The challenges and opportunities for

Takaful industry in Pakistan

Sanaullah Ansari
Assistant Professor
Shaheed Zulfikar Ali Bhutto Institute of Science & Technology (SZABIST),
Islamabad
 Introduction
• The concept of insurance is very old in the world
• In early times, the protection system against risk and security on
loans were present before 2250 B.C.
• Contract of Bottomry (loan for voyage) and Respondentia (loan on
good leden on board a ship) were also in practice in 1600 B.C. in
Phoencia for sea trade and around 4000 B.C. for land and before 600
B.C. for sea and land trade in India
• The modern form of insurance started from Northwest Europe in 8th
century
 Introduction
• The concept of marine insurance was started in 12th century
• It was formally formulated in 17th century when sea trade was at its
peak
• Later, insurance industry developed rapidly and modern insurance
systems were implemented throughout the world
• Currently, there are several types of insurance contracts including:
• Marine Insurance
• Health Insurance
• Agriculture Insurance
• Life Insurance
• Vehicle Insurance
 Insurance Industry in Pakistan
• Insurance industry is working since 1947 in Pakistan
• Controller of Insurance was operating Insurance industry under
Ministry of Commerce, Government of Pakistan
• Securities and Exchange Commission of Pakistan (SECP) is regulating
the Insurance industry since January 2001
• The SECP regulates and monitors the Insurance industry in the
country through powers vested in the Insurance Ordinance 2000 and
the Companies Ordinance 1984
• Total premium revenue of Pakistan Reinsurance Company Limited was
Pak Rupees 9 billion by the end of 2014
 Conventional Insurance in Pakistan
Conventional Insurance

• Working in Pakistan since 1947

• Following Conventional Insurance Models based on Riba
(Interest)
• By the end of 2014, 7 Life Insurance Companies with Gross
premium of Pak Rupees 122 Billion
• 38 General Insurance Companies with Gross Premium of Pak
Rupees 62 Billion
• Total Gross Premium of Pak rupees 184 Billion
 Islamic Insurance (Takaful) in Pakistan
Islamic Insurance (Takaful)
• Government of Pakistan assigned the task to Council of Islamic Ideology in
1983 to draw a framework of Islamic Insurance (Takaful)
• Under the recommendations of Council, Takaful Rules were established in
2005
• First Takaful Company was established in 2006 in Pakistan (Pak-Kuwait Takaful
Company Limited)
• Following Wakala-Waqf Model which are Riba-Free
• By the end of 2014, 2 Family Takaful Companies with Gross premium of Pak
Rupees 6 Billion
• 3 General Takaful Companies with Gross Premium of Pak Rupees 2 Billion
• Total Gross Premium of Pak Rupees 8 Billion
 Insurance Industry and GDP of Pakistan
• The contribution of overall insurance industry in country’s GDP was
0.61% in 2008
• Life insurance industry’s contribution was 0.28%
• Non-life insurance industry’s contribution was 0.33%
• Overall insurance industry’s contribution was increased to 0.77% in
2014
• Life insurance industry’s contribution was 0.51%
• Non-life insurance industry’s contribution was 0.26%
 Contribution of Insurance Industry in
Pakistan’s Economy
Contribution of insurance industry in Pakistan’s economy from
the period of 2010 to 2014 is as follows:
• Total premium written by all insurance companies was Pak
Rupees 732 Billion
• Total claims paid were Pak Rupees 294 Billion
• Tax contributions to government exchequer was Pak
Rupees 45 Billion
• In 2014, total number of employees working in insurance
companies was 14,488
 Growth Rate of Insurance Industry
• The overall industry’s growth rate was 14% in 2008, 12% in
2009, 18% in 2010, 23% in 2011, 18% in 2012, 22% in 2013
and 13% in 2014
• Life insurance growth rate was 25% in 2008, 22% in 2009,
27% in 2010, 30% in 2011, 22% in 2012, 40% in 2013 and
16% in 2014
• Non-life insurance industry’s growth rate was 7% in 2008, 4%
in 2009, 9% in 2010, 16% in 2011, 14% in 2012, 0% in 2013
and 6% in 2014
 Takaful (Islamic Insurance)
• The concept of modern Takaful (Islamic Insurance) is not
very old as it started with the beginning of Islamic banking in
the world in 20th century
• The basic principles of Takaful are “Taawun” (mutual
assistance) and “Tabarru” (donations, gift, give away)
• All these terms are the part of “Kafala” concept which
means to help each other
• Therefore, the mechanism of Takaful is based on Wakala-
Waqf Model
Wakala-Waqf Model
 Wakala-Waqf Model
• All the products of Takaful strictly follow Sharia’h rules, regulations
and laws
• Sharia’h Advisory Board is responsible to watch the business
decisions and activities
• In Takaful, individuals of a community gather on a common platform
to contribute reasonable amounts into Waqf Fund to protect
themselves and others from future losses
• In case of any loss, it is compensated by Waqf Fund and Takaful
Operator is not responsible for the compensation
• At every year end, the excess amount which is left after paying all
claims and expenses can be distributed among all the participants of
the Waqf Fund with the advice of Sharia’h Advisory
 Wakala-Waqf Model
• Shareholders of a Takaful company are not entitled to get the profits
which are generated by the insurance operators which is in contrast
with conventional insurance companies where profit generations
from insurance transactions is the primary objective
• Similarly, the policyholders of Takaful Company have the right to cast
their vote in the elections of company’s directors and they have the
access to the final accounts of the company as well
• However, these rights are not available to the policyholders of
conventional insurance companies
• These differences are making Takaful industry more popular than
conventional insurance among Muslim population in Pakistan
 Challenges and Opportunities for
Takaful Industry in Pakistan
• As roots of conventional insurance are very deep in the country, it is very difficult
for Takaful companies to penetrate in the market
• Therefore, these companies have to face many challenges for their survival in the
market
• Many of the consumers are tempted towards Takaful due to religious reasons
which provide great opportunities to this industry in Pakistan
• A vast majority of consumers also keep in mind the products and benefits being
offered by these companies
• To investigate about these challenges and opportunities, open ended interviews
were conducted from the employees and consumers of Takaful companies
• 50 employees and 50 consumers were interviewed to get their feedback and
opinions
• In the light of the interviews, many challenges and opportunities for Takaful
companies in Pakistan are found
 Challenges and Opportunities for
Takaful Industry in Pakistan
Lack of Awareness
• According to the respondents, consumers are fully aware about the
mechanism, products and benefits of conventional insurance
• However, it is the major challenge for Takaful companies that
consumers are not fully aware about the Islamic principles of
insurance
• Very low literacy rate plays vital role in the creation of this problem
• Those, who are responsible to provide full information about Islamic
principles of business, are not performing their role
• Therefore, there is a very big knowledge gap in the country
 Challenges and Opportunities for
Takaful Industry in Pakistan
Lack of Awareness
• Consumers who want to switch from conventional to Islamic mode of
insurance are very much confused
• Takaful companies are also responsible for this ignorance as they are not
providing proper knowledge to their current and potential consumers
• Even, employees of Takaful companies are not fully trained and aware
about their system and products, they are also misguiding their consumers
• Takaful companies should play their role positively and effectively to
provide proper and complete knowledge to the consumers
• If they will do it, there is a huge market waiting for these companies.
 Challenges and Opportunities for
Takaful Industry in Pakistan
Unclear Practices by Takaful Companies
• In the light of the answers by the respondents, it is found that the practical
system of Takaful is being partially understood by the consumers
• As Takaful companies are following Wakala-Waqf Model, there is still ambiguity
about the practices being followed by them
• Similarly, the products of conventional and Islamic insurance are almost same;
questions arise about the practicality of these products of Takaful companies
• The operational staff of Takaful companies is also not able to answer the
practicality of their respective company
• This is the responsibility of Takaful companies that they should provide proper
information about the mechanism and practices which they are following
• If consumers would know about the practices being followed by these
companies, their trust will boost and they will switch from conventional to Islamic
insurance
 Challenges and Opportunities for
Takaful Industry in Pakistan
Business Volume
• Respondents were also very keen about the comparison of business volume in between
conventional insurance companies and Takaful companies
• Business volume of insurance companies is measured by total premium revenue
• By the end of December 2014, total premium revenue of insurance industry in Pakistan
was Pak Rupees 192 billion which consists of Pak Rupees 64 billion of non-life companies
and Pak Rupees 128 billion of life insurance companies
• In this total business volume, the proportion of Takaful companies is Pak Rupees 8 billion
which is only 4.2% of the total insurance industry
• As Takaful companies are trying hard to increase their business volume but they are not
succeeding due to the reason that they are not marketing their products efficiently
• Both employees and consumers suggest that Takaful companies should work
aggressively to increase their business volume
• Unless these companies capture the larger proportion of the market, their survival and
growth will be at stake
 Challenges and Opportunities for
Takaful Industry in Pakistan
Re-Investments
• All insurance companies reinvest pooled funds of their premiums in different sectors to
generate profits which are required by them to manage their expenditures, payment of
dividends to shareholders and for the settlement of claims
• Conventional insurance companies reinvest their funds in every type of business sectors
whether they are Sharia’h compliant or not
• Whereas, this is an ethical, moral and legal obligation for Takaful companies to invest
only in those business sectors which are Sharia’h compliant
• Takaful companies are claiming that they are reinvesting their funds in such business
sectors but as consumers do not have complete access to the information and records,
there is still an ambiguity in their minds that these companies are not properly following
Sharia’h principles
• Similarly, Takaful companies are also not trying to satisfy their consumers on this
particular issue, which is creating a gap between these two
• Consumers suggested that Takaful companies should make it clear that in which business
sectors they are reinvesting so that they could be satisfied.
 Challenges and Opportunities for
Takaful Industry in Pakistan
Claims Settlements
• According to the respondents, the services performance of insurance companies is
checked by their claims settlements
• Claims are cross verified by insurance companies to complete their legal obligations and
then these are decided to be settled completely, partially or refused
• The processing time of this verification plays vital role in whole process
• Unnecessary delay in this process loses the confidence of the consumers towards the
company as they expect quick settlement of their claims
• Therefore, conventional insurance companies are trying their best to lessen the
processing time for the satisfaction of their consumers
• However, Takaful companies are still facing this problem as their processing for claims
settlement is not satisfactory due to several reasons
• These companies are suggested by their employees and consumers to make valuable
reforms in their claims settlement process so that their trust towards consumers can be
strengthen further
 Challenges and Opportunities for
Takaful Industry in Pakistan
Tough Market Competition
• As conventional insurance is the major share holder of insurance industry
in Pakistan, it is giving tough competition to Takaful industry
• Being a small part of this huge industry (only 4.2%), Takaful companies are
facing large number of challenges to overcome the monopolistic position
of conventional insurance in the country
• The respondents suggested that the only way to be in this competition and
to gain a reasonable proportion, Takaful companies have to develop
further by providing new Sharia’h compliant products and to provide
excellent services to their consumers
• In their opinion, new product development, establishment of new
companies, extension in current branch network and provision of better
quality services would be helpful for Takaful companies to grow in future
 Conclusion
• In the light of the responses by the employees and consumers of
Takaful companies, it is concluded that there is a huge market of
insurance in Pakistan as people want to avail life and non-life
insurance services
• But, majority of the Muslim consumers are avoiding from it due to
religious reasons as conventional insurance is based on Interest (Riba)
• Whereas, the basis of Takaful is Sharia’h compliant and this industry
is working according to the guidance and teachings of Islam
• Therefore, there is a huge potential of Takaful business in the country
as vast majority of Muslim population want to join it due to religious
reasons
 Conclusion
• As a tiny part of the overall insurance industry in the country, Takaful
companies are trying their level best to provide Islamic insurance
services to their consumers
• But, due to several limitations, they are not performing as per the
expectations of the market and consumers
• There are several challenges which are negatively impacting the
progress, development and growth of this industry
• Lack of awareness, unclear practices by these companies, business
volume, re-investments, claims settlements and tough market
competition are the major problems being faced by Takaful
companies
 Conclusion
• These can be overcome by providing awareness about Islamic
Insurance to the vast majority of consumers, developing new and
Sharia’h compliant products, aggressive marketing of services,
establishment of new Takaful companies, increasing branch network
of existing companies and by satisfying the consumers by all means
• If Takaful companies would succeed to overcome these challenges,
there will be a revolutionary development in Pakistan as there are
unlimited opportunities and huge potential for Takaful industry in this
market
Thank You