Challenges for Takaful Going Forward 133
A takaful fund has a one-year-term renewable product and prices its risks on a best-estimate basis. Its five-year underwriting experience is shown in figure 9.1. First, let us assume that there is no surplus distribution to either the participant or the takaful operator. Deficits are covered first by retained surplus from past underwriting years and, if that is insufficient, by a qard from the takaful operator, which would be repaid from future underwriting surplus. In the example in figure 9.1, over an observation period of five years, the cumulative profit or loss is zero (20 – 10 + 30 – 50 + 10), with deficits being made good either by retained surplus or by a temporary loan from the takaful operator. Let us now assume that any underwriting surplus is shared equally between the takaful operator and the participants. The resulting distribution is shown in figure 9.2. Any deficits in this example would be met from a qard from the takaful operator, as there would be no retained surplus. The alternative scenario in figure 9.2 would result in an outstanding qard of 40 after five years. Where has this 40 been used? In this example, Figure 9.1 Five-Year Underwriting Experience of a Takaful Fund Surplus
20 Best estimate
Year 1
Year 2 –10
30
Year 4
Year 3
10 Year 5
–50
Deficit
Figure 9.2 Underwriting Surplus Shared Equally Surplus
Best estimate
10 10 Year 1
Year 2 –10
10 10 10
Year 4
10 Year 5
–50 Deficit Distribution to participant
Distribution to operator
Repayment of qard