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Operational and Actuarial Aspects of Takaful Topic 5 Underwriting and Processing
Sub Topics n n Basic Principles of Insurance Basic Underwriting Certificate Issuance Actuarial Issues in Underwriting
Basic Principles of Insurance n 1. 2. 3. 4. 5. 6. There are six principles of insurance which consist of: Insurable Interest Utmost good faith Indemnity Subrogation Contribution Proximate Clause
Insurable Interest n A certificate/policy is not valid unless the insured person stands to suffer a financial loss if the insured event occurs (e. g. loss or damage to property or creation of a liability), or benefit from the non-occurrence of the event, i. e. the property being preserved or no liability being created.
Insurable Interest n n n Ref: Section 18 of the Gaming Act 1845 Consistent with Shariah principle of avoiding maisir Feasey v Sun Life Assurance Corporation of Canada (2003)
Utmost Good Faith n n Insured to disclose material facts Breaches may be through concealment; non-disclosure; fraudulent misrepresentation; innocent misrepresentation. Pan Atlantic v Pine Top (1995) - innocent misrepresentation English courts have imposed continuing duties of good faith on companies. See cases.
Utmost Good Faith In line with Shariah principles n Hakim b. Hazim who reported that the Prophet (may peace be upon him) as saying, “Both parties in a business transaction have the right to annul it so long as they have not separated; and if they speak the truth and make everything clear they will be blessed in their transaction; but if they tell a lie and conceal anything the blessing on their transaction will be blotted out. ” n
Indemnity n n An insured s/b in the same financial position after a loss Not applicable to life assurance Ref: Castellain v. Preston (1883) Purpose is to avoid gambling
Subrogation n n The right of the company to take over any recovery rights the insured may have against third parties Implied - companies may not exercise subrogation rights against a co-insured that is covered in respect of the loss. Ref: Co-operative Retail Services v Taylor Young Partnership (2002)
Contribution Clause n n The insured may insure as many times and with as many different insurers as he wishes, however, in the event of loss each company pays a suitable proportion of the loss either in proportion to the sum insured or in proportion to their respective independent liabilities. Since under the indemnity principles, the insured cannot recover more than his/her financial loss, therefore, in the event that two or more insurers do face liability for the same loss, the paying company is entitled to recover from the other insurers by way of contribution, its share of the loss
Proximate Clause n n n Under this principle, there must be a cause and effect relationship between the peril insured against and the resulting loss The insurer is liable only for loss proximately caused by an insured peril not loss caused by uninsured peril; the insurer will be liable if the sequence between an insured peril and the loss is unbroken. Ref: Pawsey v Scottish Union and National (1907)
Underwriting n n n Underwriting is the process of assessing and classifying the degree of risk of an applicant and of selecting participants Need to control the quality of new and renewal business and avoid adverse selection The purpose of underwriting is to develop and maintain a profitable portfolio of business and for underwriting to achieve its purpose
Underwriting Family Takaful n Operational environment and documentation 1. 2. 3. 4. Underwriting Policy Underwriting manual Proposal Forms Medical Questionnaire/Personal Health Declaration 5. Agent’s report – Facts Find Report 6. The Rating system (loading)
Family Takaful Underwriting Policy n n n Retention level Non Medical limits Maximum Age Maximum Coverage per participant Maximum Coverage per policy type Underwriting authority
Family Takaful Underwriting Manual n n n Height and weight table Exclusions e. g. aids, leukemia for children policy Gender loading Non smoker discount Occupational loading Large sum assured discount
Family Takaful Proposal Forms n n n Citation of ‘Utmost Good Faith’ principle Personal Information Lifestyle information Brief medical history Brief family background Details on current insurable position
Family Takaful Medical Questionnaire n n n For policies exceeding non-medical limits Person physician statement Urine Test, Blood Test, ECG report, X rays may be required
Family Takaful Agents Report n n n First line underwriter BNM require fact find report Does an agent has apparent authority?
Family Takaful Rating/Loading n n 1. 2. 3. Instead of rejecting an applicant who is a substandard risk he can be accepted with a loading A quantitative method of classifying risks on the assumption that: medical factors affect the mortality, the impact of each of the factors can be determined by a statistical study of people affected by these factors a numerical value can be assigned to each factor according to its impact
Family Takaful Rating/Loading n n A normal case is rated at 100 of the normal mortality and points are added or subtracted in accordance to information revealed by the participant in his / her application Retakaful assistance is sometimes necessary to accept a substandard case
General Takaful Underwriting n n n The underwriting process will vary depending on the class of takaful being considered Initially, underwriting for general insurance depended largely on gut feel; however, over the years a more accurate method had been developed and many of the takaful operators used these experience as their guidance Operators use tariffs in order to prevent acute losses
General Takaful Underwriting n n In Malaysia tariffs are applied to motor and fire coverage Due to the absence of sound scientific and mathematical basis for some general classes of takaful, there was a need to turn to tariff; takaful industry has adopted the use of tariffs just like their insurance counterpart
General Takaful Underwriting n Underwriting guides are structured along major lines of business or classes of business; it provide for properly structured decisions, ensure uniformity and consistency and incorporates claims experience; the underwriting guide can be for a single sub-class or for several classes.
General Takaful Underwriting n n Given the underwriting guides, underwriters should still follow a structured decision-making process to ensure that ultimately there is surplus in the takaful fund The process are as follows : Gathering information; n Analyzing and evaluating alternatives; n Selecting an alternative; n Implementing; n Monitoring; n
General Takaful Underwriting n Underwriting also refers to the process of selecting participants by recognizing and evaluating hazards n Hazard can be physical, morale and legal in nature. n The following factors will determine whether a risk should be accepted, the cover should be limited, the terms amended or the case rejected; • Types of cover – peril covered, basis of settlement • Occupation • Protective factors • Identity • Claims experience
General Takaful Underwriting n n n Cover should be limited if the sum covered is over the amount of potential liability Can amend the terms of contract by excluding certain risks or increasing deductibles (underwriters should try to make modifications so as to allow the submission to be acceptable) Compared to insurance, takaful underwriters should also consider occupation of participant which are prohibited by Shariah; the operator may not want underwrite these cases.
Takaful Contract Processing n n General takaful underwriting slightly differs from family takaful underwriting in that the underwriting of the various classes of general takaful may be initiated either directly by the underwriter (external) or through agents or brokers The application form, broking slip, quotation slip or tender documents as the initiating documents providing the relevant information and terms of the risk may be submitted.
Takaful Contract Processing n The content of the application documents with regard to the risk and the terms specified by the applicant or the broker are then subjected to the following checks : n Ensuring that the application form and related documents are complete; n Review the risk involved; n Whether a survey is required to determine the terms and clauses; n Whether special rating is required; n Checking underwriting guide, cession or treaty; n Past claim experience of the applicant / participant / broker;
Takaful Contract Processing n n n Operator approval is required; if risk is rejected, an letter is despatched; if accepted and risk need to be surveyed, the underwriter will request for a survey (in-house or by professional surveyors) When risk is accepted, a cover note is issued; for motor takaful cover note are issued immediately electronically The underwriter need to consider the necessity of facultative retakaful,
Takaful Contract Processing Application made through agents, brokers, direct or tender retakaful Check the documents Yes Is a survey required No Yes Do a survey Yes Can the risk be accepted Issue cover note Is retakaful needed No Decline letter Stop Issue certificate No
Takaful Contract Processing n The issuance procedure can be summarized as follows : n Job assignment n Review Document Submitted n Allocated work n Enter Data and Indicate Mode of Printing n Check for completeness and Correctness n Issue and Prepare Policy or Endorsement Documents n Sort and Dispatch
Motor Takaful Tariff Capacity (RM) * Comprehensive Cover (RM) Third Party (RM) Act Only Not more Than 1400 225. 20 72. 00 60. 75 Not more than 1650 251. 50 81. 00 67. 50 Not more than 2200 277. 90 90. 00 76. 50 Not more than 3050 304. 20 99. 00 85. 50 Not more than 4100 330. 50 108. 00 92. 25 Not more than 4250 356. 80 117. 00 99. 00 Not more than 4400 383. 20 126. 00 108. 00 Exceeding 4400 409. 50 135. 00 114. 75 * RM 26 is added to every RM 1000 for values more than RM 1000
Motor Takaful Tariff Sum insured : RM 50, 0000 Make & Model : Proton Wira 1. 5 Age of car : 4 years Capacity : 1468 c. c NCD : 25%
Motor Takaful Tariff n Comprehensive: • • • n First RM 1, 000 Next RM 49, 000 (26 x 49) Basic Contribution 25% NCD Contribution Paid RM 251. 50 RM 1, 274. 00 RM 1, 525. 00 RM 381. 37 RM 1, 144. 13 Third Party: • • • Basic Contribution Loading 50% Gross Contribution 25% NCD Contribution Paid RM 81. 00 RM 40. 50 RM 121. 50 RM 30. 38 RM 91. 13
Fire Takaful Rate Risk : Menara Hang Tuah Risk Address : Jalan Arau, Taman Emas, KL Sum covered : RM 30 Million Occupation : Office-space Construction : Class 1 Rate : 0. 1 % ( Issued by PIAM ) Takaful Contribution = RM 30 Mil x 0. 1% = RM 30, 000
Actuarial Issues n n n Types of underwriting include normal underwriting, simplified underwriting and non-underwriting Expected differences in mortality or other benefits can be priced and reserved for, but anti-selection is more difficult to account for Different Funds for different products (risks) leads to different u/w standards
Actuarial Issues (…contd) n Both IT and shari'a concerns are involved in determining the number of Tabarru funds: • Life: separate funds for death, hospital/surgical, critical illness? • General: separate funds for fire and motor? n Primary concerns, that tariff rates forces cross subsidy between classes of risks
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