takaful in pakistan dec 2013

50 December 2013 www.meinsurancereview.com

Takaful MarkeT Profile – SouTh aSia

It comes as a surprise to most people when they come to know that takaful started in Pakistan only seven years back. I recall that the visit of Brother Rafik

Kassim, Chairman of Amana Takaful in 2003, led us to realise that Sri Lanka, with a small Muslim population, had had takaful for many years, but Pakistan with 98% Muslims still had conventional insurance only.

The Takaful Rules 2005 were promulgated by the Securities and Exchange Commission of Pakistan. I had the privilege to be a member of the three-person task force responsible for drafting these rules. Pak Kuwait Investment, along with Meezan Bank – the only dedicated Islamic bank at that time – then took the initiative to set up the first general takaful company which commenced operations at the end of 2005. Five takaful companies were established between 2005 and 2008 – three providing general takaful and two providing family takaful services.

Impressive growth ratesThe takaful industry generates a total contribution of about US$52 million, of which family takaful contributes about $40 million.

Graphs 1 and 2 show the premium figures for past years. The growth in life insurance is particularly impressive. The growth in takaful is even more impressive, at about 63% in 2012 which is fairly decent after five to seven years of operations of different companies, despite the numbers still being small. The growth of the conventional insurance industry for 2012 was 26%.

Family takaful contributions for 2012 showed a growth of 76%. New business, including single contributions, increased by almost 100%. The two family takaful players captured 15% of the private sector (excluding state-owned State Life) new business in 2012, though it is a mere 5% if we include State Life. It must also be seen that Pakistan’s private sector life insurance industry has, in 20 years,

Takaful in Pakistan

The untapped growth potentialGiven its impressive growth rates, the takaful sector in Pakistan presents tremendous opportunities for foreign investors, says Mr Abdul Rahim Abdul Wahab, FSA.

Source: Annual reports of major companies(US$1=PKR100)

2006 2008 2010 2012

1,000

800

600

400

200

Life

Non-life

Graph 1: Conventional insurance premiums

(US$

mill

ion)

Graph 2: Takaful contributions

2008 2009 2010 2011

50

40

30

20

10

Family

General

(US$

mill

ion)

2012

Including State Life

Takaful5%

State62%

Conventional33%

Life insurance – New business 2012

Excluding State Life

Takaful$13

Conventional$74

(US$ million)

captured a 33% market share with the state-owned company still dominating with 62% of total premiums.

Given the above scenario, the family takaful figures are very encouraging, considering a short span of just over five years. Pak Qatar started late in 2007 and the company has already shown a profit for the year 2012.

Although the dynamics of Malaysia are entirely different, the first takaful company was established there in 1985. After 27 years, takaful has a market share of 30% of new business, as per 2012 figures from Bank Negara Malaysia. Pakistan is a very recent entrant in takaful, and hence the early players which are able to establish themselves at this stage are sure to benefit tremendously from the growth potential this country offers.

Adding to the potential in the Pakistani insurance sector, insurance penetration is quite low, contributing

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www.meinsurancereview.com December 2013 51


only 0.7% of the GDP. This is attributed to religion and people not taking up conventional life insurance, which is prohibited in Islam. It remains to be seen how much increase in penetration takaful players can achieve. The concern is that with just two family takaful companies, the job of creating takaful awareness and the large distribution networks required to reach the masses cannot be achieved given the size of the country. It is therefore, again, an opportunity for multinational players to make their presence known in this market.

Recent regulations impacting takafulThe SECP has been playing a very active role in the progress of the insurance industry. Recent regulations impacting takaful which are in the process of obtaining public comments or regulatory approval include:

Modifications in Takaful Rules in 2012The Takaful Rules 2012 allow conventional insurers to set up takaful window operations. The five takaful players had filed a petition against certain points to ensure a level playing field. These include separate capital required for window operators to have independent statutory deposit, separate solvency and complete infrastructure requirements.

They also suggest that there is a need to have a dedicated sales force, as with Islamic banking. Their argument is that window operations, with the same

sales force, may create problems in terms of the public getting confused, which may hurt the development of the takaful industry. With separate capital and dedicated sales teams, the concept would develop better and overall penetration may increase further.

BancassuranceThe bancassurance guidelines 2010 were recently reviewed, and proposed draft amendments were announced for public comments. The basic aim of these amendments is to improve customer value and protection, for instance by revising the whole remuneration structure, applying restrictions to recycling life insurance policies, introducing commission claw back provisions, maintaining minimum surrender values, increasing financial underwriting requirements, and ensuring mandatory after-sales call-back requirement.

The regulation also aims to help policyholders better understand their policies by introducing a “need analysis document” which requires illustrations to be given in Urdu and provided at the point of sale.

According to SECP’s survey in 2012, bancassurance had a compound annual growth rate of 95% in the last five years, but it faces issues ranging from mis-selling, renewal persistency and an inappropriate remuneration structure, hence requiring regulator’s intervention to protect and provide sustainable growth for this sector. This is being addressed gradually by the regulator.

The well-established GCC and Malaysian takaful players should seriously look at Pakistan as an

emerging takaful market which has yet to show its true potential and can show explosive growth with more serious long-term players.

Most GCC players struggle due to lack of critical mass business volume despite very capable management and state-of-the-art systems and processes in place, as they serve only a small customer base.

Further, in the thirst to write larger business volumes, they tend to underprice, leading to deficits in the takaful funds that they operate, with wakala fees on the one hand generating income but increasing Qard Hassan on the other hand.

This further hurts shareholder returns and the cycle seems to be worsening over the past few years with larger deficits and higher Qard Hassan which may eventually not be recovered.

The business plan of some of the earlier GCC players was to have the parent company in Bahrain, the UAE or Qatar and subsidiaries or branch operations throughout the Middle East and elsewhere in the region, including Pakistan and later, certain western countries like the US, France and the UK.

Potential for foreign investorsUnfortunately, the political and economic environment

in Pakistan has kept them away till now. I believe that Pakistan has its ups and downs but long-term takaful players would benefit from the sheer volume opportunities.

The recent growth in the insurance sector, the improvement in the regulatory environment to promote insurance awareness, regulatory controls to develop a sound industry, consumer protection-related regulations in recent months and the interest in Shariah-compliant services by the public at large would offer opportunities for growth in the takaful sector which may not be matched in other countries.


52 December 2013 www.meinsurancereview.com


Shariah boardThe SECP established a Shariah board in May 2013 to advise on Shariah matters, development and promotion of Islamic financial institutions (IFIs), which include Islamic mutual funds, Islamic pension funds and takaful operators and other financial institutions. The board’s key function is to validate products of IFIs, ensuring their compatibility with the Shariah principles and also to recommend guidelines on the criteria for investment by Islamic capital institutions. Mufti Hassan Kaleem is the Chairman of the Shariah Board.

Centralised Insurance Information SystemSharing policyholders’ information through a centralised information system accessible to all insurance players is a major initiative by the regulator. Expected to be functional by end of this year, the system will ensure availability of information relating to individual life and group life policyholders.

Issues and challengesStakeholders in the Pakistan and the Middle Eastern markets should benchmark against the steps taken by the Malaysian regulator and takaful industry. An overall market analysis, using Porter’s five forces model for example, needs to be carried out by the government and industry to develop a solid takaful industry and promote its rapid growth as an industry. Key steps adopted in Malaysia include:

• Support for certified Islamic financial professionals;• Designing proper regulatory framework and research

institutes, such as the International Shari’ah Research Academy for Islamic Finance (ISRA);

• Establishing a strong sukuk sector;• Clear message that takaful system is Islamic and

conventional is not;• Only full-fledged takaful players are allowed;• Mandating takaful companies to go for retakaful;• Creating an association of Shariah professionals,

supported and financed by the central bank which creates regular forums for discussion of Shariah-related matters;

• Central Bank working together with the industry association – the Malaysian Takaful Association; and

• Coordination with the Malaysian Accounting Standards Board (MASB) to cater to changes needed by Islamic finance and takaful.

Pakistan has its challenges but at the same time, offers tremendous opportunities. Issues include the availability of human resources, creating awareness with low literacy rates and low savings rates, availability of general retakaful, etc. However, the sheer volumes that can be achieved surpass the concerns about issues and provide ample opportunities for success. The rewards are high: the ability to earn returns for shareholders and offer Shariah-compliant protection and savings to a very large Muslim community.

Mr Abdul Rahim Abdul Wahab is Actuarial Practice Segment Leader, Partner, Director and Consulting Actuary with SHMA/ Sidat Hyder. The views expressed are his personal views. He may be contacted at [email protected].

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takaful in pakistan dec 2013

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