Modeling and simulation to determine the optimal incentives for Islamic insurance operators in pure wakalah contract

Abstract

The determination of optimal incentives aims to improve takaful operator performance. The incentives depend on premiums paid by participants. The premium remains the property of participants, and the operators in the insurance company, manage the fund collected. In this study, the mathematical model of the takaful is formed based on a pure wakalah business model. The model is obtained using expected utility theory, where the participants are risk-neutral, and the operators are risk-averse. The optimal incentives for takaful operators are obtained based on the model with three affecting factors: additional participants, underwriting efforts, and proportion of investment fund. This study shows that this increasing number of takaful pools in the pure wakalah business model gives more incentives to the operators until they reach the optimal number of additional participants. However, increasing the operators' underwriting process effort or investment in the takaful funds will not give additional incentives to them.