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Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures by Hussein Kureshi, Mohsin Hayat

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Chapter 26Pricing of Takaful Policies and Retakaful

We examine some basic approaches to pricing general and family policies in this chapter.

Case Study 1: Corporate Medical Takaful Plan under General Takaful

In this case study, we calculate the gross contribution to be paid by a company with 1,000 employees. The company is seeking medical coverage for its 1,000 employees from a takaful operator (TO).

The TO analyzes the records of the company and puts together the data in Table 26.1 that reveals certain patterns of behavior among the employees with regard to their hospital visits.

Table 26.1 Medical History Table

Medical History of 1,000 Employees for Previous Year
Number of Employees Frequency of Hospital Visits Total Visits Cost of Each Visit Total Costs
605 0 0 100 0
305 1 305 100 30,500
76 2 152 100 15,200
13 3 39 100 3,900
1 4 4 100 400
1,000 500 50,000

The data reveals that of the 1,000 employees, 605 never visited the hospital last year, 305 visited the hospital once, 76 visited twice, 13 visited three times, and one sorry fellow went to the hospital four times. On average, the 1,000 employees made 500 visits to the hospital. Each hospital visit cost the employer $100. Therefore, the employer paid $50,000 in hospital bills in the previous year.

The actuary then visits the hospital to assess for which treatments the employees on average came. This helps the actuary structure the product offering so that an average claim size is $100 per visit. ...

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