Advantages Of Takalah Model

(i) Mudarabah Model

The mudarabah takaful model works on the following basis: takaful operators (known as shareholders) bear all expenses incurred in operating the business and as a reward are entitled to share underwriting excess and investment profits. This is an adjustment of mudarabah Islamic commercial contracts between takaful operator and participants (or policyholders) who provide the capital. The biggest dissent of this model is underwriting excess is non-profit. It is excess of premium over claims known as surplus. This business model is difficult to manage where expenses are fixed but income (surplus) is not. However, this is a very good model from the participants' perspective because they do not directly contribute to the operator's

In Malaysia, only two of takaful operators practice this mudarabah model.

(ii) Wakalah Model.

Under wakalah model, the surplus is referred to the surplus contributed by the participant into the Risk Fund based on tabarru’ contract. Upon reaching a financial period, the sum of tabarru' will not be equal with the amount the claim. If the tabarru’ amount is less than the sum of claims then the Risk Fund will be deficit, otherwise the tabarru’ amount exceed the claim then the Risk Fund will have a surplus.

The wakala model is the default standard for takaful. Operators charge and carry out takaful operations. For takaful operators, he makes a profit if wakala fee exceed expenses.

The surplus is actually the excess premium paid by the participants, so the surplus refund can be explained as a experience refund. Once this is accepted, then the surplus is belongs of the

Given that the participants are responsible for the deficit in the risk pool, it may seem odd that participants should share any excessive contribution to the shareholders. Many see this as an incentive compensation to the operator to manage the portfolio well, as evidenced by the surplus. However, whether this incentive is necessary given since the operators have already received a fee for underwriting services. As practised in Malaysia, wakala models is a model where operators only impose their management and distribution costs through wakala fees, while the profits are from the sharing of any underwriting surplus. There is also a wakala model where even management expenses and distribution costs are met from underwriting surpluses and zero fees are charged. This last extreme wakala model is similar to the mudarabah model. Even some Shari'ah scholars will also describe mudarabah model as a wakala model with zero fees

We can explain this wakala model from the perspective of both participants and operators. From a participant's perspective, the decision on the use of a wakala model whether operators share in excessive premiums or not will depend on how much higher is the wakala fee he has to pay. It is not always clear that having a share of the operator in the the underwriting surplus gives the participants the best value