The incurred in operating the business and as a

mudarabah takaful model works on the following basis: takaful operators (known
as shareholders) bear all expenses incurred in operating the business and as a
reward, takaful operators are entitled to share underwriting excess and
investment profits. This is an adjustment of mudarabah Islamic commercial
contracts between takaful operator and participants (or policyholders) who
provide (contribute) the capital. The biggest dissent of this model is
underwriting excess is non-profit. It is excess of premium over claims known as
surplus. This business model is difficult to manage where expenses are fixed
but income (surplus) is not. However, this is a very good model from the perspective
of participants because they do not directly contribute to the operator’s cost.
All their contributions are available to meet claims. Only when there is any
excess of contribution to the claim, the operator will be compensated for the
expenses incurred, and even if only to the extent that the surplus is
sufficient to meet this expense.


  Contribution into the takaful risk pool is
deemed as donation which under the Islamic contract of tabarru’, towards the
expected increase in claims. The adoption of tabarru’ and the risk-sharing
concept in this risk pool address the Shari’ah’s fundamental concerns about
conventional insurance. However, the tabarru’ will not be exactly equal with
the 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 for
companies to commercially viable. If take away the surplus sharing then the
whole model will collapse.

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         However, the mudarabah takaful model
is an unpopular choice. In Malaysia, only two of takaful operators practice
this mudarabah model.


Wakalah Model


  Under wakalah model, the surplus is referred
to the surplus contributed by the participant into the Risk Fund based on
tabarru’ contract. Upon reaching a financial period, the sum of tabarru’ will
not be equal with the amount the claim. If the tabarru’ amount is less than the
sum of claims then the Risk Fund will be deficit, otherwise the tabarru’ amount
exceed the claim then the Risk Fund will have a surplus.


  The wakala model is the default standard for
takaful. Operators charge and carry out takaful operations. For takaful
operators, he makes a profit if wakala fee exceed expenses.


  The surplus is actually the excess premium
paid by the participants, so the surplus refund can be explained as a
experience refund. Once this is accepted, then the surplus is belongs of the


  In Malaysia, several takaful companies
provide shareholders to share in experience refund. Given that the participants
are responsible for the deficit in the risk pool, it may seem odd that
participants should share any excessive contribution to the shareholders. Many
see this as an incentive compensation to the operator to manage the portfolio
well, as evidenced by the surplus. However, whether this incentive is necessary
given since the operators have already received a fee for underwriting
services. As practised in Malaysia, wakala models is a model where operators
only impose their management and distribution costs through wakala fees, while
the profits are from the sharing of any underwriting surplus. There is also a
wakala model where even management expenses and distribution costs are met from
underwriting surpluses and zero fees are charged. This last extreme wakala
model is similar to the mudarabah model. Even some Shari’ah scholars will also
describe mudarabah model as a wakala model with zero fees


  We can explain this wakala model from the
perspective of both participants and operators. From a participant’s
perspective, the decision on the use of a wakala model whether operators share
in excessive premiums or not will depend on how much higher is the wakala fee
he has to pay. It is not always clear that having a share of the operator in
the the underwriting surplus gives the participants the best value proposition.


operator’s perpective, the wakala fee is determined as the sum of:

Management expenses;

Distribution costs include commissions; and

Benefits to the operator