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School / Department School of Mathematical Sciences (SMS)

Course B Sc (Hons) in Actuarial Studies (BAS)

Subject Code and Name MAT3034 Stochastic Processes

Lecturer Sia Jye Ying

Assignment Due Date 20/11/2020

STUDENT’S DECLARATION

1. I/ We hereby declare that this assignment is based on my/ our work except where acknowledgement of
sources is made.

2. I/ We also declare that this work has not been previously submitted or concurrently submitted for any
other courses in Sunway University or Sunway College or other institutions.

3. Submit “Turn-it-in” report: Yes No

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Overview

The insurance industry in Malaysia is growing significantly. It also plays an

important socio-economic role as it vastly contributes to the Malaysian GDP. Insurance
provides an alternative for the insured to diversify their financial planning. As such,
insurance allows people to plan for the financing of their retirement needs, medical expenses,
children’s education, and investment income. Today, there are two insurance options which
are conventional insurance and Takaful insurance.

Life insurance first started in Malaysia in the 18 th century. Initially, it was based on
British system as it was managed by British trading companies and agencies. According to
WealthLink, today, there are 18 life insurers in Malaysia. It ensures the financial security of
an individual. It helps to reduce the burden of the affected family members of the
policyholder in times of misfortunes. It is a safety net against uncertainty.

Takaful was first introduced into the Malaysian market in 1993. Malaysia now
becomes the second largest Takaful market, after Saudi Arabia. Takaful is the alternative
form of insurance coverage for Muslim customers as it operates based on the fundamentals of
Shariah. It also provides protection to individuals and corporate firms from the occurrence of
loss and hazards, just like any other conventional insurance. Besides that, Takaful insurance
has since experienced rapid growth due to country’s population where around 60% of the
population holds Islamic faith. Family takaful expanded by 12.9%, faster than the 5.4% in life
insurance, as of the first half of 2018, according to Asia Insurance Review (2019).

Hence, this paperwork aims to further explain the concepts of life insurance and family
takaful, its differences in terms of characteristics, and the attractions of Takaful to non-
Muslim potential customers.
Applicability of Insurance in Life Insurance and Takaful in Family Takaful

Life Insurance

Life insurance is a contract between an individual (insured) and policyholder. The

individual agrees to pay a premium and in return, the insurance company agrees to pay a
predetermined amount of money to the insured, in the event they become disabled or when
some specified event like accident takes place, or if the insured dies. Four basic types of life
insurance policies include term insurance, whole life insurance, and endowment insurance
and family takaful.

There are several basic principles in life insurance such as utmost good faith. Both
parties (the insured and the insurer) should have good faith towards each other. They must
provide clear information as possible regarding to terms and conditions of the contract. The
following principle is indemnity. It is a guarantee to restore the insured to the position they
were in before the uncertain incident that caused loss (to the insured). The insurer should
compensate the insured. Principle of contribution allows the insured to claim indemnity to the
extent of actual loss from all insurance contracts involved in their claim.

Family Takaful

Family takaful plan is the Islamic version for Life Insurance. It protects the insured
with long-term saving and investment program. All Family Takaful plans are fixed period
and do not carry fixed sum insured. The amount of benefits that the insured receives depends
on the maturity period, the contribution amount where they have agreed or perhaps profits
earned from the investments based on his contributions. It is where a participant decides on
the size of his annual contribution. The amount will flow into two separate accounts:
Participants’ Account (PA) and the Participants’ Special Accont (PSA). The PA is where the
larger proportion of money is paid whereas money paid into PSA is paid with the attention of
helping other insured in times of difficulties.

In participation of a family takaful, an amount of money (which the insured agreed)

will be contributed to the takaful fund. A contract (aqad) will be signed as per your
contributions in investments and savings. The tabarru’ contribution, or also known as
donation, will be used to give favour to the recipient without any specific consideration in
return. If the insured is alive on the takaful maturity, they will be entitled to share the net
surplus from the funds (provided if any).

If the insured dies before the maturity of the Takaful plan, the benefit will be paid to the
claimant who is entitled to receive the claims based on the contract. If the insured withdraws
from the plan before the maturity, they will be refunded all the money in their PA and the
profits earned from the investment thus far. However, his contributions in PSA will not be
returned as agreed.
Differences between Life Insurance and Family Takaful

The very fundamental differences between life insurance and general takaful is summarized
in the table below:

Takaful Conventional Insurance

Risk is shared and distributed among other
participants
Does not have Gharar (uncertainty), Riba
(interest), nor Maysir (gambling)
Subject to Shariah and government laws
Investment funds are Shariah compliant
Risk is transferred and passed from the
insured to the insurer
Contains interest, gambling and uncertainty
Subject to solely government laws
Investment funds not necessarily Shariah
compliant

Takaful is an optimized operation for affordable risk protection as it provides fair

profits for the operator. The initial capital is contributed by the participants in form of
premiums (rabb al-mal). On the other hand, conventional insurance is more financially
motivated in the sense that it maximizes shareholder’s wealth and its initial capital is supplied
by the shareholders themselves.

In terms of taxation, takaful is subjected to local, state and federal taxes and
participants are required to arrange tithing (zakat) for charity donation. Conventional
insurance is only subject to local, state and federal taxes. The accounting standards of Takaful
is consistent with national rules (GAAP) plus conformance with Islamic rules while
conventional insurance is only consistent with GAAP and statutory rules.

The contract involved in takaful is a combination of tabarru’ (donation) and profit-

sharing contract between the participant and other participants in the pool of funds. On the
other hand, conventional insurance is an exchange contract between the policyholder and the
insurer.

When it comes to withdrawal benefits, Family takaful participants will receive the
total accumulated amount of the contribution into their Participant’s Investment Account
(PIA). However, when a participant wants to surrender their conventional insurance, they will
be losing valuable benefits and the cover of the policy. This hinders them from achieving
their long-term financial objectives. They may also not obtain similar protection with the
same terms in the future.

Attractions of Takaful to Non-Muslim Potential Customers

 Certainly, there are several misconceptions that Takaful is only for Muslims. The
concept of sharing risks is not solely based on one religion, but to people of all races and
religions. Hence, this section discusses on the attractions of takaful to non-Muslim customers.

Salleh and Kamaruddin (2011) investigated the effects of personality attributes by

determining the sales performance of the Takaful’s agents. In their research, they concluded
that self-efficacy and self-monitoring are positively related to the Takaful sales performance.
A salesperson with high self-efficacy will be able to commit their time and efforts to attract
more customers. Self-monitoring also used to foresee salespersons’ performance in the
industry. The findings suggest that the higher self-monitoring of salespersons, the higher their
performance. The raison d'être is that a salesperson who can adjust and be adaptive to
different selling situations and customers are likely to be able to attract more sales.

According to a research done by Bandura and Cervone (1986), self-efficacy theory

predicts that people tend to perform better when they believe they do possess the necessary
skills to succeed. Hence, when a salesperson believes that they have the persuasive skills and
is able to convince customers, they will perform better.

On the other hand, another research conducted by Gustina and Abdullah (2012)
identified the factors that result in the demand in family Takaful in comparison to
conventional insurance. The factors are education, saving, GDP per capita and religion. As
GDP per capita rises in a nation, more people would want to diversify their investment
portfolio by investing a portion of their savings into family Takaful.

Some Non-Muslims would also choose Takaful based on its very distinct characteristic
from conventional insurance – the concept of sharing risks. This is to provide financial
assistance to other insured should they require emergency funds in form of donation
(sedekah). Any surplus in the pool of funds is owned by the policy holders. In other words,
the insured divides a certain amount to put inside the pool of funds which they cannot take it
back as it now legally belongs to the policyholder. The more people participate, the more
funds available to cover more people for protection.

Reference
Bandura, A. and Cervone, A. (1986), “Differential Engagement of Self-Reactive Influences
in Cognitive Motivation”, Organizational Behaviour and Human Decision Processes, 38, 92-
113.

Gustina, & Abdullah, N. I. (2012). Analysis of Demand for Family Takaful and Life
Insurance: A Comparative Study in Malaysia. Journal of Islamic Economics, Banking and
Finance, 67-86.

MEIR Team (2019). Malaysia: Several factors brighten prospects for takaful sector.
Retrieved from https://www.asiainsurancereview.com/News/View-NewsLetter-
Article/id/45350/Type/middleeast/Malaysia-Several-factors-brighten-prospects-for-takaful-
sector

Murugiah, S. (2016). Growth potential for Takaful sector is favourable, says Fitch Ratings.
Retrieved from http://www.theedgemarkets.com/article/growthpotential-takaful-sector-
favourable-says-fitch-ratings

Salleh, F., &Kamaruddin, A. R. (2011).The Effects of Personality Factors on Sales

Performance of Takaful (Islamic Insurance) Agents in Malaysia. International Journal of
Business and Social Science, Vol. 2 (No. 5), 259-265.

WealthLink (2004). Can you provide a short history of life insurance in Malaysia? Retrieved
from http://www.wealthlink.com.my/main/?
option=content&task=view&id=4&Itemid=27#:~:text=Records%20indicated%20that%20the
%20first,started%20in%20the%2018th%20century.