Guidelines on Valuation Basis for Liabilities of General Takaful Business

The contract underlying takaful operations defines a unique relationship between the takaful operator and participants of a takaful scheme. While the takaful fund is responsible for meeting contractual benefits on the basis of mutual assistance among participants, takaful operators are expected to observe fundamental obligations toward participants. This includes adhering to Shariah principles and undertaking fiduciary duties to prudently manage the takaful funds, as well as covering the costs involved in managing the takaful business.

In fulfilling their fiduciary duty, takaful operators must implement measures to ensure the sustainability of general takaful funds to meet benefits and of the shareholders’ fund to support the takaful contracts for their full term. These measures include setting up appropriate provisions for liabilities in both the shareholders’ fund and, on behalf of participants, in general takaful funds, to ensure adequate funds are available to meet all contractual obligations and commitments as they fall due, with a reasonable level of certainty.

The Shariah Advisory Council of Bank Negara Malaysia has resolved that setting up provisions for liabilities in takaful business is permissible. Maintaining provisions to ensure the takaful fund can meet its obligations is a prudent approach, as Shariah encourages taking precautionary measures to address future uncertainty.

The ‘Guidelines on Valuation Basis for Liabilities of General Takaful Business’ (Guidelines) sets out prudential requirements that should be observed by takaful operators in valuing liabilities of their general takaful business, with the aim of providing for those liabilities at a specified level of adequacy with explicit prudential margins. This Guidelines is intended to reflect the takaful operator’s fiduciary duty to manage the takaful funds prudently, treat participants fairly as well as to ensure that the shareholders’ fund can adequately support the takaful business.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking