Operational and Actuarial Aspects of Takaful

1. Operational and Actuarial Aspects of Takaful Actuarial Concepts and Actuarial Control Cycle

2. Sub Topics • Role of the Actuary • The Business Environment • Basic Actuarial Concepts • Components of Actuarial Control Cycle • Pricing • Experience Monitoring • Liability Provision

3. BNM Guidelines – JPIT 10 • Role of the Appointed Actuary • AA must be a FSA, FIA,FAIA or FAA under Section 2 of TA 1984 • Appointment or termination only with BNM’s approval

4. BNM Guidelines – JPIT 10 • Section 3 -To interpret participants reasonable expectations • Section 4 - Valuation of Liabilities • Section 4.2 - Ensure data accuracy • Section 4.3 -Testing of assumptions • Section 4.7- Test profitability of Business • Section 4.12 - Recommends Distribution of Surplus

5. BNM Guidelines – JPIT 10 • Section 4.13 - Preparing an FCR • Section 4.14 - Comments on Investment Policy • Section 4.15 - Comments on Re Takaful Policy • Section 4.16 - Additional Solvency Test

6. Role of the Actuary - Monitoring and Reporting • FCR Contents:- • Comments on Co Strategic Plan • Performance of Business vis a vis budget • Design of Takaful Model and Adherence • Comments on Profit Test assumptions • Adequacy of Reserves • Comments on Investment Strategy and Performance • Comments on Retakaful • Comments on Surplus Sharing provisions • Overall Risk Management capabilities • Shariah Issues

7. Role of the Actuary - Monitoring and Reporting • Development of KPIs and KRIs (from FCR)- relates more to underwriting risks • Expense overruns • Annual Expense Inflation • Expense Analysis • Loss Ratios • Accuracy of Assumptions used • Investment Performance

8. Role of the Actuary The Balancing Act Shareholders Employees Takaful Scheme Regulators Agents Participants Management

9. Role and Qualifications of The Actuary in other Countries • Baharin; Refer to Central Bank of Bahrain Rule book sections TA 2.4.3, TA 2.4.4 and TA 2.4.5 • Pakistan; Refer to Insurance Ordinance 2000 section 26. Actuary is as prescribed by the authority • Brunei; Same as Malysia and includes FCIA

10. Role and Qualifications of The Actuary in other Countries • UK; FIA • US; Member of the American Academy of Actuaries as a minimum qualification • Canada; Member of the Canadian Institute of Actuaries

11. The Business Environment Legal System Taxation Economic growth & other factors Employment & Income Patterns Demographics Regulations on Takaful Economic Environment Competition Literacy, Health & Living standards Investment Yields Status of Capital Market Existence of welfare / retirement systems

12. Basic Concept -Risk Pool Risk Exposure Risk Contribution Risk Pool Covered benefits Contractual Sums Covered Ex Gratia Benefits Risk Fund Expenses:- Claims Handling Fees Loss Adjuster Fees Risk Survey Fees Medical Test Costs Hospital Reports Underwriting Expenses Retakaful Expenses

13. Basic Concepts - Level Contribution • The incidence of many contingencies increase with age • Unlikely that participants will pay increasing contributions • Hence, level contributions • But the sum total of contributions and investment profit earned thereon accumulated over each point in time is sufficient to match the increasing risk pattern effective at that point in time

14. Basic Concepts - Dripping Risk Contribution (Tabarru’) Savings Contribution Level Takaful Contributions Risk Fund Savings Fund

15. Actuarial Control Cycle • The actuarial control cycle describes the essential process by the actuary to assist the operator to manage its takaful funds on a sound financial basis • The actuarial control cycle can be broken down into three major steps namely 1) the pricing step 2) the experience monitoring step and 3) the liability provisioning step. • The actuarial control cycle may also be seen to operate within the pricing and liability provisioning steps as pricing and liability provisioning are themselves continual loop processes.

16. Early Actuarial Control Cycle a) Initial Assumptions b) Profit Test c) Model e) Updating of Assumptions d) Monitoring Appraisal Values Analysis of Surplus

17. Actuarial Control Cycle Simplified Monitor Experience Pricing Set Liability Provisions

18. Pricing • Involve the collection of relevant data, assumptions and other inputs that will be needed • The assumptions need to be made will include the following: • Underlying mortality/morbidity/claims distribution pattern • Investment rate of return for discounting cash flows • Rate of management expenses for marketing and processing • Withdrawals pattern which affect the recoverability of initial expenses incurred (marketing, underwriting and issuing new business contracts) • The level of taxation, statutory reserving requirements, factors affecting the takaful business

19. Pricing • The actuary need to understand the nature of the data and statistics obtained and the degree of its applicability to the particular product or business portfolio in question. • The actuary’s task in pricing and re-pricing products will also include consideration of the relative weightage to place on pricing factors obtained from internal experience as well as external sources.

20. Experience Monitoring • What to monitor and analyze? • Claims • Expenses • Investment performances • The experiences must be compared against assumptions used. • Must compare “apple to apple”

21. Experience Monitoring-Claims • Need to set up monitoring capabilities • Look to determine degree of fluctuations; random or not? • Determine monitoring period

22. Experience Monitoring - Expenses • Severity of impact depends on Model used. • How to allocate expenses? New or renewal expenses? By product types? • Must set up capabilities to segregate and track such expenses.

23. Experience Monitoring - Investment • How to determine yield? i=(2xI)/(A+B-I) • How to implement Mudarabah on returns?

24. Liability Provisioning • Making provisions for future claims arising from the takaful fund. • The liability provisions so created will have an impact on the surplus available in the takaful fund • Estimate the profit generated for the takaful operator. • Increase Retakaful

25. Experience Monitoring • Purpose of Analysis: • Change assumptions? • Re price products • Withdraw products

26. End