond the scope of this research as they have not triggered any Sharīʿah issue in
the eyes of the authors. The following summarises the key findings:
1
1
As for mortality and morbidity, the research discovers that these two assumptions
are Sharīʿah compliant based on the principles of ibāḥah (permissibility), maṣlaḥah
(public interest), istiqrā (induction) and ʿurf (custom). Despite being predictive in
nature, the statistically proven tables of mortality and morbidity are deemed the
best estimates of the insured’s time of death and injury.
2
As for investment returns as a pricing element, the research acknowledges the cash
flow method, which prices products at a loss in order to recoup the profitable rate
from future investment returns. If profitable, the investment return would offset any
underwriting loss. However, the research raises a concern on the repercussions of
investment losses. While the participant may not be very much concerned about
profits in non-unitised takāful funds, the shareholders’ losses in the same funds
may affect the solvency of the takāful funds, let alone the expected profitability.
This may amount to an unfair arrangement for the shareholders that the regulators
may have to address.
3
The assumptions of inflation and interest rates are also used, especially in the
valuation of assets. Both function within the concept of the time value of money;
therefore, this research has discussed whether the concept is Sharīʿah compliant. In
this regard, the authors observe that time value of money is used in both contracts
of exchange and contracts of donations. In contracts of exchange, the time value
of money is inherent in some sales such as bayʿ bi thaman ājil (deferred sale),
bayʿ al-taqsīṭ (sale by instalment) and bayʿatayn f ī bayʿah (two sales in one). In
contracts of tabarruʿ, the donation can still be calculated based on the time value
of money if there are future cash flows. Both partake in the time value of money
from the technical aspect only.
Other assumptions such as health condition are found to be Sharīʿah compliant
despite some industry experts’ opinion that the existing underwriting process (which
affects pricing) is not in line with the spirit of taʿāwun or mutual cooperation. However,
regarding consideration of the family medical history of the participant, no consensus
on its fairness and Sharīʿah compliance has been garnered. Still some Sharīʿah scholars
are not quite satisfied that the participant should be arbitrarily charged a loading
for his/her family medical history. Concurring with this observation, the researchers
recommend a regulatory amendment to this consideration. However, the issue is still
open for further Sharīʿah investigation to arrive at a Sharīʿah ruling on the matter.
Since fees and charges are all imbedded in the gross contribution paid by the
participant, the research identifies two issues that warrant Sharīʿah investigation.
1
Fee on the tabarruʿ fund as practiced in Malaysia
The research identifies obscurity in the justification for imposing such a fee
on the tabarruʿ fund by the takāful operator since the wakālah fee covers the
administrative expenses of the risk fund. The linkage of this fee to the performance
of the fund as in the Malaysian context would make it behave like an ‘upfront
surplus’. The research recommends the embedment of this fee in the wakālah fee
if operationally justified.
2
The cost of qarḍ
The authors have conducted a series of interviews with five actuaries and one CEO
of a retakāful company in Malaysia. Some secondary data on the issue have also
been referred to. Two views were prominent: (i) the first group holds that the cost
2
of qarḍ is not embedded in the price while (ii) the second group maintains the
opposite view. The researchers acknowledge the lack of transparency on this issue,
and it was too difficult to figure out whether the cost of qarḍ is in fact imbedded in
the price. For those who ascertained that the cost of qarḍ is factored into the price,
they maintained that qarḍ must be provided for in the capital structure, especially
when some regulations would consider the qarḍ irrevocable if not recouped within
a stipulated period of time. Based on juristic analysis on qarḍ in the context of
takāful, the research concluded that the cost of funds cannot be charged as doing
so would be tantamount to ribā.
The research recommends that the regulators place more regulations on certain family
takāful products that are prone to either aggressive or conservative modes of pricing.
The research also recommends that cost of qarḍ, as indicated by some practitioners,
should not be factored into the pricing of takāful products.
Keywords: pricing, underwriting, takāful, assumptions, Sharīʿah
3
SECTION
1
INTRODUCTION
The pricing of family takāful products is an integral part of product development,
marketing and profitability for takāful operators. Having been developed in conventional
insurance, the methods of pricing have become part and parcel of the main tasks
of the actuary appointed by the takāful operator. The pricing elements have been
adopted by the takāful industry with the blessings of both the regulators and Sharīʿah
authorities.
The research focuses on the Sharīʿah compliance of the pricing elements used in
family takāful products, namely individual takāful (savings, education, annuity and
investment-linked) and group takāful products. It also provides a Sharīʿah basis for
certain elements deemed necessary to consider in the pricing process. Although each
family product has certain specific features, the research will focus on the common
features that necessitate the same pricing methods. Hence, the research will not
discuss the pricing elements of each family product individually.
Against this backdrop, the research aims to achieve the following objectives:
1
To highlight the concept, principles and features of the pricing of family takāful
products.
2
To identify the main elements of pricing used by takāful operators.
3
To investigate the Sharīʿah compliance of selected pricing elements used by
takāful operators.
4
To highlight the regulatory framework for some aspects related to the pricing of
family takāful products.
5
To propose some amendments to the current regulations governing the pricing of
family takāful products.
The research adopts a qualitative method of inquiry and utilises content analysis to
analyse the conformity or disparity of family takāful pricing mechanism with the Sharīʿah
principles of price-setting (tasʿīr). The researchers conducted open-ended interviews
with five actuarists and one CEO of a retakāful company in Malaysia and noted their
opinions on the pricing of family takāful products. These individuals were selected
based on their experience and engagement in various areas of pricing of family takāful
products. The authors have tended to incorporate their views in formulating a Sharīʿah
stand on the prevailing pricing elements. The interviews were conducted in English
and ranged from approximately 30 minutes to an hour. Participants were informed that
the interviews would be confidential and would be recorded to allow for transcription
at a later time. The research also adopts the comparative method to discuss the views
of the interviewees as well as those of classical scholars in order to assess the Sharīʿah
compliance of the pricing elements used in takāful.
The paper is organized as follows: after the Introduction, Section 2 provides a review
of literature on the pricing of family takāful. Section 3 deals with the concept and
objectives of conventional insurance pricing, along with the pricing elements used
and some of the relevant regulations. Section 4 focuses on the Sharīʿah compliance of
selected pricing elements of family takāful products. Section 5 concludes the study
by making recommendations to better regulate the pricing of family takāful products.
4
SECTION
2
LITERATURE REVIEW
Literature on takāful pricing is still scarce. The literature on the Sharīʿah compliance
of pricing elements—to the best knowledge of the authors—does not exist yet. The
issue of pricing family takāful products is mainly discussed from the technical point
of view. Most references on takāful focus on the assumptions used in pricing takāful
products. INCEIF’s textbook titled Takaful: Realities and Challenges (Alhabshi et al.
2012) is probably the most elaborate reference on takāful underwriting and pricing.
The textbook highlights the main assumptions used in pricing family products, namely
mortality/morbidity/claims distribution patterns, investment returns, expenses,
withdrawal pattern, taxation, cost of capital, cost of qarḍ, profit loading and retakāful
expenses. Ajmal (2007) identified the major pricing elements such as mortality/
morbidity and cost effectiveness. He added competitiveness as a market force
leading to affordable prices. What is important for Ajmal is to continuously review the
assumptions of existing business.
The pricing mechanism follows a systematic process, according to Engku Ali et al.
(2008). It begins with the establishment of a technical committee consisting of relevant
parties such as the actuarial/pricing department, the underwriting department,
claims department, investment department, IT department and accounts department.
Presenting models of a single contribution mortgage plan, Engku Ali et al. (2008)
highlight that two types of assumptions are used in pricing, a best estimate assumption
and a 95% confidence level assumption. The crux of their thesis is that pricing depends
on the takāful model chosen, adequate risk-based capital (RBC) and solvency margin.
The pricing assumptions used by actuaries were taken for granted in this reference as
their Sharīʿah compliance has not been questioned.
The takāful contribution draws its main components from the conventional insurance
premium structure. The latter, according to Thanyan (2003), consists of a net rate
that covers the cost of risk underwritten based on certain assumptions made by the
insurance company, and a commercial rate that covers the net rate plus contingency
reserve, expenses, taxes, commissions for agents and brokers, and profit loading for
shareholders. While the above pricing elements have been widely acknowledged by
all references, the core concept that the insurance and takāful market adopted is that
the amount of premium/contribution should be commensurate with the written risk
and the sum covered. The higher the risk, the higher the gross contribution.
This correlation between price, risk and sum covered is emphasized by Quradāghī
(2006) and Milhim (2002) as it is the norm in insurance and takāful undertakings. Since
the price of takāful products is sensitive to various elements pertaining to mortality,
morbidity and others, it is in principle not subject to the forces of demand and supply
in the market. The price is based on statistical technics using the law of large numbers
(Al-Wannis 2014). However, other factors such as the type of product can still influence
the price. Investment-linked products have higher contributions/premiums due to a
higher investment element and complex features, coupled with the trend of agents
who tend to target large premium sizes and more affluent consumers (BNM 2017).
Mispricing is an issue that some takāful actuaries have raised. Kassim (2004) is
concerned about scenarios whereby prices are either overly conservative or aggressive.
5
In both cases, it is not clear who would pay for any deficit. The price also depends on
how innovative a product is. Innovation enables prices to be more competitive, and
takāful companies can gradually bridge the gap with conventional insurance. Recent
takāful reports noted that ‘risk pricing will encourage takāful companies to innovate
as they seek newer propositions to help them compete more effectively on price and
product’ (CIBAFI 2018, p.43). Using financial technology (fintech) such as the internet of
things (IoT), big data analytics and blockchain may make underwriting more precise
(CIBAFI 2018) and prices more competitive. From a regulatory perspective, prices of
takāful products may be exempt from certain taxes to stimulate the market. In Saudi
Arabia, for example, which introduced a 5% value added tax (VAT) in January 2018, ‘life
insurance is similarly exempt from VAT’ (ICD-Thomson Reuters 2017). With regards to
the effects of mispricing on the insured, it could jeopardize the protection right of the
takāful participant (IRTI & World Bank Group 2016).
None of the above literature has addressed the Sharīʿah compliance of the pricing
elements. The only reference that has obliquely referred to the Sharīʿah compliance
of underwriting and rating of risks is that of Nu Nu Htay et al. (2013), who conducted
interviews with some Sharīʿah scholars in Malaysia. According to the findings, the
majority of interviewees agree that underwriting principles are Sharīʿah compliant,
quoting public interest (maṣlaḥah) and custom (ʿurf) as Sharīʿah bases for them. The
interviewees, however, expressed concern over some pricing elements such as the
family medical history of the insured, occupation and income. The interview findings,
however, were more on the perception of some Sharīʿah scholars on risk underwriting
and rating. They fell short of linking underwriting to pricing and its technical aspects.
The elements that scholars had reservations about were generally discussed from
the point of view of fairness without providing an Islamic jurisprudential analysis. This
finding concurs with Daud’s view (2009) that the current underwriting practices do
not conform with the spirit of taʿāwun (mutual cooperation). On whether cost of qarḍ
is factored into the price, Frenz and Soualhi (2010) have noted that theoretically the
market does not allow it, but in reality many takāful companies do include cost of
capital charges in their profit testing models. This is an issue that invites a Sharīʿah
enquiry, which the authors of this paper will undertake.
Based on the above literature review, the research gap stems from the lack of Sharīʿah
characterization and analysis of the pricing elements of takāful, which—to the best of
the authors’ knowledge—no previous research has attempted.
6
SECTION
LIFE INSURANCE PRICING: CONCEPTS, OBJECTIVES,
REGULATIONS AND ELEMENTS
3
Pricing from the Actuarial Perspective
It is important to note that the concepts, objectives and pricing elements of life
insurance products and takāful products are the same (Frenz & Soualhi 2010). The
authors will address this point from the conventional perspective first since the
actuarial aspects of pricing were developed long before takāful. From the conventional
perspective, pricing in insurance refers to the mechanism of determining the cost and
profit of an insurance product, i.e., the premium. Mishra (2010) asserts that ‘the price of
a life insurance product is based on the costs of providing the product, plus a margin
for profit’. Life and non-life insurance products have their distinct pricing mechanisms
depending on relevant assumptive risk factors, nature of risk covered and the sum
assured (Thanyan 2003).
The premium is basically the price that the insured must pay to the insurer in return
for benefits defined in the policy. The Dictionary of Finance and Investment Terms
defines premium as ‘the fee paid to an insurance company for insurance protection’
(Downes & Goodman 1991). The fee is statistically determined by actuaries who use
insurance mathematics to predict the present value of future benefits due to be paid to
the insured, and their corresponding premiums. In principle, the premiums form part of
the cash inflow as opposed to cash outflow, i.e.: the benefits and the expenses (Olivieri
& Pitacco 2010).
The insurance industry adopts two types of premium, single and periodic. The former
is a lump sum payment calculated based on assumptions comprising net rates using
mortality and morbidity tables, and risk factors of homogenous risks such as health
and lifestyle. The second type (periodic) requires periodic settlement of the premium
taking into account the same actuarial principles in calculating the price.
Pricing is thus based on mathematical principles, using the law of large numbers. The
law states that ‘the greater the number of observations of an event based on chance,
the more likely the actual result will approximate the expected result’ (Dorfman 2008).
This would mean ‘an insurer or an insurance company’s loss prediction becomes more
accurate as the number of insured in the risk pool increases’ (Mishra 2010). As the
scale of loss is accurately predicted, premiums can be determined, either high or low.
In soft markets, when the investment earning of an insurance company exceeds its
underwriting losses, prices may be quoted low. In hard markets, when an insurance
company’s bad investments run in an unprofitable underwriting environment, prices
are quoted high. This leads to conservative underwriting by either providing less
coverage for a given premium or raising the price and maintaining the same level of
coverage (Dorfman 2008).
Pricing Objectives
According to the Institute of Chartered Accountants of India (2005), the objectives of
pricing are as follows:
7
It is important
to note that
the concepts,
objectives and
pricing elements
of life insurance
products and
takāful products
are the same.
1
Rate adequacy: The rates quoted for a typical family insurance policy must be
adequate so that current assets of the company can meet future liabilities. This
means that the present value of prices must be consistent with future benefits to
be paid to the policyholders. Price adequacy is not always based on the principle
of value and counter-value whereby the price of a product normally consists of
the cost, expenses and loading of profit. Prices in life insurance can adopt the cash
flow underwriting practice whereby insurance is priced at a loss. This requires that
the investment of insurance assets offsets underwriting losses (Dorfman 2008).
2
Rate equity: Equity in pricing life insurance refers to premiums that are
commensurate with future losses and costs that the insured bring to the pool. This
would entail a proper underwriting mechanism whereby the risks are adequately
selected, classified and priced. Sub-standard risks are priced higher due to
additional risks pooled by some policyholders affecting the solvency and capital
adequacy of the company.
3
Rates not excessive: The rates must be commensurate with the benefits provided
at maturity. They should not be too excessive, affecting the customer’s ability to pay
the premium. That would deprive the company of certain segments of customers
who would have otherwise been covered. On the other hand, they should not be
too low, which would put the funds at risk of insolvency. In order for insurance
companies to mitigate the risks of excessive pricing, they should maintain prices
that are competitive and sensitive to market risk. Besides, they are allowed by their
regulators to re-price the products. In doing so, they are generally supposed to
outline the risk limits, thresholds or triggers for re-pricing (BNM 2010).
Regulations of Takāful Pricing
A number of countries, including Malaysia, have regulations on takāful with direct or
indirect reference to pricing. All these jurisdictions leave it to the industry, namely the
takāful company, to determine the gross contribution rate based on data gathered on
the participant. Division 5 (subsection 85) of Malaysia’s Islamic Financial Services Act
(IFSA) 2013 highlights the actuary’s duty to handle prudential tasks. The subsection
reads: ‘An appointed actuary shall have such duties and functions set out in any
standards as may be specified by the Bank under subsection 57(1).’
Under the power of the Bank to specify standards on prudential matters, subsection
57(1) reads:
Without limiting the generality of subsection (1), standards specified under that
subsection may include standards relating to:
(a) capital adequacy;
(b) liquidity;
(c) corporate governance;
(d) risk management;
(e) related party transactions;
(f)
maintenance of reserve funds;
(g) takāful funds; and
(h) prevention of an institution from being used, intentionally or unintentionally, for
criminal activities.
8
Standards relevant to actuaries as far as pricing is concerned include capital
adequacy, liquidity, risk management, maintenance of reserve funds and takāful
funds. For example, pricing must be adequate to maintain the solvency of the risk
fund. Underwriting a risk inadequately will have an adverse effect on claims payments
leading to the depletion of the risk fund.
Reserving is another function of the actuary; he has to make sure the RBC requirements
are maintained at all times so that future liabilities are paid when due. Other guidelines
on pricing can be found in the Takaful Operators Framework (2013) and Guidelines on
Introduction of New Products by Insurers and Takaful Operators (2015), both issued by
Bank Negara Malaysia (BNM).
To give a glimpse of some regulations that have addressed takāful pricing, alSaboor (World Takaful Report 2016) compared the regulations of a few countries as
summarised in Table 1.
Reserving is
another function
of the actuary;
he has to make
sure the RBC
requirements are
maintained at
all times so that
future liabilities
are paid when
due.
Table 1: Summary of Ragulatory Guidelines for Takāful Product Pricing
Estimated Total
Population in 2013
(in million)
Estimated
Muslim
Percentage
Separate Takāful
Regulation
(Date)
Regulator Guideline for Takāful
Pricing
182.1
97%
Yes
(2012)
Takāful operators must formulate ‘risk
management and rating procedures’
approved by the appointed actuary.
9.3
96%
Yes
(2014)
A Financial Condition Report (FCR) is
required to be certified by the actuary
and endorsed by the chairman of
the board of directors including
evaluation of the pricing policies and
procedures of the company.
Indonesia
249.9
95%
Yes
(Revised 2013)
‘Generally Silent’ with respect to
product pricing. The focus is instead
on takāful windows needing to spinoff to full-fledged takāful entities,
risk-based capital as a solvency
safeguard, and increased paid-up
capital requirements.
Nigeria
173.6
75%
Yes
(2013)
National Insurance Commission’s
(NAICOM)
comprehensive
Operational
Guidelines
for
takāful insurance operators is
groundbreaking for the region.
As part of the licensing process,
applicants are required to document
the proposed pricing mechanism as
part of the marketing strategy.
Country
Pakistan
United Arab
Emirates
9
Estimated Total
Population in 2013
(in million)
Estimated
Muslim
Percentage
Separate Takāful
Regulation
(Date)
Regulator Guideline for Takāful
Pricing
Kenya
44.4
29.50%
Yes
(2015)
Insurance Regulatory Authority’s
(IRA) takāful operational guidelines
are a bright light for the emergence
of takāful in the region. The 20page document makes no separate
mention of product pricing but
mentions the word ‘actuary’ 4 times.
Maldives
0.3
100%
No
Although no separate takāful
regulations exist, takāful is ‘regulated’
under
the
‘work-in-progress’
insurance regulation and supervisory
advancement
for
conventional
insurance. The word takāful is
mentioned 16 times in the document,
showing continued interest in
developing the market, beginning
from the regulatory standpoint.
Country
Source: World Takaful Report 2016, Middle East Global Advisors 2016
Pricing Elements
The pricing elements are the factors considered in pricing an insurance/takāful
product. Haron and Taylor (2009, p . 170) explain:
In family takāful, (which includes Shariah compliant life insurance), the premium
contribution includes a saving or investment element, which is not a donation into [the]
mutual risk pool, but rather a payment into a participant’s investment account.
The pricing elements are also known as ‘assumptions’ that underwriters and actuaries
use to arrive at fair prices. These elements generally comprise four main blocks that
constitute the components of insurance premiums (Dorfman 2008; Mishra 2010):
1
Actual cost of losses (claims to be paid out based on mortality rates in the
population);
2
Expenses of operating and managing the insurance pool;
3
Allowance for unexpected loss: and
4
Earnings on investment of collected premiums.
Alhabshi et al. (2012) hover around the same elements as the main assumptions of
pricing, which include the following:
1
The mortality/morbidity/claims distribution pattern underlying the benefits
covered under the takāful plan;
2
The investment rate of return to be used in discounting cash flows;
10
3
The management expenses to be incurred in making and processing the contracts
issued under the new product;
4
The withdrawal pattern of participants, which may affect the recoverability of initial
expenses incurred in marketing, underwriting and issuing new business contracts;
and
5
The level of taxation and other external factors such as statutory reserve
requirements.
The Institute of Chartered Accountants of India (2008) includes other aspects such as
time value of money, the benefits promised and contingency loading. Thanyan (2003)
differentiates between net rate and commercial rate. The former consists of the cost of
loss calculated based on the law of large numbers and probability. The latter comprises
the net rate plus contingency reserve to cover unexpected increase of the cost of risk
during the financial year, expenses, taxes, commissions and profits for shareholders.
Under the technical aspects of pricing, BNM’s Guidelines on Introduction of New
Products by Insurers and Takaful Operators (2015), refers to some pricing elements for
insurance and takāful as summarised in Table 2.
Table 2: Pricing Elements of Insurance and Takāful Products
Pricing element
Mortality
Description
Remarks
Probability of death in a progressive life •
span up to a certain age.
•
A mortality table is used.
An explicit margin can be built in this
assumption.
Morbidity
Probability of injuries based on past A morbidity table is used.
experiences.
Contingency
A reserve that could be used to mitigate
the risk of future cost increase or any loss.
Lapse basis
The basis upon which an insurance/ •
takāful policy has ceased to exit due to
non-payment of premiums/contribution or
•
the exhaustion of cash surrender value.
The lapsed policy could
reinstated after a grace period.
Gross investment return that can offset •
underwriting losses.
For takāful, the gross investment
profit rate is applied to the PIF and
PRF separately.
•
Assets are earmarked to back future
liabilities.
Investment return or
investment profit rate
assumption
11
-
be
If the policy is lapsed, it no longer
pays the death or permanent
disability benefits.
Pricing element
Expense
Description
Loadings covering operations
Provision for
commission
Payments for insurance/takāful agents
Remarks
They comprise:
•
Initial expense loading;
•
Renewal expense loading;
•
Allowance for future inflation, if any;
•
For takāful products, expenses
which are borne by the takāful fund
and shareholders fund, respectively;
and acquisition expense for products
acquired via direct marketing or
telemarketing.
•
Commission rates must be payable
according to policy or takāful
certificate years separately for the
basic agent and the agency leaders
in a table for all premiums or takāful
contribution payment terms.
•
Other commissions must be stated.
Risk discount rate
The rate used to discount future cash
flows
•
This is applicable if the cash flow
projection method is used for pricing.
Profit loadings
Profit margins
•
Profit margins must be provided as
well as key model points used in
pricing such policy terms.
Source: Bank Negara Malaysia 2015
The above pricing elements of life and takāful family products unveil a number of
features:
1
The assumptive feature: most of the adopted elements are based on assumptions
that the underwriters and actuaries make. There are two types of assumptions:
assumptions that are statistically established such as that of mortality and morbidity
in a given population. In this type, the insured is put in an age class for which his/
her death is predicted statistically based on the law of probability. The second type
refers to loadings that vary from one insured to another such as health condition,
family health history and lifestyle. Other loadings are also added such as expenses
and shareholders’ profit.
2
The price of insurance/takāful is not subject to the forces of the market, namely
the demand and supply factor. The price is mainly determined based on the
unique mortality of the insured. Other determinants such as tax and profit loading
are applicable to all insured.
3
Although in takāful the contribution is treated as tabarruʿ (donation), its calculation
follows the same basis used for pricing a premium in conventional insurance; i.e.,
price vs. risk; price vs. sum assured. Since the subject matter of insurance/takāful
is the risk, the Sharīʿah rulings on pricing, which apply more to sales and leasing,
12
are not the same as pricing takāful products. In insurance/takāful the priced risk
is yet to exist whereas in financial transactions the priced asset must exist during
the time of pricing with the exception of iṣtiṣnāʿ, salam and ijārah mawṣūfah f ī
dhimmah.
4
Regulators have set guidelines for the pricing mechanism to be fair to the insured.
They acknowledge the assumptions made by the insurance takāful operators
but urge them to adopt prudent measures to have the best estimates for risk
occurrences and the prices commensurate with them. In the BNM’s Takaful
Operational Framework (2013, p. 10), some of the pricing guidelines are mentioned,
as below:
In determining the price of the products, prudence must be maintained to avoid underpricing and balanced with due care to avoid participants from being charged excessively.
Key factors such as the expected frequency and severity of risk exposures and expected
management costs and expenses must be considered in pricing the takaful products.
Assumptions used in pricing the takaful products could be based on the takaful operators’
or industries’ past experience and future expectations. Given the nature of the business,
which may involve payments of contributions or liabilities long into the future, products
should be priced to include appropriate buffers or designed with flexible features, which
could absorb future fluctuations and uncertainties.
The above guideline considers the unique pricing structure of takāful. Prices, according
to the guidelines, must be fair to avoid underpricing that affects the solvency of the
funds and the future payment of claims. Prices should also not be excessive to the
extent of burdening the insured. Engku Ali et al. (2008) highlight that BNM emphasizes
three basic principles of pricing:
1
Adequacy: the price should be sufficient to pay losses and reasonable operating
expenses of the takāful operator.
2
Not excessive: the price should not be too high that the participants are paying
more than the risks covered in the contract.
3
Responsiveness: the price should be responsive over time to changing loss
exposure and changing economic conditions.
13
Prices,
according to the
guidelines, must
be fair to avoid
underpricing
that affects the
solvency of the
funds and the
future payment
of claims. Prices
should also not
be excessive
to the extent of
burdening the
insured.
SECTION
4
SHARĪʿAH COMPLIANCE OF THE PRICING ELEMENTS OF
FAMILY TAKĀFUL PRODUCTS
In this section, the authors will examine the Sharīʿah aspects of the elements
and methods used to price family takāful products. It is important to note that the
examination will cover family products having both elements of savings and protection.
The examination covers basic family products as well as investment-linked products.
The Sharīʿah Compliance of Assumptions as the Basis for Pricing
Takāful Products
Firstly, Islamic jurisprudence, in both classical and contemporary references, has
addressed the legitimacy of the state setting the prices of goods in sale contracts.
(This is relevant for takāful products as the regulator sets the basis for those prices
and establishes thresholds for certain lines of business.) Without going into the details,
scholars have had two major opinions on the issue. Generally, the four schools of
Islamic jurisprudence prohibited the ruler from imposing specific prices on goods
(Al-Mawsūʿah al-Fiqhiyyah al-Kuwaytiyyah 1427H). However, there are exceptions
to this prohibition; the ruler or his agents can impose pricing when traders arbitrarily
overprice goods to the detriment of customers, a situation most often associated with
hoarding and monopolies. Another situation that would make pricing permissible is
when people have a pressing need for certain goods; the ruler can force traders to
sell those goods at fixed prices. The same would apply to people’s pressing need for a
particular service or profession. Another relevant situation would be when the right to
sell certain goods is restricted only to some traders. If not controlled, the designated
traders may take advantage of this privilege and start manipulating the market for their
own interest (Al-Mawsūʿah al-Fiqhiyyah al-Kuwaytiyyah 1427H).
The above pricing parameters apply to goods that already exist in the market. A
question that arises at this juncture is whether these parameters apply to pricing
takāful products. Answering this question would start by examining the similarities and
differences between the subject matter of takāful products and those of more typical
commercial transactions:
Table 3: Comparison between the Subject Matter in a Typical Financial Transaction and the Subject
Matter in Takāful
Islamic financial transaction
(asset/usufruct)
Takāful
(risk)
Existence
Yes
Uncertain
Deliverability
Yes
Uncertain
Unencumbered
Yes
Not applicable
Subject matter criteria
14
Subject matter criteria
Islamic financial transaction
(asset/usufruct)
Assumptions (assuming Applicable only to deferred sales where
future cash flow
the time value of money is considered.
positions or situations)
Contract
Sale (spot/deferred)
Takāful
(risk)
Yes
Tabarruʿ
Source: Authors’ own
Based on the above comparison, the subject matter of Islamic financial transactions
differs from that of takāful products and therefore the pricing philosophy and techniques
should differ. The two converge in one item only: when assumptions are made for
deferred sales (bayʿ bi thaman ājil) in Islamic financial transactions. In deferred sales,
the time value of money is used to determine the present value of the future cash flow.
In takāful, the time value of money is used to determine the present value of the future
liability of the takāful fund.
In takāful, the
time value of
money is used
to determine the
present value of
the future liability
of the takāful
fund.
Despite the above differences, the authors will try to refer to the regulator’s objectives
of pricing sales contracts, namely the avoidance of excessive pricing, protection of
customers, and ascertaining the value-for-money feature. These objectives tend to be
the same when pricing takāful products.
Before we embark on investigating the Sharīʿʿah compliance of the pricing elements of
family takāful products, the authors have consulted primary1 and secondary data and
have come up with a list of elements depicted in Table 4.
Table 4: Pricing Elements in Family Takāful Products
Mortality/morbidity
Habits
Investment returns
Gender
Future expenses
Lifestyle
Cost of qarḍ
Family health history
Buffers to absorb future
fluctuations and uncertainties
Current health status
Family medical history
Occupation
Shareholder profit
Obesity
Withdrawal patterns
Tax
Lapse rate
Legislation
15
1.
Primary Data for this
study consist of a total of
six (6) individual interviews.
Out of six (6) interviews,
four (4) participants were
from Actuarial Partners
Sdn. Bhd. and two (2)
participants from Munich
Retakāful. The identities
of the respondents were
kept
confidential
by
assigning pseudonyms of
P1 for participant 1, P2 for
participant 2, and so forth.
Contingency loading
Claims trends
Risk management wakālah fee
Austerity and recession
Future interest rate
Fraudulent liability claims
Future inflation
Increasing care cost
Assumption about future
demography of a population
Emerging claims/risks
Misrepresentation risk
From the above comprehensive list of pricing elements, assumptions are made to
reflect future projections of money value, health, conditions and other unexpected
events that may affect the solvency of the takāful operators. The authors’ Sharīʿah
analyses will be divided between future projections of the assumptions and the current
assumptions, based on the existing situation of the participant.
The Sharīʿah Compliance of Elements Based on Future Projections
A number of the pricing elements are based on future projections:
1
Mortality/morbidity
2
Investment returns
3
Future expenses
4
Future interest rate
5
Future inflation
The researchers will adopt a selective approach, focusing on elements that need
substantiation from the Sharīʿah perspective. Thus, the discussion will centre on
mortality/morbidity, investment returns, inflation and interest rates. The chosen
elements relate to future factors that are embedded in the present contributions in
takāful.
Mortality/Morbidity
The death probability of a takāful participant is referred to as the mortality rate while
the injury probability is referred to as the morbidity rate. ‘Actuaries have developed
mathematical models of the rates and timing of these events to be used in pricing and
reserving’ (Alhabshi et al. 2012). The rates are assigned to specific ages and presented
in tables called mortality and morbidity tables. Tables for males and females are
developed separately as the mortality rate of females is less than that of males. The
mortality and morbidity rates are responsive to many factors including the improvement
of life expectancy brought about by modern health care and medicine.
16
Table 5: Mortality Rates for Males and Females
Exhibit 1 : Expected Future Lifetime of a Healthy Employee
Male
Female
Adjusted RP-2014
Adjusted RP-2014
IRS 2017
Mortality
Table
Mortality
Table with
MP-2016
% Change
IRS 2017
Mortality
Table
Mortality
Table with
MP-2016
% Change
Age in
2017
25
57.80
62.26
7.72%
59.68
64.88
8.72%
30
52.89
56.92
7.61%
54.72
59.50
8.73%
35
48.01
51.58
7.42%
49.79
54.13
8.71%
40
43.18
46.25
7.09%
44.88
48.78
8.69%
45
38.36
40.94
6.71%
39.99
43.45
8.67%
50
33.56
35.69
6.37%
35.13
38.18
8.68%
55
28.76
30.57
6.31%
30.34
32.99
8.72%
60
24.04
25.63
6.63%
25.69
27.89
8.57%
65
19.44
20.96
7.84%
21.16
22.90
8.25%
70
15.48
16.87
8.99%
17.23
18.55
7.67%
75
11.78
13.06
10.85%
13.61
14.50
6.54%
Source: http://cammackretirement.com/index.php/knowledgecenter/insights/impact-of-the-proposed-irs-mortality-tablesand-strategies-to-reduce-its-effects
Table 5 shows the expected future lifespan of a healthy employee. It is noticed that
the mortality rate changes from one year to another and varies according to gender.
It also shows the percentage of changes from 2016 and 2017 due to factors such
as the improvement of life expectancy and the sophistication of risk management
instruments.
The Sharīʿah compliance of this particular assumption is viewed from various Sharīʿah
sources and categories of evidence. Ibāḥah (permissibility), maṣlaḥah mursalah (public
interest), istiqrāʿ (induction) and ʿurf (custom) are the main Sharīʿah categories of
evidence that the authors will use to analyse the Sharīʿah compliance of the selected
pricing elements.
From the ibāḥah (permissibility) perspective, there is obviously no Sharīʿah text from
the Qur’an or Sunnah on the permissibility of pricing a risk based on mortality and
morbidity assumptions. Nor is there any ijmāʿ (scholarly consensus) on the issue, nor
do any classical books of Islamic jurisprudence discuss it. From an uṣūlī perspective,
however, there is a presumption that acts done for worldly benefits are permissible
17
unless they conflict with a clear Sharīʿah text or ijmāʿ or entail demonstrable harm
that outweighs any attendant benefits. Ibn Imām al-Kāmiliyyah (2002) maintained that
iṣtiṣḥāb (presumption of continuity) is a valid proof in the Sharīʿah.
The ḥadīths of Abū Mūsā al-Ashʿarī and Jābir () are usually quoted as the most explicit
Sharīʿah evidence for takāful. It may be noted that the contribution in the form of food
which they mention was not determined in either quantity or quality. It was fully left
to the goodwill and discretion of the participants in the cooperative pool to contribute
whatever they could provide. Abū Mūsā () narrated that the Prophet () said:
َ َ َّ أَ ْ َ ِّ َ َ َ َ ُ ف
َ� ُعوا ما
ْ «إن الشعر ي ي ف� إذا أ
َ َ أ ْو َق َّل َط َع ُام ِع َي ِال ْم ج� ْ َل ِد َين ِة ج،الغ ْزو
�
وا
ل
م
ر
ِ
ي
ِ َ َِ ِ َ ْ َ ُ ف
ِ ِ
ِ
ُ
ث َّ ْ َ َ ُ ُ َ ْ فَ ُ ْ ف
َ
ف
َّ
َ
َ
َّ
»...اح ٍد ِج�لس ِوي ِة
ِ كن ِعند ْه ِ ي� ث ْو ٍب و
ِ � اقتسموه بي�م ِ ي� ِإ� ٍء و،اح ٍد
When the Ashʿarī Tribe face shortage of food in war or in Madinah, they collect
whatever food they have; then place it on a cloth; then divide it equally in one
container… (Al-Bukhārī 1422H, vol. 3, p. 138, no. 2486)
Jābir ibn ʿAbdillāh narrated:
َ َ
ََ
َّ ُ ُ َ َ َ َ
ُ الهل َص َّل
َّ الهل َع َل ْي ِه َو َس َّ َل َب ْع ًثا ِق َب َل
� فَأ َّم َر َعل يْ ِ� ْم أ َ ج،الس ِاح ِل
«بعث رسول
ِ
َ
َ
َ
ُ
ف
ُ
َ
َ
ُ
َ
َّ
َ
َ
َّ َ ْ ف
َْ
َ ف
َ ُع َب ْي َد َة ْج فَ� ج
ال َّر ِاح ََ َو ْه ث َال
ض
َِ َ � َرجنا فَح ت� ِإَذا َ ك ُن ُّا ُ ِبب َع، أَ ْوأ� ِف َ ي ِ� ْ َم،ث ِم َائ َ ٍة
َّ
َّ �َ الطر يق َف ف
َ فأ َم َر أ ُبو ُع َب ْيدة ج�ز َو ِاد ذ ِلك ج،الز ُاد
ُ ج،ال ْيش
فكن،� ِم َع ذ ِلك كه
َّ َ ُ ُ ْ ُ َ ْ َ َ َ ْ َ ِ َ ِْ تَ ِْ ي َ َ َ ُ َ ِّ ُ َ ُ َّ َ ْ ِ َ ً َ ً َ تَّ َ ِ ف
فل يكن ي ِصيبنا ِإل،� فكن يقوتنا ك يو ٍم ق ِليال ق ِليال ح� ف ِ ي،ِمزودي � ٍر
ٌ ٌ
».تَ ْ� َرة تَ ْ� َرة
The Prophet () dispatched a battalion along the coast, appointing Abū
ʿUbaydah ibn al-Jarrāḥ as their leader. They were three hundred including
myself. When we reached a certain location, our food began to run out. Abū
ʿUbaydah ordered the provisions of the army to all be collected. He would
feed us a little food every day until it finished, and then we started getting one
date each. (Al-Bukhārī 1422H, vol. 3, p. 137, no. 2483)
From the
perspective
of maṣlaḥah
mursalah,
mortality/
morbidity tables
are deemed the
most accurate
instrument
for predicting
people’s injuries
and deaths.
It may be noted that there is a difference between the cooperative model presented
in the two ḥadīths and the contemporary model of takāful. As is evident from the two
ḥadīths, the quantity and quality of the contribution was fully left to the participants
to decide. This is not the case with contemporary takāful where the value of the
gross contribution is determined by the takāful operators, using technical aspects
pertaining to net rates and future assumptions that are sensitive to market movement,
estimated future value of liabilities and expected investment returns and expenses.
The difference between the determination of contribution in the classical cooperative
model, as highlighted in the two ḥadīths, and the modern pricing mechanisms does
not, however, affect the initial ruling on the pricing of family takāful products, which is
permissibility (ibāḥah).
From the perspective of maṣlaḥah mursalah, mortality/morbidity tables are deemed
the most accurate instrument for predicting people’s injuries and deaths. Maṣlaḥah
mursalah is defined as ‘benefit that is neither rejected by Sharīʿah nor explicitly
18
considered’ (Ghazālī 1996, p. 173). Things accepted under maṣlaḥah are generally
deemed to have conformed to the universal objectives of Sharīʿah, namely religion,
self, intellect, progeny and wealth (Shāṭibī 2003).
The researchers would consider actuary science permissible in principle and in line
with the Sharīʿah principles and objectives. Using mathematics, the actuaries calculate
the present value of future liabilities, make accurate valuations of assets and liabilities
and assign the most corresponding contribution rates to the risks accepted by the
underwriters. They also calculate the reserves and contingencies and determine fees
and charges. At the time of underwriting, the written risk has yet to occur, the reserves
have yet to be adjusted to the new risk, contributions have yet to be determined, and
the weight of the pooled risk has yet to be known. Hence, the only way to maintain the
solvency of the fund, guarantee the payment of future liabilities, achieve the saving and
protection objectives of takāful and manage all relevant risks is to use mathematics,
namely the law of probability that uses the law of large numbers. In substantiating the
importance of the actuary role and the legitimacy of his work, the AAOIFI (2015, p. 682)
Standard on Islamic Insurance states:
The contribution may be determined according to the actuarial principles based on
statistical techniques. In this regard, due consideration should be given to whether the
risk involved is fixed or variable.
Using the law of probability to determine takāful prices has its legitimacy in using
ẓann (speculation) or ẓann ghālib (pre-dominant speculation) in Islamic jurisprudence.
Imam Suyūṭī (n.d.) is of the opinion that ẓann entails ‘predominant belief’. Regarding
the authenticity of ẓann, Ibn Amīr al-Ḥājj (1996) held that ‘every speculation (ẓann) the
mujtahid has is definitely the ruling of God,’ not ignoring the fact that ‘fiqh is mainly
speculative,’ as he says.
Although the scope of application of ẓann in statistics and fiqh is different, the analogy
that we are drawing serves to legitimize the use of ẓann or ẓann ghālib in issues that
have Sharīʿah effect, such as using statistics as a tool of pricing Sharīʿah-compliant
takāful products.
Thus, mathematics used to calculate the gross contribution is an instrument (wasīlah)
leading to the realization of the objectives of takāful, i.e., taʿāwun via mutual guarantee.
Imam al-Qarāf ī (1973, vol. 1, p. 449) said: ‘As the means for a prohibited thing is prohibited,
similarly the means for an obligatory thing is obligatory’.
Ibn ʿĀshūr (2001) reiterated that ‘the means for the best objectives (maqāṣid) is the
best means, and the means for the worst objectives is the worst means’. In the same
vein, Muslim jurists have always emphasized the importance of applying mathematics
in certain sections of Islamic jurisprudence such as the law of inheritance (mīrāth).
Ibn ʿAbd al-Barr (1994, vol. 2, p. 790) reiterated this meaning, saying:
As for mathematics, scholars have validated it for knowing numbers, multiplication,
division….[It] is an indispensable science for the law of inheritance, wills,… prayer times,
pilgrimage, almsgiving situations, sales, the number of the passing years, months, hours
of the day and night, moon locations…
19
Thus, it is in the interest (maṣlaḥah) of the takāful fund to use modern techniques
to deal with the unique nature of takāful and its Sharīʿah objectives. The objectives
of Sharīʿah in takāful are manifested in cooperation and mutual guarantee that will
ultimately provide a certain level of protection to the family of the insured after his/her
passing and preserve their wealth (hifẓ al-māl).
The tables of mortality and morbidity, with the law of large numbers, can also find
their Sharīʿah legitimacy in the method of istiqrāʿ (induction). Induction is the process
of tracing a number of incidents or events that would eventually help conceptualize
a universal principle. Logicians would define it as ‘judging a universal principle on
the basis of its existence in the particulars of that universal’ (Ibn Sīnā 1992). Induction
has been used in ijtihād in a number of issues, namely the corroborative number of
witnesses in a civil or criminal case and the authenticity of tawātur, whether textual
(tawātur lafẓī) or significative (maʿnawī) (Hallaq 1995). In articulating the usūlī maxims
and maqāṣid al-Sharīʿah, Imām al-Shāṭibī (2003) traces a number of particular items
of Sharīʿah evidence to formulate universal principles. This is exactly the link between
istiqrā used to formulate universal maxims of Sharīʿah and the law of large numbers
used to design the mortality and morbidity tables. The latter use the inductive
method to trace several homogenous mortalities and morbidities to the point that
the actuary would be able to predict the death of people with high probability. From
the perspective of ʿurf (custom), the tables of mortality and morbidity have become a
customary practice in the insurance world, including takāful.
Investment Returns
The cash flow method of pricing takāful, as we highlighted earlier, necessitates that
the pricing should be at loss at the beginning of the coverage in such a way that the
future investment returns would offset the underwriting losses (if any). Theoretically,
this method is supposed to be advantageous to the participants since they pay a
lower rate. From the Sharīʿah perspective, and in the absence of textual evidence from
Qur’an or Sunnah and in the absence of ijmāʿ, this is deemed Sharīʿah compliant. The
bases for this judgment are the same as those the authors provided for mortality and
morbidity tables: ibāḥah, maṣlaḥah and ʿurf. The issue arises when the actual future
returns fall short of meeting the assumption made, especially when the current quality
of assets is not suitable. According to Global Takaful Report (Milliman 2017, p. 36),
There is a limited availability of suitable long term Shariah compliant assets to match
the liabilities in most jurisdictions. For countries with a RBC framework such as Malaysia
and Indonesia, any mismatching or concentration risk will further increase capital
requirements.
If the future returns fall short of meeting the assumption made, there will be an adverse
effect on the solvency of the risk fund that could lead to its deficit. This is a mafsadah
(harm), which the Sharīʿah tends to block (sadd al-dharīʿah). It will also trigger the
qarḍ injection that will affect the surplus distribution. In such a scenario, the takāful
operator may opt for re-pricing, which could be disadvantageous to the participants.
This unwelcome scenario is what the regulators are concerned about. On the adverse
effects of inadequate assumptions, BNM’s Takaful Operational Framework (2013, p. 15)
has made it the fiduciary duty of the takāful company to design a business strategy
considering all factors that could affect the solvency of the takāful fund:
20
Takaful operators shall have in place appropriate investment strategy that considers the
nature, term, currency, amount and timing of the takaful liabilities and [is] commensurate
with the funds’ tolerance of risks. The investment strategy must be reasonably formulated
to avoid adverse impact on the takaful funds.
The takāful operator acts as wakīl on investment whereby he is held accountable in
case of negligence. The takāful operator should make outright transfers to the risk
fund to offset the losses impacting the whole takāful operation. Such a transfer is in line
with the Sharīʿah requirements of wakālah. In this regard, BNM’s Takaful Operational
Framework (2013, p. 28) reads:
Where there is a loss arising in the PRF due to mismanagement or negligence, the
takaful operators shall bear full responsibility and automatically rectify the deficit or
loss via an outright transfer. For this purpose, takaful operators must have in place a
written policy that identifies circumstances which [are] tantamount to mismanagement
or negligence. In cases where the Bank, based on its own assessment, is satisfied that
the deficit or loss in the PRF is due to mismanagement or negligence, the Bank may
direct the takaful operators to rectify the deficit or loss via an outright transfer of assets
from the shareholders’ fund (instead of qard).
The shareholders could be harmed by not getting the expected returns should the
takāful operator fail to design a sound business strategy. This would violate the Islamic
legal maxim ‘Harm shall not be inflicted or reciprocated’ (Ibn Nujaym 1999, p. 72). The
takāful operator’s failure in fiduciary duty would put both the participants and the
shareholders at risk as the agency problem could result in conflict of interest affecting
the soundness of the business strategy. While BNM’s Takaful Operational Framework
(2013) has regulated the compensation made by the takāful operator to the risk fund,
no regulation is made to compensate the shareholders when the negligence of the
takāful operator is proven. The authors would recommend an amendment to BNM’s
Takaful Operational Framework (2013) to address this issue. Therefore, the investment
returns assumption is not quite fair to the shareholders should there be a loss in the
investment. This type of arrangement is Sharīʿah compliant only if the shareholders
make tanāzul (waiver of right) on their share of the investment returns in case of losses
due to the negligence of the takāful operator.
Inflation and Future Interest Rate
Inflation
In economics, inflation is defined as ‘a sustained increase in the general price level
over a given period’ (Gillespie 2007, p. 380). Pricing in takāful embeds inflation as one
of its components. Sherif and Shaairi (2013, p. 32) maintain
…inflation and its volatility [are] found to have a significant negative relationship with
the insurance expenditure as life insurance products are mostly savings products that
provide monetary benefits over the longterm.
Since pricing takes into account the future value of the takāful benefit, the objectives
of takāful will be met if the sum covered is not eroded by inflation. From a Sharīʿah
point of view, this is permissible on the ground of three Sharīʿah principles that attest
to the fact that time erodes the value of money and future liability. It is important
21
While
BNM’s Takaful
Operational
Framework (2013)
has regulated the
compensation
made by the
takāful operator
to the risk fund,
no regulation
is made to
compensate the
shareholders
when the
negligence of the
takāful operator
is proven.
to note that the principles we are about to discuss have been widely articulated in
Islamic jurisprudence in relation to exchange contracts. The authors find no evidence
in Sharīʿah prohibiting the usage of certain concepts laid down for exchange contracts
in contracts of donation (tabarruʿāt), namely the time value of money. Pricing is a
technical exercise in which there is no effective difference between the present value
of future cash flows or liabilities in contracts of exchange and contracts of donation
such as takāful.
Time value of money
Financial experts have held that in some sectors such as money and banking ‘time has
value’ (Cecchetti & Schoenholtz 2010). This principle is widely used in many products
and services in banking and insurance. Cecchetti and Schoenholtz (2010, p. 4) noted
that the ‘borrowed resources [in case of a loan] have an opportunity cost to the lender
so you have to pay rent on them’. In fact, it is not only about the opportunity cost
because the latter may not necessarily erode the purchasing power of money. The
most plausible reason in the authors’ opinion is that time will erode the purchasing
power of the future liability, which is the result of inflation. The time value of money is a
manifestation of inflation; hence the importance of discussing the stand of Sharīʿah on
the time value of money vis-a-vis takāful pricing.
Scholars generally accepted the time value of money in Islamic finance to determine
prices upfront. ‘Muslim jurists have held that time has a share in the price’ (Al-Miṣrī
1999). Accordingly, they have allowed the deferred price to be higher than the spot
price. The vast majority of jurists are of the view that the deferred price can be higher
than the spot price (Al-Uthmānī 2011).
Imām al-Nafrāwī (1995, vol. 2, p. 99) from the Mālikī School stated:
The evidence that the deferment of payment [in a sale] is permissible is the saying
of the Prophet (): ‘Whoever defers the asset in salam, the weight or volume and the
deferment period of the asset must be known.’ This commandment entails obligation.
The deferment period is stipulated to avoid selling what a person does not own, which
is prohibited. [The Prophet] () also stipulated that the asset be known in order to know
the time of delivery, and deferment has a share in the price.
To reiterate the same notion of time value of money, Imām al-Kāsānī (1986, vol. 5, p.
187) held that
there is no similarity between spot and deferred payment as the exchange of an asset
on spot is better than deferring it, and the deferred price is more than the spot price.
When discussing the issue of tawwarruq, which involves the time value of money,
Imām Ruhaybānī (1994, vol. 3, p. 61) held:
If a person needs cash, and he buys what costs a hundred for a higher (price) such as a
hundred and fifty, for example, in order to avail himself of the cash, there is no harm. This
issue is called tawarruq.
22
Sale by installment (bayʿ al-taqsīt)
The majority of schools of Islamic jurisprudence (Mālikīs, Ḥanaf īs, Shāfiʿīs and Ḥanbalīs)
allowed installment sales (al-Uthmānī 2011; Ghayth 2010). The International Islamic
Fiqh Academy of the Organization of Islamic Cooperation (IIFA-OIC) allowed it in its
Resolution No. 51 (2/6):
First: it is permissible to increase the deferred price in contrast to the spot price. It is
also permissible to mention the spot price of the asset and the price that will be paid by
installment for known periods. The sale is only valid when the contracting parties decide
whether they opt for spot or deferred payment.
Some scholars, however, rejected this kind of sale; for example, Abū Zahrah and alAlbānī (Ghaith 2010). The prevailing view is that of the majority of Muslim scholars. That
would lead us to adopt the same for the price of a takāful product based on the future
value of the takāful benefit. This is particularly true for level periodic payments in a
typical family product. It is worth mentioning that the validity of installment sales has
been extensively discussed by early and contemporary scholars of fiqh academies, the
elaboration of which falls beyond the scope of this research.
Two sales in one sale (bayʿatayn f ī bayʿah)
The purpose of discussing the issue of two sales in one sale in the context of takāful
pricing is to show that the future value of a cash flow is higher than the present one.
The concept is used in sales to incorporate time value in the final price. Similarly, in
takāful the value of the future sum covered is higher than the present one. In both sale
and takāful, the price quoted takes into account the value of the future liability. The
ḥadīth of two sales in one sale is another item of evidence on the issue at hand. The
ḥadīth reads:
َ ُ َّ َّ َ َّ ُ ُ َ َ َف
َّ
ف
»الهل َعل ْي ِه َو َس َل َع ْن َب ْي َع َت ْ ي ِف� ِ ي� َب ْي َع ٍة
الهل صل
ِ «� رسول
The Prophet () prohibited two sales to be concluded in one sale (Tirmidhī, in alMubārakfūrī 1353H)
The interpretations given to the ḥadīth focus on having two prices, spot and deferred,
with the deferred price being higher than the spot price. Ashhāb narrates that a trader
asked Imām Mālik about the way he used to sell oil. Imām Mālik asked him: How do
you sell it? The trader replied that he would sell it for 25 on deferment and 24 on spot.
Imām Mālik replied that this is not permissible (al-Siqqillī, 2013).
Imam al-Shawkānī (1993) reported a similar interpretation of two sales in one sale from
Imām Shāfiʿī, when someone says: I sold you this asset for one thousand spot or two
thousand for payment in a year.
After examining the authenticity and interpretation of the ḥadīth of ‘two sales in one sale’
by classical scholars, al-Quradāghī (2013) asserts that the ḥadīth lays the ground for the
permissibility to price an asset with two prices, one higher because of the deferment
and the other lower because it is paid on spot. Undoubtedly, al-Quradāghī means that
either the deferred price or the spot one should be chosen by the contracting parties
before they get separated.
23
Interest rate
The relationship between interest rate and takāful contribution is undeniable:
2.
Investopedia,
https://
www.investopedia.com/
ask/answers/061515/howmuch-do-changes-interestrates-affect-profitabilityinsurance-sector.asp.
It can be
concluded that
there is evidence
in the Sharīʿʿah
to use future
projections to
price existing
assets or
services.
Interest rate risk for insurance companies is a significant factor in determining profitability.
Although rate changes in either direction may affect insurance company operations,
insurance company profitability typically rises and falls in concert with interest rate
increases or decreases.2
Takāful is similar as far as the effect of the interest rate is concerned. Investment
portfolios of takāful operators, whether ordinary investment participant funds (PIF) or
unitized investment funds, follow the interest rates in pricing assets, namely ṣukūk. The
latter use KLIBOR or SIBOR or any interest rate benchmark for pricing the securities.
Therefore, an increase or decrease in the interest rate would affect the profitability of
the takāful operator.
Thus, it can be concluded that there is evidence in the Sharīʿah to use future projections
to price existing assets or services. Despite the difference between sale and tabarruʿ,
there is no Sharīʿah objection to using conventional benchmarks or benefiting from the
mathematical assumptions developed in conventional insurance.
The Sharīʿah Compliance of Assumptions Based on Current and
Past Data of the Participant
The previous discussion centered around the Sharīʿah compliance of pricing future
assumptions used in takāful. This section will discuss the Sharīʿah compliance of the
pricing elements that are readily available to the takāful company. These elements are
handled first by the underwriter who reviews applications for insurance and decides
whether to accept or reject them (Dorfman 2008). The same purpose of underwriting is
found in takāful where ‘the basic purpose of takāful underwriting is to provide equitable
and fair risk sharing amongst the participants in line with the concept of partnership
and solidarity in takāful’ (Yusof et al. 2011, p. 429).
Studies are scarce with regards to evaluating the underwriting process from the Sharīʿah
point of view. Md. Hashim and Ahmad (2014, p. 1) delineated parameters of acceptable
risk such as ‘Risk must be pure and non-speculative’ and ‘The cause of loss must be
lawful’. Regarding the takāful contribution, they suggested the following parameter:
‘The source of the contribution (premium) must be lawful from the perspective of both
civil law and Sharīʿah law’; however, no parameters were put for the components of the
gross contribution, which is the price of the takāful product.
Nu Nu Htay et al. (2013, p. 284) conducted interviews with purposefully selected
Sharīʿah scholars who are involved in takāful as advisors and researchers. The study
found that ‘all of the Shari’ah scholars said that the practice of underwriting and risk
rating is permissible.’ They concluded
The collective view from the Shari’ah scholars is that most of the underwriting factors
were allowed to be used in the risk rating process. However, most of them expressed
concerns regarding the use of factors such as family history, financial status, gender,
occupation and physical build in the underwriting process.
24
We shall examine some of the pricing elements that have Sharīʿah impact and see
whether they are Sharīʿah compliant. This is a selective rather than exhaustive exercise.
The participant’s health condition
The health condition is an important factor that can determine the nature of risk that the
insured would bring to the pool. A rule of thumb in insurance and takāful practices is
that healthier people bring less risk to the risk pool; thus the underwriter would classify
them as standard risks. The elderly and people with chronic illnesses or dangerous
occupations are either rejected or accepted with higher premiums/contributions.
Underwriters classify them as sub-standard.
A Sharīʿah issue may arise as to the fairness of such a classification. It may be
hypothetically argued that providing insurance and takāful for the healthier people
and rejecting those with certain illnesses and charging them higher is unfair. It can
be argued that the cooperative aspect of takāful may fade away if healthier people
with standard risks are charged lower contributions and those with sub-standard risks
are charged higher. Some takāful experts have implied that there are elements of
unfairness in underwriting family takāful products. Daud puts it thus:
The underwriting process, especially those involving medical underwriting with rigorous
tests and detailed analysis of the health condition of a person, does not conform to the
spirit of taʿāwun or mutual cooperation. Takāful operators should not decline any person
from wanting to tabarruʿ to the fund to help other people but instead should provide a
control in the amount of coverage in the initial years of the coverage.
This argument can be bolstered by the two ḥadīths quoted earlier in which the health
condition of the participants was not a factor in accepting the food contributed and
distributed equally. Nevertheless, this argument can be countered by noting that
fairness necessitates that the underwriter should differentiate between standard risks,
which bring ordinary risks to the pool, and substandard risks that may deplete the risk
fund if the risks happen at an early stage of the cover. It is simply a correlative relationship
between the amount of contribution and the sum covered that should be paid as and
when the risk happens during the takāful policy. This is studied mathematically and
demonstrated by strong correlations that amount to the best estimates possible.
Besides, a literal comparison between the cooperative schemes highlighted in the two
ḥadīths quoted earlier and contemporary takāful pricing techniques is not sufficient to
judge modern underwriting and actuarial practices unfair. Maṣlaḥah and ʿurf would
suffice to attest to the Sharīʿah compliance of considering the physical build of the
participant in pricing family takāful products.
Family medical history
According to Nu Nu Htay et al. (2013), there are three angles that the underwriter would
consider in selecting and rating family takāful products. The first is heredity, which
includes the transmission of genetic characteristics from one generation to another.
The second includes longevity of the family, and the third is the environment in which
the family lives.
The underwriter may give a higher risk rating if the both parents have died before age
50, or if the family discloses two cases of diabetes or heart disease before age 60. The
underwriters are more likely to give a better rating if both parents reach age 70. (p. 284)
25
This assumption is not unanimously accepted by Sharīʿah scholars. The scholars
interviewed by Nu Nu Htay et al. (2013, p. 284) ‘agree that risks based on family history
are speculative and that in Shari’ah pricing should be done on a subject matter which
exists or is very likely to exist’. Although this assumption may not be speculative per
se, given the very nature of takāful risks and the probability of their occurrence, the
current application may raise a question as to whether it is Sharīʿah compliant for a
person to be burdened for the health condition of another, i.e. his/her family members.
Adding an
extra loading to
the contribution
because of family
medical history
should not be
taken for granted
or unquestionably
accepted
by Sharīʿʿah
authorities as
this may burden
people with
things they are
not responsible
for.
We argue that adding an extra loading to the contribution because of family medical
history should not be taken for granted or unquestionably accepted by Sharīʿah
authorities as this may burden people with things they are not responsible for. This
may defeat the Sharīʿah principle of personal responsibility and the financial liability
attached to it. This may open the door for some takāful operators to be too strict to
add loadings that only burden the participants. In evaluating some jurisdictions that
gave takāful operators a wide discretion to design their risk management and rating
strategy, al-Ṣaboor (2016, p. 16) warned: ‘Pricing actuaries need to have professional
flexibility, but too much leaves the door open for abuse.’
The researchers would consider this assumption unregulated and subject to abuse.
Hence the Sharīʿah compliance of such assumption is still questionable. A more
cooperative approach is needed in takāful. Discounts can still be provided by ways
approved by the actuary. These include cross subsidies among the funds, exploring
new asset classes to enhance the investment portfolios, and adjusting retention levels
to cede more risks to retakāful companies at a competitive price. Surplus could be
used to subsidize prices for participants with sub-standard risks. This suggestion
may be feasible on the ground that as long as the takāful contribution can fill the gap
between generations continuously entering and exiting the pool (the intergenerational
process), the underwriting surplus could serve the same purpose. Waqf could also be
used to subsidize rates for sub-standard risks, and zakāh could also be used for microtakāful schemes with the full adherence to the Sharīʿah rulings of waqf and zakāh. The
articulation of these concepts within the context of takāful is beyond the scope of this
research.
The Sharīʿah Compliance of Fees and Charges as Components of
Family Takāful Product Prices
All takāful regulations acknowledge the right of the takāful companies to be
remunerated via fees and charges. Since the participant pays those fees and charges
together with the tabarruʿ, they form part of the gross contribution that he has to pay,
be it a single contribution or periodic. BNM’s Takaful Operational Framework (2013)
states:
In consideration of the services rendered and costs incurred in administering the
takaful operations, takaful operators are entitled to be remunerated through fees and
charges imposed on contributions and takaful funds or through share in profit/surplus
of the takaful funds. These remunerations shall be consistent and in accordance to the
operational model being adopted.
Takāful companies charge some fees and charges relevant to the takāful policy.
There are some charges that are not embedded in the price such as reinstatement
26
fees, stamp duty and surrender charges. For investment-linked products, charges
may include initial charge, investment management charges, risk charges, switching
charges, top-up charges and partial withdrawal charges (BNM 2014). However, it
may be worth looking at one charge that did not garner consensus on its Sharīʿah
compliance. This is the wakālah risk management fee (WRMC) charged to the tabarruʿ
fund. BNM’s Takaful Operational Framework (2013, p. 23) reads:
Where takaful operators impose a fee on tabarruʿ, the takaful operators shall ensure that
the following requirements are observed:
The fee shall be allocated to and maintained in the PRF until it can be distributed as
income to takaful operators, subject to the PRF being in surplus position as described in
paragraph 10.22(d) (i) to (iii). The distribution as income shall only take place when there
is surplus in the PRF.
The clause does not explain why such a fee can be imposed by takāful operators
in addition to the wakālah fee. This fee on the tabarruʿ fund can only be recognized
as income to the takāful operator if surplus is realized. By linking this fee to the
surplus, there is a possibility that the very nature of this fee may create confusion or
lack of clarity as to its Sharīʿah compliance. It has the feature of a wakālah fee since
the main utilization of the upfront wakālah fee is to manage the risk fund, including
administrative expenses. BNM’s Takaful Operational Framework (2013) states ‘The
upfront fee is mainly used to cover commissions and management expenses incurred
in the management of takaful funds.’ The fee on the tabarruʿ fund, in the researchers’
view, may be seen as a surplus taken upfront since it depends on the realization of the
underwriting surplus distributed at the end of the financial year. This is to say that for
the takāful operator to recognize this fee as income, he shall exercise due diligence.
This entails adequate underwriting, pricing, claims management, accurate reserving
based on risk-based capital (RBC), risk management and marketing in the same way
as when planning to share in the underwriting surplus.
This fee could be perceived as a double wakālah fee on the risk fund since it is taken
to manage the risk fund, which is why the upfront wakālah fee is taken upfront. It is
also not clear from the sparse data available whether the fee on the tabarruʿ fund
includes any profit element similar to the upfront wakālah fee. A margin can be loaded
into the upfront wakālah fee to remunerate the takāful operator. This is referred to by
BNM’s Takaful Operational Framework (2013, p.21): ‘Takaful operators shall ensure that
any margin included to compensate shareholders for effort taken in managing takaful
operations is appropriate and reasonable.’
The authors are of the opinion that the fee on tabarruʿ must find a proper Sharīʿah
justification and be further regulated in terms of structure. If this fee were to cover
management expenses, then the operator is bound to disclose the difference
between the management expenses embedded in the upfront wakālah fee and the
management expenses embedded in the fee on tabarruʿ. If well justified by the takāful
operator, this fee could be added to the main wakālah fee so that no impression is
created that the takāful operator is charging a double wakālah fee.
From another perspective, the wakālah fee and fee on tabarruʿ are charged to serve two
different objectives. The wakālah fee is charged at a lower rate to allocate more to the
investment fund. This will provide the participants with higher returns on investment,
27
making the plan fairer and more attractive. The fee on tabarruʿ would relate to the risk
fund expenses such as management, actuary services and audit costs. This justification
seems reasonable and justifiable from the technical point of view. However, a few
questions may be relevant that require further investigation which falls beyond the
scope of the current research. They are as follows:
1
If the fee on tabarruʿ is used to cover the expenses such as yearly audit costs,
actuarial services and claims management, what is the initial wakālah fee used for
after allocating a portion to the investment fund?
2
If the purpose of this ‘double fee’ is to charge a lower wakālah fee to avail more
income to the participants, wouldn’t the fee on tabarruʿ reduce the investment
portion, leading to lower returns to the participants?
Another question follows: Isn’t the end result the same, i.e., whether we charge a
standard wakālah fee with an embedded fee on tabarruʿ (single fee) or charge a
lower wakālah fee and a fee on the tabarruʿ fund (two fees)?
3
With the new Minimum Allocation Rate (MAR) requirement, which will be effective
in the near future, the wakālah fee will be even lower with more allocation made
to the participants’ fund. This has prompted the takāful industry to structure
financial retakāful (Fin Re) solutions that would ultimately top up the shortfall of
the wakālah fee. This is done despite the existence of the fee on tabarruʿ, a fee
that is supposed to secure a sound matching of income with outlays. This is to say,
in the researcher’s view, the reduction of the wakālah fee to avail more investment
income to the participants may not be realized if TOs do not cope well with the
MAR requirement or fail to develop Fin Re solutions to maintain the solvency of the
funds and the sufficiency of the wakālah fee.
These questions will open new areas of research to enhance the pricing models.
Cost of Qarḍ
The present discussion focuses on the practice of the shareholders providing an
interest-free loan (qarḍ) to the risk fund. The objectives of the discussion are twofold:
the first is to investigate whether the cost of providing qarḍ is embedded in the pricing
of family takāful products, and the second is whether embedding such a cost in the
pricing is Sharīʿah compliant. It should be noted that this issue is one of the most
unaddressed issues in the takāful industry. References addressing this issue are so
scarce that the researchers have had to rely on interviews to understand the real
practice by takāful operators on the issue at hand.
Qarḍ in Islamic jurisprudence is the ‘transfer of ownership in fungible wealth to a person
on whom it is binding to return wealth similar to it’ (AAOIFI 2015, p.518). Qarḍ has been
regulated in the takāful industry and permitted by Sharīʿah authorities. It is allowed for
a takāful operator to provide qarḍ when the risk fund runs into deficit. In Malaysia, the
provision of such a qarḍ is mandatory pursuant to IFSA 2013. However, the Islamic Fiqh
Academy of Jeddah considers such an obligation as Sharīʿah non-compliant (Islamic
Fiqh Academy-OIC, 2015).
According to the Standard on Solvency Requirements for Takāful (Islamic Insurance)
Undertakings published by IFSB (2010) ‘Qard is frequently identified as a mechanism
28
for providing capital to a PRF [Participant Risk Fund] of a takaful operation.’ Some
jurisdictions have special clauses for qarḍ provision, with terms and conditions set by
the central bank. Division 6, subsection (95) of IFSA 2013 reads:
Where the value of the assets of the takaful fund is less than the value specified under
paragraph 92(1)(b), the licensed takaful operator shall provide qard or other forms of
financial support to the takaful fund from the shareholders’ fund for an amount and on
such terms and conditions as may be specified by the Bank.
The cost of qarḍ that we intend to examine in this section has two components: the
first is the expense required for the provision of the qarḍ, the offering of the qarḍ, and
its recovery from future surpluses. The second is the cost of not being able to recover
the qarḍ from future surplus. This would attract a Sharīʿah concern related to the
permissibility of pricing the probability of not recovering the qarḍ and the expenses
relevant to its provision and recovery from future surplus.
Two views exist in the market as to whether the cost of qarḍ is embedded in the price
of family takāful products:
1
The first view is that the cost of qarḍ is embedded in the price. This view was held
by one participant (P1), an actuary from Actuarial Partners, and was also advanced
by INCEIF’s textbook Takaful: Realities and Challenges. Lending some credit to this
view, Frenz and Soualhi (2010) noted that ‘many [takāful] companies do include
cost of capital charges in their profit testing models’. Since the provision of qarḍ and
not being able to recover it may affect shareholder profits, those companies would
consider it in their capital structure, paving the way for charging the participants
the cost of qarḍ.
2
The second view was held by the other interviewees, who averred that the cost of
qarḍ is not embedded in takāful products.
As for the first view, Alhabshi et al. (2012, p. 355) assert that one of the pricing
components is the ‘cost of temporary qarḍ (loan) required from shareholders to top
up anticipated takāful funds deficits arising from the product’. P1 is of the view that the
probability of not recovering the qarḍ is priced in the takāful market as this practice is
what the shareholders want when they place paid-up capital to establish the company.
According to him, when the shareholders place RM100 million to establish a takāful
company as per the requirement of the regulator in Malaysia, they make a projection of
a certain percent return, say ten percent. If the actual return is six percent, the shortfall
of the expected return—i.e. four percent—will be factored into the price which the
participant has to pay as the contribution. From a business perspective, according to
P1, the shareholders will risk losing capital if they do not adopt this pricing strategy.
Alternatively, mutuals are the most viable alternatives to takāful as they do not require
capital by shareholders. The first view may be indirectly supported by regulations that
may put the takāful operator in an uneasy situation when it considers the repayment
of qarḍ after a specified period irrecoverable. BNM’s Takaful Operational Framework
(2013, p. 27) states: ‘Takaful operators shall specify the time period over which the qard
shall be repaid. Beyond this period, the qard shall be deemed irrecoverable.’
It can be argued that the declaration that the qarḍ shall be deemed irrecoverable
means it is a capital loss that needs to be addressed by the regulators. Takāful
29
It can be
argued that the
declaration that
the qarḍ shall
be deemed
irrecoverable
means it is a
capital loss that
needs to be
addressed by the
regulators.
operators are first obligated to provide qarḍ and are then asked by the regulators to
consider it irrevocable after a certain period of time. This may provide a justification for
the actuary to price the probability of not recovering the qarḍ within the specified time
period. Another interviewee (P2) linked pricing to the probability of not recovering the
qarḍ but averred that this probability is not factored into the price.
The second view is represented by P3, P4 and P5. They maintain that the cost of qarḍ
is not priced. They did not provide any reason for their view either from an actuarial or
a Sharīʿah point of view.
The Sharīʿah issue that the researchers foresee is that factoring the cost of qarḍ in the
price would amount to ribā. The latter is featured by the fact that if x amount of qarḍ is
given, this qarḍ would have four possibilities presented in Table 6.
Table 6: Possibilities of Factoring the Cost of Qarḍ in Pricing Family Takāful Products.
Possibility
Description
Possibility 1
The cost of qarḍ is factored into the price and the qarḍ is recovered from future surplus.
Possibility 2
The cost of qarḍ is factored into the price but qarḍ is not recovered from future surplus.
Possibility 3
The cost of qarḍ is not factored into the price but the qarḍ is recovered from the surplus.
Possibility 4
The cost of qarḍ is not factored into the price and the qarḍ is not recovered from the
surplus.
Source: Authors’ own
While possibilities 2, 3 and 4 do not trigger Sharīʿah issues, the first possibility does
attract the issue of ribā as the factored amount is deemed above the qarḍ amount. The
cost is a fixed amount charged upfront but does not reflect the actual cost of providing
qarḍ. There is no disagreement among Muslim scholars that any benefit that accrues
above the qarḍ is outright ribā. However, the applicability of this established Sharīʿah
ruling might not be agreeable to all scholars. We can raise some possible arguments
as follows:
In a typical loan, the interest rate is calculated as a percentage of the loan, whereas in
the case of the cost of qarḍ in takāful, the amount of the cost is not a percentage but
rather a loading in case the qarḍ is not repaid. Another difference is that in a typical loan,
the interest rate is charged with the loan at the time of its provision, whereas the cost of
qarḍ in takāful is charged before the loan is given upfront. These two arguments could
be challenged by the fact that the majority of scholars do recognize the fact that for
certain contractual arrangements the interest rate is charged upfront and the qarḍ is
provided later, albeit in contracts with other names. This is the case of kafālah bi ujrah
(guarantee for a fee) with the right of recourse. Imam al-Shanqīṭī (2011) narrated the
consensus of Muslim scholars on the prohibition of a guarantee with a fee:
30
It is not permissible to charge ujrah (fee) on kafālah (guarantee). The reason is as follows:
if a person guarantees another person’s money or debt, and then he charges him a fee for
the guarantee, in case the debtor fails to settle his debt the guarantor would be bound to
pay on behalf of the debtor based on the requirements of Sharīʿah….That is why Muslim
scholars, both early and later, have by consensus prohibited kafālah for a fee because
[these arrangements] are means to contracts leading to ribā….thus, kafālah with ujrah is
tantamount to kafālah on debt.
The Islamic Fiqh Academy-OIC prohibited kafālah bi ujrah in its Resolution No. 12
(12/2) as did AAIOFI (2015). It is worth mentioning that the discussion on the issue of
kafālah with ujrah is beyond the scope of this paper. However, the researchers note
the permissibility of kafalah with ujrah by Sharīʿah authorities such as the Sharīʿah
Advisory Council of the Central Bank of Malaysia. The authors are of the view that the
two possible counter-arguments are not solid enough. Thus, any loan or debt whose
interest rate is charged upfront and does not reflect the actual the cost of qarḍ is
prohibited due to ribā.
31
SECTION
5
CONCLUSIONS AND RECOMMENDATIONS
After examining the pricing elements of family takāful products both from Sharīʿah and
operational perspectives, the authors have reached the following conclusions:
1
The concepts, objectives and pricing elements of family takāful products are
similar to those of conventional insurance.
2
Life and non-life insurance products have their distinct pricing mechanisms
depending on relevant assumptive risk factors, nature of risk covered and the sum
assured.
3
Prices in insurance and takāful are supposed to be adequate. They are also
supposed to be commensurate with the risk and sum covered.
4
Regulations of takāful pricing are still not very well developed in non-Malaysian
markets due to less promulgation of takāful regulations.
5
There are plenty of elements that can be used to price an insurance/takāful
product. Mortality/morbidity, investment returns, expenses, taxes, cost of capital,
lapse pattern, and withdrawal pattern are prominent pricing factors.
6
Mortality/morbidity tables are Sharīʿah compliant based on ibāḥah, maṣlaḥah,
induction and ʿurf.
7
Mathematics and the law of large numbers used to calculate the gross contribution
are the instruments (wasāil) leading to the realization of the objectives of takāful,
i.e. cooperation via mutual guarantee.
8
The investment return factored into the price is Sharīʿah compliant based on
ibāḥah, maṣlaḥah and ʿurf.
9
The investment returns assumption is not quite fair to the shareholders should there
be a loss in the investment. This type of arrangement is only Sharīʿah compliant if
the shareholders make tanāzul on their share of the investment return.
10 The time value of money is a Sharīʿah-compliant element that can be used to price
family takāful products.
11 The permissibility of sale by installment (bayʿ al-taqsīṭ) can be used as a Sharīʿah
basis for takāful pricing for technical reasons. The difference between sale and
takāful in terms of contract and objectives is well noted by the authors.
12 Two sales in one (bayʿatayn f ī bayʿah), after the two parties have settled on either
the spot price or the deferred price is permissible. Since the deferred price is
higher than the spot price, this could be used as a Sharīʿah basis for calculating
the present value of the future sum covered.
13 Some of the pricing elements such as health condition are deemed unfair by some
practitioners. Strictness in underwriting individual or group takāful is not always
deemed fair.
14 Adding an extra loading to the contribution because of family medical history
should not be taken for granted or unquestionably accepted by Sharīʿah authorities.
15 Any loan or debt whose interest rate is charged upfront and does not reflect the
actual cost of qarḍ is prohibited as it is ribā.
16 There is obscurity as to why the fee on the tabarruʿ fund is imposed by the takāful
operator since the wakalah fee is supposed to cover the administrative expenses
32
of the risk fund. The linkage of this fee to the performance of the fund (surplus) as
in the Malaysian context would make it behave like an ‘upfront surplus’.
In view of the above, the authors propose the following recommendations:
1
To ensure price fairness, the regulators should further regulate certain family
takāful products that are prone to either aggressive or conservative modes of
pricing.
2
To control the pricing of external factors such as family medical history, the
regulators should direct the takāful industry to avoid burdening the participants
with things they are not responsible for.
3
Regulation on the cost of qarḍ should be enhanced so that takāful operators
cannot embed it into the price under different names.
Overall, the study has shown that there is a need to conduct further Sharīʿah research
on the technical aspects of takāful, namely the Sharīʿah parameters of pricing various
takāful products. Further research is also still needed to better disclose the components
of pricing and the Sharīʿah compliance of excessive and unjustified loadings in family
takāful products. Finally, this study has shown that research is needed to explore
regulatory reforms with regards to the fairness and justifications of loadings, pricing,
the relationship between pricing and qarḍ, and the validity of fees and charges.
33
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