The Surplus That Wasn't There
A family takaful operator's participants' risk fund for its group credit takaful line shows the following for the year (PKR million): contributions received 500; wakala fee to the operator 25% of contributions; direct claims paid 210; retakaful contribution paid 60; retakaful recoveries received 40; increase in outstanding claims reserve 30. A qard hasan of 25 advanced by the shareholders' fund two years ago to cover a deficit has never been repaid. The finance head proposes to declare surplus of 175, retain 60% as an operator 'performance incentive' and credit the remainder to participants. The Shariah board has not been consulted, and the actuarial valuation report is still unsigned.
1. Recompute the surplus correctly, state the order in which it must be applied, and show why the finance head's figure of 175 is wrong.
Read the worked answer
Working (PKR million):
| Line | Amount |
|---|---|
| Contributions received | +500 |
| Wakala fee (25% × 500) | −125 |
| Direct claims paid | −210 |
| Retakaful contribution | −60 |
| Retakaful recoveries | +40 |
| Increase in claims reserve | −30 |
| Gross surplus | 115 |
| Less: repayment of qard hasan | −25 |
| Distributable surplus | 90 |
Why 175 is wrong. The finance head has effectively ignored the wakala fee, the retakaful contribution and the reserve movement, and added recoveries twice or in the wrong direction. A surplus is what remains of the participants' fund after all outgoings, including the reserve build-up, which is a liability of the fund and not spare money. Declaring a surplus that does not exist means distributing money the fund needs to meet outstanding claims - a solvency and a Shariah failure, since the next deficit falls back on the shareholders.
Order of application. (1) Meet all claims and reserve requirements; (2) repay any qard hasan from the shareholders' fund, because the shareholders' money covered participants' claims and cannot be left outstanding while participants receive a distribution; (3) any Shariah-board-approved retention for contingencies; (4) only then distribute surplus. Repaying the qard is not optional or a management preference.
2. Is the proposed 60% operator retention defensible? Explain what the governing documents must say and what the Shariah board's role is.
Read the worked answer
Almost certainly not, on three grounds.
- The share must be agreed ex ante. An operator's surplus share is a mudaraba-type profit share whose ratio must be fixed in the wakala agreement and known to participants at inception. A ratio chosen after the result is known is not a profit share; it is a unilateral appropriation of other people's money. If the agreement says 80:20, 80:20 applies even if the operator would prefer 40:60.
- The operator is already remunerated. It has taken a 25% wakala fee for managing the fund. A 60% surplus share on top of that is disproportionate and must be justified as an incentive for good claims management, not as a second income stream.
- The Shariah board decides, not finance. Surplus distribution is a Shariah matter: whether a surplus exists, whether reserves must first be built, and what ratio applies. The board needs the signed actuarial valuation, the qard position and the reserve policy before it can resolve.
What the documents must contain: the surplus-sharing ratio, the reserve and retention policy, the priority of qard repayment, the treatment of unclaimed surplus, and the basis for crediting individual participants. If the current agreement is silent on any of these, no distribution can be made until the agreement is amended and re-approved.
3. The marketing team wants to issue a press advertisement announcing a 'record surplus distribution of PKR 175 million'. What do you advise?
Read the worked answer
Stop it. The advertisement would publicise a figure the fund does not have, and it would be published before the Shariah board has resolved and before participants have actually been credited.
Specific problems:
- Accuracy and fair treatment. Announcing a distribution before it is approved creates an expectation the operator may not be able to honour, and misleads both existing participants and prospective buyers.
- Misstatement risk. Once the correct computation is done (gross 115, distributable 90 after the qard), any figure near 175 is indefensible. Correcting a published number afterwards damages credibility more than silence now.
- Sequencing. Approval chain is: signed actuarial valuation → finance certification → Shariah board resolution → management/board approval → crediting of participant accounts → communication. Marketing sits last.
- Content. When a communication is eventually issued it must state the basis (the ratio, the period, the fact that individual amounts vary) and must not be framed as an investment return.
The correct response to marketing is a holding line: 'distribution subject to Shariah board approval', followed by a factual notice once the resolution is in hand and accounts are credited.