Module 5: Underwriting & Claims in Takaful Module 5 Underwriting & Claims in Takaful
Module 5: Underwriting & Claims in Takaful LEARNING OUTCOMES At the end of the program, the participants will be able to: • Explain the basics of underwriting • Demonstrate underwriting from Shariah perspective • Explain the basics of claims • Demonstrate claims from Shariah perspective 2
Module 5: Underwriting & Claims in Takaful 3 Basics of Underwriting Underwriting from Shariah Perspective Basics of Claims Claims from Shariah Perspective 1 2 4 3 LEARNING TOPICS:
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING What is Underwriting? 5 Underwriting is a process where an underwriter evaluates and assesses a person, property, profession, business, or other entity and determining whether to provide Takaful for them. The process of evaluating a proposal made either to accept, accept with conditions/at certain imposed terms, or decline, is usually based on an established set of guidelines or procedures. Participant agrees to contribute by DONATING into the Participants’ Risk Fund (PRF) Underwriter Takaful Company
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING What is Underwriting? 6 The purpose of underwriting is to evaluate and assess the new risk by calculating the extent to which the risk, in any respects, departs from the normal risk and to what extent the additional exposure or risk can be covered, underwriting guards against anti-selection and determine a contribution amount that commensurate with the risk being undertaken to be pooled with other risks. Participant agrees to contribute by DONATING into the Participants’ Risk Fund (PRF) Underwriter Takaful Company High Risk Low Risk High Risk RMX.00 Low Risk RMY.00
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING Underwriting Philosophy 7 Underwriting Philosophy Underwriting philosophy is an embedded corporate strategy of a Takaful Operator. It defines the approach that a Takaful Operator wishes to undertake in accepting risks; which is a core function of any Takaful business. It, in essence, aims to achieve a balanced underwriting account. Contributions charged for risk underwritten should be calculated to meet the PRF’s claims obligations, and at the same time adequately pays for the operation and administrative cost with a margin of profit for Takaful funds (Shareholders’ Fund, Participants’ Individual Fund and Participants Risk Fund). It is important to note that it is at this stage of corporate strategy that a Takaful Operator will determine its overall underwriting direction and decision. Underwriting Policy Underwriting Policy is derived from the underwriting philosophy. It provides the framework within which the Takaful Operator would develop products for the market. This policy is derived from the underwriting philosophy set forth by the Takaful Operator. The basic purpose of an underwriting policy is to transform the objectives of the management into rules and guidelines that will direct the company’s underwriting decisions. The underwriting policy decides the composition of the book of business.
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING Underwriting Philosophy 8 Determinants of Underwriting Policy Setting (or amending) Takaful Operator’s underwriting policy should be done, keeping in mind the following determinants.
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING Who is an Underwriter? 9 Underwriter An underwriter is a professional that has the ability to understand the risks to which the underwritten subject matter is exposed to. This ability is gained not only through theoretical study but is also the result of years of experience dealing with similar risks and observing how claims are being paid on those risks. On that premise, the central role of the underwriter is to direct and ensure that the Takaful Operator would be able to establish homogeneous portfolios by evaluating the risks and accepting them under appropriate conditions.
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING Who is an Underwriter? 10 There are many types of underwriters in the Takaful industry. In general, they are grouped into two: Family Takaful Underwriter versus General Takaful Underwriter Types of Underwriter Family Takaful Underwriter Family Takaful underwriters focus on medical information declared in proposal forms and the medical reports supplemented together with the forms. They are familiar with information such as the impact of medical history and other health related issues with permissible Takaful interest. Family Takaful Underwriter
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING Who is an Underwriter? 11 There are many types of underwriters in the Takaful industry. In general, they are grouped into two: Family Takaful Underwriter versus General Takaful Underwriter Types of Underwriter General Takaful Underwriter General Takaful Underwriters are familiar with their respective line of business (homeowners, motor, properties, workers compensation, etc). They understand the risks involved for these businesses and the available and practical methods of dealing with these risks. They conduct site inspection, and gather information from various other resources to ensure the applicant meets the Takaful Operator’s underwriting standards. General Takaful Underwriter
Module 5: Underwriting & Claims in Takaful BASICS OF UNDERWRITING Who is an Underwriter? 12 Roles and responsibilities of an underwriter 1. Formulate, direct and coordinate with other technical departments (Actuarial, Claims, Risk Management, Retakaful) in line with the operator’s strategic direction and corporate objectives. 2. Design, develop, execute and monitor the underwriting functions covering various Takaful schemes, rating, authorities, tariff, process workflow, and standard operating procedures. 3. Gather insights into the claims processes and procedures in order to continuously improve the underwriting process. 4. Gather insights into the Retakaful arrangement and Retakaful functions, by understanding the Takaful Operator’s Retakaful programs involving capacity building, technical knowledge transfer, and coverage. 5. Work closely with the Business Development or Marketing Department in negotiations with clients, brokers, agents. 6. Maintain close relationship with local, regional and international industry associations and monitor industry trends. 7. Maintain close relationship and cooperate where necessary, with other Takaful, Retakaful and insurance operators/companies and keep abreast with markets development. 8. Compile and prepare technical reports as required by the management and regulatory authorities. Underwriter
Module 5: Underwriting & Claims in Takaful UNDERWRITING FROM SHARIAH PERSPECTIVE
Module 5: Underwriting & Claims in Takaful UNDERWRITING FROM SHARIAH PERSPECTIVE Upholding Maqasid Shariah through underwriting 14 Primary objective of Shariah is enjoining benefit and avoiding harm from the people in their affairs of this world and the hereafter. This objective can be achieved through the protection of the following:
Module 5: Underwriting & Claims in Takaful UNDERWRITING FROM SHARIAH PERSPECTIVE 15 1. It preserves fairness among the participants during the process of underwriting and determination of contribution. Fairness is sought after in Islam, as mentioned in the Quran: Underwriting is consistent with Shariah Upholding Maqasid Shariah through underwriting 2. Underwriting is encouraged since there is no argument against it. In Muamalat, everything is encouraged for as long as there is no obvious argument against the act itself. This is parallel with Islamic legal maxim which says: The original ruling for everything that is beneficial is mubah (permissible), until there is evidence of its prohibition. 3. Underwriting is a common practice in the Takaful industry and is not against the principle of Shariah. This common practice is consistent with the Islamic legal maxim of “Custom is of force”.
Module 5: Underwriting & Claims in Takaful UNDERWRITING FROM SHARIAH PERSPECTIVE Upholding Maqasid Shariah through underwriting 16 Takaful provides its participants an avenue to protect FAITH (through Shariah-compliant contract and principles), LIFE (through Family Takaful), INTELLECT (through Family Takaful), LINEAGE (through Family Takaful) and WEALTH (through General Takaful). To ensure that the participants who participate in Takaful plans are not penalized by the entrance of applicants who do not share the same intention for mutual assistance, underwriting protects the Participants’ Risk Fund (PRF) from anti-selection. Underwriter
Module 5: Underwriting & Claims in Takaful Factors in Underwriting (Family) Depending on the type (business lines) of Takaful, underwriting process is performed based on many factors: Underwriting criteria for Takaful UNDERWRITING FROM SHARIAH PERSPECTIVE 17
Module 5: Underwriting & Claims in Takaful Factors in Underwriting (General) Depending on the type (business lines) of Takaful, underwriting process is performed based on many factors: Underwriting criteria for Takaful UNDERWRITING FROM SHARIAH PERSPECTIVE 18
Module 5: Underwriting & Claims in Takaful Underwriting is a process where an underwriter evaluates and assesses a person, property, profession, business, or other entity and determining whether to provide Takaful for them. The process of evaluating a proposal made either to accept or decline, is usually based on an established set of guidelines or procedures. Underwriting process Underwriter UNDERWRITING FROM SHARIAH PERSPECTIVE 19
Module 5: Underwriting & Claims in Takaful 1. Identification and Evaluation of Risk The underwriter will identify and evaluate the level of risk that is involved and determine the rates that will be used for each individual proposal. This information can be sought through various means: Underwriting process Underwriter UNDERWRITING FROM SHARIAH PERSPECTIVE 20
Module 5: Underwriting & Claims in Takaful 2. Selection of Risk The underwriter will, after identifying and evaluating the exposures associated with the risk, decide on whether to accept or reject the proposal. Underwriting process Underwriter UNDERWRITING FROM SHARIAH PERSPECTIVE 21
Module 5: Underwriting & Claims in Takaful 3. Determination of Takaful Contribution, Terms and Conditions Upon completion of the initial analysis on whether to issue the certificates under preferred, standard or substandard basis, or to reject the applicant, the underwriter will determine the Takaful contribution, terms and conditions for the applicant. Underwriting process Underwriter Contributions charged by Takaful Operators on each individual participant are usually regulated by the local regulatory and supervisory authorities. Guidelines are provided to ensure that the Takaful Operators do not undercharge (for solvency and survival of the Participants’ Risk Fund) and do not overcharge (for fairness to the participants). In determining the Takaful contribution for a proposal, the underwriter will work together with the actuaries and/or product development team in ensuring that the rates charged reflect the severity of risks, otherwise, the Takaful contribution will be inadequate to pay for losses. The actuaries and/or product development team will usually have a pre-determined base-rate for each product line using mortality table (Family Takaful) or rates schedule (General Takaful). UNDERWRITING FROM SHARIAH PERSPECTIVE 22
Module 5: Underwriting & Claims in Takaful 4. Confirmation of Acceptance If terms, conditions and Takaful contribution charged are acceptable to the proposer, participant will be informed accordingly. Underwriting process Underwriter Family Takaful Family Takaful participants are required to go through a waiting period before some or all of the coverage can begin. The purpose of the waiting period is to protect the existing participants of the PRF by ensuring that new participants are not able to make a large claim shortly after joining and then cancelling their participation after the claim. Though letter of acceptance will be issued, confirmation of full acceptance for certificate coverage is contingent upon the fulfillment of the waiting period. The participant also has the rights to cancel the certificate within the cooling-off period. General Takaful Upon confirmation of acceptance, a cover note will be issued as evidence of temporary cover until the certificate is issued. A cooling-off period (applicable for selected General Takaful products) will also be granted for the participants to review the terms and conditions of the certificate, where the participant has the rights to cancel the certificate within the cooling-off period. UNDERWRITING FROM SHARIAH PERSPECTIVE 23
Module 5: Underwriting & Claims in Takaful 5. Retention and Retakaful Depending on the Takaful Operator’s retention policy, each risk will be apportioned in accordance with the appropriate retention level and the balance will be ceded to Retakaful. Underwriting process The underwriting process requires the underwriter to know the capacity of the Takaful Operator. The underwriter should not assume more risks than the contribution can cover, and at the same time needs to ensure that the needs of the participants are met as well as not rejecting new business unnecessarily. Other Roles of Retakaful Operators Provide the reference rates to be used by the underwriters for the purpose of pricing contribution. Assist in underwriting large and specialised risks by providing their technical advice. Assist in providing statistics, analysis or research pertaining to the specific class of business. Increase new business capacity, allowing underwriters to write more new business. Manage catastrophic claims, allowing underwriters to manage the loss incurred by Participants’ Risk Fund Retakaful allows the underwriter to balance these needs, by accepting risks that are beyond the retention limit of the Takaful Operator. The amount exceeding the retention limit will be ceded to Retakaful Operators. UNDERWRITING FROM SHARIAH PERSPECTIVE 24 Underwriter
Module 5: Underwriting & Claims in Takaful 6. Payment of Contribution Takaful contribution paid by the participants takes into consideration several expenses. Underwriting process Risk Charge This is the minimum rate chargeable on the risks. For Family Takaful, the underwriter uses either the mortality or morbidity rates for each age band in rating the individuals or group. For General Takaful, a manual rate book will be referred to in pricing the eligible participant. Management Expenses This is the percentage that will be loaded into the pricing to cover for the administrative expenses incurred by the Takaful Operator in issuing the certificate. UNDERWRITING FROM SHARIAH PERSPECTIVE 25 Profit & Commission An allowable (by regulatory and supervisory authority) percentage for profit and commission will be loaded into the minimum risk charge, for the purpose of payment to the intermediaries as well as allocation for profit to the Takaful Operator for managing the Participants’ Risk Fund. Different Takaful models call for different pricing mechanism for profit. Underwriter
Module 5: Underwriting & Claims in Takaful BASICS OF CLAIMS
Module 5: Underwriting & Claims in Takaful BASICS OF CLAIMS The Concept of Mutual Assistance in Takaful Factors to be considered in establishing claims philosophy 27
Module 5: Underwriting & Claims in Takaful What is Claims Philosophy? Claims philosophy is an embedded corporate strategy of a Takaful Operator. It defines the approach that a Takaful Operator wishes to undertake in its claims management; which is a core function of any Takaful business. Claims philosophy in essence is aimed at achieving a balanced scorecard between meeting the expectation of the participants and their rights under the Takaful contract. While maintaining participants’ satisfaction is the key to a successful Takaful Operator, the duty of care being the custodian to the Takaful fund as entrusted by the Takaful participants should not be neglected. BASICS OF CLAIMS 28 Factors to be considered in establishing claims philosophy
Module 5: Underwriting & Claims in Takaful Factors for Consideration BASICS OF CLAIMS 29 Factors to be considered in establishing claims philosophy
Module 5: Underwriting & Claims in Takaful General principles to be considered BASICS OF CLAIMS 30
Module 5: Underwriting & Claims in Takaful CLAIMS FROM SHARIAH PERSPECTIVE
Module 5: Underwriting & Claims in Takaful CLAIMS FROM SHARIAH PERSPECTIVE Takaful Operator in executing its role as the PRF manager, is responsible for the following: a) Claims payment does not breach the principles of mutual cooperation among the participants, which might lead to the breach of the principles of Shariah in a Takaful contract. b) Payment of claims must ensure that only deserving participants receive the donation from other participants. c) Breach of any element relating to Shariah principles in a contract of Takaful, will render the Takaful contract void leading to claims not being approved by the Takaful Operator. d) Claims payment are made according to the Takaful contract. e) Claims are paid from the correct funds. f) Claims payment are made in accordance with appropriate procedures to prevent fraudulent claims or payment of invalid claims. Essential elements of claims in Takaful 32
Module 5: Underwriting & Claims in Takaful Exclusion Exclusion is a provision in a Takaful certificate that eliminates coverage of some risks from a Takaful plan. Essential Elements of claims in Takaful Exclusions for risks that are Shariah non-compliant and/or do not meet the terms of the Takaful contract CLAIMS FROM SHARIAH PERSPECTIVE 33
Module 5: Underwriting & Claims in Takaful Non-Disclosure Non-Disclosure is the failure to disclose key facts and information that are required to form a binding Takaful contract, to the Takaful Operator. Essential elements of claims in Takaful Why non-disclosure breaches Takaful contract? CLAIMS FROM SHARIAH PERSPECTIVE 34
Module 5: Underwriting & Claims in Takaful Nomination Nomination is the process of selecting a candidate who will receive the sum covered when the person covered dies within the term of the certificate. The Takaful Operator would pay the claims to the candidate, also known as nominee. Essential elements of claims in Takaful How nomination works in a Takaful contract? CLAIMS FROM SHARIAH PERSPECTIVE 35 © IFSA 2013
Module 5: Underwriting & Claims in Takaful Essential elements of claims in Takaful Beneficiary CLAIMS FROM SHARIAH PERSPECTIVE 36 © IFSA 2013 Nomination Conditional hibah is a hibah contingent upon a certain condition or event in the future.
Module 5: Underwriting & Claims in Takaful Essential elements of claims in Takaful Beneficiary CLAIMS FROM SHARIAH PERSPECTIVE 37 © IFSA 2013 Nomination How Hibah works in a Takaful contract?
Module 5: Underwriting & Claims in Takaful Essential elements of claims in Takaful Beneficiary CLAIMS FROM SHARIAH PERSPECTIVE 38 Nomination SAC BNM resolution on Hibah in Takaful: The SAC, in its 34th meeting dated 21 April 2003, has resolved the following: i. The Takaful benefit may be made as hibah because the objective of Takaful is to provide coverage for Takaful participant. Since the Takaful benefit is the right of Takaful participant, the participant is at liberty to exercise his right in accordance with Shariah; ii. Since the hibah by the participant is a conditional hibah, the status of the hibah will not be transformed into a bequest; iii. Normally, Takaful benefit is attached to the death of participant and maturity of Takaful certificate. If the participant is still alive when the Takaful certificate matures, the participant will receive the Takaful benefit. However, if the participant passed away before the maturity date, the hibah will be effective; iv. Participant is entitled to revoke his hibah which was made before the maturity of Takaful certificate, because a conditional hibah will only be completed after delivery (qabd); v. Participant is entitled to revoke his hibah which was made to certain individual and deliver the benefit to another person, or terminate his participation in Takaful if the nominated recipient passed away before the maturity date; and vi. Takaful nomination form shall clearly mention that the status of nominee is as beneficiary, if it is intended by the participant as hibah.
Module 5: Underwriting & Claims in Takaful Essential elements of claims in Takaful Beneficiary CLAIMS FROM SHARIAH PERSPECTIVE 39 Nomination SAC BNM resolution on Nomination Based on Hibah under Takaful Scheme The SAC, in its 52nd meeting dated 2 August 2005, has resolved that the concept of statutory protection as practised by conventional insurance may be applied in Takaful industry in the following manners: i. Payment of Takaful benefit will neither become part of the estate of the deceased (Takaful participant) nor subject to the deceased’s debt; ii. The Takaful participant may appoint a responsible trustee for the Takaful benefit. However, the government-owned trustee will be the trustee for such Takaful benefit in the following situations: a) There is no appointed trustee; b) Nominee is incompetent to enter into a contract; and c) The parents had predeceased the nominee in the event the nominee is incompetent to enter into a contract. iii. Once the trustee received the Takaful benefit, the Takaful company is deemed to be released from all liabilities relating to such Takaful benefit.
Module 5: Underwriting & Claims in Takaful Essential elements of claims in Takaful CLAIMS FROM SHARIAH PERSPECTIVE 40 © IFSA 2013 Executor Nomination Anyone can be named as the executor. He/she does not necessarily need to be the recipient of the Takaful benefits. He/she is responsible to ensure the benefits are distributed according to relevant guidelines. Any trustworthy individual or outside legal party can be nominated as executor.
Module 5: Underwriting & Claims in Takaful Nomination Essential elements of claims in Takaful CLAIMS FROM SHARIAH PERSPECTIVE 41 What happens if the nominee predeceases Takaful participant? What happens if the nominee dies after the death of the Takaful participant? The Takaful Operator shall pay the share of the deceased nominee (if there is more than one nominee), upon the death of the Takaful participant to the estate of the deceased Takaful participant unless the Takaful participant has made a subsequent nomination in place of the deceased nominee. The Takaful Operator shall pay the Takaful benefits to (a) the estate of the deceased Takaful participant if the nominee is an executor; or (b) the estate of the deceased nominee if the nominee is a beneficiary under conditional hibah. © IFSA 2013
THE END END OF MODULE 5: UNDERWRITING & CLAIMS IN TAKAFUL