Transcript Operational and Actuarial Aspects of Takaful Product Design and

Operational and Actuarial
Aspects of Takaful
 Product Design and Pricing
(I) THE APPLICATION OF SHARIAH PRINCIPLES IN
PRODUCT DESIGN
 Actuaries in designing takaful products, need to be at least aware of
the core principles which embody the shariah. The spriritual basis of
the shariah is grounded in the shariah realizes benefits (maslahah) to
mankind as a manifestation of that mercy;
 This principle of realizing benefit to the individual and the Community
is a fundamental value which runs throughout the entire shariah. The
benefits which the shariah sets out to achieve are graded in three
categories in a descending order of importance, i.e.,:
 Daruriyyat masalih (essential);
 Hajiyyat masalih (Complementary);
 Tahsiniyyat masalih (embellishment);
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 A shariah complaint product like takaful should embody the same
objectives as the Shariah itself. For example, the essential objectives
of the Shariah are five such as:
 Preservation of Faith
 Preservation of Life
 Preservation of Lineage
 Preservation of Intellect and
 Preservation of Property
The five essential objectives are essential to normal order in
society and the neglect of it will lead to chaos and the collapse
of normal order in society;
 Therefore, in coming up with new product , the consideration of a
proposed product idea under the Shariah is a vital step, e.g., takaful
product offering abortion benefits;
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(II)
MARKET IDEA SCREENING
 In a typical product development process, there will usually be the
following steps:

Product Development Process
Idea Generation
Idea Screening
Product
Development
Modify Product
Shariah Advisory
Board
Product
Launch/Roll Out
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 Compared to tangible products, takaful are legal contracts, therefore,
contracts such as this will be viewed both by the Shariah Board as
well as the court system; takaful contracts deal with risks which are ‘
long tail’ in nature;
 The management of takaful operator therefore needs to carefully
evaluate risks that the takaful fund will be exposed when the new
product usually involves the underwriting, claims and actuarial
departments.
 The risk analysis will include;
 Is the risk controllable
 Is the risk something that can be forecasted?
 Is the risk something the management can handle?
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 When new products could expose the takaful fund to high coverage
amount, management needs to take precautionary measures
through appropriate wording of contract terms and/ or risk
management measures such as underwriting and takaful
arrangements. Management should also need to evaluate the
attractiveness of such plans in terms of profit potential and
contribution volumes as opposed to cost (use of expertise, use of
new systems to manage new product)
 The takaful operator also needs to evaluate product viability from the
perspective of safeguarding the solvency of the takaful fund; even
though the operator is not guaranteeing the benefits, its acts as a
fiduciary acting in the best interests of the participants; takaful
products should not be launched which serve to maximize takaful
operator profit at the expense of endangering the solvency of the
takaful fund;
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 The actuary’s role in providing financial numbers reflecting market
potential and risk exposures is valuable to a management wishing to
objectively screen and identify products exhibiting the best return to
both participants and shareholders alike.
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(III) PRODUCT COMPLIANCE WITH SHARIAH
/ REGULATORY GUIDELINES
 In compliance to shariah and the regulatory requirements, checks will
be carried out at several points in the pathway from idea generation
to product roll-out.
 These checks include:
 Preliminary checking on product concept;
 Once approved development of product may progress;
 Once product details and contract wordings are ready, submit it to
Shariah Advisory Board for approval;
 If not approved, products need to be amended;
 Full disclosure and transparency of product features includes point of
sale material and marketing brochures;
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 At the same time similar checks to meet regulatory requirements is
also being made and this includes:
 Preliminary submission of proposed contract wordings;
 Marketing literature;
 Benefit structure;
 Contribution rates;
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(IV) TYPICAL TAKAFUL PRODUCT DESIGN FEATURES
 The product features would include:
 Contingencies covered;
 Supplementary benefits covered;
 Wording of takaful contract;
 Profit sharing arrangement;
 Expense / benefit structure;
 Degree of risk assessment;
 Cancellation / Extension / Renewal features;
 Benefit Limitations / Exclusions;
(a) Contingencies Covered
 For family takaful business, the main contingencies covered are risk
of death, disability and other related contingencies such as diagnosis
of critical illness, hospitalization;
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 For general takaful business, the contingencies are many and
varied;
 House owner Takaful – Physical damage to building and
contents, due to fire, explosion, theft;
 Comprehensive Motor Takaful – Physical damage to car as well
as liability to third parties;
 Personal Accident Takaful – Contingencies covered death,
disability or minor bodily injury
as well as hospitalization
expense;
 Medical Takaful – Hospitalization expense due to any cause;
 Marine cargo takaful – Financial loss arising from loss or
damage of goods, stock or equipment
while in transit;
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(b) Supplementary Benefits
 These are extra benefits added on the basic core benefit of the plan;
it do not come free ; it would require extra contribution;
 For example, medical takaful plan provides emergency and
evaluation services; hospitalization and disability coverage to a basic
family takaful benefit
 It is optional in nature;
 Coverage endorsement in general takaful contracts may be
considered the general takaful equivalent of supplementary benefits
in family takaful.
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 Wording of Takaful Contract
 The nature of contract wording could be “tight” or “loose” in relation to
other similar coverage products in the marketplace;
 The following are examples of the wording of a Total and Permanent
 Disability (TPD) coverage under two separate contract;
(1) “Total and Permanent Disability (TPD) is disability such that the
participant is unable, at the time the disability commences or at
anytime thereafter to engage in occupation for wages, compensation
or profit provided however at such disability must last for a continuous
period of not less than six (6) months.

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(2) “Total and Permanent Disability (TPD) is disability such that the
participant is unable, at the time the disability commences or at anytime
thereafter to engage in his or her own occupation provided however
that such disability must last for a continuous period of not less than six
(6) months”.
 The first definition might require the participant to be practically
bedridden in order to qualify; this definition would be considered “tight” ;
number of disability cases would be narrowed down to just a few very
severe disability cases; thus probability of paying disability benefits
would be lower and hence risk contribution should be lower;
 Under the second definition, the like hood of a participant qualifying for
such a benefit would be much higher as even mild forms of disability
may tender the participant incapable of engaging his or her own
occupation.
 Comparing the two above definition, it would be reasonable to expect a
takaful contract covering TPD benefits under the ‘any occupation/
definition would require a lesser contribution compared to that of ‘own
occupation’;
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(d) Nature of Profit Sharing Arrangement;
 In many cases, the takaful contract may permit sharing of investment
profit and underwriting surplus;
 Issue of sharing of underwriting surplus is still a moot point for many
Shariah scholars; many operators especially in South East Asia have
introduced products; which prominently features surplus sharing as a
key feature of product design; sharing of investment profit and
underwriting surplus with participants is done regardless of the
operational model;
 The ratio for the investment profit between operator and participants
could be say 50:50 or 70:30 or any other ratios agreed.
 The underwriting surplus would similarly be split on some pre-agreed
ratio spelt out in the contract; the challenge to the actuary in this
instance is first to determine the emergence of underwriting surplus
and to determine its allocations;
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(e) Expense / Benefit Structure
 The way benefits are structured are left to the imagination and creativity
of takaful operators so as to market products competitively; the
actuary’s role is to make sure that benefits are structured fairly to
participants, economically viable and operationally feasible;
 There is no fixed way in which provisions for expenses are reflected in
the pricing of the product; in a mudharabah model, operators expenses
are recovered from direct charges to the takaful fund or from operators
share of investments profit and underwriting surplus; in a wakalah
model, an explicit fee will be used to recover operator expenses;
 The variations in allocating and charging expenses to the participant /
takaful funds are many and really depend on the operator:
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 Charge upfront wakalah fee for commission and management
costs;
 All management expenses are absorbed by the takaful operator;
 Commission and management expenses are borne by takaful fund
on an incurred basis;
 Upfront wakalah fee as percentage of tabarru’ charges;
 Regardless of the underlying operational model, the anticipated
expenses of marketing and operation is reflected in the product pricing
process either directly in the form of an explicit expense margin or
provision embedded in the contribution formula or implicitly in the cash
flow tests carried out to assess the financial viability or profitability of a
particular takaful product.
 Expenses generally consists of:
(i) Variable costs – marketing costs, agency commissions
underwriting expense;
(ii) Fixed costs – fixed asset depreciation, staff salaries, overheads;
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 In assessing financial viability of the product from operators
perspective is the speed and magnitude the operators expenses and
other sunk costs are recovered over time;
 Tests of acceptable profitability (profit tests) to the operator as well as
solvency within takaful fund are carried out by the actuary using cash
flow models which are simplified representative s of the takaful fund
over time;
 In coming suitable contribution rates for a new product, the actuary
need reliable data which would indicate the operators existing and
projected costs of operating the business.
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(f) Degree of Risk Assessment
 In maintaining the principle of fairness, participants need to be
assessed for the degree of risk that is potentially brought into risk
pool through the process of risk assessment or risk underwriting;
 It is fair and logical to expect that the lesser risks that a covered
participant or asset brings into the risks fund the lower the
contribution rate should be; likewise participants bringing in higher
risks should be charged a higher takaful contribution;
 A takaful product may be differentiated from the competition by
simply either;
 Having more extensive risk selection;
(low contribution for those who qualify)
 Reduced risk selection (simplified underwriting)
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 Example of case 1: Participant are charged super low contribution if
he undergo and passed medical tests beginning
of each year (say 5 years);
 Example of case 2: Issuance to a family plan made immediately
upon answer 3 or 5 questions on the state of
health of the participant;
(g) Cancellation / Renewal Features
 Many short duration products (medical plans) issued on an annual
renewable basis would be subject to fresh risk selection; in such
cases, operator may typically reserve the right to decline renewals or
subject the renewal to an increase in contribution.
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 Non renewal of contracts is effectively a cancellation of coverage;
hence, the value of continuity of coverage may be very valuable to a
participants who suffers deteriorating health; thus, continuity of
coverage may be a feature which can be used to advantage by
operators; to fill such needs, medical takaful plans may for example
be issued which offer guaranteed renewability of coverage up to
some maximum age (e.g., 65 or 70 years)
 From a product pricing perspective, care needs to be taken in pricing
such guaranteed renewable plans; healthy participants would be
more likely to drop out, leaving the takaful fund inhabited by not so
healthy participants; this phenomenon is known as cumulative antiselection;
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(V) FULFILMENT OF PARTICIPANTS REASONABLE
EXPECTATIONS (PRE)
 Be an intangible product participants should be clear as to what they
are entitled to under the contract should misfortune strike;
 In conventional insurance, a concept in ethical business practice has
developed of meeting the reasonable expectations of a participant
known as PRE; therefore by virtue being Shariah complaint, takaful
operator meeting the PRE requirement is already an in-built
mechanism;
 As such, contract documentation and especially marketing literature
has to be clear so as to what the participant can reasonably expect in
benefits from the takaful fund should the participant submit a claim.
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 The operators task in meeting expectation is two fold:
 Firstly , the takaful operator needs to ensure that the pricing and
design of takaful products is done on a basis that anticipates
fulfillment of the product promise under all reasonable scenarios.
 Secondly, care needs to be taken in marketing the product so that
participant expectations are properly managed. Participant
expectations are very much influenced by the actions of personnel
marketing takaful products and the literature made available to
participants.
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(VI) THE ESSENTIALS OF PRODUCT PRICING
(a) Introduction
 Product costs should not just reflect the ‘raw material’ cost of the risk
exposures to be covered in the contract but consideration of everything
else that goes with the product. The various factors that need to be
considered include:
 The risk contribution required to cover actual risk exposure only;
 Marketing expenses;
 Opportunity cost of capital needed to be retained in the takaful fund to
support the risks covered in the proposed product;
 Profit expectations of takaful operator;
 Retakaful expenses;
 Anticipated investment profit rate of return to be earned from
investment of takaful fund assets;
 The last factor is especially important for long term takaful contracts; it
will effect the takaful contribution amount due to the greater effect the
opportunity cost of capital will have on evaluating cash flows a long time
horizon.
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 The actual contribution amount that will be required from the
participant is called the gross contribution (GC) where;
GC = RC + λ +E
 Where;
 GC = Gross contribution
 RC = Risk Contribution
 λ
 E
= Safety loading
= Expense Margin
 The formula is generic, regardless of operational model used;
 Example:
 If the expense margin could 25% of the gross contribution (10%
provision for agency commission and 15% for management
expenses) and assume not safely margin, λ = 0
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Therefore;
G = RC + λ + E
= RC + 0 + 0.25 GC
0.75GC = RC
GC = RC / 0.75
 If safety loading is placed at 10% of gross contribution;
Then;
GC = RC + 0.1GC + 0.25GC
Therefore;
GC = RC/ 0.65
 Example : A takaful scheme is proposed to cover a group of
construction workers. The risk contribution is set for
RM150,000. Calculate the gross contribution, where the
safety loading is 5% of gross contribution and marketing
and management expenses is 15% of gross premium.
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GC
= RC + λ + E
= RC + 0.05GC + 0.15GC
= RC + 0.20GC
Therefore;
GC = RC / 0.8
Since RC = 150,000
GC = 150,000 / 0.8 = RM187,500
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(b) Derivation of the Risk Contribution
 Risk contribution is defined as the expected ultimate cost in claims of
the risk being covered; and includes the safety loading which is an
allowance for the degree of uncertainly attached to the ultimate
claims cost.
 The factor that will most affect the risk contribution are:
 Claims Frequently;
 Claims Severity;
 Both claims frequently and claims severity may be variable and the
observed claim outcomes for each may be subject to some
postulated underlying stochastic process. A technically correct
computation of the risk contribution would thus need to incorporate
the variability in both claims amount and number of claims occurring.
It is also important to note that claims frequency and claims severity
need to be treated separately as each are affected by different
factors.
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Where ;
n = average or expected no. of claims, and
m = average or expected amount per claim
(c) Claims Frequency
 Claim frequency very simply refers to the probability of claim
occurrence. One obvious way to measure the probability of claims
occurrence is to compare the number of claim submitted to the
number of people exposed to the risk of the claim
Example:
A workforce of 1000 gold miners in Mauretania. Below is
the number observed that have been admitted into
hospital.
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No. of hospital admission
0
1
2
3
4
No. of gold miners
605
305
76
13
1
1000
Total number of hospital admission = 500
Population exposed to risk of hospitalization = 1000
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Therefore, the average yearly claims frequency is
= 500/1000 = ½, half a hospital admission per miner per year.
(one out of every two miners will make a visit
to hospital)
If a takaful scheme were to be set up to provide hospitalization
expense coverage and the gold mine management wished to fix a
hospitalization takaful benefit of $100 per hospital visit, what should
the fair contribution amount be for each gold miner covered under
the takaful scheme
The Risk contribution RC = n x m
From above, RC = ½ x 100 = $50
 In many practical cases, the estimation of claims frequencies will be
hampered by lack of appropriate statistics.
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(d) Usage of Statistical Distribution Patterns with Known Formulae
 Based on limited or even unavailable data, it is often the case that
practical calculations for purpose of takaful applications (such as
contribution rates) need to be done with reference to assumed
underlying claims frequency pattern.
 For this purpose one of several statistical distribution patterns with
known formulae would be used as the assumed statistical model for
claim frequency; statistical distributions such as the Poisson distribution,
Bionomical distribution and the Normal distribution may be used;
 For the Poisson distribution which is frequently used to represent the
pattern of claims frequency, have the following characteristics:
Average of claim frequency = λ
Variance of claim frequency = λ
Probability of n claims occurring = (λn e -λ) / n!
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 The process of formulating contribution rates needs to be prospective
in nature, since takaful benefits are paid in the future;
 Although
historical data provide some guidance on trends in claim
frequency, ultimately some judgment need to be exercised due to
changes in the environment and the portfolio of risks;
 Greater care needs to be taken in estimating claims frequencies for
general takaful products as compared to family takaful products, unlike
family takaful, in general takaful multiple claims are possible in the
same year and in addition, the contract would typically cover range of
different risks or perils.
(e) Claims Severity
 Claim severity simply refers to the probability of claims size occurrence.
As in the case estimating claims frequency, reliable statistics can be
difficult to obtain and resource will often need to be made to assuming
a Statistical distribution with a known formula as the underlying
statistical model.
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 Even in cases where sufficient claims statistics may exist, the use of
the statistical distribution that fits the observed claims data may be
preferable because:
 It may be more convenient as the rates are easier to complete;
 Working on related actuarial tasks become easier with a formula
based statistical distribution;
 Inferences about the underlying behavior of participants and the
covered risks may be easier to discern with a formula based
statistical distribution;
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 Example : Consider the same workforce of 1,000 gold miners in
Morotania; below are their hospital cost statistics:
Hospital Cost per admission
< 4000
4001 - 8000
8001 - 12000
12,0001 – 16,000
16,001 – 20,000
20,001 – 24,000
24,001 – 28,000
28,001 – 32,000
No. of admissions
280
130
40
25
14
7
3
1
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What is the average hospitalization cost per admission for this
group?
Total Hospital Cost = 2000 (280) + 6000 (130) + 10000 (40)
14000 (25) + 18000 (14) + 22000 (7) + 26000
(3) + 30000 (1)
= $2,604,000
Since, there are 500 hospital admissions in the year;
Average Hospitalization Cost = Total Hospitalization Cost /
number of admission
= 2,604,000 / 500
= $5,208
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Therefore the appropriate risks contribution to be charge to each
participant is;
RC = n x m
n = ½, m = 5208
Therefore;
RC = ½ x 5208 = $2,604
(f) The Importance of Understanding the Claims Severity Pattern
 In working on claims amounts statistics, the underlying claims pattern
and not just the average claims figure needs to be carefully looked
at; an example of where care needs to be taken in studying claims
severity is in considering the extremities of the observed data.
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 In the above example, the distribution of claims amount is skewed to
the right with no claims exceeding $32,000, this does not mean there
will be no claim exceeding $32,000.
 In this instance the actuary in conjunction with professional claims
and underwriting managers need to work out an allowance or
provision for such contingency;
 The distribution of claim amounts due to its highly skewed nature do
have great influence on the pricing; getting an accurate picture of the
tail is a challenge because of the scarcity of data; in this type of
position operators with a small takaful fund was be at a
disadvantage; even large operators are unlikely to have sufficient
claim experience; retakaful or reinsurance companies would have
the benefit of such claims experience;
 As such, in many lines of general and family takaful business,
guidance from retakaful operators and reinsurers in the setting of
rates and contact wording is useful;
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(g) Other Methods of Calculating the Risk Contribution
 In the absence of data, a method known as ‘burning cost’ method
can be used where in this case the risk contribution is the ratio of
past reported or paid claims to some measure of the population or
participants exposed to the risk; this method has some application to
types of covered risks which generate larger number of claims with
very little variation in claims size;
 Example : A takaful operator in Buranda has been marketing
Professional Indemnity (PI) contracts for the past 4
years. Since the business is perceived very safe the
operator intends to reduce the PI contribution rate. Is the
data given below is sufficient to support the operators
intention:

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Fiscal Year
Contribution
Vol. (B$)
Claims Paid in
the fiscal year
(B$)
Paid Claims
Ratio
2003
100,000
10,000
10%
2004
200,000
40,000
20%
2005
800,000
145,000
18.13%
2006
2,000,000
445,000
22.25%
The nature of PI takaful cover is such that claims arising from
business issued in a particular year may not be paid until many
years subsequent to the year of issue. Being a liability cover it may
take many years to settle due to delays in claim intimation.
Therefore, data given above, cannot correctly measure the claims
experience; the yearly claims do not necessarily correspond with the
contributing volume;
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 Even though the claims ratio is low, the reliability of the result is
suspect; in addition, the effects of inflation, changes in claims
settlement practices as well as growth in new business is ignored;
 In order to identify the actual claims pattern arising from each year of
takaful business issued, claims data needs to be obtained that links
the claims paid in a particular year with the year in which the contract
generating the claim was originally issued.
 The point of this example, besides indicating the danger of blindly
applying the burning cost approach, is also to illustrate that the takaful
operator needs to consider that the claims paid for a particular takaful
product in any one year is a composite of many different claims which
originate from different periods of coverage for all year up to the
current year.
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Example:
From the previous example, let say the takaful operator have
obtain a more detailed claims information:
been to
Year of
issue
Contribution
Volume
Claims Paid
Development
Year 0
Claims Paid
Development
Year 1
Claims Paid
Development
Year 2
Claims Paid
Development
Year 3
2003
100,000
10,000
20,000
25,000
35,000
2004
200,000
20,000
40,000
50,000
2005
800,000
80,000
160,000
-
-
2006
2,000,000
200,000
-
-
-
Describe the method of data tabulation. Is this information sufficient for you
to check the validity of the managements conclusions? What conclusions
can you draw from the tabulated data?
The above tabulation of claims is known as a claims triangulation; the
tabulation makes it much easier to trace trends and identify the ultimate
claims experience emerging on takaful business issued in any given year.
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 The below is the Cumulative Paid Claims Triangulation
Year of
Issue
Contribution
Volume
Claims Paid Development
Year 0
Year 1
Year 2
Year 3
2003
100,000
10,000
30,000
55,000
90,000
2004
200,000
20,000
60,000
110,000
-
2005
800,000
80,000
240,000
-
-
2006
2,000,000
200,000
-
-
-
 Cumulative claims up to the present year is derived by adding the
claims paid in the current year to the sum of claims in all previous years
for the same block of contract issued in a given year.
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 The ultimate claims ratio development using paid claim
triangulation:
Year of
Issue
Contribution
Volume
Claims Ratio Development
Year 0
Year 1
Year 2
Year 3
2003
100,000
10%
30%
55%
90%
2004
200,000
10%
30%
55%
-
2005
800,000
10%
30%
-
-
2006
2,000,000
10%
-
-
-
With the above triangulation, it is much easier to identify the ultimate
claims ratio that is emerging on business issued in any given year.
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 In the above case, it is obvious that the true claims ratio is not as low
as the operator is given to understand. Based on the above
triangulation, it can be concluded that the operator would be well
advised to not reduce the takaful contribution rates for PI business at
the present stage.
(h) Generalized Linear Modelling (GLM)
 One guiding assumption in using claims statistics to compute
contribution rates is that participants that share the same
characteristics i.e., homogeneous, should likewise be exposed to the
same risks. Unfortunately, the population exposed to risk are often not
homogeneous; therefore by breaking down the claims data into
smaller blocks originating from takaful participants with similar risk
factors, a more valid determination of contribution rates can be made.
 Once homogeneous data in a volume that sufficiently reliable is
complied, statistical methods such the GLM may then be used to
construct contribution rates that reflect the various rating factors.
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 GLM as applied to takaful work refers to a whole family of methods
that essentially attempts to piece various risk factors in one statistical
model that can explain or account for the observed claims experience.
(i) Calculating the Risk Contribution in Family Takaful
 Fortunately, in family takaful, the major risk factors that appear to
drive the death risk are those that affect claims frequency and are far
fewer than those that appear to drive general takaful risks. The main
reason is that in family takaful, the benefit is invariably fixed and
therefore claims severity is not subject to the random variation as
seen in general takaful.
 The main risk factors for family takaful appear to be age, gender and
to a lesser extent occupation, lifestyle habits and avocation.
 Given below is a set mortality table and an illustration of how the risk
contributions for family takaful is computed.
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Example:
Consider a 3 year level contribution term takaful product
developed for Burunda. Given:
is
(a) The mortality of participants is assumed to follow the table
below;
(b) Management and marketing expenses costs = 45% of gross
contribution
(c) The takaful fund is expected to generate 3% investment profit
per year
Exact Age
No. of lives
No. of dying
Prob. of dying
Prob. of surviving
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1,000,000
1,550
0.00155
0.99845
36
998,450
1,667
0.00167
0.99833
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996,783
1,804
0.00181
0.99819
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994,978
1,950
0.00196
0.99804
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993,028
2,125
0.00214
0.99786
40
990,903
-
-
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 Given that the entire contribution computed net management and
marketing expense is intended to be 100% tabarru’ into the takaful
fund, what is the gross level takaful contribution for a life age 35
wishing to participate in a 3 year term takaful plan which pay
B$100,000 death benefit at the end of the year of death?
 A key principle in the computation of a fair takaful contribution is the
principle of actuarial equivalence;
Contribution = Risk Benefits + Management Costs
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36
37
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Therefore risk benefits;
= 100,000 [1/1.03 (0.00155) + ( 1/1.03 )2 (0.99845)
(0.00167)
+ (1/1.03)3 (0.99845) (0.99833) (0.00181)]
= 100,000 [ 0.001505 + 0.001572 + 0.001651 ]
= 472.76
The gross contribution;
= GC + GC (1/1.03 ) (0.99845) + GC (1/1.03 )2 (0.99845)
(0.99833)
= GC [ 1 + 0.969369 + 0.941022 ] = GC [2.910391]
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Management Costs = 0.45 (Gross Contribution)
Therefore;
2.910391 GC = 472.76 + 0.45 (2.910391 GC)
GC = (472.76) / (0.55 x 2.910391) = 295.34
The gross level contribution for a life aged 35 is $ 295.34
Example : consider an annually renewable group term family takaful
plan being quoted for a corporate client with 1,000 staff in
Buranda. Given;
(a) Mortality pattern of participants is given below;
(b) Management and marketing costs equals 15% of the gross
single contribution;
(c) The rate of investment profit per annum is ignored.
50
Exact Age No. of lives
No. of dying
Prob. of dying
Prob. of surviving
35
1,000,000
1,550
0.00155
0.99845
36
998,450
1,667
0.00167
0.99833
37
996,783
1,804
0.00181
0.99819
The staff to be covered under the group takaful scheme is as follows;
Exact Age of Staff
Number of Staff
Takaful Death Benefit per
Staff
35
400
100,000
36
400
100,000
37
200
100,000
What is the gross single takaful contribution to charge for the above
group of 1,000 lives?
51
Risk Contribution (RC) = 100,000 [ 400 (0.00155) + 400 (0.00167) +
200 (0.00181)]
= 165,000
Gross Contribution (GC) = RC + 15% GC
Therefore; GC = RC/0.85 = 165,000/0.85 = 194,117.65
 The sum total of assumptions used in the pricing of the product is
known as the pricing basis
 The parameters for the pricing basis would typically be derived from
observed experience taken from inside and outside the takaful
operator. In the case of a newly set up takaful operator and fund,
since internal experience would be used as guidelines.
 The above computation is relatively simplistic it ignores the effect of
liability provision may have on the takaful fund and other effects.
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(j) Cash Flow Method of Pricing
 With this approach, the contribution calculation does not just
consider expected cash flows of benefit and contribution payment but
sensitivities to other factors as well such as the probability of
withdrawal or disability benefits thereon.
 This method also known as the method of profit testing, is set up to
overcome the limitations of the formula method outlined earlier;
 Other factors that can be explicitly incorporated into the cash flow
model include specific operator profit targets, taxation, the effect of
liability provisions, the opportunity cost of temporary loan injections
by the operator, nature of the takaful operational model being used,
etc.
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 The cash flow method is especially useful in analyzing operator profit
as the sources of operator revenue may come from one or more of the
following three sources of possible revenue as follows:
 Management fees computed as a % of takaful funds managed, a
flat yearly fee contract and a % of the contribution collected for the
fund;
 Share of yearly investment
 Share of underwriting surplus
 With the cash flow method, the specific revenue sources can be easily
identified and product features such as contribution and benefit levels
can be easily reconfigured to meet certain the operators goals for
shareholders and participants.
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(k) Various Profit Targets
 There are several profit targets that a takaful operator may use in
evaluating the attractiveness of a particular product for development.
 The following are examples of possible profit targets that may be
used;
 Profit margin
 Breakeven Year
 Return on Investment
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End
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