In takaful, the surplus is definedas an asset minus the liability of takaful risk fund. Surplus exists due to thedifference between actual experience and price assumptions. Total of surplusdepends on how assets and liabilities of the takaful fund are assessed. Surpluscan be split among participants (policyholders), to takaful operators(shareholders), and keep in the fund for contingencies.
The surplus of the tabarru’account to be distributed between participants and takaful operators is basedon the fact that takaful contracts are generally built on tabarru’ (donation)and ta’awun (help-assist) along with mutual consent between parties. Tabarru isa key principle that underlies takaful products. Other shari’ah principles suchas mudarabah are wakalah are used to support the implementation of takafuloperations.
Surplus comes from many sources suchas excessive investment income, favourable experience in benefits such asmortality benefits, fire etc. However, in family takaful, the surplus isusually treated separately, namely underwriting surplus. This is due to thatthere are often separate models used for investment, such as mudarabah while underwritingsurplus aspects are more likely to be considered under the wakala model. From Shari’ah perspective ofsurplus, underwriting surplus arise from risk funds which are actually anexcess of takaful contributions derived from claims incurred regardless of anyinvestment gains arising from the contributions accumulated in the fund.
Therefore, the operator does not contribute to any incremental growth orincrease in the value of the funds.The Accounting and AuditingOrganization for Islamic Financial Institutions (AAOIFI) is an well-known Islamicinternational autonomous non-for-profit corporate body that prepare and providestandards for Islamic financial institutions and the industry, includingtakaful. According to AAOIFI, there are relevant standards allocating for thesurplus, namely Financial Accounting Standards (FAS) No. 13 (Disclosure ofBases for Determining and Allocating Surplus or Deficit in Islamic InsuranceCompanies). FAS 13 is intentionally incorporated to determine and allocatesurplus or deficit in Islamic Insurance Companies.
It is required in thestandards for Takaful operators to provide a statement of surplus (or deficit)of the policyholder. The Takaful operators themselves should disclose themethod they use in allocating underwriting surplus and the shari’ah basisapplied in the notes. For general takaful funds, theunderwriting surplus is determined for each takaful business class after takinginto account commissions, unearned contributions, retakaful, claiming incurredand management expenses.
Surplus can be distributed according to the terms andconditions set by the company’s shari’ah committees and all takaful operatorshave to disclose the amount of surplus in their takaful fund. For family takaful, the surplus isdetermined by the annual actuarial valuation of the family takaful fund. Thesurplus that can be distributed to the participants is determined afterdeducting the claims or benefits paid, retakaful provisions, commissions, managementexpenses and reserves. It is distributed according to the terms and conditionsset by the company’s Shari’ah committees. Takaful company may invest the insurancesurplus for the policyholder’s account, if there is a real provision for thiseffect in the insurance policy. The consideration to be paid to the party insuch investment related with percentage of investment profit in mudarabah orcommission amount in the case of the agency, shall be stated in the insurancepolicy.