IRP 118 – Unearned Wakālah Fee in the Takāful Industry in Malaysia: A Critical Analysis

The issue of unearned wakālah fees (UWF) arises due to the statutory requirements in the Islamic Financial Services Act (IFSA 2013) that mandate takāful operators to refund any undue contribution with the corresponding wakālah fee in the event of surrender or termination of a _takāful _certificate. The relevant statutory provisions and Bank Negara Malaysia (BNM) guidelines on the valuation basis for liabilities of family and general takāful are open to more than one interpretation, and the exact definition and components of money not due are not clear. The implementation of the statutory provisions and regulatory guidelines on the refund of UWF has raised the following issues for the Malaysian takāful industry:

1. How to determine UWF and its components from money not due that must be refunded as stated in the statutory provisions and BNM guidelines?
2. What are the Sharīʿah justifications, if any, to support the requirements for refund in the event of surrender?
3. How to resolve any Sharīʿah and technical issues pertaining to the implementation of the refund of UWF due to lack of clarity regarding its definition and components?

Accordingly, this paper delineates the concept and components of the wakālah contract, its salient features, contractual relationship, subject matter, including the wakālah fee, and juristic deliberations regarding it. It also examines the background and means of identifying UWF by explaining its subject and components, differences between earned and unearned wakālah fee, and the treatment of UWF. Further, it studies Sharīʿah and technical issues related to recognition, calculation and refund of UWF and other surrender values.

This research finds that UWF relates to the unexpired portion of the up-front wakālah fee, which is a liability upon the takāful operator and a cash asset to the takāful participant. The determinant factor of UWF treatment is the payment frequency, which could be monthly, quarterly, semiannual or annual. Although the frequencies are not applicable to single contribution takāful and renewable takāful products because the payments are scheduled as one-off, they too are subject to the issue of UWF. The research explains the huge gaps in using the four payment frequencies and the variances in the treatment of UWF. It finds that from the Sharīʿah perspective, a fee-based wakālah contract is a binding contract and takes the rules of an ijārah contract. In the event of termination, the wakīl is entitled to an amount commensurate with the portion of service done. This is because the written or agreed up-front wakālah fees cease to exist and the contracting parties should resolve any outstanding obligations by reference to the service fees commensurate with services performed. Accounting principles and actuarial calculation play key roles in determining the service fees commensurate with the services. Therefore, the research elaborates those technical issues related to UWF which are based on accounting and actuarial principles. From the accounting side, this entails how to account for the wakālah fee under MFRS 17 and what is the exact time to recognise the wakālah fee as income in the income statement. As for the actuarial side, the notable issue is the determination and estimation of management expenses and related expenses such as commissions that translate to earned and unearned wakālah fee, which are based on actuarial principles.

The paper recommends the following:

1. Up-front wakālah fee usually forms part of the total contribution and comprises the main income of a takāful operator (TO); hence, transparency is essential in determining the earned and unearned portions. This highlights the need for a proper definition of UWF and clarification of its components from the regulator. This would be a laudable accomplishment to further strengthen transparency and fair treatment in the takāful business.
2. There is a need for clear directions and guidelines on the calculation of the undue takāful contribution and its corresponding UWF to enhance the current practices and ensure fair treatment of UWF.
3. There is a need for adoption of service fees commensurate with services performed and the takāful protection run-off period1 based on accounting and actuarial principles.
4. There is a need to bridge the huge gaps in UWF treatment due to the different payment frequencies that signify unfair treatment for takāful participants (TPs).
5. There is a need for tripartite expertise involving Sharīʿah experts, actuaries and accountants to be harnessed to ensure a holistic solution and effective implementation of takāful regulatory requirements and operations including UWF. Any gaps in the tripartite engagement could inadvertently lead to implementation barriers.

Keywords: unearned wakālah fee, surrender value, takāful contribution, payment frequency, up-front wakālah fee