Pricing of Family Takāful Products: A Sharīʿah Perspective

 269
IRP109/2019
Pages: 40


EXECUTIVE SUMMARY

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:

  1. The pricing methodologies of insurance and takāful are similar despite the differences between their contracts and objectives.
  2. The pricing elements need Sharīʿah investigation and substantiation in view of some concerns raised by industry experts and Sharīʿah scholars about the unfairness of certain underwriting and pricing elements.
  3. The price in insurance and takāful is commensurate with the nature of the risk, the sum covered and the estimated time of the risk occurrence.

 

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:

  1. As for mortality and morbidity, the research discovers that these two assumptions are Sharīʿah compliant based on the principles of ibāah (permissibility), malaah (public interest), istiqrāʾ (induction) and ʿurf (custom). Despite being predictive in nature, the statistically proven tables of mortality and morbidity are deemed the best estimates of the insured’s time of death and injury.

 

  1. As for investment returns as a pricing element, the research acknowledges the cash flow method, which prices products at a loss in order to recoup the profitable rate from future investment returns. If profitable, the investment return would offset any underwriting loss. However, the research raises a concern on the repercussions of investment losses. While the participant may not be very much concerned about profits in non-unitised takāful funds, the shareholders’ losses in the same funds may affect the solvency of the takāful funds, let alone the expected profitability. This may amount to an unfair arrangement for the shareholders that the regulators may have to address.

 

 

  1. The assumptions of inflation and interest rates are also used, especially in the valuation of assets. Both function within the concept of the time value of money; therefore, this research has discussed whether the concept is Sharīʿah compliant. In this regard, the authors observe that time value of money is used in both contracts of exchange and contracts of donations. In contracts of exchange, the time value of money is inherent in some sales such as bayʿ bi thaman ājil (deferred sale), bayʿ al-taqsī (sale by instalment) and bayʿatayn f ī bayʿah (two sales in one). In contracts of tabarruʿ, the donation can still be calculated based on the time value of money if there are future cash flows. Both partake in the time value of money from the technical aspect only.

 

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.

  1. Fee on the tabarruʿ fund as practiced in Malaysia

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.

  1. The cost of qar

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 qaris 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 qaris in fact imbedded in the price. For those who ascertained that the cost of qaris factored into the price, they maintained that qarmust be provided for in the capital structure, especially when some regulations would consider the qarirrevocable if not recouped within a stipulated period of time. Based on juristic analysis on qarin 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 qar, 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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