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In takaful,the surplus is defined as an asset minus the liability of takaful risk fund. Liabilitycomprises actuarial liability and accounting liability. Surplus exists due tothe difference between actual experience and price assumptions.

Total of surplusdepends on how assets and liabilities of the takaful fund are assessed. Surpluscan be split among participants (policyholders), to takaful operators(shareholders), and keep in the fund for contingencies. Surplus comefrom many sources such as excessive investment income, favourable experience inbenefits such as mortality benefits, fire etc. However, in family takaful, thesurplus is usually considered separately, called underwriting surplus.

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Thereason for split in family takaful is that there are often separate models usedfor investment, such as mudarabah whereas underwriting surplus aspects are morelikely to be considered under the wakala model. From Shari’ahperspective of surplus, underwriting surplus emerge from risk funds which areactually an excess of takaful contributions derived from claims incurredwithout taking into account of any investment gains earned from thecontributions accumulated in the fund. Therefore, the operator does notcontribute to any incremental growth or increase in the value of the funds. TheAccounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) is an Islamic international autonomous non-for-profit corporate bodythat prepare accounting, auditing, governance, ethics and Shari’ah standardsfor Islamic financial institutions and the industry. According to AAOIFI, thereare relevant standards allocating for the surplus, namely Financial AccountingStandards (FAS) No. 13 (Disclosure of Bases for Determining and AllocatingSurplus or Deficit in Islamic Insurance Companies).

FAS 13 is intentionally incorporatedto determine and allocate surplus or deficit in Islamic Insurance Companies. Itis required in the standards for Takaful operators to provide a statement ofsurplus or deficit of the policyholder. The Takaful operators themselves shoulddisclose the method they use in allocating underwriting surplus and the shari’ahbasis applied in the notes. For general takafulfunds, the underwriting surplus is determined for each takaful business classafter taking into account commissions, unearned contributions, retakaful, claimingincurred and management expenses. Surplus can be distributed according to theterms and conditions set by the company’s shari’ah committees. All takafuloperators have to reveal the amount of surplus in their takaful fund.For familytakaful, any surplus or deficit is determined by the annual actuarial valuationof the family takaful fund.

Any actuarial deficit will be made well byshareholders’ funds via Qard Hassan. The surplus that can be distributed to theparticipants is determined after deducting the claims / benefits paid and payable,retakaful provisions, reserves, commissions and management expenses and it is distributedaccording to the terms and conditions set by the company’s Shari’ah committees. An insurancecompany may invest insurance surplus for the policyholder’s account, if thereis a real provision for this effect in the insurance policy. The consideration tobe paid to the party in such investment (percentage of investment profit inmudarabah or commission amount in the case of the agency) shall be stated inthe insurance policy.


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