Operational and Actuarial Aspects of TakafulActuarial Concepts and Actuarial

Control Cycle

Sub TopicsRole of the Actuary The Business EnvironmentBasic Actuarial ConceptsComponents of Actuarial Control CyclePricing Experience MonitoringLiability Provision

BNM Guidelines – JPIT 10Role of the Appointed ActuaryAA must be a FSA, FIA,FAIA or FAA under

Section 2 of TA 1984Appointment or termination only with BNM’s

approval

BNM Guidelines – JPIT 10Section 3 -To interpret participants

reasonable expectationsSection 4 - Valuation of LiabilitiesSection 4.2 - Ensure data accuracy Section 4.3 -Testing of assumptionsSection 4.7- Test profitability of BusinessSection 4.12 - Recommends Distribution of

Surplus

BNM Guidelines – JPIT 10Section 4.13 - Preparing an FCRSection 4.14 - Comments on Investment

PolicySection 4.15 - Comments on Re Takaful

PolicySection 4.16 - Additional Solvency Test

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

Role of the Actuary - Monitoring and ReportingDevelopment 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

Management

Employees

Agents

Shareholders

Participants

Regulators

TakafulScheme

The Balancing Act

Role and Qualifications of The Actuary in other CountriesBaharin; 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

Role and Qualifications of The Actuary in other CountriesUK; FIAUS; Member of the American Academy of

Actuaries as a minimum qualificationCanada; Member of the Canadian Institute of

Actuaries

Economic Environment

Legal System

Literacy, Health & Living standards

Taxation Economic growth & other factors

Employment & Income Patterns

Regulations on Takaful

Status of Capital Market

Investment Yields

Competition

Existence of welfare / retirement systems

Demographics

Risk Exposure Risk Contribution

Risk Pool

Covered benefits

Contractual Sums Covered

Ex Gratia Benefits

Risk Fund Expenses:-Claims Handling FeesLoss Adjuster FeesRisk Survey FeesMedical Test CostsHospital ReportsUnderwriting ExpensesRetakaful Expenses

Basic Concepts - Level ContributionThe incidence of many contingencies

increase with ageUnlikely that participants will pay

increasing contributionsHence, 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

Level Takaful Contributions

Risk Fund Savings Fund

Risk Contribution (Tabarru’)

Savings Contribution

Actuarial Control CycleThe 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.

b) Profit Test

a) Initial Assumptions

c) Model

Analysis of Surplus

d) Monitoring

e) Updating of Assumptions

Appraisal Values

Monitor Experience

Pricing

Set Liability Provisions

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:

1. Underlying mortality/morbidity/claims distribution pattern2. Investment rate of return for discounting cash flows3. Rate of management expenses for marketing and

processing4. Withdrawals pattern which affect the recoverability of

initial expenses incurred (marketing, underwriting and issuing new business contracts)

5. The level of taxation, statutory reserving requirements, factors affecting the takaful business

PricingThe 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.

Experience MonitoringWhat to monitor and analyze?

ClaimsExpensesInvestment performances

The experiences must be compared against assumptions used.

Must compare “apple to apple”

Experience Monitoring-ClaimsNeed to set up monitoring capabilitiesLook to determine degree of fluctuations;

random or not?Determine monitoring period

Experience Monitoring - ExpensesSeverity 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.

Experience Monitoring - InvestmentHow to determine yield?

i=(2xI)/(A+B-I)

How to implement Mudarabah on returns?

Liability ProvisioningMaking 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

Experience MonitoringPurpose of Analysis:

Change assumptions?Re price productsWithdraw products