The agent isthe representative of the takaful operator (insurance company) in relation tothe principal, who is appointed according to the prevailing laws. The main bondof the agent is its relationship with the takaful operator, not with the takaful participant. A takaful agent represents the takaful operatorand its primary duty is to promote the Takaful plan or product issued by the takafuloperator it represents.
Brokers generally do not have contractual agreements with takaful operators and not bound by any takaful operator. Takaful brokers provide acomprehensive range of professional takaful broking services to assistpotential customers on how to make paid contributions / premiums more costeffective and at the same time enjoying maximum coverage. Different withagents, takaful brokers represent customers and advise customers on the mostappropriate takaful plan. Broker will receive brokerage fee in return for the services rendered. All takaful brokers arelicensed by Bank Negara Malaysia and must registered with The Malaysian Insuranceand Takaful Brokers Association (MITBA). The Shari’ah issues with regards tobrokers and agents that need to be addressed as follows:1.
Lack of knowledge in subject matter related TakafulWe have heard the grievances made by the participants of takafulagent are the misconceptions about providing takaful or unsatisfactoryservices. The Takaful Society of Malaysia (MTA) also outlines some guidelinesof conduct that must be adhered to by any agent promoting takaful. In line withthe Shari’ah requirements that emphasize the rights of both parties to signcontracts, each agent needs to provide accurate information about a productoffered so that the needs of takaful participants will be fulfilled.
Agents andbrokers need to equip themselves with knowledge related to the concept of takafuland the importance of financial planning. They need to know the whole takafulsystem itself, including the internal processes of the takaful operator and thetakaful plans offered. This knowledge is important to ensure that they are moreprepared to deal with potential participants or participants on the appropriateproducts and services. Takaful agents and brokers need to be knowledgeable in subject matter and transparent. The failure of agents and brokers in understanding the concepts and products of takaful will cause the products and services provided to customers not comply with Shari’ah compliant. There are still agents and brokers who use conventional insurance approaches in their marketing. They only focus on the information pertaining to the protection or benefits of takaful to be acquired such as insurance agents explaining insurance coverage and tend to over promise.
In essence, takaful agents actually need to increase their knowledge of the ‘legality’ of contracts according to Islam. The takaful contract is not just a contract of tabarru ‘(welfare), but also has a mudarabah contract (business collaboration) element. The contract theory in Islam require to explain contractual content / objectives (muqtada al-‘aqd). The mistake of the agent clarifying the contract thorough and detailed will result in uncertainty in the contract. Brokers and agents of takaful must have excellent and proper understanding in objective, concept and products of takaful to ensure they able to fulfill their responsibility to market the Takaful products. 2. Agents and brokers have ethicalproblemTo achieve or increase salestargets, agents and brokers often compete with each other. To increase theirsales, takaful agents and brokers need to get new customers to avoid dismissal.
They will use different types methods to increase their sales and try to keeptheir performance in the firm. They may promise any benefitsthat are not in the contract or guarantee capital and investment profits and soon. Unethical practices of takafulagents arise in order to increase their sales.
They may act out of control tomaintain self-interest and may cause agent misconduct has been identified. Insurance agents have theopportunity for ethical misconduct because the service provided is veryabstract and difficult for customers to fully understand. Another scenario is agent tendto earn another commission from the existing participant. Towards this purpose,agent need to sell new policy to existing participants. Thus, there is atwisting occur which the participants will be persuaded by the agent to replacethe existing purchased plan to another plan that need to contribute more. Takafuloperation might address this issue as it will affect the overall takafulindustry image. Takaful agents act as atrustee for takaful operator and participants of the takaful contributions.
Referring to Majallah, takaful agents must take into account any collected takafulcontributions and he must ensure that those contribution is submitted to the takafuloperator immediately. Failure to hand out the contributions takaful operatorstimely can consider is a breach of agent’s duty and embezzlement action. 3. Agents unable todisclose the details of total charged to the participant Among the important issues fortakaful products is that agents or brokers unable to clearly explain toparticipants of the commissions and service fees imposed by takaful operatorson each donation. To market their products, takaful operators have appointedagents and brokers to carry out marketing work. Problems arising, participantsare not informed of the charges incurred on the contribution / payment made,and sometimes there is no current statement sent to the customer indicating theaccumulated revenue in the investment account. The charges may vary dependingon the performance of the takaful operator and this may expose takafulparticipants to the risk to bear high costs. This practice is clearlycontradictory to al dharar yuzal (kemudharatanmesti dielakkan) and gharar (uncertainty).
An agent or broker mustdisclose the details of the total cost charged to the participant and agreed bythe takaful participant. The total cost charged should be taken into accounthow much is earned by the takaful agent, the amount obtained by the takaful operator,and the amount of charges imposed by the investment fund manager or theinvestment link. Although nowadays commissions paid to takaful agents areincluded in management expenses (where these funds are derived fromparticipants’ contribution payments) but there are still issue regarding the amount of commissionshould be paid to the agent for the services rendered. 4. Agent unable to disclose relavant information to the takafuloperator It is theresponsibility of the agent to obtain the necessary information from applicantand provide those relevant information to takaful operator. Takaful operatorwill based on the applicant’s information provided by agent to determinewhether accept or reject the application.
Those information will become part ofpartial of the legal contract between takaful operator and participant.Therefore, if an agent deliberately conceals any information or makes anyfraudulent statement, then he isconsider commit in a serious offence. ANSWERS The actuarial control cycle describesa crucial process by actuaries to assist takaful operators to manage their fundscontributed by participants based on a sound financial basis. Actuarial controlcycles can be divided into three main steps which are:1. thepricing steps2. theexperience monitoring steps; and3. theliability provisioning step.
The objectiveof pricing as follows:1 Evaluate the adequacy of the benefits promised.2 Must be fairly valued for policyholders. No unfairsubsidization must exist in any class insured by any of the insured classes.3 Rate cannot be excessive in relation to benefitsprovided. Pricing Involves datacollection, assumptions and other relevant inputs required. In process of determining theprice, actuaries need to make assumptions as follows:1 The pattern of mortality / morbidity/ claims distribution2 Investment return rate fordiscounting cash flow. How much investment profit can be expected by theoperator in the future from the takaful contribution received at the outset ofthe policy.3 Management expenses rate formarketing and processing4 Withdrawals pattern thataffect the recovery of initial expenses incurred (related with marketing,underwriting and the issuance of new business contracts)5 Tax rate, statutory reserving requirements, factors affecting takafulbusiness.
6 Contingencies.It is alwayspossible that there might be a significant error in pricing due to theincorrect use of assumption, especially when involving key assumptions. Actuaries need to understandthe nature of the data and the statistics obtained and the degree of usabilityof the particular product portfolio or business concerned. Actuaries’ task inpricing and re-pricing of products also include the relative weightageconsiderations to place on pricing factors which derived from internalexperience as well as external resources. Normally, in the pricingprocess, actuary will face two dilemmas: 1 If the price is tooconservative, it will not be fair to the insured. If it is too aggressive, itmight be inadequate. In this circumstance, who should be pay for any deficits?2 Legislation may require the establishment of conservative reserves thatresult in new business strain.
In this circumstance, who will bear financingstrain? Pricing of any product shouldgo beyond the cost of future liabilities and it should also take into accountthe desired return on the shareholders’ funds, as well as current marketplacefeatures. After established the price and selling some products, the companythen concerned with setting aside the appropriate level of reserve for companyfuture benefits. The overall success in pricingdepends on the pricing and Rational and Consistent underwriting rules. ANSWERS Risk management canbe defined as a systematic approach to managing risks that threaten the assetsand income of a business or entrepreneurship. There are five types of risks in business have beenidentified that are relevant to takafulas follows:1. Underwriting risk2. Operational risks3. Credit risk4.
Liquidity risk5. Market risk Underwriting risk andoperational risk are directly related to the operations of the takaful company.Whereas, credit risk, liquidity risk and market risk are associated with thecompany’s investment activities. All types of risk in takaful require specificrisk management strategies and need to be managed individually. The effectively manage the risks intakaful include the following steps:1. Identifyingrisks2. Managingrisks3.
Enhancingrisks management culture in takaful industry The three current practical challengesin risk management which is confronting takaful operators as follows: 1. Shari’ah Based Challenges Practically, most of the risk management techniquesare not applicable to Islamic financial institutions due to Shariah compliancerequirements. Therefore, Shari’ah-based challenge to risk management wascreated for takaful companies. These challenges arise because Shari’ahprohibits the use of certain instruments such as derivatives involving futures,options, swaps; and debt sales. But these mentioned instruments are beneficialin conventional risk management. 2. Internal ControlsInternal controls areimportant to recognize and assess the risks faced by takaful companies. Effectiveinternal control plays a crucial role in risk management of takaful companieswhich can evade takaful companies from systemic crises and enable companies tobe aware of the possible problems and risks they may face in the future.
Tohave an effective internal control mechanism, the takaful company must ensurethat Shariah controls are in addition to all statutory regulations. It urgesSyariah audit requirements as part of an on-going system of internal control. 3. Corporate GovernanceIt is crucial for takafulcompany to have an effective corporate governance to ensure the independenceand efficiency of board of director and management level who take theresponsibility to develop policies and implement strategies for risk managment.The lack of effective corporate governance may caused BOD not functioningindependently and thereby poses a challenge to risk management. If theineffective corporate governance phenomenon persist, it will increase theoperating risks which may lead to operational failure.
This operational failureis due to the inability of BOD to implement independent and unbiased decisionsfor the best interests of all stakeholders. As a shari’ah compliance insurancecompany, takaful companies are facing with additional challenge related to theShari’ah Supervidory Board’s corporate governance. This additional challengehighlight more need to incorporate corparate governance culture to resolveissues related to the takaful industry.