CHAPTER 8

ACTUARIAL AND
TECHNICAL ASPECTS
OF TAKAFUL
Outline
 Introduction
 Actuary
 Roles of Actuary
 Duty of an Actuary
 Actuarial Aspects
 Actuarial Techniques
 Premium Rating
 INTRODUCTION
 Takaful operators need to have the technical expertise of an
actuary to ensure the effectiveness and soundness of financial
management of the business particularly in the areas of assets
and liabilities management, product pricing, determination of
reserves and assessment of the overall risks.
 The concepts of an appointed actuary and participant’s
reasonable expectations were introduced as a part of insurance
regulations in many jurisdictions.
 Under Bank Negara Malaysia, every takaful operator
conducting family takaful business must designate a person to
be its appointed actuary stated 1st january 2017.
 What is an Actuary?
 An actuary deals with the business of insurance and
is responsible for many areas under the broad
category of insurance.
 The actuary is an individual who will analyze
important data such as mortality, sickness, injury
and disability rates and use that information to aid
those involved with insurance.
 An actuary is responsible for collecting the data to
forecast future risks and see how these predictions
will affect various aspects of insurance.
 Objective
 Objective of actuarial science is to quantify risks and
ensure fairness to all parties in the operation of takaful
 Roles of an Actuary
The actuary has the role of technical expert, ensuring
fairness and equitability in the takaful company.
Particular roles include:
Pricing/product development
Calculation of mathematical reserves
Determination of fair distribution surplus
Ensuring company solvency
Determination of appropriate retkaful program
Asset liability management
General Risk management
Development and analysis of industry and company
experience
 Duty of an Actuary
• to review a variety of documents. These documents
relate to statistical information, insurance plans, annuity
plans, pension plans, contracts and company policies.
• to determine company policy and explain such policy
and its aspects to those who will benefit from it
• do consulting work and help various companies with
their statistical needs and company policy construction.
• Actuaries may also be asked to testify as expert
witnesses in various forms of litigation.
• develop mathematical ideas and formulas so that the
proper data can be assessed. The actuary must use
his/her mathematical abilities to format equations which
will aid in the resolution of an issue.
 Actuarial Aspects
• Product design
• Product pricing
• Distribution of surplus
• Valuation and solvency test
• Retakaful arrangement
• Product must meet the actual needs of the
customer.
• Anti-selection / adverse selection
• Product must complement existing portfolio of
products and avoid triggering off ‘replacement
activity’.
 Actuarial Techniques
1. Theory of Compound Interest
o Study of growth of capital through investment.
o A compound interest arises when interest is added to the
initial investment (called principal), so that from that
moment on, the interest that has been added itself earns
interest.
o Concerned on investment returns on contributions received
from the participants.
 Actuarial Techniques
1. Time consideration in transaction
o The possibility of tabarru’ rate for monthly installment
to be higher than the annual installments.
o Actuaries incorporate the time value of money in their
calculations to assess the net value of a stream of cash
flows at a particular point in time. The point in time may
either be now or a date in the future. Determining the
value of a stream of cash flows at a date in the future
involves accumulation with interest.
 Premium Rating
 Calculation in determination of
contribution/premium basis.
 Under conventional, net premium takes into
account only of interest (or investment return) and
mortality, no allowance is given for the
administrative expenses of the life insurance
company.
 The premium includes loading for expenses and
may also include margins to cover contingencies
and profit.
 Premium Rating
 Under Takaful contract, expenses are not allowed to
be deducted from the takaful funds.
 Costs such as obtaining medical reports to protect
the fund may be charged to the fund.
 Valuation Basis
 Involve valuing the future obligations under the policy
contract.
 Making assumptions as to the future mortality risk,
investment return and expenses.
 Minimum valuation basis is stipulated under the
insurance regulation and Takaful regulation by Bank
Negara. Eg: net premium valuation method with
mortality table A2429 and assuming an investment
return of 4% per annum.
 Able to use other valuation basis as long as it is higher
than the minimum basis.
 Valuation Methods
 Pureor Net Premium Method
 Gross or Office Premium Method
 Bonus Reserve Method
 Net Premium Method
 It involves calculating a present value for the contractual
liabilities of a contract, and deducting the value of future
. Both contractual liabilities, and future premiums in this
calculation allow only for mortality and interest.
 The key with a net premium valuation is that the
premiums being valued are theoretical measures - they
make no reference to the actual premiums being charged
by the insurer.
 This technique is a well established actuarial valuation
method, that became popular because of its simplicity,
consistency, and ease of calculation..
 Gross Premium Method
 The gross premium method uses the amount of
contractual premiums payable and includes explicit
assumptions for interest and discount rates, mortality
and morbidity, persistency and future expenses.
 These assumptions can vary by contract type and
reflect current and expected future experience.
Explicit provision is made for vested bonuses and
explicit allowance is also made for future regular
bonuses, but not terminal bonuses.
 Bonus Reserve Method
 Similarto Gross Premium Method but with an
additional item to be valued as a liability, which is
the future bonus that is expected to be declared.
 Purposes of Valuation
 Test solvency
 Check the adequacy of the premium scale.
 Settle the terms of a merger or transfer liabilities.
 Determine the distribution of surplus.
 Distribution of Surplus
 Surplus means anticipated profit as profit will not
be known until the transaction is completed.
 Valuation method is applicable to Takaful except
the treatment of expenses.
 Separation of investment or saving portion from
the portion of covering risks.
 Retakaful & retention
 Retakaful is a technique to reduce the financial
instability of the takaful fund arising from claim
fluctuation.
 Financial instability may arise due to the non-
homogeneous mortality risk or the non-
homogeneous sum covered.
 Making takaful arrangement for the amount in
excess of the takaful operator’s retention limit
would make the risk become more homogeneous.
 Determining Retention Limit
 Shareholders’ capital and free or contingency
reserves
 Size of the existing portfolio of business
 Type of risks underwritten
 Distribution of the sum covered and ages.
 Conclusion
 Actuarial techniques are equally applicable in the
takaful business.
 The fundamental feature of takaful is the separation
of accounts between the saving portion of the takaful
contribution from the portion to cover risks.
 Another major difference between conventional and
takaful is in the treatment of expenses.