The insurance industry in Pakistan contributes almost 0.9 percent of the gross domestic product, of which Takaful industry shares 3 percent of the insurance industry, whereas insurance sector in India contributes 3.8 percent of total GDP and Turkey, where the contribution is 1.45 percent of GDP. In the 200 million plus population of Pakistan, insurance penetration is very low where the majority of the population is left uninsured and unaware. Awareness amongst the masses is the biggest challenge. As 75 percent of our population falls in the lower income bracket located in undeveloped rural areas, the poverty level of such areas is so low that they cannot afford to have Takaful. Thus, the only affordable segment of consumers available to the insurance and Takaful industry is the 20 percent middle income people, who can be educated and regulated into getting their assets and lives insured.
Takaful is a concept that has been practiced for over 1400 years. Its origin roots from the Arabic word ‘Kafalah’, which means ‘joint guarantee’. The first Takaful company was set up in Sudan in 1979, almost simultaneously followed by another one set up in Bahrain. The Government of Pakistan issued ‘Takaful Rules 2005’ on September 3, 2005, giving the country a viable and compatible Islamic operational model after which Dawood Family Takaful and Pak Qatar Family Takaful acquired license to operate as a first-ever Shariah compliant Life Takaful operator of Pakistan. Pak Qatar Group launched Pak Qatar General Takaful after their successful launch of Family Takaful. With recent regulatory action last year, conventional insurance companies are allowed to enter into Takaful industry via Takaful windows. This was due to amendment in the set of rules governing the Islamic insurance industry which had earlier disallowed conventional insurance companies to enter the Takaful market without setting up their independent subsidiaries with separate paid-up share capital.
Takaful is based on the Wakalah-Waqf model, where the Takaful company acts as a Takaful operator (Wakeel) and forms a pool (Waqf), in which every policy holder contributes some amount, which is then used for compensating any loss arising to policy holder participating in that Waqf pool. Insurance companies, as a Takaful operator, charge their Takaful management fee separately and is not entitled to share any benefit of surplus in the Waqf pool left after compensating each and every claim. The fund available in the pool is invested in Shariah compliant avenues, profits realized are returned to the Waqf pool thereafter. The investment made is based on Mudarabah based model and thus excludes Gharar, Maysir and Riba from conventional insurance system to form Takaful way of insurance.
Under the law, Takaful operator pays a defined loss from Waqf pool, i.e. Participant Takaful Fund (PTF). The loss is borne by PTF, based on the contributions (premium) of policyholders. The liability is then spread amongst the policy holders and all losses divided among them. Therefore, the policy holders are both the insurer and the insured. Contributions to the PTF are for the purpose of pooling of the risks amongst participants to provide relief to them against defined losses as per PTF rules and Participant Membership Document (PMD). As such, participants (policyholders) are the owners of the fund and entitled to its surplus (profits), if any. The Takaful operator acts as a management of the ‘Participants Takaful Fund’.
The Takaful business has been struggling since its inception despite adequate capital injections from sponsors. General Takaful operators rely heavily on Islamic Banking Car Ijarah business. It provides a complete Shariah-compliant banking solution for Islamic banking customer, but on the other side with the introduction of Takaful window, the share of car Ijarah business is not enough for a profitable business for existing full-fledged Takaful operators. Although many other products are still to be introduced under Takaful, the progress is hampered due to Shariah-compliance reasons. It contributes to low market penetration and customer need of complete set of products according to their requirements. New and innovative products meeting participant’s requirements need to be developed. Some products like travel insurance and crop insurance are still to materialize. Many small and mid-sized businesses are left untapped, which reflects a complete focus on large size companies where sustainability of business with such clients always remains on risk. Same reflection is found in the balance sheet of Takaful operators where the business revenue shows high dependency on Islamic banks.
The Re-Takaful (Islamic reinsurance) sector has proven its growth with increasing capacity and well-rated securities. The sustained and improving double-digit growth in the Takaful market, along with the strong take-up of Islamic financing in both the retail and commercial grounds, provides opportunities for Re-Takaful operators. However, no one can safely claim that Re-Takaful have enough capacity to support Takaful growth across all lines of business. The industry has not had a smooth ride as it struggles to step out of the shadows of their reinsurance counterparts. Unfortunately, the fact is that not all Takaful companies have Re-Takaful as their default option, with management still preferring to deal with the conventional reinsurers that they have had long-standing relationships with.
The Takaful industry is still in its developing stages and needs proactive assistance from regulators, and requires raising awareness among the masses. Rather than relying on an Islamic Bank-based clientele approach, business penetration must be increased in all other segments. In the long run, the industry would also ideally need to come up with products that reflect a strong Takaful identity to open up new market segments. This will make the Takaful industry a default choice for protection against all odds.