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?)

Comments

Post a Comment

Popular posts from this blog

Other Ways to Prepare Prophet Model Point Files? Try FoxPro!

Image
If you are a frequent Prophet user, you must be definitely familiar with "Model Point Files" ("MPF"), i.e. the policy data that you compile in a specific format that Prophet can recognize as inputs for Prophet runs. If my guess is right, most probably you use Data Conversion System ("DCS") to convert the source data you download from your policy administration system (may be in various format, e.g. fixed ASCII / fixed width, comma delimited, tab delimited, etc.) into the required MPF, based on the definitions you specified in your DCS programs. In case your source data are divided into various files, you may need to carry out more steps to prepare MPF, for example: Open different source files in Excel Combine required fields from different source files by using commands (such as) VLOOKUP, SUMIF & MATCH. You may have automated this process by using VBA. Convert the required files into text files Use DCS to convert those text files into MPF  How...
Read more

How do You Setup Indicators in Your Prophet Model?

Image
In my previous post, I have discussed areas that you may consider in setting up input variables . Before I proceed my discussion on core variables, I would think that it is good for use to take a look on indicators - as indicators play an important role in setting core variables with various formulas (known as "variable definitions" in a Prophet model).  The funny thing about indicators is: it DOES NOT carry any formulas that you need to use in calculating a variable! Basically, they are just some texts that you can combine using different logical operators (AND, OR, NOT), such as "ORD_PAR AND SING_PREM" for a single premium ordinary participating product. 
Read more

How Should I Do My UAT? (1): Program / Spreadsheet / Model

Image
If you are working in the actuarial department of an insurance company, it may not be uncommon to you involving in various testing exercises, which are known as User Acceptance Testing ("UAT") in general. Some of us may think that UAT is only applicable to the policy administration system implementation project (Oops... Do I remind on the non-stop follow-ups from your Project Manager?), but in fact UAT is also needed for the programs, spreadsheet templates or actuarial model we use to perform various actuarial studies - whether they are developed internally or by external consultant. It is particularly important for those tools which we are going to use to perform regular studies. In my view, there is no one right answer for the approach to be used in performing UAT on program / spreadsheet / model - most importantly, the approach that you adopt should allow the required testing to be carried out in a structured manner, and it should not create too much "processes...
Read more