Transcript ST 2003 : OPERATIONAL ASPECTS OF TAKAFUL MODULE

Operational and Actuarial
Aspects of Takaful
 Takaful Contracts and Underwriting
LEGAL DOCUMENTATION OF TAKAFUL
CONTRACTS
 Legal documentation of takaful contracts usually contain the
following :

Provisions – parameters of the contract

Clauses – specific or special conditions of events

Warranties - preconditions

Exclusions – non-claimable contingencies
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(a) Provisions :
(i) General Provisions :

The contract

Incontestability

Modification

Freedom from Restrictions

Age and Sex

Proof of Age

Currency and Place of Payment
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(ii) Contribution Provisions
 Certificate Years and Anniversaries
 Payment
 Change
 Grace period
 Contribution Pause
(iii) Fund Provisions
 Shariah –Approved Funds
 Valuation of Funds
(iv) Ownership Provisions
 The owner
 Change of Ownership
 Assignment
 The Nominee
 Revocation of Nomination
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(b) Condition, Clauses, warranties and Exclusions
 Conditions relates to what is not covered, what is covered and
under what circumstances; there are numerous clauses
contained in contracts of different kind; the following some of
the important clauses that a takaful company should
automatically incorporated :


Reinstatement Value Memorandum;
Special Provision
(c) Types of Takaful Contracts
 Different takaful companies in different countries use slightly
different wordings for their contracts; in fact takaful companies
in the same country use different contract wordings because
these companies used different contract such as Mudharabah,
Wakalah and others ;
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 A main contract is a contract that is a stand-alone and
complete contract by itself; e.g. Takaful Education Certificate ;
 A supplementary contract does not stand by itself, it is usually
attached to the main contract; e.g accident Supplementary
Certificate
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PRINCIPLES OF TAKAFUL CONTRACT
 The basic formalities in a commercial contract there must be :
(i) The subject matter (al-Ma’qud ‘alaih);
(ii) Contracting parties (al-Muta ‘aqidayn)
(iii) Consideration (al-’Iwad al-Mutaqawwim)
(iv) Terms and conditions (Shurut)
(v) Ijab and Qabul
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 Other principles are:
(i)
Insurable Interest ;
(ii)
Utmost of Good faith ;
(iii)
Indemnity ;
(iv)
Subrogation ;
(v)
Contribution ;
(vi)
Proximate Cause ;
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 Insurable Interest :
 In a broad sense an insurable interest implies some
relationship between the insured and the event insured
against, so that its occurrence would result in injury or loss;
without this principle the contract can become a wagering
agreement which is not in line with Shariah requirement ;
generally, an insurable interest must exist when the
certificate / policy is issued and at the time of loss except in
the case of marine insurance when insurable interest is
required only at the time of loss, and in life insurance when
insurable interest is required only at the inception;
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 Utmost of good faith :
 Utmost of good faith is an obligation of the insured to
disclose material facts; a material fact is a fact that would
influence the judgement of a prudent underwriter in deciding
whether to accept a risk for insurance and on what term; the
proposer has a duty to disclose material facts at inception,
at renewal and at other instances when the status of the
contract has changed ; a breach by the insured makes the
contract null and void at the insurer’s option; breaches can
happen
through
concealment,
non-disclosure,
misrepresentation;
 From the Shariah viewpoint the principle of utmost of good
faith is in line with Islamic teachings as contained in a hadith
related by Hakim b. Hazimi;
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 Indemnity :
 Simply stated, indemnity means reimbursement for actual
loss sustained; it is a principle designed to place an insured
in the same financial position after a loss that existed
immediately before the loss; an exact financial
compensation may be denied by an inadequate sum
insured, indemnity limit, excess or franchise; this principle
cannot be applied to valued policies such as life insurance
or personal accident cover;
 Subrogation :
 The right of the company who has granted an indemnity to
take over any recovery rights the insured may have against
third parties liable for the same loss; a subrogation condition
in the certificate / policy enables the company to take action
in the insured’s name before paying the claim; subrogation
may arise under contract, tort or statue;
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 Contribution :
 Under the contribution principle, the insured may insure as
many times as he wishes and with as many different insurers
as he wishes, however, in the event of loss each company
pays a suitable proportion of the loss either in proportion to the
sum insured or in proportion to their respective independent
liabilities; since under the indemnity principles, the insured
cannot recover more than his/her financial loss, therefore, in
the event that two or more insurers do face liability for the
same loss, the paying company is entitled to recover from the
other insurers by way of contribution, its share of the loss;
 Proximate Cause :
 Under this principle, there must be a cause and effect
relationship between the peril insured against and the resulting
loss; the insurer is liable only for loss proximately caused by
an insured peril not loss caused by uninsured peril; the insurer
will be liable if the sequence between an insured peril and the
loss is unbroken;
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PRINCIPLES OF UNDERWRITING
 Underwriting is the process of assessing and classifying the
degree of risk of an applicant and of selecting participants;
by doing so, a takaful operator can controls the quality of
new and renewal business that they write;
 The purpose of underwriting is to develop and maintain a
profitable portfolio of business and for underwriting to
achieve its purpose, takaful operators must avoid adverse
selection;
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(a)
FAMILY TAKAFUL UNDERWRITING
 In family takaful the following are underwriting components
and process that need to be addressed :
(i)
(ii)
(iii)
(iv)
(v)
(vi)
Agent’s report
Preliminary processing
Information gathering
Underwriting factors
Underwriting manual
The numerical rating system
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(i) Agent’s Report :
 Since agents are those who deal directly with potential clients,
their opinion and judgement becomes an essential part of the
underwriting process;
 All takaful agents are provided with application forms from
which pertinent information about the applicant can be gathered
for the underwriter to make a decision; agents must make sure
all questions are answered fully and the description of any
health problems are described exactly and completely; when
health problems are noted, additional information need to be
furnished such as :





Medical illness;
Date and duration of an attack or episode;
Date of first attack;
Frequency of episodes;
Date of last attack;
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




Full names and addresses of doctors visited and dates of
such visits;
Dates of hospitalizations and name of hospitals;
Effects and complication of the problem;
Type of treatment or medication;
Date of last treatment or medication;
 Agents are expected to report to underwriters anything about
the applicant that is not reported in the application form;
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(ii) Preliminary Processing :
 An application will be assigned a proposal number to be
used for control purposes and also for the certificate / policy
number ;
 Make sure that the application and supporting documents
are complete; if a national database is available, make a
search about applicant from other company’s records;
 Depending on the size of the operator, the underwriting
decision can be made at a branch level or directly to the
head office;
 An underwriter will normally use the numerical rating process
to rate the risk concerned ;
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(iii) Information Gathering :
 Primary source of underwriting is the takaful application form;
however other information's are also required for additional
information and verification and this include the Attending
Doctor’s Statement (ADS) ;
 The application form has two or three sections; section (I)
contains questions pertaining to details of the applicant and the
takaful plan applied; section (II) includes questions about the
health history of the applicant which may include the applicant’s
(a) height and weight; (b) current and past health problem;
(c)recent visits to doctors; (d) reasons for the visits;
 Based on the information, the underwriter can accept, reject or
accept with modification or KIV of the application; a underwriter
can classify an application as a non-medical case or call for a
medical examination;
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 For a non-medical case, normally the participant ought to
satisfy the following criteria :



Applicant is younger than a certain age;
Applicant is applying for less than a certain amount of
sum covered;
Has indicated no health problem;
 For a medical case, the applicant must undergo some kind of
medical examination such as, pulse rate, blood pressure,
blood sugar, heart size, heart sounds, blood tests,
electrocardiogram; the type of medical examination required
depends on the applicant’s age, amount of cover requested,
the agent’s report and answers from the applicant’s form; the
takaful underwriter obtained his request for information mostly
from the ADS;
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(iv) Underwriting Factors :
 Apart from age, underwriting factors comprises of medical and
non-medical risk factors; medical risk factors include (a) build,
(b) other physical condition, (c) medical and family history;
 As mentioned above an application can be accepted at
standard rates, loaded-up, postponed or KIV; when the
application is loaded-up the new rates, terms and conditions
will be sent to the applicant for his acceptance;
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 The following are the medical risk factors :
 Build -
Takaful underwriters usually use the body mass
index (BMI) method or the girth to buttock (GTB)
ratio; BMI more than 25 or GTB more than 1 is
considered obese;
 Other physical condition - presence of cardiovascular
diseases, high blood
pressure, kidney disease,
chest disorder, cancer or
diabetes can result in above
– average mortality;
 Medical and family history - applicant’s health history may
also signify an above
average mortality risk;
–
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 The following are some of the non-medical risk factors :
 Occupation
 Avocation or hobbies
 Lifestyle
 Environment
 Foreign residence or travel
 Insurable interest
 Anti-selection
 Personal finances
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(v) Underwriting Manual
 The
underwriting manual provides underwriters with
background information on underwriting impairments and
serves as a guide to suggested underwriting actions when
various impairments are present; the underwriting manual
usually contains the following :

Anatomy and physiology – discusses the main body
systems, their structure and interrelationship the main
body systems includes body cells, the muscular-skeletal
structure, the cardiovascular system, the respiratory
system, the digestive system, the genitor-urinary system,
the nervous system and the endocrine glands;
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
Disorders and Diseases – this section covers the nature
and function of the heart, investigation of heart diseases,
various diseases associated with the heart and their
underwriting implications; this includes main causes of
hypertension, diseases of the arteries, diseases of the
respiratory system, treatment of metabolic disorders, and
all other diseases of the various systems of the human
body;

Assessment of Extra Risks – this section covers the nature
of extra risks, methods of treating under-average lives,
imposition of additional premiums or restrictions on cover
provided and the mechanism of loading;
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
Financial Risk Assessment – here the main objectives of
financial underwriting including anti-selection and fraud,
the range and underwriting of personal covers, the range
and underwriting of key person insurance and business
loans cover and the evidence required;

Underwriting Life and Disability Risks – this section covers
social and legislative constraints on underwriting practice;
it covers the mechanic of application processing, structure
of the underwriting department, role of the Chief Medical
Officer, requirements for medical evidence and the like ;
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
Mechanics of underwriting – this section covers the
structure of proposal forms, supporting medical evidence
with particular reference to the ADR, medical examiner’s
report, questionnaires, basic concepts of life
underwriting; it also includes how anti-selection,
numerical rating system, classification of risks,
assessment and ratings as well as acceptance terms;

AIDS Risks : in this section the discussions involved HIV
virus, modes of transmission, treatment and underwriting
strategy and development of underwriting practices for
HIV and AIDS ;
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(vi)
The Numerical Rating System – it is a quantitative
method of
classifying risks ; it assumes that (a)
medical and non-medical
factors affect the mortality
of a risk, (b) the impact of each of the factors can be
determined by a statistical study of people affected by
these factors, and (c) a numerical value can be
assigned to each factor according to its impact in
mortality ; the principle of the numerical rating system is
that a normal case is rated at 100 of the normal mortality
and points are added or subtracted in accordance to
information revealed by the participant in his / her
application; once the case is fully rated, the participant
can be accepted as a standard case, or a substandard
case or an unacceptable case ;
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(b)
GENERAL TAKAFUL UNDERWRITING
 For general takaful, the underwriting process will vary
depending on the class of takaful being considered ;
 Since the early days, underwriting for general insurance
depended largely on gut feel; however, over the years a more
accurate method had been developed and many of the takaful
operators used these experience as their guidance ; many
also resort to tariffs in order to prevent acute losses ;
(i) Tariffs :
 Due to the absence of sound scientific and mathematical basis
for some general classes of takaful, there was a need to turn
to tariff; takaful industry has adopted the use of tariffs just like
their insurance counterpart; in Malaysia tariffs are applied to
motor and fire coverage;
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 Underwriting guides are either structured along major lines of
business or classes of business; it provide for properly
structured decisions, ensure uniformity and consistency and
incorporates claims experience; the underwriting guide can be
for a single sub-class or for several classes;
 Given the underwriting guides, underwriters should still follow a
structured decision-making process to ensure that ultimately
there is surplus in the takaful fund; the process are as follows :

Gathering information;

Analyzing and evaluating alternatives;

Selecting an alternative;

Implementing;

Monitoring;
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 Underwriting
also refers to the process of selecting
participants by recognizing and evaluating hazards; hazard
can be physical, moral, morale and legal in nature;
 The following factors will determine whether a risk should be
accepted, the cover should be limited, the terms amended or
the case rejected;
 Types of cover – peril covered, basis of settlement;
 Occupation
 Protective factors
 Identity
 Claims experience
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 Takaful underwriter should limit the cover, if the sum covered is
over the amount of potential liability; underwriters can amend
the terms of contract by excluding certain risks or increasing
deductibles; underwriters should try to make modifications so
as to allow the submission to be acceptable;
 Compared to insurance, takaful underwriters should also
consider occupation of participant which are prohibited by
Shariah, where the operator shall not underwrite these risks;
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(VI)
TAKAFUL CERTIFICATE / CONTRACT PROCESSING
 General takaful underwriting slightly differs from family takaful
underwriting in that the underwriting of the various classes of
general takaful may be initiated either directly by the
underwriter or through agents or brokers; they submit the
application form, broking slip, quotation slip or tender
documents as the initiating documents providing the relevant
information and terms of the risk.
 The content of the application documents with regard to the risk
and the terms specified by the applicant or the broker are then
subjected to the following checks :

Ensuring that the application form and related documents
are complete;

Review the risk involved;
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
Whether a survey is required to determine the terms and
clauses;

Whether special rating is required;

Checking underwriting guide, cession or treaty;

Past claim experience of the applicant / participant /
broker;
 From the review relevant facts are forwarded to Senior
management for consent to proceed; if risk is rejected, a letter
or a fax will be sent to the applicant; if accepted and risk need
to be surveyed, the underwriter will request for a survey to be
done either in-house or by professional surveyors; once
survey performed, compare survey report with the information
disclosed in the application;
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 When risk is accepted, issue a cover note; nowadays
however, takaful operators issue takaful certificate
immediately; for motor takaful cover note are issued
electronically;
 After the issuance of the takaful certificate, the underwriter
must consider the necessity of facultative re-takaful, if this is
required, the underwriter will request for the cover from the retakaful department;
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 Below is a typical general takaful certificate issuance procedure :
Application made through
agents, brokers, direct or
tender
retakaful
Check the
documents
Yes
Is a survey
required
No
Yes
Do a survey
Yes
Can the risk be
accepted
Issue
cover note
Is retakaful
needed
No
Decline letter
Issue
certificate
No
Stop
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 The issuance procedure can be summarized as follows :

Job assignment

Review Document Submitted

Allocated work

Enter Data and Indicate Mode of Printing

Check for completeness and Correctness

Issue and Prepare Policy or Endorsement Documents

Sort and Dispatch
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 Examples :
(a)
Fire Takaful Rate :
Risk
Risk Address
Sum covered
Occupation
Construction
Rate
:
:
:
:
:
:
Menara Hang Tuah
Jalan Arau, Taman Emas, Kuala Lumpur
RM 30 million
Office-space
Class 1
0.1 % ( Issued by PIAM Technical Rating
committee)
Takaful Contribution :
RM 30,000,000 x 0.1 %
= RM 30,000
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(b)
Motor Takaful :
For Motor Policy issued in west Malaysia the Tariff is :
Capacity
(RM)
* (RM)
Comprehensive Third Party
Cover
(RM)
Act Only
Not more Than 1400
225.20
72.00
60.75
Not more than 1650
251.50
81.00
67.50
Not more than 2200
277.90
90.00
76.50
Not more than 3050
304.20
99.00
85.50
Not more than 4100
330.50
108.00
92.25
Not more than 4250
356.80
117.00
99.00
Not more than 4400
383.20
126.00
108.00
Exceeding 4400
409.50
135.00
114.75
* RM 26 is added to every RM 1000 for values more than RM 1000
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Sum insured :
Made & Model :
Age of car
:
Capacity
:
NCD
:
RM 50,0000
Proton wira 1.5
4 years
1468 c.c
25%
Comprehensive Cover :
(a)
(b)
(c)
1,525.00
(d)
(e)
First RM 1,000
Next RM 49,000 (26x49)
Basic premium
RM 251.50
RM 1,274.00
RM
25% NCD
Premium Paid
RM 381.37
RM 1,144.13
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Third Party Cover :
(a)
(b)
(c)
(d)
(e)
Basic Premium
RM 81.00
Loading 50%
RM 40.50
Gross Premium
RM 121.50
25%
RM 30.38
Premium Paid
RM 91.13
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