Themudarabah takaful model works on the following basis: takaful operators (knownas shareholders) bear all expenses incurred in operating the business and as areward, takaful operators are entitled to share underwriting excess andinvestment profits. This is an adjustment of mudarabah Islamic commercialcontracts between takaful operator and participants (or policyholders) whoprovide (contribute) the capital. The biggest dissent of this model isunderwriting excess is non-profit. It is excess of premium over claims known assurplus.
This business model is difficult to manage where expenses are fixedbut income (surplus) is not. However, this is a very good model from the perspectiveof participants because they do not directly contribute to the operator’s cost.All their contributions are available to meet claims. Only when there is anyexcess of contribution to the claim, the operator will be compensated for theexpenses incurred, and even if only to the extent that the surplus issufficient to meet this expense.
Contribution into the takaful risk pool isdeemed as donation which under the Islamic contract of tabarru’, towards theexpected increase in claims. The adoption of tabarru’ and the risk-sharingconcept in this risk pool address the Shari’ah’s fundamental concerns aboutconventional insurance. However, the tabarru’ will not be exactly equal withthe claim. If tabarru’is inadequate, there will be a deficit; if it is excessive,there will be surplus. Surplus under the mudarabah takaful model is crucial forcompanies to commercially viable. If take away the surplus sharing then thewhole model will collapse. However, the mudarabah takaful modelis an unpopular choice. In Malaysia, only two of takaful operators practicethis mudarabah model.
(i) Wakalah Model Under wakalah model, the surplus is referredto the surplus contributed by the participant into the Risk Fund based ontabarru’ contract. Upon reaching a financial period, the sum of tabarru’ willnot be equal with the amount the claim. If the tabarru’ amount is less than thesum of claims then the Risk Fund will be deficit, otherwise the tabarru’ amountexceed the claim then the Risk Fund will have a surplus. The wakala model is the default standard fortakaful.
Operators charge and carry out takaful operations. For takafuloperators, he makes a profit if wakala fee exceed expenses. The surplus is actually the excess premiumpaid by the participants, so the surplus refund can be explained as aexperience refund. Once this is accepted, then the surplus is belongs of theparticipants. In Malaysia, several takaful companiesprovide shareholders to share in experience refund.
Given that the participantsare responsible for the deficit in the risk pool, it may seem odd thatparticipants should share any excessive contribution to the shareholders. Manysee this as an incentive compensation to the operator to manage the portfoliowell, as evidenced by the surplus. However, whether this incentive is necessarygiven since the operators have already received a fee for underwritingservices. As practised in Malaysia, wakala models is a model where operatorsonly impose their management and distribution costs through wakala fees, whilethe profits are from the sharing of any underwriting surplus. There is also awakala model where even management expenses and distribution costs are met fromunderwriting surpluses and zero fees are charged. This last extreme wakalamodel is similar to the mudarabah model.
Even some Shari’ah scholars will alsodescribe mudarabah model as a wakala model with zero fees We can explain this wakala model from theperspective of both participants and operators. From a participant’sperspective, the decision on the use of a wakala model whether operators sharein excessive premiums or not will depend on how much higher is the wakala feehe has to pay. It is not always clear that having a share of the operator inthe the underwriting surplus gives the participants the best value proposition. Fromoperator’s perpective, the wakala fee is determined as the sum of:a.Management expenses;b.Distribution costs include commissions; andc.Benefits to the operator