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. This isdue to that there are often separate models used for investment, such as mudarabahwhereas underwriting surplus aspects are more likely to be considered under thewakala 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 standards for Islamic financial institutions and the industry.
According to AAOIFI, there are relevant standards allocating for the surplus,namely Financial Accounting Standards (FAS) No. 13 (Disclosure of Bases forDetermining and Allocating Surplus or Deficit in Islamic Insurance Companies).FAS 13 is intentionally incorporated to determine and allocate surplus ordeficit in Islamic Insurance Companies. It is required in the standards forTakaful operators to provide a statement of surplus or deficit of thepolicyholder.
The Takaful operators themselves should disclose the method theyuse in allocating underwriting surplus and the shari’ah basis applied in thenotes. 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 is determined by the annual actuarial valuation of thefamily takaful fund. The surplus that can be distributed to the participants isdetermined after deducting the claims or benefits paid, retakaful provisions,reserves, commissions and management expenses and it is distributed accordingto 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.