Is "Claim Contingency Reserve" Necessary for Takaful Business?

When I worked with one of my previous client, I came across "Claim Contingency Reserve" (CCR) in their operation model. According to "Takaful and Retakaful - Principles and Practices" written by Tobias Frenz, CCR (also known as Special Reserves or Equalisation Reserves in some markets) acts as a buffer against an adverse or volatile claims experience.

My client and I have a few discussions on CCR, especially on whether it is necessary to establish CCR in the participant risk funds. Normally, CCR is funded by surplus arising during the year and setup as a % of tabarru' or technical provision (This reminded me of the old days when I calculated solvency margin using 4% of reserves, ...). It was a a challenge to determine an appropriate % to be used and the approach to releasing CCR over time. Well, there is no prescribed % or approach available. 15% or 10%, which is better? Should we release over 3 years or 5 years? Should we release linearly or staggered (like commission payment pattern)? I'm afraid no one can really give you a good answer...

In my view, CCR has the same purpose as the solvency margin or capital (such as Risk-based Capital (RBC) Framework practised by the conventional insurers in Malaysia). Previously, there was no regulatory solvency framework (I was quite surprise when I found this during the employment with my first takaful employer), which required the takaful operators to setup solvency margin to protect the participants against adverse deviation. Hence, it might make sense to establish buffer and call it as CCR. (Personally I don't prefer to call this buffer as "reserve" - for me, this is not a form of "reserve" like the technical provisions we setup for the takaful liabilities).

Recently, Bank Negara Malaysia (BNM) has issued concept paper for RBC Framework for Takaful Operators - I was quite excited as I have been expecting this for some years! Once takaful operators adopt RBC Framework, I would think it is no longer necessary to have CCR in their operation model (otherwise you will have double provision).

Time to say goodbye to CCR! (Remember to revisit your surplus management policy, OK?)

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