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The agent is
the representative of the takaful operator (insurance company) in relation to
the principal, who is appointed according to the prevailing laws. The main bond
of the agent is its relationship with the takaful operator, not with the takaful participant. A takaful agent represents the takaful operator
and its primary duty is to promote the Takaful plan or product issued by the takaful
operator it represents.


Brokers generally do not have contractual agreements with takaful operators and not bound by any takaful operator. Takaful brokers provide a
comprehensive range of professional takaful broking services to assist
potential customers on how to make paid contributions / premiums more cost
effective and at the same time enjoying maximum coverage. Different with
agents, takaful brokers represent customers and advise customers on the most
appropriate takaful plan. Broker will receive brokerage fee in return for the services rendered. All takaful brokers are
licensed by Bank Negara Malaysia and must registered with The Malaysian Insurance
and Takaful Brokers Association (MITBA).

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The Shari’ah issues with regards to
brokers and agents that need to be addressed as follows:

1.       Lack of knowledge in subject matter related Takaful

We have heard the grievances made by the participants of takaful
agent are the misconceptions about providing takaful or unsatisfactory
services. The Takaful Society of Malaysia (MTA) also outlines some guidelines
of conduct that must be adhered to by any agent promoting takaful. In line with
the Shari’ah requirements that emphasize the rights of both parties to sign
contracts, each agent needs to provide accurate information about a product
offered so that the needs of takaful participants will be fulfilled. Agents and
brokers need to equip themselves with knowledge related to the concept of takaful
and the importance of financial planning. They need to know the whole takaful
system itself, including the internal processes of the takaful operator and the
takaful plans offered. This knowledge is important to ensure that they are more
prepared to deal with potential participants or participants on the appropriate
products 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. 

      Agents and brokers have ethical

To achieve or increase sales
targets, agents and brokers often compete with each other. To increase their
sales, 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 keep
their performance in the firm. They may promise any benefits
that are not in the contract or guarantee capital and investment profits and so
on. Unethical practices of takaful
agents arise in order to increase their sales. They may act out of control to
maintain self-interest and may cause agent misconduct has been identified. Insurance agents have the
opportunity for ethical misconduct because the service provided is very
abstract and difficult for customers to fully understand.


Another scenario is agent tend
to earn another commission from the existing participant. Towards this purpose,
agent need to sell new policy to existing participants. Thus, there is a
twisting occur which the participants will be persuaded by the agent to replace
the existing purchased plan to another plan that need to contribute more. Takaful
operation might address this issue as it will affect the overall takaful
industry image.


Takaful agents act as a
trustee for takaful operator and participants of the takaful contributions.
Referring to Majallah, takaful agents must take into account any collected takaful
contributions and he must ensure that those contribution is submitted to the takaful
operator immediately. Failure to hand out the contributions takaful operators
timely can consider is a breach of agent’s duty and embezzlement action.


3.          Agents unable to
disclose the details of total charged to the participant


Among the important issues for
takaful products is that agents or brokers unable to clearly explain to
participants of the commissions and service fees imposed by takaful operators
on each donation. To market their products, takaful operators have appointed
agents and brokers to carry out marketing work. Problems arising, participants
are not informed of the charges incurred on the contribution / payment made,
and sometimes there is no current statement sent to the customer indicating the
accumulated revenue in the investment account. The charges may vary depending
on the performance of the takaful operator and this may expose takaful
participants to the risk to bear high costs. This practice is clearly
contradictory to al dharar yuzal (kemudharatan
mesti dielakkan) and gharar (uncertainty).


An agent or broker must
disclose the details of the total cost charged to the participant and agreed by
the takaful participant. The total cost charged should be taken into account
how 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 the
investment link. Although nowadays commissions paid to takaful agents are
included in management expenses (where these funds are derived from
participants’ contribution payments) but there are still issue regarding the amount of commission
should be paid to the agent for the services rendered.


4.          Agent unable to disclose relavant information to the takaful

It is the
responsibility of the agent to obtain the necessary information from applicant
and provide those relevant information to takaful operator. Takaful operator
will based on the applicant’s information provided by agent to determine
whether accept or reject the application. Those information will become part of
partial of the legal contract between takaful operator and participant.
Therefore, if an agent deliberately conceals any information or makes any
fraudulent statement,  then he is
consider commit in a serious offence.




The actuarial control cycle describes
a crucial process by actuaries to assist takaful operators to manage their funds
contributed by participants based on a sound financial basis. Actuarial control
cycles can be divided into three main steps which are:

pricing steps

experience monitoring steps; and

liability provisioning step.


The objective
of pricing as follows:

Evaluate the adequacy of the benefits promised.

Must be fairly valued for policyholders. No unfair
subsidization must exist in any class insured by any of the insured classes.

Rate cannot be excessive in relation to benefits


Pricing Involves data
collection, assumptions and other relevant inputs required.

In process of determining the
price, actuaries need to make assumptions as follows:

1       The pattern of mortality / morbidity
/ claims distribution

2       Investment return rate for
discounting cash flow. How much investment profit can be expected by the
operator in the future from the takaful contribution received at the outset of
the policy.

3       Management expenses rate for
marketing and processing

4       Withdrawals pattern that
affect the recovery of initial expenses incurred (related with marketing,
underwriting and the issuance of new business contracts)

Tax rate, statutory reserving requirements, factors affecting takaful


It is always
possible that there might be a significant error in pricing due to the
incorrect use of assumption, especially when involving key assumptions.


Actuaries need to understand
the nature of the data and the statistics obtained and the degree of usability
of the particular product portfolio or business concerned. Actuaries’ task in
pricing and re-pricing of products also include the relative weightage
considerations to place on pricing factors which derived from internal
experience as well as external resources.


Normally, in the pricing
process, actuary will face two dilemmas:


1       If the price is too
conservative, it will not be fair to the insured. If it is too aggressive, it
might be inadequate. In this circumstance, who should be pay for any deficits?

Legislation may require the establishment of conservative reserves that
result in new business strain. In this circumstance, who will bear financing


Pricing of any product should
go beyond the cost of future liabilities and it should also take into account
the desired return on the shareholders’ funds, as well as current marketplace
features. After established the price and selling some products, the company
then concerned with setting aside the appropriate level of reserve for company
future benefits.


The overall success in pricing
depends on the pricing and Rational and Consistent underwriting rules.



Risk management can
be defined as a systematic approach to managing risks that threaten the assets
and income of a business or entrepreneurship. There are five types of risks in business have been
identified that are relevant to takaful
as follows:

Underwriting risk

Operational risks

Credit risk

Liquidity risk

Market risk


Underwriting risk and
operational risk are directly related to the operations of the takaful company.
Whereas, credit risk, liquidity risk and market risk are associated with the
company’s investment activities. All types of risk in takaful require specific
risk management strategies and need to be managed individually.


The effectively manage the risks in
takaful include the following steps:



risks management culture in takaful industry


The three current practical challenges
in risk management which is confronting takaful operators as follows:


Shari’ah Based Challenges


Practically, most of the risk management techniques
are not applicable to Islamic financial institutions due to Shariah compliance
requirements. Therefore, Shari’ah-based challenge to risk management was
created for takaful companies. These challenges arise because Shari’ah
prohibits the use of certain instruments such as derivatives involving futures,
options, swaps; and debt sales. But these mentioned instruments are beneficial
in conventional risk management.


Internal Controls

Internal controls are
important to recognize and assess the risks faced by takaful companies. Effective
internal control plays a crucial role in risk management of takaful companies
which can evade takaful companies from systemic crises and enable companies to
be aware of the possible problems and risks they may face in the future. To
have an effective internal control mechanism, the takaful company must ensure
that Shariah controls are in addition to all statutory regulations. It urges
Syariah audit requirements as part of an on-going system of internal control.



3.       Corporate Governance

It is crucial for takaful
company to have an effective corporate governance to ensure the independence
and efficiency of board of director and management level who take the
responsibility to develop policies and implement strategies for risk managment.
The lack of effective corporate governance may caused BOD not functioning
independently and thereby poses a challenge to risk management. If the
ineffective corporate governance phenomenon persist, it will increase the
operating risks which may lead to operational failure. This operational failure
is due to the inability of BOD to implement independent and unbiased decisions
for the best interests of all stakeholders. As a shari’ah compliance insurance
company, takaful companies are facing with additional challenge related to the
Shari’ah Supervidory Board’s corporate governance. This additional challenge
highlight more need to incorporate corparate governance culture to resolve
issues related to the takaful industry.






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