TAKAFUL BASIC EXAMINATION (TBE)

TEXTBOOK
PART B – GENERAL TAKAFUL

MALAYSIAN TAKAFUL ASSOCIATION

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TAKAFUL BASIC EXAMINATION (TBE) TEXTBOOK
Part B: General Takaful
2022 EDITION

Copyright © 2022 by the Malaysian Takaful Association

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or
transmitted in any form by any means, electronics, mechanical, photocopying, recording or otherwise,
without the prior written permission of the authors.

This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold,
hired out or otherwise circulated without the prior consent from the authors in any form of binding or
cover other than in which it is published and without a similar condition including this condition being
imposed on the subsequent purchaser.

Published by:

Malaysian Takaful Association

21st floor, Main Block
Menara Takaful Malaysia
No 4, Jalan Sultan Sulaiman
50000 KL

Edited and Produced by :

ACTIVE PERFORMANCE CONSULTING SDN. BHD.

No. 17, Jalan Telawi 8, Bangsar Baru, 59100 Kuala Lumpur (898600-A)

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CONTENTS Page

CHAPTER 1: INTRODUCTION TO GENERAL TAKAFUL

1.0 INTRODUCTION 6
1.1 PBENEFIT OF GENERAL TAKAFUL 6
1.2 CHARACTERISTICS OF GENERAL TAKAFUL PRODUCTS 7
1.3 THE BASIC PRINCIPLES APPLIED TO GENERAL TAKAFUL 8
1.4 CLASSES OF GENERAL TAKAFUL BUSINESS 10
ASSESSMENT QUESTIONS 11

CHAPTER 2: GENERAL TAKAFUL CLASSES – MOTOR TAKAFUL

2.0 INTRODUCTION 12
2.1 CLASSIFICATION OF MOTOR VEHICLES 13
2.2 TYPES OF MOTOR COVER 14
2.3 COMMERCIAL VEHICLES 16
2.4 RATING FACTORS 16
2.5 NO-CLAIM-DISCOUNT (NCD) 17
2.6 EXCESS 18
2.7 EXCLUSIONS 18
2.8 EXTENSIONS 19
2.9 BETTERMENT 19
ASSESSMENT QUESTIONS 20

CHAPTER 3: GENERAL TAKAFUL CLASSES – FIRE TAKAFUL

3.0 INTRODUCTION 21
3.1 BASIC FIRE TAKAFUL 21
3.2 HOUSEOWNER TAKAFUL 24
3.3 HOUSEHOLDER TAKAFUL 25
3.4 BUSINESS INTERRUPTION TAKAFUL (IN CONJUNCTION WITH FIRE TAKAFUL) 27
3.5 INDUSTRIAL ALL RISK (IAR) TAKAFUL 28
ASSESSMENT QUESTIONS 30

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CONTENTS Page

CHAPTER 4: GENERAL TAKAFUL CLASSES – ENGINEERING, MARINE AND AVIATION TAKAFUL

4.0 INTRODUCTION 31
4.1 RENEWABLE ENGINEERING TAKAFUL 32
4.2. NON-RENEWABLE TAKAFUL 34
4.3 MARINE TAKAFUL 35
4.4 AVIATION TAKAFUL 38
ASSESSMENT QUESTIONS 40

CHAPTER 5: GENERAL TAKAFUL CLASSES – MISCELLANEOUS TAKAFUL

5.0 INTRODUCTION 41
5.1 THEFT TAKAFUL 41
5.2 LIABILITY TAKAFUL 42
5.3 MISCELLANEOUS ACCIDENT TAKAFUL 44
ASSESSMENT 49

CHAPTER 6: GENERAL TAKAFUL PRACTICES - RISK ASSESSMENT AND UNDERWRITING

6.0 INTRODUCTION 50
6.1 THE UNDERWRITING PROCESS 50
6.2 RETAKAFUL AND CO-TAKAFUL 53
6.3 RATING 55
6.4 PAYMENTS AND REFUNDS 56
6.5 LIBERALISATION OF MOTOR INSURANCE AND TAKAFUL 57
ASSESSMENT 58

CHAPTER 7: GENERAL TAKAFUL PRACTICES – DOCUMENTATION IN GENERAL TAKAFUL

7.0 THE PROPOSAL AND DECLARATION FORM 59
7.1 THE IMPORTANCE OF THE PROPOSAL FORM 59
7.2 CONTENTS OF A PROPOSAL FORM 59
7.3 COVER NOTE 60

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CONTENTS Page

7.4 THE GENERAL TAKAFUL CERTIFICATE 61

7.5 ENDORSEMENTS 62
7.6 WARRANTIES 63
7.7 RENEWAL NOTICE AND RENEWAL CERTIFICATE 63
7.8 ON LINE OR DIGITAL COVERAGE 63
ASSESSMENT QUESTIONS 64

CHAPTER 8: GENERAL TAKAFUL PRACTICES – CLAIMS

8.0 INTRODUCTION 66
8.1 CLAIM PROCESS 66
8.2 REPUDIATION OF LIABILITY 70
8.3 POST-SETTLEMENT ACTION 71
8.4 MARKET AGREEMENTS 71
8.5 MANAGING DISPUTES 72
8.6 APPLICATION OF AVERAGE CLAUSE IN CLAIMS 73
ASSESSMENT QUESTIONS 74

CHAPTER 9: GENERAL TAKAFUL PRACTICES - ETHICS AND CODE OF CONDUCT

9.0 INTRODUCTION 76
9.1 DEALINGS WITH AGENTS 76
9.2 MINIMUM ENTRY QUALIFICATION 77
9.3 CORPORATE NOMINEE 77
9.4 COMMISSION WITHIN WAKĀLAH FEES AND DISCLOSURE 78
9.5 COMPLIANCE WITH CASH-BEFORE-COVER (CBC) FOR MOTOR TAKAFUL 78
ASSESSMENT QUESTIONS 79

GLOSSARY OF GENERAL TAKAFUL TERMS 81

ANSWERS TO SELF-ASSESSMENT QUESTIONS 83

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CHAPTER 1: INTRODUCTION TO GENERAL TAKAFUL

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Describe the objective of General Takaful.

• Understand the key characteristics of General Takaful.

1.0 INTRODUCTION

General takaful is a Sharī’ah compliant risk management approach designed to indemnify a certificate
owner for the financial loss arising from the occurence of a covered event. Indemnity restores the
participant to the same financial position as he was in just before the loss.

General takaful covers participants against financial loss, liability or injury arising from or following a
covered misfortune to property, assets or persons. Some examples are:

• motor vehicle takaful which provides compensation to victims of road accidents.

• fire takaful which mitigates the damage to a business caused by a fire.
• marine cargo takaful and export credit takaful which helps to reduce the financial impact of risks in
international trade and commerce.

This risk indemnification concept is in line with the Sharī’ah Maxim (Qawā’id al-Fiqhiyyah), ‘al-Ḍararu
Yuzāl’ which means ‘Harm Must be Eliminated’. This is exemplified in the following Ḥadīth:

Anas bin Malik narrated that a man said:

"O Messenger of Allāh! Shall I tie it and rely (upon Allāh), or leave it loose and rely
(upon Allāh)?" He said: "Tie it and rely (upon Allāh)."

(Jāmi’ al-Tirmidzi : 2517)

1.1 BENEFIT OF GENERAL TAKAFUL

As general takaful is a risk indemnification solution, it takes into account the pre and post loss objectives
of a certificate owner:

a. The pre-loss objectives are:

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 • Prepare for potential losses in the most economical way
• Reduce fear and worry
• Legal compliance to benefit from the indemnification process

b. The post-loss objectives

• Indemnification or reduction in the consequences of loss

• Speed of indemnification and recovery
• Survival of the organization
• Financial stability of the individual

1.2 CHARACTERISTICS OF GENERAL TAKAFUL PRODUCTS

The characteristics of General Takaful products can be summarized as shown in Table 1.1 below.

Table 1.1: General Characteristics of General Takaful Products

CHARACTERISTICS DESCRIPTION
Annual or Short-Term Contracts General Takaful contracts usually last for a period of one
year or less and at the end of that period, it can be renewed
by mutual consent of the Takaful Operator and the
participant.

Varying Contribution at the At the end of the contract period, the Takaful Operator will
time of Renewal reassess the risk. Based on the reassessment, a different
contribution rate may be charged. The difference in the
rate could be due to two basic causes:

a. Change in the nature of the individual risk to be covered

and/or

b. Overall change in the certificate/ contribution rates for

that particular class of business owing to, for example, an
overall worsening of the consequences of the risk to be
covered.

Contracts of Indemnity In general takaful, the aim is to place the participant in the
same financial position as he was in before the occurrence
of the loss, subject to maximum limits of the covered
amount.

Payment of a Claim does not Under general takaful, the settlement of a claim will not
Terminate the Contract terminate the contract unless a claim is paid for total loss.
If it is not a total loss, further claims can be made within the
contract period for the balance of the sum covered.

Risk to Be Covered Does not Unlike family takaful contracts where the mortality risk
Necessarily Increase with Time increases with age, a covered risk under general takaful
may not necessarily increase with the lapse of time. It may
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 decrease due to better safety measures taken by the
participant (e.g. installation of water sprinklers and fire
alarm for the premises, better fire resistant materials etc.)

1.3 THE BASIC PRINCIPLES APPLIED TO GENERAL TAKAFUL

General takaful contracts applies six general principles in practice. The six principles are:

1. Principle of Permissible Takaful Interest

2. Principle of Utmost Good Faith
3. Principle of Indemnity
4. Principle of Subrogation
5. Principle of Contribution
6. Principle of Proximate Cause

The above principles have been discussed in general under Part A of the text. However, the principles of
indemnity, subrogation and contribution will be further discussed here as these have greater relevance
to the conduct of general takaful business.

1.3.1 Principle of Indemnity

Indemnity can be defined as a mechanism used by the Takaful Operator to provide compensation in an
attempt to place the participant in the same pecuniary position after the loss as enjoyed (by the
participant) immediately before the loss. This principle is applied to prevent the participant from making
a profit out of his loss.

General Takaful certificates are contracts of indemnity where the loss is measurable in monetary terms.
For example, the damage to property may be RM 100,000, the indemnity for a car involved in an accident
may be RM 20,000, the loss due to theft at a factory is RM 250,000 etc. The indemnity will be paid in
monetary terms.

The principle of indemnity shall apply as follows:

• The participant has to prove that he has suffered a loss arising from the subject matter covered under
the takaful certificate and the loss is an actual monetary loss.

• The amount of compensation must be within the sum covered under the takaful certificate. The
compensation cannot be more than the sum covered. It must be emphasized that the sum covered is
not a measure of indemnity by itself but it sets an upper limit to which the loss can be indemnified.
The actual amount of indemnity will be based on the principle of “the sum covered or the market
value whichever is lower”.

• If the participant receives more than the actual loss, the Takaful Operator has the right to recover the
extra amount from the participant.

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1.3.2 Principle of Subrogation

The principle of subrogation allows a Takaful Operator who has indemnified a participant for a loss to take
over the participant’s legal rights to recover the loss from a negligent third party who is responsible for
the loss. The Takaful Operator can exercise subrogation rights in the participant’s name

In cases where the participant had been partly indemnified by a third party, the Takaful Operator will only
pay the balance. If the Takaful Operator recovers more than what the third party has paid to the
participant, such excess must be returned to the participant.

Subrogation is not applicable to Family Takaful and Personal Accident Takaful as these are not contracts
of indemnity.

Example 1.1

Participant A’s house was destroyed by a fire due to the explosion of a factory close by. A claim
was submitted by Participant A to his Takaful Operator for RM 500,000. Upon payment of the
claim, the Takaful Operator is accorded with the subrogation right to claim the amount settled
with participant A from the factory owner who is responsible for the loss.

1.3.3 Principle of Contribution

The Principle of Contribution is applied to prevent the participant from making a profit arising from
multiple claims for the same loss from different Takaful Operators. Under this principle the loss shall be
proportionately shared between the Takaful Operators concerned.

Example1.2

Participant B has a fire takaful cover for RM 1 million on his house with each Takaful Operator X,
Y and Z with the hope of making a profit through multiple claims from all the Takaful Operators
should the house be destroyed by fire. He hopes to receive an amount of RM 3 million (RM1
million from each Takaful Operator).

When the house was destroyed by fire, participant B submitted his claim to all the Takaful
Operators as planned. However, upon discovery that there were three takaful certificates, each
Takaful Operator only paid their proportionate share of the loss i.e. RM 333,333 (total indemnity
of RM1 million).

For the principle of contribution to apply, the following conditions must be fulfilled:

• All the certificates must be in force at the time of happening of the covered event.

• The same subject matter is covered (i.e. applied only when the same person covers the same subject

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 matter) with more than one insurer.

• The same peril caused the loss (i.e. contribution arises only if the multiple certificates cover the
same perils which caused the loss).

1.4 CLASSES OF GENERAL TAKAFUL BUSINESS

General Takaful business is categorized into two m a j o r classes: Motor and Non-Motor business. This
is illustrated in the Table below.

Table 1.2: GENERAL TAKAFUL BUSINESS

Classes Main/Basic Product Sub-Products

Motor Motor Takaful • Private Cars

• Commercial Vehicles
• Motorcycles
• Special Vehicles

Non-Motor Fire Takaful • Basic Fire Takaful

• Houseowners Takaful
• Householders Takaful
• Business Interruption
• Industrial All Risk (IAR)

Marine and Aviation Takaful • Marine Hull

• Marina Cargo
• Aviation

Engineering Takaful • Contractors All Risk Takaful (CAR)

• Erection All Risk (EAR)
• Boiler and Pressure Vessel
• Machinery Breakdown
• Electronic Equipment/Computer

Miscellaneous Takaful • Theft Takaful

• Liability Takaful
• Miscellaneous Accident Takaful



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 CHAPTER 1 ASSESSMENT QUESTIONS

1. General Takaful is a risk management tool that manages risk exposures by taking into account the

I. pre-loss objectives
II. post-loss objectives
III. conditional takaful objectives
IV. contingent loss objectives

A. I & II
B. I, II & III
C. I, III & IV
D. All of the above

2. A General Takaful certificate aims to place the participant in the same financial position as he was in
before the occurrence of the loss, subject to the maximum limits of the covered amount under the plan
is called

A. a contract of adhesion
B. a contract of cohesion
C. a contract of replacement
D. a contract of Indemnity

3. The principles applied in the general takaful business will include all of the following EXCEPT

A. Principle of Subrogation
B. Principle of Consideration
C. Principle of Contribution
D. Principle of Proximate Cause

4. The actual amount of indemnity in a general takaful contract will be based on

A. the sum covered or the market values whichever is lower

B. the sum covered or the market values whichever is higher
C. in proportion of the amount of contributions paid to date
D. in proportion to the achievement of the Takaful Operator’s profit target

5. The _________________ is applied to General Takaful in order to prevent the participant from making
profit out of multiple claims for the same loss from different Takaful Operators.

A. Principle of Subrogation
B. Principle of Consideration
C. Principle of Contribution
D. Principle of Proximate Cause

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CHAPTER 2: GENERAL TAKAFUL CLASSES – MOTOR TAKAFUL

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Classify the types of vehicles covered under Motor Takaful and the No Claim Discount applicable
for the respective vehicles.
• Understand the types of coverage granted under Motor Takaful.
• State the rating factors considered in determining the Motor Takaful contribution

2.0 INTRODUCTION

The motor takaful industry in Malaysia is generally governed under the Islamic Financial Service Act, 2013
and more specifically under the Road Transport Act, 1987 (RTA 1987).

The Road Transport Act, 1987 (RTA) regulates motor vehicles and traffic on the roads in Malaysia and
enforces compulsory insurance (or takaful). Section 90 (1) of the RTA states that:

‘… it shall not be lawful for any person to use or to cause or permit any other person to use, a motor
vehicle unless there is in force a policy of insurance (or takaful) or such other security in respect of third-
party risks’.

Section 90(2) of the RTA, 1987 states that a person who contravenes this section shall be guilty of an
offence and liable to a fine not exceeding RM 1,000 or 3 months imprisonment and if the court deems fit,
the offender will be disqualified from holding a driving license for 12 months from the date of conviction.

‘Third Party’ refers to the beneficiary of the certificate who is someone other than the two parties
involved in the contract (the takaful participant and the Takaful Operator). The basic certificate required
by law does not provide any benefit to the participant. However, it covers the participant's legal liability
for death or disability of a third-party’s loss or damage to a third-party’s property.

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2.1 CLASSIFICATION OF MOTOR VEHICLES

Motor Takaful provides the participant with coverage against:

• loss or damage to their vehicle due to accident, theft or accidental fire,

• bodily injury or death of a third party as well as loss or damage of a third party’s property.

For the purpose of rating, the Motor Tariff classifies vehicles as follows:

Table 2.1: Motor Tariff Classification

TYPE OF VEHICLE DESCRIPTION
Private Cars Private car used for social, domestic and pleasure purposes and
for business or professional purposes of the participant only.
These include three-wheeled cars and station wagons.
Note: Use for hire or reward, racing, reliability trial, etc. are
excluded.

Commercial Vehicles Vehicles used for commercial purposes, which include vans, taxis,
pick-ups, open lorries, trucks, articulated vehicles, etc. that are
not categorized under private car certificates but under
commercial vehicle certificates. These include all vehicles
(including three-wheeled carriers) not provided for under the
private cars or motorcycles classification.

Motorcycles These include motorcycles with or without side-cars, motor

scooters, auto-cycles or mechanically assisted pedal cycles. The
Tariff further sub-divides the motorcycles into:

• Private motorcycles
• Commercial motorcycles
• Motorcycles (with or without side-cars) used for hire.

Special Vehicles These include forklift trucks, mobile cranes, bulldozers and
excavators, agricultural and forestry vehicles, site clearing and
levelling plants, mobile plants, delivery trucks (pedestrian
controlled), dumpers, (mechanical navies), shovels, grabs, trolleys
and goods-carrying tractors, fire brigade vehicles, (road rollers),
(gritting machines), hearses, mobile shops and canteens, prison
vans, tar sprayers, dust carts, tractors and traction engines.

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2.2 TYPES OF MOTOR COVER

When you buy a motor vehicle, you need to buy a motor takaful certificate before the vehicle can be used
on the road. There are many types of motor takaful certificates available. There are four (4) types of cover
available for each category of motor vehicles as shown below in Table 2.2.

Table 2.2: TYPES OF MOTOR TAKAFUL COVER

Third Party Third party Fire & Theft Comprehensive cover Extension cover or
rd
(Also known as 3 (Sometimes known as (Also known as 1st Optional Benefits to a
party certificate) 2nd party certificate) party) Comprehensive
Certificate (Subject to
agreement by the
Takaful Operator and
payment of additional
contributions)
Death or injury to other Death or injury to other Death or injury to Breakage of screen only
parties parties other parties
Damage to other Damage to other Damage to other Damage arising from
parties’ property parties’ property parties’ property flood, windstorm,
landslides & other
natural disasters.
N/A Loss/Damage to the Loss/Damage to the Damage to the vehicle
vehicle caused by Theft vehicle caused by due to Malicious
or Fire Theft or Fire damage or Riot, Strike
and Civil commotion
N/A N/A Damage to the vehicle Personal accident and
caused by the accident Medical benefits for the
driver and/or
passengers
N/A N/A N/A Liability to passenger
N/A N/A N/A Liability to 3rd party
caused by Passenger

2.2.1: Act Cover

This is the minimum cover corresponding to the requirements of the Road Transport Act 1987. The cover
required is in respect of legal liability for death or bodily injury to a third party (excluding passengers). It
also includes a cover for reasonable expenses incurred for hospital treatment for injured persons. This
type of certificate is hardly ever written by Takaful Operators.

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2.2.2 Third Party Cover

This certificate covers a participant against claims for bodily injuries or deaths caused to other persons
(known as the third party), as well as loss or damage to third party property caused by the participant’s
vehicle.

Legal liability refers to tortious liability, not contractual liability, e.g. arising due to the participants’
negligent or reckless driving.

This is normally the lowest option for a takaful participant; it does not cover loss or damage to the vehicle
of the participant.

2.2.3 Third Party, Fire and Theft

This certificate provides takaful cover against claims for third party bodily injury and death, third party
property loss or damage, and loss or damage to the vehicle due to accidental fire or theft.

2.2.4 Comprehensive Cover

This certificate provides the widest coverage, i.e. third party bodily injury and death, third party property
loss or damage and loss or damage to your own vehicle due to accidental fire, theft or an accident.

The coverage under a comprehensive certificate is divided into two sections.

• Section A – Loss or damage to own vehicle (Own Damage).

• Section B – Legal liability to third parties (Third Party).

2.2.4.1 Risks Covered Under Section A

• Accidental collision or overturning

• Collision or overturning caused by mechanical breakdown
• Collision or overturning caused by wear and tear
• Fire, explosion and lightning:
o By malicious act.
o By burglary, housebreaking or theft.
• By impact damage caused by falling objects, provided there is no flood, typhoon, hurricane, storm,
tempest, earthquake, volcanic eruption, landslide, subsidence or sinking of the soil/earth or other
convulsions of nature
• Whilst in transit (including its loading and unloading) by:
o Road rail, inland waterway
o Direct sea route across the straits from the island of Penang

2.2.4.2 Risks Covered Under Section B

• Cover against legal liability to a third party that may arise in consequence upon injury or death of any
third party arising out of the use of the motor vehicle. This is termed as Third Party Bodily Injury (TPBI).
The law allows for unlimited liability for TPBI.
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• Cover against any legal liability to a third party in the event of damage or destruction to property
belonging to any third party arising out of the use of the motor vehicle. This is known as Third Party
Property Damage (TPPD). Currently, the law limits damages underTPPD to RM3 million.

• Cover against legal costs and expenses incurred by the participant which is payable with Takaful
Operator’s consent. Reasonable medical expenses due to a road accident to any person limited up to
a maximum of RM400.00 for in-patient and RM40.00 for out-patient treatments.

This is the cover under the Malaysian MotorTariff.

Act Cover

Third Party Cover

TYPES OF MOTOR COVER

Third party, Fire and Theft
Section A

Comprehensive Cover

Section B
Figure 2.1: Third party, Fire and Theft Cover

2.3 COMMERCIAL VEHICLES

The scope of coverage is similar to the Private Motor Vehicle except with two additional exclusions:

• damage caused by overloading or strain.

• damage caused by explosion of any boiler forming part of or attached to or on the covered
vehicle.

2.4 RATING FACTORS

The rating of motor Takaful contribution is generally based on the following criteria:

• Type of cover – third party or comprehensive.

• Type of vehicle – private car, commercial vehicle, motorcycle.
• Make and model of vehicle - saloon, sports, local, imported etc.
• Year of manufacture / age of vehicle.
• Cubic capacity of engine.
• Use of vehicle.
• Market value of vehicle.
• Driver/owner of vehicle – age, occupation, experience.
• Excess.
• Past claims.
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In Malaysia, the motor premium or Takaful contribution for the motor insurance and Takaful business is
subject to Malaysian Motor Tariff. However, the practice towards de-tariff has been introduced in 2017.

2.5 NO-CLAIM-DISCOUNT (NCD)

If no claim is made or arises from a participant’s certificate, and provided the subject matter is covered
for a continuous period of twelve (12) months in each of the following time periods, the participant is
entitled to a No-Claim-Discount (NCD) upon renewal of the certificate as follows:

Table 2.3: No-Claim-Discount (NCD)

Period of insurance Private Car Commercial Vehicle/ motorcycle

After 1st year 25% 15%

After 2nd year 30% 20%

After 3rd year 38.33% 25%

After 4th year 45% 25%

After 5th year 55% 25%

6th year onwards 55% 25%

This can be regarded as an incentive to the participant for not causing any accident during the preceding
period of cover. If an accident occurs involving a third party, the participant will lose his NCD entitlement
even though he has not made a claim as the Takaful Operator would have to provide a monetary reserve
in anticipation of a third party claim.

The NCD is transferable if there is a change in the certificate to another Takaful Operator or to another
vehicle that belongs to the participant, since this incentive is attached to the person rather than the
vehicle.

Example 2.1

Let’s assume a vehicle has a basic takaful contribution of RM 3,500 for the current year, and the owner
is entitled to a NCD of 55%. In this case, the owner will have a discount of RM 1,925 (RM 3,500 x 0.55)

The owner will only be required to pay a sum of RM 1,575.00 (which is RM 3,500 – RM 1,925) not
including any add-on coverage, service tax or stamp duty that is applicable.

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2.6 EXCESS

Most certificates are subject to an excess clause. An excess is the first amount of a claim the participant
will have to pay. The Takaful Operator pays for the amount above the excess. The excess clause may apply
on repair claims and/or on theft claims. Some operators will overlook application of the excess if repairs
are undertaken at their panel of repairers.

For a Takaful coverage under the Third Party class, no excess is imposed. However, for coverage under
the comprehensive class, there is compulsory excess for both the participant and the authorized driver(s)
and it applies for both cars and motorcycles.

The rates of excess under the Malaysian Motor Tariff are as follows:

Table 2.4: Excess under the Malaysian Motor Tariff

Type of Vehicle Excess Rate

Private car 1% of sum covered

4WD Vehicle/ MPV 3% of sum covered

Commercial Vehicle 3% of sum covered

Motorcycle 5% of sum covered

Example 2.2

If the amount of excess is RM 1,000 and the amount of claim for accidental damage is RM 1,500, then the
Takaful Operator will only indemnify the participant for a sum of RM 500.

2.7 EXCLUSIONS

A standard motor takaful certificate will not cover certain losses. However, the participant may pay
additional contributions to extend the certificate to cover flood, landslide and landslip as well as cover the
passengers. It is important to check the certificate for the exclusions.

Motor Takaful will not cover the following:

• Participant’s own death or bodily injury due to a motor accident.

• Damage to tires unless the vehicle is damaged at the same time.
• Consequential loss, depreciation, wear and tear, rust and corrosion, mechanical or electronic
breakdowns, failures or breakages, equipment or computer malfunction.
• Loss, damage or liability occurring outside the geographical area (Malaysia, Singapore and Brunei).
• Loss or damage caused by or due to cheating or criminal breach of trust.
• Loss, damage or liability arising from an act of nature, arising during or consequence of flood, typhoon,
hurricane, storm, volcanic eruption, earthquake or landslide and other nature, landslide.
• Loss, damage or liability arising from riot, strike, war and/or warlike operations and nuclear risks.
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• If the participant or any person with the participant’s consent is not licensed to drive the vehicle.
• If the participant or the authorized driver drives the vehicle whilst under the influence of alcohol or
drugs.
• Loss, damage or liability caused by the vehicle being used for an unlawful purpose.
• If the vehicle is used for any motor sports or competition (other than treasure hunts) or any other
purpose specified in the certificate.

2.8 EXTENSIONS

Motor takaful allows for certificate owners to extend the cover to include extra benefits and additional
cover apart from the standard coverage which may include the following:

• Flood, windstorm, rainstorm, typhoon, hurricane, volcanic eruption, earthquake, landslide/landslip,

subsidence or sinking of the soil/earth or other convulsion of nature
• Breakage of glass in windscreen or windows
• Strike, riot and civil commotion
• Tuition and testing purposes
• Additional named driver
• All drivers’ extension for private car polices issued to a company of businesses only
• Passenger liability
• Liability of passengers for acts of negligence
• Additional business use

2.9 BETTERMENT

The basic premise of a motor takaful is to put the owner in the same condition as he would have been in
before an accident occurs (principle of indemnity). Betterment will apply, when in the course of repairing
an accident-damaged vehicle, a new part is used to replace an old part. Betterment is a portion of the cost
that the participant will have to bear when a brand new original part is used as the car will be in a better
condition than prior to the accident. This will be based on a scale of betterment adopted by the insurance
industry as shown below.

Table 2.5: Betterment rate

Age of vehicle Rate applied (%)
< 5 years old 0
5 15
6 20
7 25
8 30
9 35
10 and above 40

Consumers have the option to purchase new add-on takaful cover such as “waiver of betterment” or
request for second-hand spare parts subject to availability to avoid incurring betterment charges.


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 CHAPTER 2 ASSESSMENT QUESTIONS

1. In general motor takaful, a ‘Third Party’ refers to

A. the beneficiary of the certificate who is someone other than the parties involved in the contract.
B. any beneficiary including the parties involved in the contract.
C. any person or persons who have any dealing with the takaful operator.
D. none of the above is TRUE.

2. Select the CORRECT STATEMENTS with regard to the basic certificate required by law for motor
takaful

I. The basic certificate required by law does not provide any benefit to the Participant.
II. The basic covers the participant's legal liability for death/disability of third-party loss or damage to
third-party property
III. The basic cover is only applicable to situations selected by the participant
IV. The basic cover is provided at no cost when a comprehensive cover is obtained

A. I & II
B. I, II &III
C. II, III & IV
D. All of the above are FALSE

3. This is the minimum cover required under the Road Transport Act 1987.

A. Minimum coverage plan

B. Act Cover
C. Compulsory cover
D. Force cover

4. A Motor Takaful plan will not cover the following. One of the following OPTIONS is FALSE.

A. Participant’s own death or bodily injury due to a motor accident

B. Loss, damage or liability caused by the vehicle while being used for a lawful purpose
C. Damage to tires unless the vehicle is damaged at the same time
D. Loss or damage caused by or due to cheating or criminal breach of trust

5. The amount of loss the participant has to bear before the Takaful Operator will pay for the balance of
your claim is called ____.

A. Extra
B. Compulsion
C. Excess
D. Penalty

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CHAPTER 3: GENERAL TAKAFUL CLASSES – FIRE TAKAFUL

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Classify the main types of takaful cover under the general non motor takaful category.
• Understand the types of coverage granted under the general non motor takaful category.

3.0 INTRODUCTION

The main types of Takaful under this class of Takaful include:

• Basic Fire Takaful;

• Houseowners Takaful
• Householders Takaful
• Business Interruption Takaful
• Industrial All Risk (IAR) Takaful

An overview of the coverage of the above certificates is shown in Table 3.1 before the details of each
certificate type is subsequently discussed.

Table 3.1: Overview of the Main Types of Non-MotorTakaful

Basic Fire Houseowners Householders Business Industrial All Risk

Takaful Takaful Takaful Interruption (IAR) Takaful
Takaful

Covers the loss Covers Covers loss or Covers loss of gross Covers all the
of or damage to residential damage to profit due to “named perils” of
buildings by fire building against h o m e contents reduction in turnover fire and “accidental
loss or damage and increased cost of material damage”
working during the
indemnity period

3.1 BASIC FIRE TAKAFUL

This certificate covers the building and/or contents from loss or damage caused by fire and lightning. The
coverage could also be extended to include special perils e.g. storm and tempest, flood, earthquake etc.
The contribution rates, wordings, coverage, terms and conditions including clauses and endorsements of
a standard fire tariff certificate are subject to the revised Fire Tariff issued by PIAM. However, under Bank
Negara Malaysia’s tariff liberalization framework, takaful operators are also allowed to introduce non-
tariff fire takaful products with variations in coverage, terms and conditions.

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The coverage of the basic fire takaful is elaborated below:

3.1.1: Basic Cover

It covers the loss of or damage to buildings (of factories, shops, offices, private dwellings, etc.), and
contents (for example, furniture, fixtures & fittings, plants & machinery, office equipment, stocks-in-
trade, personal effects and household goods) caused by the following perils:

• fire.
• lightning.
• explosion of gas used for illuminating and domestic purposes only.

3.1.2: Extended Perils

In addition to the basic Fire Takaful, a further range of perils may be extended under the standard cover
but subject to additional contribution.

Under this extension the following perils are commonly covered:

Table 3.1: Extended Perils under Basic Fire Takaful

Dry Perils Wet Perils Miscellaneous Perils
Aircraft and aerial devices Storm and tempest Impact damage
Explosion Flood Subsidence and landslip
Riot, Strike, malicious Bursting of pipe Subterranean fire
damage and Civil Commotion
Bush, lallang fire Overflowing of water tanks Spontaneous combustion
Earthquake and Volcanic Sprinkler leakage Loss of rent
Eruption

3.1.3 Property or Assets that can be covered under Fire Takaful

The following items may be covered under Fire Takaful:

• buildings, to include walls,fences, garages, etc.

• plant and machinery.
• stock and stock in trade.
• loss of rent.
• furniture, fixtures and fittings.
• goods held in trust or commission.
• professional fees.
• removal of debris.

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3.1.4 Rating and Underwriting Criteria

Fire Takaful is normally rated and underwritten based on the following criteria:

• construction of building – bricks, wood, steel, etc.

• type of building – detached, attached complexes, etc.
• value of building - cost of rebuilding; (excluding value of land).
• use of building – residential house, shop house, factories, office complex, commercial complex, etc.
• location of building – towns, villagers, industrial areas,residential areas, flood-prone areas.
• additional risks covered.

3.1.5 Exclusions

The Fire Takaful excludes the following:

1. loss or damage caused directly or indirectly by the following perils:

• earthquake, volcanic eruption or other convulsion of nature.

• typhoon, hurricane, tornado and the like
• warlike risks.
• nuclear risks.

2. loss or damage caused proximately by the following perils:

• burning of property by order of any public authority.

• subterranean fire.
• explosion other than explosion of gas used for:
▪ illuminating and domestic purposes.
▪ burning of forest, bush, lallang, prairie, pampas or jungle and the clearing of land by
fire.

3. loss or damage to the following specified property unless expressly stated in the certificate:

• goods held in trust or on commission.

• bullion or unset precious stones.
• any curiosity or work of art exceeding RM 500., such as antiques.
• manuscripts, plans, drawing or designs, patterns, models or molds.
• securities, obligations or documents of any kind, stamps, coins or currency notes, cheques, books of
account or other business books or computer systems records.
• coal against loss by its own spontaneous combustion.
• explosives

4. specified losses by policy condition:

• loss by theft during or after occurrence of fire.

• loss or damage to property resulting from its own fermentation, natural heating or spontaneous
combustion.
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3.2 HOUSEOWNER TAKAFUL

Houseowners Takaful covers residential building against loss or damage caused by perils such as fire,
flood or earthquake etc. This certificate provides additional coverage compared to the basic fire certificate
for residential properties i.e. private dwellings, condominiums, apartments or flats.

3.2.1 Basic Cover

a. Loss or damage to the home building (including fixtures and fittings, garages, out-buildings, walls, gates
and fences) by the following covered perils:

• fire, lightning, thunderbolt and subterranean fire.

• explosion.
• aircraft and other aerial devices and/or articles dropped therefrom.
• impact damage by road vehicles, horses and cattle.
• bursting and overflowing of water tanks, apparatus or pipes excluding first RM 50 of every loss and
destruction or damage while the covered building is left unfurnished.
• theft accompanied by actual forcible and violent breaking into or out of the building or any attempt
thereat.
• hurricane, cyclone, typhoon, windstorm.
• earthquake, volcanic eruption.
• flood (including overflow of the sea).

b. Loss of rent (not exceeding 10% of the total sum covered) in the event of the building being damaged
as to be rendered uninhabitable.

Liability of the covered property to the public as owner of the premises (this would include liability arising
from defects in buildings, fixtures and fittings or in the walls, gates, fences and trees around) up to a limit
of RM10,000 plus legal costs subject to the consent of the Takaful Operator.

3.2.2 Exclusions

This Takaful coverage excludes the following:

a. loss or damage arising from:

• war, riot and kindred risks.

• contamination by radioactivity.

b. loss or damage caused by hurricane, cyclone, typhoon, or windstorm to the following:

• any building under construction,reconstruction or repair.

• metal smoke stacks, awnings, blinds, signs and outdoor fixtures and fittings including gates and
fences.

c. loss or damage caused by subsidence and landslip except where it is occasioned by

earthquake or volcanic eruption.
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3.2.3 Extensions

The Houseowner Takaful cover can be extended to include the following perils at additional cost:

• riot, strike and malicious damage.

• subsidence and landslip.
▪ plate glass exceeding RM500 per piece

3.2.4 Covered Value

A Houseowner Takaful participant must make sure that the property is adequately covered at all times,
taking into account the renovations and enhancements made to the property. The sum covered should
cover the cost of rebuilding the property in the event of loss/damage. If the property is under financing,
the participant may want to make sure that the financier has taken adequate takaful coverage. Usually,
the coverage arranged by the financier will be for the amount of loan taken. Participants may want to take
up a separate takaful cover to extend the coverage taken by their financier.

3.2.5 Strata-titled properties

• Master policy/certificate and individual takaful certificate

If a Houseowner Takaful participant owns a part strata-titled property, e.g. an apartment, the company
managing their apartment building or the Management Corporation (MC) is required to take up
insurance/takaful under a master policy/certificate. They must ensure that they get a copy of their
individual policy/certificate of insurance/takaful for their property to check the coverage taken up under
the master policy/certificate by their MC.

• Property under financing

If a house or apartment is under financing, the financier may require the owner to participate in another
Houseowner Takaful to cover the loan taken. This will result in double-takaful.

However, if their property is financed by a bank under the supervision of Bank Negara Malaysia (BNM), it
has been agreed that the financier will not require the participant to take another takaful plan but it will
accept the takaful certificate from the MC as evidence of coverage for their unit. However, the MC needs
to comply with the terms and conditions required by the financial institution, that is the takaful plan
covers the minimum risks such as fire, subsidence and landslip.

3.3 HOUSEHOLDER TAKAFUL

Householder Takaful will cover contents, such as furniture, furnishings, kitchen equipment,television and
radio sets, clothing, personal effects and valuables, and also provide coverage for fatal injury to the
participant.

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3.3.1 Basic Cover

Loss or damage to contents (including furniture, furnishings, household goods, personal effects and
valuables) caused by:

• fire, lightning, thunderbolt and subterranean fire.

• explosion.
• aircraft and other aerial devices and/or articlesdropped therefrom.
• impact damage by road vehicles, horses and cattle.
• bursting and overflowing of water tanks, apparatus or pipes excluding first RM50 of every loss and
destruction or damage while the covered building is left unfurnished.
• theft accompanied by actual forcible and violent breaking into or out of the building or any attempt
thereat.
• hurricane, cyclone, typhoon, windstorm.
• earthquake, volcanic eruption.
• flood (including overflow of the sea).
• loss of rent (similar to the Houseowners Takaful).
• breakage of mirrors (other than hand mirrors) whilst in the private dwelling only.
• fatal injury to the person covered occurring in the private dwelling occasioned by outward and visible
violence caused by thieves or by fire. The Takaful Operators will pay RM 10,000 or one half of the total
sum covered, whichever is less.
• loss or damage caused by any of the covered perils to servants’ clothing and personal effects.
• liability of the participant to the public in respect of accidental occurrence in or about the participant
premises as a private householder occupying the private dwelling up to a limit of RM50,000 plus legal
costs subject to the consent of the Takaful Operator.

Property temporarily removed but remaining in Malaysia will be covered against the above perils.
Property in transit or on the persons will not be covered against loss or damage by earthquake, volcanic
eruption, hurricane, cyclone, typhoon, windstorm and flood. Liability under this extension is limited to
15% of the sum covered.

3.3.2 Exclusions

This Takaful coverage excludes the following:

a. loss or damage arising from:

• war, riot and kindred risks.

• contamination by radioactivity.

b. loss or damage caused by hurricane, cyclone,typhoon, or windstorm to the following:

• any building under construction,reconstruction or repair.

• metal smoke stacks, awnings, blinds, signs and other outdoor fixtures and fittings including gates
and fences.
• loss or damage caused by subsidence andlandslip except where it is occasioned by earthquake or
volcanic eruption.
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3.3.3 Extensions

The Householders Takaful cover can be extended to include the following perils:

• full theft (without the limitation of being accompanied by actual forcible and violent breaking into or
out of the building).
• riot, strike and malicious damage.
• plate glass.

Householder Takaful participants, must specifically declare each item exceeding the limits
prescribed in the certificate to ensure that they are adequately compensated in the event of loss /damage.
It is advisable to keep receipts of items covered, if available.

3.3.4 Duty of Disclosure

Householder Takaful participants should fully disclose all material facts in the proposal form. When in
doubt as to whether a fact is relevant or not, it is best to ask their operator or agent. If the participant fails
to disclose any material fact truthfully, the operator may refuse to pay their claim.

3.4 BUSINESS INTERRUPTION TAKAFUL (IN CONJUNCTION WITH FIRE TAKAFUL)

Business Interruption Takaful provides cover for the following which may be suffered as a result of an
interruption to the participant’s business following damage at the covered premises by fire, lightning or
explosion of gas used for illuminating and domestic purposes:

• certain overhead costs in the form of standing charges or fixed costs such as salaries, rental, bank
charges, etc. That will remain at their full level even though sales may be reduced.
• if stock or production has been lost, the profit achievable on that stock may be lost if they lose the
customers.
• increases in costs incurred to keep the business going in a temporary manner (e.g. temporary
accommodation) or other expediency costs that increase the cost of working.

This certificate is normally issued in conjunction with Fire Takaful on the business premises. In this regard,
the Business Interruption Takaful coverage contains a material damage warranty which provides that at
the time of the happening of the damage, the individual must have a Takaful plan covering his interest in
the property against such damage and that payment has been made or liability admitted under such
coverage. By making good the loss of gross profit, the operator provides cover for the standing charges of
the business and also its net profit

The standing charges are those expenses which continue to apply even though the manufacturing or
trading activities have been disrupted, for example rates, rent, wages, salaries, contributions and auditors’
fees.

The most common Business Interruption Takaful coverage is that which cover losses flowing from:

• fire and special perils.

• engineering breakdown risks.
• computer damage and breakdown risks.
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The Business Interruption Takaful aims to provide the following cover as described in Table 3.2.

Table 3.2: Business Interruption Takaful

BASIC COVER It is also known as Consequential loss or Loss of profits cover, it provides
cover to the participant’s loss of gross profit due to reduction in turnover as
well as increased in cost of working during the indemnity period in
consequence of the damage to physical property by peril(s) covered under
the Fire certificate.

The Fire Takaful provides protection only against material loss or loss of
capital due to fire, i.e. it deals with the value of the property damaged or
destroyed, but not with related losses or additional costs incurred during the
repair period and immediately thereafter until full operations are restored.

EXCLUSION The exclusions under the scheme are similar to those found in the Fire Takaful

EXTENSION The certificate may be extended to cover:

• special perils which are similar to those offered underthe Fire Takaful.
• loss of gross profit arising from business interruption on other’s premises
(example: customer’s or supplier’s premises)

3.5 INDUSTRIAL ALL RISK (IAR) TAKAFUL

An Industrial All Risks (IAR) certificate is an "all risks" form of takaful which cover not only all the “named
perils” of Fire Takaful but also extend to cover “accidental damage” which cannot be covered under Fire
Takaful. Generally, the IAR certificate provides cover under the following heading:

Section I – Material Damage; and

Section II – Business Interruption

The coverage and exclusions of the IAR Takaful is detailed in Table 3.3 below.

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Table 3.3: Coverage and Exclusions of Industrial All Risks Takaful

Basic Cover Under Section I - Material Damage

• Provides cover for any unforeseen, sudden and accidental physical
loss, destruction or damage other than those specifically excluded in
the General or Special Exclusions.

Under Section II - Business Interruption

• Provides cover if the business carried on by the Participant at the

premises specified in the Schedule is interrupted or interfered with,
resulting in loss, destruction or damage indemnifiable under Section I.

Exclusions The Takaful Operator will not indemnify the participant in respect of loss
(including consequential loss), destruction, damage or expense
whatsoever directly or indirectly caused by or arising out of or aggravated
by:
• war, invasion, act of foreign enemy, hostilities or warlike operations
(whether war is declared or not) or civil war;
• riots, strikes, locked-out workers, malicious acts, looting,mutiny, civil
commotion, military uprising, insurrection, rebellion, revolution,
military or usurped power, confiscation, requisition or nationalization
or acts of terrorism; ionizing radiations or contamination by
radioactivity from any nuclear fuel or from any nuclear waste from the
combustion of nuclear fuel;
• radioactive, toxic explosive or other hazardous propertiesof any
nuclear explosive, assembly or component thereof;
• willful act or willful negligence of the Participant or of his
representatives; or
• total or partial cessation of work



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 CHAPTER 3 ASSESSMENT QUESTIONS

1. The main types of takaful under Fire Takaful include:

I. Houseowner’s Takaful
II. Householder’s Takaful
III. Business Interruption Takaful
IV. Industrial All Risk Takaful.

A. I & II
B. I, II &III
C. II, III & IV
D. All of the above are TRUE

2. All of the STATEMENTS BELOW about the rating and underwriting considerations for Basic Fire Takaful
are CORRECT EXCEPT

A. use of building
B. location of building
C. additional risks covered.
D. cost of rebuilding (including value of land).

3. ___ cover the contents of the house and also provide coverage for fatal injury to the participant.

A. Houseowner’s Takaful
B. Householder’s Takaful
C. Content and Injury Takaful
D. All Inclusive Takaful

4. The Business Interruption takaful is normally issued with

A. the Houseowner’s takaful

B. the Householder’s takaful
C. the Basic Fire takaful
D. the All risks takaful

5. Business interruption takaful is also known as

A. Consequential Loss takaful

B. Flow Loss takaful
C. Proximate Loss takaful
D. Related Loss takaful

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 CHAPTER 4: GENERAL TAKAFUL CLASSES – ENGINEERING, MARINE AND AVIATION
TAKAFUL

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Classify the main types of takaful cover under the engineering, marine, and aviation category.
• Understand the coverage granted under each category.

4.0 INTRODUCTION

Engineering Takaful comprises o f specialized classes of business and certificate may be classified as:

1. Renewable; or
2. Non-Renewable certificate.

The sub-classes under each category is represented in Figure 4.1 below.

ENGINEERING TAKAFUL

RENEWABLE CERTIFICATES NON-RENEWABLE CERTIFICATES

TAKAFUL TAKAFUL

Boiler and Pressure Machinery Contractors All Erection All Risk

Vessel Takaful. Breakdown Takaful. Risk Takaful - Takaful - Covers
Covers civil mechanical
engineering works engineering works
Electronic Equipment/Computer Takaful. Takaful.
Takaful.

Figure 4.1: Classification of Engineering Takaful Certificates

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4.1 RENEWABLE ENGINEERING TAKAFUL

The common types of Engineering Takaful certificate under renewable certificates are:

• Boiler and Pressure Vessel Takaful.

• Machinery Breakdown Takaful.
• Electronic Equipment/Computer Takaful.

Each of this will be discussed below.

4.1.1 Boiler and Pressure Vessel Takaful.

Table 4.1: Boiler and Pressure Vessel takaful.

Basic Cover The Pressure Vessel certificate provides cover for any sudden and
unforeseen physical loss or damage caused by explosion and collapse of
the boiler unit or other apparatus by force of internal steam or fluid
pressure. The certificate incorporates an inspection service and provides
cover against damage to the covered plants:

• Damage (other than by fire) to boiler or pressure vessel (driven by steam

or hot water) due to explosion or collapse
• Damage to participant’s surrounding property.
• Property damage and bodily injury to third parties

Exclusions The common exclusions are:

• Wear and tear but explosion or collapse arising from wearing away of
boiler and pressure plant is covered.
• Failure of expendable parts (that is parts requiring routine
maintenance) unless such defects result in explosion or collapse.
• Damage to property belonging to participant caused by fire.
• Damage or liability caused by willful act or neglect by the participant.
• Loss sustained by stoppage of work.
• Loss or damage caused by:
o Typhoon, hurricane, volcanic eruption, earthquake and the like.
o War and warlike operations, civil commotion and strike.
o Loss, damage or liability arising from nuclear risks

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4.1.2 MACHINERY BREAKDOWN TAKAFUL.

Table 4.2: Machinery breakdown takaful.

Basic Cover This scheme cover sudden and unforeseen damage to the machinery
whilst at work or at rest, and during cleaning, inspection, over-hauling or
removal or transfer to another location within the premises. The
certificate covers unforeseen and sudden damage to the covered
machinery whilst at work or at rest. Cover provided may include damage
due to faulty material, design, construction and erection.

Exclusions The main exclusions are:

• Normal wear and tear.
• Loss or damage arising from:
o Fire and explosion.
o Inundation, subsidence, landslide, earth quake and the like.
o War, riot and similar risks.
o Nuclear risks.

4.1.3 ELECTRONIC EQUIPMENT/COMPUTER TAKAFUL.

Table 4.3: Electronic Equipment/Computer Takaful

Basic Cover This certificate provides a comprehensive cover for any physical loss or
damage to the covered electronic and computer related equipment from
any cause other than those specifically excluded by the certificate. Items
damaged or destroyed must be due to sudden unforeseen
circumstances, whereby they are no longer able to function properly.

Exclusions The main exclusions are:

• Deductibles.
• Loss due to theft.
• Loss arising from:
o Earthquake, volcanic eruption, hurricane,cyclone or typhoon.
o Faults or defects existing at the commencement of the certificate
within the knowledge of the participant.
o Failure or interruption of any gas, water or electricity supply.
o Atmospheric conditions.
o Maintenance costs.
o Loss or damage for which supplier or manufacturer is responsible
by law or contract.
o Loss or damage to hired equipment for which the owner is
responsible by law or contract.
o Consequential loss or liability.

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4.2 NON-RENEWABLE TAKAFUL

These takaful plans are mainly issued in relation to civil engineering or mechanical engineering projects
where the value of the sum cover is high and the term of the cover is long. The common types of
Engineering Takaful certificate under non-renewable certificates are:

4.2.1 Contractors’ All Risks (CAR) Takaful

Table 4.4: Contractors’ All Risks

Basic Cover Contractors’ all risks (CAR) takaful is designed for the purpose of
complying with a contractor’s obligations under a civil engineering
contract which includes construction of buildings, bridges, and roads, etc.
on an ‘all-risks’ basis. Material damage to the works and third party
liability arising from the works occurring during the period of construction
and during the ‘maintenance’ or ‘defects liability’ period will be covered.

The certificate ceases at the completion of the project and handover to

the Principal. The CAR certificates are not annual certificates and as such
are not renewable.

The common exclusions are:

Exclusions • loss or damage due to faulty design.
• cost of replacement of defective material and/ or workmanship.
• wear and tear, corrosion, and deterioration.
• loss or damage due to mechanical and/or electrical breakdown of
construction plant and machinery.
• loss or damage to vehicles licensed for general road use or waterborne
vessels or aircraft.
• loss or damage to files, drawings, accounts, bills, currency, notes,
securities and cheques.
• loss discovered at time of taking inventory.
• excess to be borne by the participant.
• consequential loss howsoever caused.
• loss due to willful acts of any director, manager or site official of the
participant.
• nuclear risks.
• loss due to war, warlike operations, strike and civil commotion

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4.2.2 Erection All Risks (EAR)

Table 4.5: Erection All Risks

Basic Cover The certificate provides cover against accidental damage to actual works
being installed and any temporary works carried-on in connection with
the erection, installation, testing and commissioning of plant and
machinery at a project site. Third Party Liability – like the CAR certificate,
the EAR certificate has a section which provides cover against liability for
property damage and bodily injury to third parties.

Note: EAR involves mechanical engineering projects and covers the

erection of a plant or installation of specialized machinery, whereas CAR
covers mainly civil engineering works as explained above.

Exclusions The main exclusions are quite similar to those found in CAR certificate.

Perhaps the main difference between these two certificates is that EAR
has provision to cover testing and commissioning during installations (EAR
may cover a single large machinery, its apparatus and assembly lines or a
turnkey project involving a power producing plant and its facilities) while
CAR is strictly the building/civil engineering kind of works.

4.3 MARINE TAKAFUL

Marine Takaful covers the loss or damage to ships, cargo, terminals, and any transport or cargo by which
property is transferred, acquired, or held between the points of origin and final destination. Marine also
includes Onshore and Offshore exposed property (container terminals, ports, oil platforms, pipelines);
Hull; Marine Casualty; and Marine Liability.

Loss of or damage to property and interest by maritime perils which include:

• perils of the sea.
• heavy weather.
• stranding or collision.
• fire and similar perils.
• pilferage.

The following may form the subject matter of takaful:

• Hull and machinery.

• Legal liability arising out of collision.
• Cargo and freight.

With the exception of the collision liability which is covered under a marine hull, different marine certificate
are generally used to cover the different subject

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 There are several types of certificates and the covered risks under Marine takaful certificates as shown
in the diagram below.

MARINE TAKAFUL

Marine Hull Takaful Marine cargo Marine Freight Marine Building

Takaful Takaful Takaful

Vessel, machinery & Goods carried on Freight (Fee charged Vessel under
limited collision the vessel for carriage of goods Construction/Repair
liability by the shipper)

Figure 4.2: Types of Marine Takaful

Certificates

4.3.1 Marine Hull Takaful

Marine Hull Takaful provides a cover against loss or damage to hull and machinery. The hull is the structure
of the vessel whilst the machinery is the equipment that generates the power to move the vessel and
control the lighting and temperature system such as boiler, engine, cooler and electricity generator.

Scope of Cover

Under the Marine Hull Takaful the scope of cover is categorized as the Time Clauses. It is usually issued
for a specific period of usually 12 months. The nature and degree of risks which the Takaful Operator
assumes vary according to the kind of vessel and categorized as follows:

• Institute Time Clauses (Hull) – the most comprehensive cover.

• Institute Time Clauses (FPA).
• Institute Time Clauses (Total Loss Only).

Perils covered are perils of the sea, fire and explosion, violent theft, piracy, contact with aircraft,
earthquake, volcanic eruptions or lightning, accidents in loading and unloading, bursting of boilers,
breakage of shaft, latent defect, negligence of masters, negligence of repairers, negligence of charterers,
barratry.

Marine Hull business requires a much more technical underwriting approach by specialist underwriters.
Most companies have limited capacity to write this class of business and may rely a great deal on the
support of their Retakaful providers.

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4.3.2 Marine Cargo Takaful

Delivery of goods via ship and sea is the cheapest form of transport but it is exposed to many type of risks.
Marine Cargo Takaful provides the needed risk coverage for delivering of goods via sea. Many types of
Marine Cargo Takaful are offered by the market depending on the various terms of sale and coverage
required as shown below.

Table 4.6: Marine Cargo Takaful

“Free on Board” (FOB) The risk of loss or damage to the goods is transferred to the buyer
when the goods pass the ship’s rail.

“Cost & Freight” (C&F) The seller pays the costs and freight necessary to bring the goods to the
named destination, but the risk of loss or damage to the goods is
transferred to the buyer when the goods pass the ship’s rail in the port of
shipment.

Cost, Insurance andFreight Means that the seller delivers the goods on board of the vessel. The risk of
(CIF) loss or damage to the goods passes when the goods are on board the
vessel. The seller must pay the cost and freight necessary to bring the
goods to the named port of destination. The seller also contracts for
Takaful cover against the buyer’s risk of loss of damage to the goods during
the carriage. When using CIF, the seller fulfills his obligation to deliver
when it hands the goods over to the carrier and not when the goods reach
the place or final destination.

“Ex Quay” The seller makes the goods available to the buyer on the quay (wharf) at
the destination named in the sales contract. The seller has to bear the full
cost and risk involved in bringing the goods there.

4.3.2.1 Institute Cargo Clauses (A) / (B) / (C)

These types of Marine Cargo Takaful Certificate will include:

• Individual Cover

These are certificates issued on each and every shipment upon request by the participant.

• Open Cover

An Open Cover is a continuous cover that is issued on a certain date and remains inforce until cancelled.
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It provides automatic protection for all shipments described in the Certificate.

For shipment by vessel, the Marine Cargo Takaful certificate have three main forms of coverage defined
by three different sets of cargo clauses. These present a clear and easily understandable cover which no
longer involves cross-reference to the certificate.

Marine Cargo Takaful

Institute Cargo Clauses Institute Cargo Clauses Institute Cargo Clauses

A B C

These provide cover These provide cover against These provide cover
against loss of or specified perils. B cover is against a narrower list of
damage to the cargo by almost similar to A cover; specified perils than
all risks subject to however, it excludes losses or clause B. This means that
certain exclusions damages by pirates and thieves, the C cover is the most
and deliberate damage and restricted among the
destruction three forms of cover

Figure 4.3: Types of Marine Cargo Takaful

Clauses

4.4 AVIATION TAKAFUL

The global aviation industry has transformed modern day travel and international business. However, this
mode of transport is exposed to risks of devastating losses should any mishaps happen. Records have
shown that hundreds of lives were lost in a single air crash. There were also instances where such crashes
involved third party properties.

Most aviation certificates are issued on an ‘all-risks’ basis subject to certain restrictions. The participants
of these certificates are the large commercial airlines, the corporate or business aircraft owners, private
aircraft owners and flying clubs.

A comprehensive certificate is issued to cover:

• the aircraft itself (the hull).

• liability to passengers and others.

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In addition, the following certificates are also available:

• Public Liability Cover

This coverage, often referred to as third party liability covers aircraft owners for damage to third party
property, such as houses, cars, crops, airport facilities and other aircraft struck in a collision. It does not
provide coverage for damage to the covered aircraft itself or coverage for passengers injured on the
covered aircraft. Compensation will be paid to the victims for their losses, but if a settlement cannot be
reached then the case is usually taken to court to decide liability and the amount of damages.

• Passenger Liability Cover

This cover protects passengers who are injured or killed. In many countries this coverage is mandatory
only for commercial or large aircraft. Coverage is on "per-seat" basis, with a specified limit for each
passenger seat.

• Combined Single Limit (CSL)

CSL coverage combines public liability and passenger liability cover into a single coverage with a single
overall limit per accident. This type of coverage provides more flexibility in paying claims for liability,
especially if passengers are injured, but little damage is done to third party property on the ground.

• Freight Liability

This protects the aircraft operator against legal liability to refund freight to cargo owners.

• Personal Accident

This protects pilot and crew members in the event of personal injury or death arising out of an accident.
• Loss of License

This protects pilots, flight navigators, flight engineers against financial losses as a result of the loss of their
licenses.



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 CHAPTER 4 ASSESSMENT QUESTIONS

1. The types of Engineering Takaful certificate that can be classified as renewable certificates are

I. Boiler and Pressure Vessel Takaful.

II. Satellite Engineering Breakdown Takaful
III. Machinery Breakdown Takaful.
IV. Electronic Equipment/Computer Takaful

A. I & II
B. I, II &III
C. I, III & IV
D. All of the above are TRUE

2. Under Engineering Takaful, the takaful certificates that can be classified as non-renewable type are

A. Contractors All Risk Takaful and Erection All Risk Takaful.

B. Contractors All Risk Takaful and Machinery Breakdown Takaful.
C. Machinery Breakdown Takaful and Erection All Risk Takaful.
D. Equipment Takaful, Contractors All Risk Takaful and Erection All Risk Takaful.

3. This certificate provides cover against loss or damage to temporary works, materials, plants and other
things brought onto site by the contractor in connection with a building or civil engineering project. It
refers to ______.

A. Machinery Breakdown Takaful

B. Erection All Risk Takaful.
C. Contractors All Risk Takaful
D. Construction and Erection All risks Takaful

4. Select the takaful certificate below that fits this description “The certificate provides cover against
accidental damage to actual works being installed and any temporary works carried on in connection with
the erection, testing and commissioning of plant and machinery”

A. Machinery Breakdown Takaful

B. Erection All Risk Takaful.
C. Contractors All Risk Takaful
D. Construction and Erection All risks Takaful

5. The certificate incorporates an inspection service and provides cover against damage to the covered
plants, damage to surrounding property and property damage and bodily injury to third parties, caused
by explosion and collapse of boilers and pressure plants. This plan refers to:

A. Boiler and Pressure Vessel Takaful

B. Machinery Breakdown Takaful
C. Mechanical malfunction takaful
D. Explosive Boiler Takaful
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CHAPTER 5: GENERAL TAKAFUL CLASSES – MISCELLANEOUS TAKAFUL

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Classify the main types of takaful cover under the Miscellaneous Takaful.
• Understand the types of coverage granted under the Miscellaneous Takaful.

5.0 INTRODUCTION

Other classes of general takaful products (Miscellaneous Takaful) refers to the types of risk that are not
covered by motor, property, marine, aviation, liability or engineering takaful. Its scope is therefore very
wide and extensive and includes a wide range of contingencies as described below.

5.1 THEFT TAKAFUL

There are three types of takaful plans under this category:

• Burglary takaful
• All risks takaful
• Goods in transit takaful

5.1.1. Burglary Takaful

Burglary Takaful Scheme provides cover against loss of or damage to the contents in a business
premises (for example stocks and materials-in-trade, furniture, office equipment, plants and machinery,
household goods and personal effects of employees) following theft involving entry to or exit from the
covered premises by forcible and violent means.

In addition to the theft losses, the certificate also covers damage to the covered building and
contents upon such theft or any attempt thereat.

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5.1.2 ALL RISKS TAKAFUL

Table 5.1: All Risks Takaful

Basic Cover The All Risks Takaful is normally issued to provide cover for valuables
such as jewelry, watches, cameras, paintings and work of art. The scope of
cover is very wide and it covers against all risks (fire, theft and all accidental
causes) other than those excluded from the certificate.

5.1.3 GOODS IN TRANSIT TAKAFUL

This provides cover on an ‘all-risks’ basis, indemnifying the participant for loss of or damage to goods
by fire, accident, theft or pilferage while being loaded on, carried by, or unloaded from the motor vehicles
and their trailers, and while temporarily garaged during transit anywhere in Malaysia.

5.2 LIABILITY TAKAFUL

The term liability takaful refers to a takaful plan that provides a participant with protection against
claims resulting from injuries and damage to other people or property. Liability Takaful Certificates will
cover any legal costs and payouts a participant is responsible for if the participant is found legally liable.
Unlike other types of plans, liability plans will pay the affected third parties and not the certificate
owner.

There are six plans under this category:

• Workmen’s Compensation Takaful

• Foreign Workers’ Compensation Scheme (FWCS)
• Public Liability Takaful
• Professional Indemnity Takaful
• Product Liability Takaful
• Directors’ and Officers’ Liability (D&O)

5.2.1 Workmen’s Compensation Takaful

Table 5.2: Workmen’s Compensation Takaful

Basic Cover Indemnifies the employer (participant) to pay compensation under
Workmen's Compensation Ordinance to all employees who are
'workmen' in respect of death or injuries due to accidents or occupational
diseases arising out of and in the course of employment. This covers:

• death, permanent total or partial disablement resulting from any injury

arising out of and in the course of employment.
• hospitalization and medical expenses.
• occupational diseases, e.g. lung cancer caused by asbestos.
• repatriation expenses – compensation payable to repatriate remains to
the country of origin of the worker in the event of death or permanent
total disability
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5.2.2 Foreign Workers’ Compensation Scheme (FWCS)

With Effect from 1 November 1996, all legal foreign workers (excluding expatriates) must be covered
under a separate Foreign Workers’ Compensation Scheme. The Foreign Workers’ Compensation Scheme
(Insurance) 1998 issued under the Workmen’s Compensation Act 1952 requires every employer
employing foreign workers to cover (with a panel of insurance or Takaful Operators appointed under this
order) to effect payment of compensation for injuries sustained from accidents during and outside
working hours.

Table 5.3: Foreign Workers’ Compensation Scheme (FWCS)

Basic Cover This provides cover f o r :

• death, permanent total or partial disablement resulting from any

injury arising out of and in the course of employment.
• hospitalization and medical expenses.
• occupational diseases, e.g. lung cancer caused by asbestos.
• repatriation expenses – compensation payable to repatriate remains
to the country of origin of the worker in the event of death or
permanent total disablement.
• personal accident (off - work hours)

5.2.3 Foreign Workers Takaful Guarantee

Under Regulation 21 of the Immigration Regulations, an employer is required by the Immigration

Department to provide a guarantee in the form of a security deposit for the employment of foreign
workers (excluding Domestic Maids). This guarantee is to cover the repatriation expenses of the workers
who may be required to be sent back to their country of origin during their employment in Malaysia by
the authorities. The reasons of sending back the foreign workers to their origin country could arise from
the following situations:

• breach of Immigration Act

• the worker being involved in illegal and illicit activities such as drug, immoral work, etc
• the company goes into liquidation and is unable to provide the return passage for the workers.

5.2.4 Public Liability Takaful

Table 5.4: Public Liability Takaful

Basic Cover The Public Liability Certificate designed to protect a business firm in
respect of its legal liability to pay compensation for death or injury to third

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 parties and damage to property of third parties caused by or through
negligence of the firm or its’ employees or by defects in its premises. The
cover includes legal costs incurred by the firm, with the prior consent of
Takaful Operator.

5.2.5 Professional Indemnity Takaful

Table 5.5: Professional Indemnity Takaful

Professional Indemnity Takaful protects a professional (for example,
Basic Cover an accountant, engineer or doctor), in respect of liability arising out of
professional negligence committed by him, or his predecessors, or his
employees. The cover includes legal costs incurred by the professional,
with the prior consent of the Takaful Operator.

5.2.6 Product Liability Takaful

5.6: Product Liability Takaful

Basic Cover Product Liability Takaful provides cover to a manufacturer or seller
against his legal liability for death or injury or damage to property caused
by defects in the goods supplied or sold by the covered goods.

Examples of products that may give rise to product liability include

electrical appliances, machinery, pharmaceutical products, cosmetics and
toys. The cover includes legal costs incurred by the firm, with the Takaful
Operator’s prior consent.

5.2.7 Directors’ and Officers’ Liability (D&O) Takaful

A Directors’ and Officers’ Liability Certificate provides cover for:

• an indemnity to the company in respect of the costs it incurs in indemnifying a director

against the successful defense of a claim.
• an indemnity to the director in circumstances where this cannot be obtained from the
company because the defense has not been successful.

It can also cover the legal fees and other costs the organization may incur as a result of
such a suit. Shareholders, creditors, customers, employees and other stakeholders can
now take action against directors as individuals.

5.3 MISCELLANEOUS ACCIDENT TAKAFUL

5.3.1 Personal Accident Takaful

Personal accident takaful provides protection against the economic consequences of accidents, usually in
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the form of loss of earnings. Personal Accident (PA) Takaful is an annual plan that provides compensation
in the event of death, disablement or injuries arising solely from an accidental cause.

Participation in a PA Takaful can be on an individual or group basis, for example a personal plan or a plan
for the family, company or any registered group. It can also provide cover for accidents of any kind
whether at home, at work, while travelling, during leisure time, during sports activities, travel on road,
and can also provide a cover on a worldwide basis.

Companies covering their employees may want to save contribution by restricting cover to business hours
plus business travels and activities only.

5.3.1.1 Scale of Benefits

Personal Accident benefits are:

• death.
• permanent total disablement.
• temporary disablement where the participant is not able to perform his normal work, either
totally or partially.

5.3.1.2 Multiple Coverage

If a person has more than one PA Takaful certificate, in the event of death or disablement claim, he or his
beneficiary will be entitled to compensation under each certificate. However, for certain claim such as
medical expenses where compensation is on reimbursement basis, he will only be compensated once, up
to a maximum of actual expenses incurred.

5.3.1.3 Beneficiary

Participants are advised to nominate a beneficiary and ensure that the beneficiary is aware of the PA
Takaful cover.

Table 5.8: Personal Accident Takaful

Basic Cover The basic cover of a PA Takaful includes death and disablement arising
from accidents. The coverage may also include medical expenses,
hospitalization benefits, corrective surgery and funeral expenses, if
required.

A person may choose to either take up a PA Takaful for himself or join a

group plan for his family. Employers can purchase PA Takaful for their
employees.

Certain PA Takaful plans specify the range of age limits that can be
covered.

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 Exclusions PA Takaful will usually not cover accidents caused by thefollowing events:
• war risks.
• suicide and insanity.
• self -inflicted injury.
• influenced by liquor, drugs or narcotics.
• AIDS/HIV or any other venereal diseases.
• provoked murder or assault.
• childbirth, pregnancy or miscarriage.
• involvement in unlawful activities.
• hazardous sports.
• operating or riding a two-wheel motor vehicle.

In addition, it is quite common for PA Takaful to also exclude persons

employed under the following professions:
• police/ military and law enforcement officers.
• Divers
• pilots or crew members.
• aircraft testers.
• racing drivers.
• seamen and sea fishermen.
• professional sports person.

Note: The above may vary between Takaful Operators

5.3.2 Money Takaful

Table 5.9: Money Takaful

Basic Cover The certificate provides cover for loss of money against all risks, subject to
certain specified exclusions whilst in transit;
• coverage specifies that the transit is only between the covered premises
and the bank.
• on the covered premises during business hours.
• in a locked safe or strong room in the covered premises out of business
hours.
• in the private residence of any principal or director of the insured.
• other specified situations.

A money limit on any one loss is normally imposed for any of the said
situations. The term “money” includes cash, bank and currency notes,
cheques, postal orders, currency, postage and revenue stamps belonging
to the participant or for which he is legally responsible.

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5.3.3 Fidelity Guarantee Takaful

A Fidelity Guarantee (FG) is a takaful plan that provides a cover for a loss arising from a dishonest act of
an employee. The Takaful Operator will indemnify the loss arising from the dishonest act within the limits
prescribed in the contract.

There are two issues related to “what” triggers a claim under a fidelity guarantee takaful plan:

• the act of misappropriation has to be committed during the term of the takaful cover and during the
employee’s uninterrupted service or employment;
• the discovery of the loss has to be within a specified period (i.e. usually six to twelve months) after the
resignation, death, dismissal, retirement of the guilty party/employee or after the termination of the
takaful plan, whichever occurs first.

There are three (3) types of fidelity certificates issued and type of guarantee by Takaful Operator as
shown in the Table below.

Table 5.10: Fidelity Guarantee Takaful

Type of takaful plan Type of guarantee under the plan

Individual Certificate: This certificate covers a named employee for a stated amount or a
specific position.
Type of guarantee: Per employee/person

Collective Certificate • Named Collective

This certificate incorporates a schedule containing the names and
duties of guaranteed individuals. The amount of guarantee is set
against each name, and this can be an individual sum or a floating
sum over the whole schedule.

• Unnamed Collective
This certificate covers the employer against loss arising from
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 dishonest or fraudulent acts committed by employees belonging to
certain specified categories, for example managers, cashiers, store-
keepers and clerks.

Type of guarantee:

• Per person and event.

• Per year.

Blanket Certificate This certificate covers employers against loss arising from
dishonest or fraudulent acts of all employees, without showing
names or positions.

Type of guarantee:

• Per person and event.

• In the annual aggregate/per certificate.

Exclusion:

• Any indirect or consequential loss.

• Any third party losses.
• Inventory losses or any losses discovered during stock-taking.



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 CHAPTER 5 ASSESSMENT QUESTIONS

1. _______ provides cover against loss of or damage to the contents in a business following theft involving
entry to or exit from the covered premises by forcible and violent means.

A. Theft and Destruction Takaful.

B. Burglary Takaful.
C. Burglary and Collateral Damage Takaful.
D. Theft and Collateral Damage Takaful.

2. The _____ is normally issued to provide cover for valuables such as jewelry, watches, cameras,
paintings and work of art.

A. All Risks Takaful.

B. Theft and Destruction Takaful.
C. Burglary Takaful.
D. Burglary and Collateral Damage Takaful.

3. This certificate indemnifies the participant for loss of or damage to goods by fire, accident, theft or
pilferage while being loaded on, carried by, or unloaded from the motor vehicles and their trailers, and
while temporarily garaged during transit anywhere in Malaysia. It describes ____.

A. Goods in Transit Takaful.

B. Burglary Takaful.
C. Goods Loading Takaful.
D. None of the above is TRUE.

4. Workmen’s Compensation Takaful will

I. indemnifies the employer (participant) to pay compensation under Workmen's Compensation

Ordinance to all employees who are 'workmen'.
II. It covers death or injuries due to accidents or occupational diseases arising out of and in the course of
employment.
III. hospitalization and medical expenses.
IV. not cover repatriation charges.

A. I & II
B. I, II & III
C. II, III & IV
D. All of the above are TRUE

5. The cover under Workmen’s Compensation Takaful will include ALL of the following EXCEPT

A. hospitalization and medical expenses.

B. occupational diseases, e.g. lung cancer caused by asbestos.
C. compensation for all off-days at work.
D. personal accident (off - work hours).
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CHAPTER 6: GENERAL TAKAFUL PRACTICES - RISK ASSESSMENT AND
UNDERWRITING

LEARNING OUTCOMES

After reading this chapter you will be able to:

• State the various steps in the underwriting process and explain the significance of each step in
making the underwriting decision on a proposed risk.
• Understand the terms Retakaful and Co-takaful and its relevance to a Takaful Operator in risk
mitigation.

6.0 INTRODUCTION

Underwriting can be defined as a process of assessment, evaluation, selection and classification of the
proposed risks for takaful. In the process, an underwriter will refer to the ‘Underwriting Guide’ of a Takaful
Operator to decide which risks can be accepted and which risks are to be declined. For those that are
acceptable, the underwriter will decide the appropriate terms, conditions and rates for the proposed
cover. The underwriting process takes into account the physical, moral, environmental, market and legal
hazards of the subject matter to be covered.

In any general Takaful scheme, the participant makes a contribution into the general takaful fund (Risk
Fund or tabarru’ fund) from which losses suffered by participating members are paid. To ensure that
sufficient funds will be available to pay for such claims, the Takaful Operator must select risks that are
being proposed for takaful coverage. In this respect, the Takaful Operator has to guard against anti-
selection.

Anti-selection occurs when an applicant who knows that he has a high risk of loss submits a proposal for
takaful. When anti-selection exists within a class of risks, the actual loss will be greater than the expected
loss due to the larger than normal proportion of ‘unfavourable risks’ in the portfolio.

6.1 THE UNDERWRITING PROCESS

The underwriting process will involve the steps shown in Diagram 6.1.

Risk Identification and Determine Contribution, Confirmation of

Risk Selection
Evaluation Terms and Conditions Acceptance

Figure 6.1: Overview of the underwriting process

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1. Risk Identification and Evaluation

When a proposal is submitted for Takaful, the underwriter will identify, evaluate and asses the physical
and moral hazards associated with the proposed risk. The information to assess hazards is initially
obtained from the proposal form and the agent’s report (note: the agent is normally regarded as the
‘front-line’ underwriter as the agent is in direct contact with the prospect and is able to make a casual
judgment about the risk and the motive for the takaful coverage).

However, if additional information is required, the underwriter may take one or more of the following
actions:

• Request for a survey report on the risk

This would constitute additional information over and above that which is provided in the proposal
form. The information prepared by independent surveyor and is particularly important for large risks
related to commercial projects or for specialized risks like engineering, aviation, marine hull. Such a report
will also be beneficial for re-takaful due to the magnitude of the risk that may be involved.

• Make direct enquiries

The underwriter can make direct queries with the participant for further information or clarification.

Table 6.1 shows some factors that are considered in risk identification and evaluation.

Table 6.1: Factors considered in risk identification and evaluation.

FIRE TAKAFUL MOTOR TAKAFUL

• type of construction. • type of vehicle (private car, motorcycle,

• Location and height of building. commercial).
• nature of flooring. • cubic capacity.
• type of occupancy • age and condition of vehicle.
• nature of goods stored. • use of vehicle (passenger or carrying goods).
• situation of risk. • modification to the vehicle.
• adequacy of sum covered (on reinstatement as • age of participant/driver.
new basis) • occupation of participant/driver.

BURGLARY TAKAFUL PERSONAL ACCIDENT TAKAFUL

• nature of stock (high value, precious or heavy • age of person.

and bulky). • nature of occupation.
• situation of risk (busy commercial lot or out of • health and physical condition.
town and remote) • lifestyles/hobbies.
• type of construction (premises)
• security precautions (guarded, alarm system).

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2. Risk Selection

After the underwriter has identified and evaluated the hazards of the proposed risk, the underwriter is
ready to assess the risk and decide whether to accept or reject the proposal. If the underwriter decides
the risk is a standard risk, the proposal will be accepted at the standard rates. In some circumstances, a
proposal may be declined due to poor moral hazards. For instance, when the probability of fraud is
suspected, or poor physical hazard such as a shed of wood with an attap roof used as a workshop for metal
and soldering works. Risks are declined by takaful operator because of the ‘high risk exposures’.

Some risk may be accepted by imposing warranties and special conditions. Where there is a high
probability of small but frequent claims, the risk exposure can minimized by imposing excesses, franchises
or arranging co- or Retakaful, or accepting the risk if a fire-sprinkler system in installed with fire-proof
materials in a warehouse.

Table 6.2 : Underwriting Measures

Abnormal Hazard Risks Description
Underwriting Measures

Risk improvement requires the proposer to undertake certain

Risk Improvement
improvements (for example, the installation of a fire alarm, an
automatic sprinkler system, etc.) on the risk before the proposal is
accepted

Warranties Warranties are imposed to control hazards and to ensure that:

• new/additional hazards are not introduced during the cover
period of the certificate; or
• recommendations made by the operator are carried out by the
participant.

Exclusion clause limits the operator’s liability from certain losses

Exclusion
that would otherwise be covered under the standard cover.

Restricted With restricted cover, the proposer is offered a lower Takaful

cover coverage than the one originally requested. For example, under
motor Takaful cover, instead of being provided comprehensive
cover, the proposer may only be granted third party cover

Excess When excess is applied, the participant is required to bear a

specified amount or portion of each and every loss.

Franchise Similar to excess, in franchise, the participant will not be able to

claim if the loss amount is lower than the franchise amount.
However, unlike excess, if the loss exceeds the franchise amount, the
participant will not be required to bear the franchise amount.
Franchise is rarely used in General Takaful, except in Marine Takaful.

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3. Determine Contribution, Terms and Conditions

Charge a contribution which commensurate with the risk shared by the participants.

In reality, applicants for Takaful cover have varying loss probabilities. To ensure that the contributions
collected from a class of risks are sufficient, operators would have to charge the applicant a contribution
rate that commensurate with the risk being brought to share. Thus, through underwriting, the Takaful
Operator helps to uphold the principle of fairness or ‘adl’ as propagated in Islām.

4. Confirmation of Acceptance

If the terms and conditions set by the operator are acceptable to the proposer, the operator will issue a
cover-note (for e.g. an e-cover in the case of Motor Takaful), as evidence of temporary cover until the
certificate is issued.

In the process of developing and refining their underwriting guidelines for efficiency, t h e r e s p e c t i v e
T akaful Operators will also formulate a list of “Acceptable Risk” that is consistent with their risk appetite.
So, each Takaful Operator will have its own list of ‘preferred risks’ guidelines. For example, in respect of
motor takaful, an Operator may prefer older and experienced drivers, usually married males above the
age of 30 years who have shown good claims record and will be regarded as ‘good risks’.

The Takaful Operator will also have retakaful programs to mitigate risks in the event of catastrophic losses.
This will prevent operators from being financially crippled due to major losses that may occur
unexpectedly and thus help to shield the risk fund from depletion.

6.2 RETAKAFUL AND CO-TAKAFUL

When an underwriter assesses a risk, he has to consider the magnitude of the risk being proposed. For a
large and complex risk, a Takaful Operator may not be able to assume the whole risk alone and therefore
may have to arrange for Retakaful or Co-Takaful. Such risk may have to be declined if Retakaful or Co-
Takaful arrangement is not available. Fortunately, such instances are quite rare and Takaful Operators are
usually able to arrange for either Retakaful or co-Takaful cover when the need arises.

Co-takaful is an arrangement between two or more Takaful Operators to share the original risk and each
operator is directly responsible for that portion of the risk covered.

Retakaful is an arrangement whereby the Takaful Operator “shares” (or cedes) part of the risk assumed in
excess of the retention to Retakaful Operators. Retention is the amount of risk that is retained by the
original Takaful Operator. Retakaful can be arranged on a:

• treaty basis, i.e. on a pre- agreed basis for the whole portfolio. This form of retakaful contract offers
automatic coverage for all risks written by the ceding Takaful Operator that fall within the terms of the
retakaful contract and subject to the limits and exclusions, or

• facultative basis, i.e. one-off placements that cover the risks that either exceed the capacity of the treaty
arrangement, or are risks not covered under such arrangement. In this case, the Retakaful Operator has
the option to accept or decline the risk proposed by the Takaful Operator

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Both Retakaful methods can be subdivided into Proportional and Non-proportional Retakaful:

• Proportional retakaful

It is based on the original risk of the Takaful Operator and is ceded on a proportional basis to the Retakaful
Operator (refer to Table 6.3 below).

Table 6.3: Proportional Retakaful

Retakaful of original risk If a claim occurs

Original risk Claim

(Eg. RM 10 million) (Eg. RM 6 million)
0

Risk retained by Risk ceded to Claim paid by Claim paid by to

Takaful Operator Retakaful Takaful Operator Retakaful Operator
(Eg. RM 4 million) Operator (Eg. RM 2.4 (Eg. RM 3.6 million)
(Eg. RM 6 million) million)

• Non-proportional retakaful.

Non-proportional retakaful is the amount of loss. The cover is fixed and limited in amount. For example,
if the cover of the risk is limited to RM 5 million and the Retakaful Operator has a liability fixed at RM2
million only. This means the Takaful Operator will have a fixed maximum liability of RM 3 million. The
amount ceded to the Retakaful Operator (RM 2million) is also referred to as “excess of loss retakaful”.

The key functions of Retakaful are to hedge against the:

1. Impact of a catastrophic loss such as a massive flood, or earthquake wherein a single event can stretch
the financial resources of a Takaful Operator.

2. Accumulation of losses arising from a single event which can cause the accumulation of individual
claims under different types of takaful cover such as property, liability and casualty (for example in a
massive flood).

The benefits of Retakaful to the Takaful operator include the following;

• It enables the Takaful Operator to balance out its portfolio of risks. By selectively ceding out its main
risks, the Takaful Operator is able to withstand losses or damages from the occurrence of particular
events.
• The Retakaful Operator has a wealth of technical expertise that Takaful Operator can leverage on in
underwriting complex risks
• Retakaful also ensures the diversification of the exposure of the takaful operator.

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6.3 RATING

6.3.1 Type of Rates

The rates charged can be broadly categorized as individual rates, class rates, and merit rates.

Table 6.4 : Type of rate rates

Type of rate Description
Individual rate When an underwriter determines the rate to be charged on each risk separately
without referring to an established formula or manual, the rate determined is
known as an individual rate
Class rate When there is a large number of a risk to be covered under a class of Takaful,
it is possible to classify the risks by certain characteristics into various classes.

For example, in Fire Takaful, risks are classified according to three major
characteristics, namely:
• construction of the building (wooden, bricks,concrete).
• occupation (the building is occupied as afactory, warehouse, office, etc.).
• location of the building (urban area or out oftown).

The main objective is to establish a contribution rate known as a class rate

for that class of risks which will generate sufficient contribution to cover
losses arising from that class of risk

Merit rate A merit rating scheme is a combination of class rating and individual rating.
When a risk is subject to merit rating, the underwriter will determine the class
rate and then adjust the rate upwards or downwards depending on the merits
of the risk. The merits evaluated would include (but not limited to) electrical
installation, hazardous goods stored, sprinkler system, etc. Merit rating is used
in many classes of Takaful including fire, motor, workmen’s compensation, and
burglary coverage

6.3.2 Tariff Rating

The rating of Fire, Motor and Workmen’s Compensation Takaful is governed by their respective tariffs
originally formulated by Persatuan Insurans Am Malaysia (PIAM) with regular updates, wherein Takaful
Operators are instructed by BNM to adopt the same. When the rating of a class of Takaful is governed by
a tariff, the rate charged should not be lower than that laid down for that class of risks and the cover
granted should not be wider than that provided in the standard certificate form and endorsements.

Examples of tariffs are

• The Malaysian Motor Insurance Tariff (introduced in 1978) prescribes the types of motor insurance
cover, basis of premium rating, standard policy wording, exclusions, extensions, extra benefits and
their respective contributions and level of no-claim

• The Revised Fire Tariff (RFT 2000) regulates fire insurance/takaful business in Malaysia and prescribes
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 the basis of premium rating, discounts for fire extinguishing appliances (FEA), construction and town
classifications, scope of cover of the standard fire takaful plan, warranties, clauses and endorsements
applicable to the various types of trade and its processes.

The main objective of the tariff is to ensure that price competition among operators and insurers (both
inter and intra) will not go below the economic level.

In general, the tariffs formulated by PIAM provide the following information:

• a schedule of minimum rates for different classes of risk.

• surcharges on special hazards associated with each class of risk.
• discounts for various improvements on the risk.
• general rules and regulations governing the practice of insurance/Takaful.
• wordings for the standard policy forms, endorsements, clauses, warranties, etc.
• minimum contribution.

It is usual for operators to set a minimum contribution to be charged under each certificate so that the
administrative expenses incurred in issuing the certificate are covered.

6.3.3 Gross Contribution Rate

When the contribution rate (whether individual, class or merit rate) is calculated based on expected claims
cost, it is referred to as the pure contribution rate. Since Takaful Operators do incur expenses and pay
commissions as well as provide for variation in losses and earn a small profit in the course of managing
the risks, the rate charged is called a gross contribution rate.

The gross contribution rate is made up of four components:

• pure contribution rate.

• expenses and commissions margin.
• contingency margin (provision for variation in losses).
• profit margin.
The additions required (items 2 to 4 above) are expressed as a proportion of the pure contribution rate. It
is called the loading. For example, if the loading required for the other components is 40%, the gross
contribution rate is determined by increasing the pure contribution rate by 40%, i.e.:

Gross Contribution Rate = Pure Contribution Rate x (140 / 100)

6.4 PAYMENTS AND REFUNDS

1. Payment of Contributions

a. Sixty (60) Days Contribution Warranty Clause

Takaful Operators writing the General Takaful business are required to enforce the Contribution Warranty
ruling on most classes of Takaful except for motor, personal accident, travel and marine. Under this ruling,
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the participant is required to pay the contributions charged for the cover within 60 days from the effective
date of Takaful.

If the contribution is not paid by the 60th day, the cover will be cancelled on the 61st day and the operator
shall be entitled to the pro-rata contribution for the period they have been on risk.

b. Cash-Before-Cover Regulations

The Takaful (Assumption of Risk and Collection of Contribution) Regulations 1985 known as CBC
Regulations were enforced on 2 January 2005. Subsequently, the regulations were extended to include
Personal Lines of business such as Personal Accident Takaful, Houseowner/ Householder Takaful, etc.
effective 1 July 2007.

In the case of motor cover, it has been prescribed by law that Motor Takaful/insurance can only be issued
by Takaful Operators or their agents on ‘cash- before-cover’ basis. This means that the
contributions/premiums must be paid before a motor cover note or certificate/policy can be issued. The
above ruling applies to intermediaries, brokers, as well as Takaful Operators and insurers.

2. Refund of Contribution

Contribution is refundable if the certificate is either cancelled upon request by either the operator or
the participant. The calculation of the refund is usually on a pro-rated basis.

6.5 LIBERALISATION OF MOTOR INSURANCE AND TAKAFUL

The first phase of the liberalization of the Motor and Fire Tariff was introduced on 1 July 2016. During this
phase, insurers and Takaful Operators were given the flexibility to offer new motor products and add-on
covers at market-based pricing.

Effective 1 July 2017, contribution pricing for Motor Comprehensive, Motor Third Party Fire, Theft and
Fire products was liberalized where the contribution pricing will be determined by individual insurers or
Takaful Operators.

Contribution will take into account broader risk factors that will drive fairer pricing; greater innovation on
new products tailored to consumer needs with improved services; and sustainable motor and fire
insurance/Takaful protection for consumers over the long-term at competitive prices.

However, contribution rates for Motor Third Party product will continue to be subjected to tariff rates.

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 CHAPTER 6 ASSESSMENT QUESTIONS

1. Underwriting can simply be defined as

A. a process of evaluation and assessment of a proposal to participate in takaful.

B. a process of evaluation and assessment of selecting a takaful operator.
C. a process of evaluation and assessment of selecting an investment linked fund.
D. none of the above is TRUE.

2. __________ occurs when an applicant who knows that he has a very high risk of loss submits a proposal
for Takaful. Select the MOST APPROPRIATE answer.

A. Selection
B. Proposition
C. Anti-selection
D. Offer

3. A Takaful Operator must ensure that sufficient funds are available to pay claims as they arise. For this
the Takaful Operator must ____.

I. Manage against Anti-Selection

II. Charge a Contribution Commensurate with the Risk Shared by the Participants
III. Develop a List or Table of Acceptable Risks to Ensure the Risk Fund Can Be Sustained
IV. Arrange a Retakaful Program Aligned to the Risk and Claims Profiles

A. I & II
B. I, II & III
C. II, III & IV
D. All of the above are TRUE.

4. This risk selection process consists of evaluating information to determine how a risk will be classified.
Risks are generally classified as ______ by the Underwriter. Selection the OPTION that is FALSE.

A. standard RISK
B. managed risk.
C. substandard risk
D. declined risk

5. If additional information is required by the Underwriter to evaluate the risk, the Underwriter may take
one or more of the following actions EXCEPT

A. request for a survey report on the risk

B. make direct enquiries
C. request for an independent Survey Report
D. request for an independent report from the police.

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CHAPTER 7: GENERAL TAKAFUL PRACTICES – DOCUMENTATION IN GENERAL
TAKAFUL

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Understand the purpose of the proposal form.

• Understand the meaning of endorsement and warranties and their relevance to general takaful
certificates.

7.0 THE PROPOSAL AND DECLARATION FORM

A Takaful contract is concluded when the offer made by the proposer is accepted by the Takaful operator.
In Takaful, the offer is usually submitted through a Proposal and Declaration Form duly completed and
signed by the proposer. The declaration in the proposal form is the ‘aqad’ and is intrinsic to the Islamic
financial contract.

The Proposal and Declaration Form is important for the Takaful Operator to assess the risk and it forms
the basis of the contract between the proposer and the Takaful Operator.
All questionnaires, statements, and declarations made in the Proposal and Declaration Form must be
answered accurately in compliance with the principle of Utmost Good Faith. Any misrepresentation or
concealment of facts in the Proposal and Declaration Form may render the Takaful contract void. The duty
of disclosure is outlined in detail in Schedule 9 (Section 141) of the IFSA 2013.

7.1 THE IMPORTANCE OF THE PROPOSAL FORM

The proposal form is a document designed by the operator to assist the underwriter to:

• gather information required to assess a risk being proposed.

• speedily and accurately consider the application since the information is furnished in a structured
manner.

7.2. CONTENTS OF A PROPOSAL FORM

A proposal form generally contains the following:

7.2.1 Questions of a General Nature

Questions which are common or of a general nature in all proposal forms are as follows:

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i. Proposer’s Name
ii. Proposer’s Address
iii. Risk Address
iv. Proposer’s Occupation
v. Previous and Present Insurance/Takaful
vi. Loss Experience
vii. Sum Covered
viii. Subject Matter

7.2.2 Takaful-Related Questions.

The questions here are specific to the type of Takaful and usually concern hazards that are commonly
associated with the type of Takaful proposed. These hazards have been discussed in Chapter 6 (refer to
Table 6.1)

7.2.3 Declaration

The majority of the proposal forms used by General Takaful Operators contain a declaration clause which
requires the proposer to:

i. warrant the answers are true.

ii. warrant that the information is complete.
iii. agree that the proposal becomes the basis of contract.
iv. accept the usual form of certificate/cover for that class of business.

7.2.4 Signature

Below the Declaration Clause, there is a provision for the signature of the proposer and date.

7.3 COVER NOTE

7.3.1 Uses and Limitations of the Cover Note

Once the completed proposal form is accepted by the underwriters, a cover note is usually issued in
advance of a certificate.

A cover note:

• as a temporary Takaful certificate and it is the evidence of the cover provided by theTakaful Operator.
• provides the usual coverage found in any standard certificate for a class of business andis subject to the
usual terms and conditions of the said certificate.
• specify that the cover is subject to tariff warranties and/or special clauses wheneverapplicable.

7.3.2 Contents of a Cover Note

The contents commonly found in a cover note would include:

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• Name and address of the participant.
• Time and date of commencement of cover.
• Period of Takaful cover.
• Description of risk covered.
• Sum covered.
• Rate and contribution (if rate is not known, the provisional contribution will be shown).
• Any special terms.
• Serial number of the cover note.
• Date the cover note is issued.
• Signature of the authorized person.
• Terms of cancellation (usually 24 hours upon written notice).
• A statement to the effect that the participant is held covered on terms of the
operator’s usual form of Takaful for the risk, subject to any special terms noted on the
cover note.

The cover note has a limited validity period usually thirty (30) days and has to be
followedwith the issuance of the actual Takaful certificate.

7.3.3 E - Cover

Under the Motor Takaful business, the issuance of paper cover note and the manual method of renewing
road tax are no longer in use since 1 January 2005. The process has now been replaced by the e-JPJ or
electronic cover note system. The electronic cover note system is part of the e-government initiative
undertaken by the Road Transport Department under the Ministry of Transport. It was agreed by all the
parties involved that:
a. Takaful Operators must transmit Motor Takaful information electronically to JPJ.
b. Certificate holders would receive a confirmation slip from their Takaful Operators/agents as proof of
Takaful cover (confirmation of participation in Takaful).
c. Once successful transmission is confirmed, certificate holders would then proceed to JPJ or POS
Malaysia offices for road tax renewal.

7.4 THE GENERAL TAKAFUL CERTIFICATE

General takaful focuses on a short-term protection of properties and liabilities against any loss or damage.
The certificate signifies that the cover is issued by an authorized operator in accordance with the
requirements of the respective law. For example, a motor certificate is issued in compliance with the Road
Transport Act 1987, and it provides evidence of Takaful to the police and motor vehicle registration
authorities.

However, Marine Cargo certificates are issued by mutual agreement between the participant and the
operator. Marine cargo certificates are usually issued on an “Open Cover” basis, and a certificate is issued
as and when a shipment is declared by the participant.

7.4.1 Contents of a Takaful Certificate

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A scheduled certificate is divided into several distinct sections with details of the particular risk inserted
in one section of the certificate. The structure of a scheduled certificate is as follows:

• Heading - This section provides the full name and registered address of the Takaful Operator at the top
of the front page.

• Preamble or Recital Clause - This clause introduces the parties in the contract - the participant and the
Takaful Operator. It also refers to the Takaful contribution paid or to be paid, and it makes reference to
the effect that the Proposal and Declaration Form is the basis of the Takaful contract.

• Operative Clause or Takaful Clause - This clause sets out the essence of the contract. It specifies the
perils covered under the certificate and the circumstances in which the Takaful Operator will become
responsible to make payment or its equivalent to the participant.

• Exclusions - Exclusions are restrictions on the scope of the Takaful cover. They are inserted in the
certificate because certain perils and losses cannot be covered under Takaful.

• Schedule – this section contains all the type-written information applicable to the particular contract
such as: participant name and address, sum covered, Takaful contribution, certificate number, risk
covered, period of Takaful.

• Attestation or Signature Clause - This clause makes provision for the Takaful Operatorto attest his
undertakings under the certificate and signed by an authorised signatory of the Takaful Operator.

• Conditions

Types of Condition:

▪ Express Conditions are printed on the certificate which serves to regulate theTakaful contract. In the
absence of the express conditions, the contract of Takaful would be subject only to implied conditions.

▪ Implied Conditions relate to: the duty of utmost good faith, existence of permissible Takaful interest,
existence of the subject matter of Takaful and identification of the subject matter of Takaful.

7.5 ENDORSEMENTS

Endorsements are used to modify the terms of the certificate as well as alterations to an existing
certificate. These endorsements form part of the certificate. Both the endorsements and certificate
constitute the evidence of contract.

Endorsements may also be issued during the period of Takaful cover to record any alterations to the
contract as and when needed.

Examples of alterations to a certificate are as follows:

• variation in sum covered.

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• change of permissible Takaful interest by way of sale, mortgage, etc.
• extension of Takaful to cover additional perils.
• change in risk or transfer of risk/property to another location.
• cancellation of Takaful cover.
• change in name and address.

7.6 WARRANTIES

Warranty is a risk-specific or situation-specific condition. Although there are some standard wordings,
Takaful Operators often draw up warranties to meet specific situations. Warranties have to be strictly
complied with, whereby a breach of warranty would enable the Takaful Operator to avoid a claim.

Examples of warranties are as follows:

• Something shall be done – for example that waste material would be removed daily
• Something shall not be done – for example that in certain cases no direct heat be applied
• A certain state of fact exists – for example that the alarm system is kept in working order.
• A certain state of fact does not exist – for example no inflammable material is stored.

7.7 RENEWAL NOTICE AND RENEWAL CERTIFICATE

7.7.1 Renewal Notice

Operators usually issue a renewal notice one month in advance of the expiry date, reminding the
participant that his certificate will expire on a certain date. The notice incorporates all relevant particulars
of the certificate including the participant’s name, certificate number, expiry date of certificate, sums
covered and contribution.

7.7.2 Renewal Certificate

When a certificate is renewed for a further period, a new contract is formed. If the renewal is on similar
terms as the original contract, Takaful Operators frequently confirm the renewal by issuing the Renewal
Certificate. On the other hand, if the renewal is on revised or different terms, a fresh certificate will be
issued. A renewal certificate contains all the information similar to that found in the schedule of the
certificate, and states any changes to the certificate, if any.

7.8 ON LINE OR DIGITAL COVERAGE

There has been a rapid growth in the number of operators enabling their agency force to be equipped
with digital application via smartphone or tablets to provide for ease of marketing. This is apparent in the
case of simple categories of pure risk protection products. There digitalization enables all the information
required to be keyed-in by the agent for the operator to underwrite using a standard formula or algorithm
set in the system.

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 CHAPTER 7 ASSESSMENT QUESTIONS

1. The main aim of the proposal form is to _______ .

A. commit the Takaful Operator to issue the certificate applied for.

B. ensure the agent earns his/her commission.
C. gather information required to assess a risk being proposed.
D. none of the above is TRUE.

2. A proposal form generally contains the following.

I. A statement pertaining to the Anti-Money Laundering Act 2001.

II. Takaful-Related Questions.
III. Questions of a General Nature.
IV. Questions related to the work history of the employees.

A. I & II
B .I, II &III
C. I, II &IV
D. All of the above are TRUE.

3. The Takaful Operator will ask about the proposer’s current and previous takaful history in the proposal
form. The reason for this is that…

A. the history can provide useful information on moral and physical hazard of the Proposer.
B. that the Takaful Operator wants to check as to the proposer’s integrity with other Operators.
C. the Takaful Operator wants to file the history Bank Negara Malaysia.
D. the Takaful Operator has to file the details with the Malaysian Takaful Association.

4. The information required in the proposal form on the loss experience of the proposer aims to..

A. automatically load the risk with a higher contribution.

B. get an indication of the quality of the risk proposed.
C. refuse the application if there has been a previous claim.
D. to discover if there were disputes and report them to Bank Negara.

5. In the proposal form, questions specific to the type of Takaful applied are asked due to the concerns
with regard to the possible hazards. For Marine takaful examples of hazards are____.

I. method of packing.
II. port of discharge.
III. name, age, class, gross tonnage of vessel.
IV. value of consignment or limit per bottom.

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A. I & II
B. I, II &III
C. I, II &IV
D. All of the above are TRUE.

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CHAPTER 8: GENERAL TAKAFUL PRACTICES – CLAIMS

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Understand the main components of the claims process

8.0 INTRODUCTION

It defines takaful claims as “a demand for payment of an amount due under a Takaful certificate”. For this
purpose, a Takaful Operator must have proper guideline on claims to ensure that all claims are processed
on a timely, fair, efficient, and accurate manner.

8.1 CLAIM PROCESS

The steps in the claim process are shown in Diagram 8.1 and explained in succession thereafter.

Notification of Checking Investigation Claim Discharge

Loss Coverage of Claims settlement form

Figure 8.1: The components of the claims process

8.1.1 Notification of Loss

It is a condition precedent to liability that when a loss occurs, immediate notification of the loss is given
to the Takaful Operator. Depending on the wording of the notification condition, notice may be verbal or
written and it may require the participant or covered person to furnish full particulars together with the
claim form with details of the loss, identity of the claimants, etc. with supporting documents as proof
within the time frame as stipulated in the certificate, for example 7, 14 or 30 days.

Table 8.1: Claim Documents

MOTOR TAKAFUL OWN DAMAGE CLAIM

• police report
• certified copy of vehicle registration card and road tax
• certified copy of driving license and identity card for driver

FIRE TAKAFUL

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 • photographs
• technician’s report (where applicable)
• purchase invoices, repair bills, sales record and other related documents
• police report (where damage is extensive)
• fire brigade report (where damage is extensive)

BURGLARY TAKAFUL

• police report
• purchase invoices, repair bills, sales record and other related documents

PERSONAL ACCIDENT TAKAFUL DEATH CLAIM

• post-mortem report
• death certificate
• burial certificate
• police report
• letter of employment

It is also imperative that the participant acts in good faith to take immediate remedial action to minimize
further loss in the event of a claim. For example, a participant under a comprehensive motor takaful cover
should not leave the motor vehicle unattended in the event of an accident or breakdown.

8.1.2 Checking Coverage

Once intimation of the loss or accident is received, a preliminary check is made to see if the event is likely
to be covered. The preliminary check involves reviewing whether:

a. the certificate is in force.

b. the loss or liability is caused by a covered peril.
c. the subject matter is the same as that covered under the certificate.
d. notice of loss been given without undue delay.

Once the preliminary check determines that the certificate is in force and the peril is covered, the claimant
will be given a Claim Form or Accident Report Form. The claimant will also be informed of the claim
procedures, together with a list of documents that are required to process the claim.
However, if the claim official finds that the event falls outside the scope of cover of the certificate, the
claimant will be informed of the decision.

8.1.3 Investigation of Claims

When a claim form is issued, it does not mean that the Takaful Operator has admitted liability. The claim
form seeks to obtain immediate information for the registration of the claim.

The Takaful Operator may:

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a. Rely only on the information submitted on the claims form and other documents submitted to
proceed with settlement, or

b. Conduct a thorough investigation, either by its own staff or by appointing independent adjusters. The
extent and manner of investigation will vary according to the size and complexity of the claim. Small claims
are usually paid on the basis of documents submitted by the claimant and managed by a claim officer.
Large and complicated claims will be investigated in more detail by an independent loss adjuster.

In general, claims investigation involves ascertaining the following:

1. The Validity of a Claim

This involves ensuring whether:

• the event actually occurred

• the event is caused by a covered peril
• the event does not fall within the scope of an exclusion
• the subject matter affected by the event is the same as covered under the certificate
• the event occurred within the geographical area mentioned in the certificate
• the person making the claim is the rightful claimant
• any breach of condition/warranties which may invalidate the claim
• The claimant still has insurable interest on the subject matter.

2. Loss Amount or Potential Liability

This involves determining the amount or quantum of the loss or potential liability.

Where property is damaged or lost, the amount of loss is ascertained from proof of the value of such items
or estimates of repair, replacement or reinstatement. In liability claims, the potential liability is an
estimate of the loss suffered by the third party and mitigated by the extent of their own contributory
negligence.

Following the completion of an investigation, when a decision on the liability and quantum is made, an
offer of settlement would be made to the claimant. If the offer is accepted, the claimant would be required
to sign an Acceptance and/or a Discharge Form, before the final claim payment is made.

3. Ascertaining Subrogation Rights and Contribution possibilities

If the cause of the loss, damage or accident is caused by some other party and the participant has a right
of action against that party, the Takaful Operator after settling the claim, can act on behalf of the
participant and seek recovery from the third party in accordance with its subrogation rights.

In the event there are multiple policies or certificates covering the same subject matter and loss, damage
or liability is caused by the same event, then each policy or certificate will share the claim on a rateable
proportion basis.
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 Table 8.2: Components of Claims Investigation

Ascertaining the Loss Ascertaining Subrogation

Ascertaining the Validity
amount or Potential rights and Contribution
of a claim
liability possibilities

8.1.4 Claim Settlement

Claim settlement would be affected by any of the following methods:

1. Methods of claim settlement

a. Cash payment of claim by money transfer.

b. Repair.
c. Replacement.
d. Reinstatement.

8.1.4.1 Guidelines on Claim Settlement Practices

On 5 December 2003, the JPIT/GPT 3-Guidelines on Claims Settlement Practices was issued to further
enhance claims processing and include fraud control and risk management measures. The following are
the prescribed timelines for Takaful operators under the Guidelines:

Table 8.3: Guidelines on Claim Settlement Practices

Claim Process Timelines
Notification of Claims • Within 7 days from receipt of claim notification, register and initiate
claim processing

Verification of facts • Within 14 working days of receipt of claim form, acknowledge the
receipt in writing

Assessment of claims • Within 7 working days from the date of receipt of the completed claim
form and all relevant supporting documents, appoint licensed/in-
house staff adjusters
• Within 14 working days from appointment, the adjuster’s final report
must reach the Takaful Operator
• Within 60 working days from the date of first notification and
every 30 working days thereafter, to notify the claimant of the position
of a claim, until the matter is resolved; and
• If fraud is suspected, the claimant should be advised in writing that he
claim is under examination

Settlement • Offer of Settlement:

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 • Within 7 working days from receipt of the final adjuster’s report,
send offer letter to claimant or his/her authorized representative;
• Where there is no dispute as to liability, accept the
recommendation made in the adjuster’s report; and
• Any dispute with the adjuster’s final report should be resolved
with the adjuster before making an offer of settlement to the
claimant.

• Repudiation of Liability

• Within 7 working days after receipt of the adjuster’sfinal, advise

the claimant in writing on the rejection of his/her claim

Payment of claim
• Full payment must be made to claimant from date of receipt of the
acceptance of offer and/or Discharge Voucher and all relevant
documents within:
• 14 working days for claims of up to RM1 million; or
• 21 working days for claims exceeding RM1 million

For claims payable on a reimbursement basis, within 7 working days

from date of receipt of original bills from the claimant

8.1.4.2 Methods of claim settlement and the Discharge form

1. Claims settlement methods.

a. settlement with a participant in respect of a covered loss; or

b. settlement with a third party on behalf of a participant in respect of the latter’s liability.

2. Purpose of a discharge form.

In both cases, the Takaful Operator would require the claimant to execute a discharge. This avoids the
possibility of any further claims being made in relation to the same loss, either against the Takaful
Operator or the participant.

8.2 REPUDIATION OF LIABILITY

Not every claim filed by a participant will result in the payment of the claim. The Takaful Operator may
have a reason to repudiate liability which may be any or all of the following:

1. there was no loss or damage as reported.

2. the loss or damage for which a claim has been made was not caused by a peril covered or was
excluded under the certificate.
3. the certificate had been rendered void as a result of a breach in condition or warranty.

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8.3 POST-SETTLEMENT ACTION

When a claim has been paid, the operator may take one of the following actions:

1. Terminate the Takaful certificate.

2. Reduce the sum covered (or reinstate with additional contribution payment).

8.4 MARKET AGREEMENTS

8.4.1 Motor Insurers’ Bureau (MIB)

The Motor Insurers’ Bureau shall be interpreted under Section 89 of the Road Transport Act 1987 (RTA)
as the bureau which has executed an agreement with the Minister of Transport to secure compensation
to third party victims of road accidents in cases where such victims are denied compensation by the
absence of insurance or of effective insurance as required under section 90 of the same Act. Section 89
furtherprovides the statutory definition for “authorized takaful operator” as used in the context of this
Part of the Act:

“Authorised takaful operator” means a person lawfully carrying on motor vehicle takaful business in
Malaysia and who is a member of the Motor Insurers’ Bureau.

8.4.2 Revised Knock-for-Knock Agreement (KfK)

The Revised Knock-for-Knock Agreement dated 18 March 1987 (hereinafter referred to as the Principal
Agreement) was made between the insurance and Takaful Operators.

The knock-for-knock claims settlement agreement requires each insurer/operator to deal with the
damage to their own policyholder’s/certificate holder’s vehicle, if such damage is comprehensively
covered,irrespective of who was responsible for the accident.

It is an arrangement which enables motor insurers/operators to speed up the settlement of claims and
reduce legal and administrative expenses. The agreement applies to damage being caused to vehicles in
connection with which indemnity is granted against damage and/or third party risks by parties:

• as a result of collision or attempt to avoid collision;

• by the loading or unloading of a vehicle; or
• by goods falling from a vehicle.

The knock-for-knock agreement was further revised in June 2001 (Supplemental Agreement - Revised
Knock-For-Knock Agreement). This provides that in the event of an accident involving the participant and
a Third Party vehicle, the participant, under acomprehensive Takaful cover, has an option to make a claim
for damage to his own vehicle from his own operator - if the participant or his authorized driver is deemed
not to be at fault and opts to make a claim for the damage to his vehicle under his own Takaful
certificate instead of making a claim against the Third Party insurer/operator, the participant’s NCD shall
not be forfeited.

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8.4.3 Centralised database for Motor Repairers Estimation

With the support of Bank Negara Malaysia, the insurance and takaful industry implemented the
centralized database for motor repairs estimation, developed by Motor data Research Consortium Sdn
Bhd (MRC) in 2001 with the objective of minimizing subjectivity in motor repairs estimation. It also has
the added benefit of improving transparency in claims estimation and anti-fraud mechanism.

With improved transparency in the estimation of accident damage claims, incidences of fraud and leakage
as a result of collusion between the vehicle owner and repairer would be reduced.

8.5 MANAGING DISPUTES

Disputes between claimants and operators may generally involve one of two issues:

e. the question of whether the operator is liable or

f. the quantum of loss, if the operator is liable

When a dispute arises, it may be resolved through the following channels:

1. Negotiation

When there is a dispute, the claim officer will try to settle the dispute through discussion with the claimant.
Failing this, the claimant may have the matter mediated by the Ombudsman for Financial Services (OFS).

2. Litigation

When a claim is repudiated or the arbitrators’ or mediators’ decision is being further challenged by the
claimant, he may institute legal action against the operator. The operator normally considers litigation as
a last resort and therefore would try to bring about an out-of-court settlement unless it involves a huge
claim or an important principle of law.
3. Arbitration

In practice, most general takaful certificates have an arbitration clause which may provide that all disputes
(or disputes relating to quantum only) will have to be referred for arbitration before court action can be
considered by the participant. Generally, arbitration is preferred to litigation because it is speedier and
less costly than legal action, and hearing is in private rather than in open court.

4. Mediation

Bank Negara Malaysia prescribes mediation by the Ombudsman for Financial Services (OFS) if claimants
are not happy with the Takaful Operators’ decisions, either in respect of liability or quantum.

The mediation process includes investigating the complaint through various sources based on the facts
presented, having face-to-face discussions, having meetings with all the parties concerned or conducting
an enquiry, taking into account industry practices, and consulting legal sources before a decision is made.
However, in the event that both parties cannot reach an amicable settlement, the Mediator will make a
decision based on the investigation, industry practices and the relevant applicable law(s).
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 Figure 8.3: Methods to manage claim disputes

MANAGING DISPUTES

Negotiation Litigation Arbitration Mediation

Settle the Legal action Settle the Mediation

dispute to settle dispute by the
through the dispute through Ombudsman
discussion arbitration

8.6 APPLICATION OF AVERAGE CLAUSE IN CLAIMS

When the sum covered of an asset or property is less than the market value and the certificate is subject
to average, a claim under such certificate will only be met in the proportion which the sum covered bears
to the full value of the property at the time of loss.

The formula generally used to adjust the claim is as follows:

Claim payable = Sum Covered X Loss

Value at risk

Table 8.4: Calculation for Average Clause

Example 8.1

A participant covered his car under a Motor Takaful plan for RM 30,000 when
the market value was RM 50,000. When the car was damaged in an accident,
the repair costs was RM 20,000, the claims amount is:

Sum Covered (RM 30,000) X Loss (RM 20,000) = RM 12,000

Market Value (RM 50,000)

In this case the Takaful Operator will only pay the participant RM 12,000.
The balanceRM 8,000 will have to be borne by the participant himself.


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 CHAPTER 8 ASSESSMENT QUESTIONS

1. The IFSA 2013 defines takaful claims as

A. “…a demand for payment of an amount due under a Takaful certificate…”

B. “…any benefit, whether pecuniary or not, which is payable under a Takaful certificate...”
C. “…a demand for contributions to be made under a Takaful certificate…”
D. “…any benefit and liability, whether pecuniary or not, which is payable under a Takaful certificate...”

2. Once intimation of loss or accident is received by the Takaful Operator, a preliminary check is made and
this involves checking whether

I. the certificate in force.

II. the contribution has been paid.
III. the loss or liability is caused by a covered peril.
IV. the subject matter is the same as that covered under the certificate.

A. I & II
B. I, II & III
C. II, III & IV
D. All of the above are TRUE.

3. A dispute in claim may be settled in the following manner.

A. Mediation
B. Complaint to police
C. Call an ambulance
D. Submitting a claim to a different Takaful Operator

4. The claims investigation process involves ascertaining the following _______. Select the combination
below that is true.

I. the event actually occurred.

II. the event is caused by a covered peril.
III. the event does not fall within the scope of an exclusion.
IV. the subject matter affected by the event is the same as covered under the certificate.

A. I & II
B. I, II & III
C. II, III & IV
D. All of the above are TRUE.

5. The documents required to substantiate a motor claim include all of the following EXCEPT
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A. police report.
B. certified copy of vehicle registration card and road tax.
C. the coroner’s report.
D. certified copy of driving license and identity card for driver.

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CHAPTER 9: GENERAL TAKAFUL PRACTICES - ETHICS AND CODE OF CONDUCT

LEARNING OUTCOMES

After reading this chapter you will be able to:

• Understand the main objective of the Inter-Takaful Operators’ Agreement (ITA) on Takaful
• State the acts that limit the scope of the Agency

9.0 INTRODUCTION

The Inter-Takaful Operators’ Agreement (ITA) on Takaful Operations is a joint effort by the industry
members at the betterment of the industry through self-regulation. The Agreement encompasses all
members of the Malaysian Takaful Association (MTA) with the following objectives:

• promoting and protecting the interests of the takaful industry, for the mutual benefit of all members
of MTA and the public.
• regulating and controlling the conduct and activities of every person marketing takaful.
• monitoring the tariffs, commissions and remuneration applicable to takaful.

For the purpose of regulating and controlling the conduct and activities of all registered agents the
secretariat shall:

• to receive and consider applications for agents’ registration for and on behalf of any Takaful Operator.
• to issue, renew or extend certificates of registration to agents.
• to approve and certify the appointment of agents of any corporate nominees.
• to monitor and control the conduct and activities of agents to comply with the Regulations and/or
Guidelines.

9.1 DEALINGS WITH AGENTS

In respect of matters involving agents, the Inter-Takaful Operators’ Agreement on General Takaful
Business provides for the following:

a. Authorized Agents

All members of MTA shall only authorize, deal and/or transact General Takaful business with registered
Takaful agents or brokers.

b. Restriction on Payments

Commission shall only be paid to agents or brokers who are involved in procuring, selling, transacting,
dealing or negotiating of any General Takaful.

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c. Compliance with Regulations

All members of MTA shall ensure that their agents comply with all the rules for the registration and
regulation of General Takaful agents stipulated under the Agreement.

d. Scope of Agency

Members of MTA shall not permit or authorize their agents to:

• issue or complete takaful certificates.

• conduct a loss survey or make loss adjustments.
• settle or approve takaful claims.

e. Suspension of Agent

If the member company, after due investigation found that an agent had breached a Regulation, the agent
shall be suspended and not allowed to transact any general takaful. The suspension shall be in force until
further notice from the member company.

MTA member companies shall:

• keep a complete and up-to-date record of all their agents, including their corporate agents,
directors, shareholders and corporate nominees.
• maintain proper and accurate accounts showing the amount of commission paid to their agents.
• provide the Association with any information concerning any of their agents as and when
requested.

9.2 MINIMUM ENTRY QUALIFICATION

The Takaful Basic Examination (TBE) is an entry qualification for all those who intend to be a registered
Takaful agent for promoting takaful products and services. It is a compulsory qualification designed to
ensure a minimum entry standard into the industry.

The TBE was introduced on 1 January 2009 as per the requirement of the MTA Inter-Takaful Operators
Agreement. The TBE qualification is divided into two categories, namely the General Takaful and Family
Takaful examination.

9.3 CORPORATE NOMINEE

A corporate agency shall be represented by a Corporate Nominee who:

• shall be the principal officer of the corporate agency or such other officer as approved;
• is engaged full time in the principal office of the corporate agency; and
• is a person of good character and high integrity.

Where a Corporate Nominee leaves the employment of the agency, the agency is required to replace the
Corporate Nominee.

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9.4 COMMISSION WITHIN WAKĀLAH FEES AND DISCLOSURE

An efficient and responsible Takaful Operator is one that conducts its business in a prudent manner. This
includes the exercise of control over collection of contributions, expenses and its business development
strategies.

The Guidelines on “Valuation Basis for Liability of General Takaful Business” which came to effect on 1 July
2011, together with the Guidelines on Takaful Operational Framework, form the basis for Takaful
Operators to conduct their business in a transparent and prudent manner. It also provides (amongst other
matters) for the maximum gross commissions and agency-related expenses for the following classes of
Takaful business (written within Malaysia) to be limited to the following percentages of gross direct
contributions:

Table 9.1: Commission Structure for General Takaful Business

No. Classes Rate
1 Marine Cargo, Aviation and Transportation (MAT) 15%
2 Motor 10%
3 Fire 15%
4 Marine Hull 15%
5 Engineering 15%
6 Bonds 10%
7 Other classes 25%

Agents are also compelled to disclose commissions received on a particular marketing transacted
whenever requested by the respective client or participant.

9.5 COMPLIANCE WITH CASH-BEFORE-COVER (CBC) FOR MOTOR TAKAFUL

Pursuant to the circular issued by BNM, Section 96 of the IFSA 2013 and Takaful (Assumption of Risk and
Collection of Contribution) Regulation 1985, for the motor and other “personal lines” business, the Takaful
Operator or its agent shall not assume any risk unless the contributions for such covers:

• has been paid to the Takaful operator or its agent (cash-before-cover); or

• is secured by an irrevocable bank guarantee and is paid by the end of the month following the month
in which the risk is assumed, failing which a demand is to be made on the bank guarantee.



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 CHAPTER 9 ASSESSMENT QUESTIONS

1. The Inter-Takaful Operator’s Agreement (ITA) made amongst all members of the Malaysian Takaful
Association (MTA) has the following objectives. Select the COMBINATION below that is TRUE.

I. promoting and protecting the interests of the Takaful industry.

II. regulating and controlling the conduct and activities of every person transacting Takaful business.
III. monitoring the tariffs, commissions and remuneration applicable to Takaful business.
IV. ensuring only the best quality agents are registered with the association.

A. I & II
B. I. II & III
C. II, III & IV
D. all of the above are TRUE

2. The members of MTA shall not permit or authorize their agents to _____. Select the option below that
is FALSE

A. issue or complete Takaful certificates.

B. conduct a loss survey or make loss adjustments.
C. advise their clients on the solution appropriate to their needs.
D. settle or approve Takaful claims.

3. To be a takaful agent, the minimum qualification required is _______________.

A. Completion of primary education

B. University graduate
C. Takaful Basic Examination
D. No minimum qualification

4. A corporate agency in general takaful shall be represented by a Corporate Nominee subject to approval
and fulfilment of the following qualifying criteria.

I. the corporate nominee is the principal officer of the corporate agency or officer as approved
II. the corporate nominee is engaged full time in the principal office of the corporate agency
III. the corporate nominee is a person of good character and high business integrity
IV. the corporate nominee is a person who shall do all the selling and negotiations with clients all the time.

A. I & II
B. I. II & III
C. II, III & IV
D. all of the above are TRUE

5. The cash before cover is covered under ______. Select the MOST APPROPRIATE answer.
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A. Section 96 of the IFSA 2013.
B. Section 101 of the IFSA 2013.
C. Section 96 of the IFSA 2013 and Takaful (Assumption of Risk and Collection of Contribution) Regulation
1985.
D. Section 101 of the IFSA 2013 and Takaful (Assumption of Risk and Collection of Contribution) Regulation
1985.

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GLOSSARY OF GENERAL TAKAFUL TERMS

Average Clause
Stipulates that a takaful fund is only liable for such proportion of the loss as the sum covered bears to
total value at risk.

Basic Sum Covered

This is the minimum amount to be received upon death or when the Person Covered becomes disabled.

Claims Notification
A notification to a takaful operator that payment of an amount is due under the terms of the certificate.

Excess of Loss Treaty

A type of retakaful treaty in which retakaful operator pays all or a specified percentage of a loss arising
from a particular occurrence or event (frequently of a more or less catastrophic nature) in excess of a
fixed amount and up to a stipulated limit.

Exclusions
List of conditions that are not covered under the certificate

Facultative Treaty
A retakaful contract under which a ceding takaful operator has the option to cede and the retakaful
operator has the option to accept or decline individual risks.

General Takaful
Protection to participant for losses arising from perils such as accident, fire, flood, liability and burglary.

Gross Direct Contributions

Contributions on original gross rate charged to clients in respect of direct takaful business without any
deduction for commission or brokerage.

Indemnity
Restoration to the claimant of a loss by payment, repair or replacement.

IFSA, 2013
Islamic Financial Services Act 2013.

Named Peril
Perils that are specifically covered under the Takaful certificate.

Net Contribution
Gross contribution less all retakaful contributions payable.

Permissible Takaful Interest

A participant’s financial interest in the subject matter covered under the Takaful.

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Principle of Contribution
The principle holding that two or more Takaful operators each liable for a covered loss should participate
in the payment of that loss. Having paid its share of a loss, a Takaful operator may be entitled to equitable
contribution—the legal right to recover part of the payment from another Takaful operator who is also
liable for the same covered loss.

Proportional Treaty
A contract under which a takaful operator and a retakaful operator participate proportionately in the
contributions and losses on every risk that comes within the scope of the contract.

Proximate Cause
The cause having the most significant impact in bringing about the loss under a Takaful certificate when
two or more independent perils operate at the same time (i.e., concurrently) to produce a loss.

Subrogation
The right of a Takaful operator who has taken over the claimant’s loss to pursue remedies against a third
party.

Total Loss
A loss of sufficient size so that it can be said there is nothing left of value.

Utmost Good Faith

The principle of utmost good faith requires anyone seeking Takaful to disclose all relevant facts. These are
facts that would influence the judgment of a prudent underwriter in fixing the contribution or determining
whether they will take on the risk. Where material non-disclosure can be proven, a contract can be voided.

The above glossary and explanation do not necessarily bear their legal meanings as they are prepared
strictly for the information of readers who are unfamiliar with certain terms and expressions used.

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 ANSWERS TO SELF-ASSESSMENT QUESTIONS

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 BAB 1 1 2 3 4 5
A D B A C

BAB 2 1 2 3 4 5
A A B B C

BAB 3 1 2 3 4 5
D D B C A

BAB 4 1 2 3 4 5
C A B B A

BAB 5 1 2 3 4 5
B A A B C

BAB 6 1 2 3 4 5
A C D B D

BAB 7 1 2 3 4 5
C B A B D

BAB 8 1 2 3 4 5
A D A D C

BAB 9 1 2 3 4 5
B C C B C

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