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:
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:
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.
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.
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 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
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