International experts revealed that it is mandatory for everyone in the developed world, to have a cover for unforeseen losses. On the other hand, the need of such an instrument is much greater in developing countries, as susceptibility to risk is high as there are very less opportunities obtainable to recover from big losses. In developing countries therefore, which are usually characterized for having low income levels, and lacking access to good health care, sanitation, education and social security systems, it is of dire significance to have such a system of risk transfer. For the wellbeing of individuals and businesses like repaying loss to property, life or business the insurance companies provide various services. Insurance company in simple words encourages the entrepreneurs and individuals to go for high return activities, which surely possess a big risk. In the absence of such a service, most of the investors hesitate to undertake such business activities.
No doubt in the market, Shariah-compliant insurance is one of the fasted growing areas, and is of growing interest to businesses. Islamic insurance is attributed to organizing financial systems compatible with Islamic teaching and cultural identity. Furthermore, Islamic insurance also called as Takaful, is an alternative model to conventional insurance; which is forbidden in Islam, it having some elements which are against Islamic law like Riba (usury), Gharar (ambiguity), and Maisir (gambling).
Takaful in contrast to conventional insurance, is organized on the base of mutual assistance, mutual protection and assurance, accountability, incorporated into the concept of Tabarru (donation). It is also identified that making the insurance as per the Islamic rules started after 1979 CE. It was a Sudanese company which started practical operation of Takaful as Islamic insurance. The experts also recorded that the rate of growth, in terms of the number of participants (insureds), the number of (Re) Takaful operators (insurers and reinsurers) and the overall contributions (premium) generated, is considerably larger than in the conventional insurance market. Different studies revealed that the conventional insurance aims to transfer risks, whereas Islamic insurance shares risks. Islamic insurance aims to remove uncertainty from the policyholder through attaining a mutual concept of insurance.
By adopting a mutual concept, Islamic insurance aims to remove excessive uncertainty through returning some profits to the original policyholder. To remove the risk of gambling, the mutual concept reduces an individual’s incentive to make large returns at the expense of others. All Islamic insurance operators must keep contributions (premiums) and underwriting funds in non-interest bearing accounts. Islamic insurance is not only aimed at Muslims or Islamic businesses – it can be purchased by anyone as long as their business does not contravene Shariah principles (e.g. alcohol production, pork farming or casinos). Barring any non-Shariah compliant risk exposures, both conventional and Islamic insurance provide the same coverage to clients. Islamic insurance offers the client an opportunity to make a financial return if, at the end of the underwriting year, there is a surplus in the contribution (premium) fund. The worldwide (re)insurance community is starting to take greater notice of Islamic insurance. Interest and take up through insurers is rising as governments look to foster financial systems that adhere to Islamic teaching and cultural identity.
Studies also recorded that Malaysia has firmly organized itself as an Islamic hub globally by leadership and innovative product offerings in the niche industry. As such, the creation of an Islamic finance-enabling ecosystem is the key driver of the Malaysian Takaful industry’s growth. According to the said Fitch Ratings Inc in its latest report on Malaysian Takaful trends and outlook for 2020, this makes Malaysia a leading model for the sector, mainly in light of the Muslim-dominated make-up of the untapped population segment.
Statistics showed that family and general Takaful premiums increased by 29.6 percent and 16.4 percent respectively in the first half of 2019 (1H19), compared to 12.2 percent in conventional life and -1.3 percent in general insurance.
The Takaful sector also continues to gain share in the domestic insurance market with family Takaful accounting for 35 percent of the overall life market based on new business premiums in 1H19 (2018: 32%).
General Takaful accounts for 16 percent of the overall general insurance market (2018: 14%). But Takaful’s penetration is still far too low despite a Muslim population of more than 60 percent and a burgeoning middle class in the country. According to the State Bank of Pakistan (SBP), a Convention of D-8 countries was held in Kuala Lumpur in November, 2002 on “The Emergence of Takaful in the Wake of Globalization“. It is worth noting that among D-8 countries it is only Pakistan where Takaful business has not been launched so far. Islamic banks and financial institutions require Takaful services for their operations. Although, the insurance business in Pakistan declines in the jurisdiction of the Securities & Exchange Commission of Pakistan (SECP), institutions operating Islamic banking would have to deal with insurance. As such, the Central Bank should desire that Takaful business be launched in Pakistan at the earliest. In the revised Insurance act, the Government of Pakistan has added the provisions for Takaful companies in Pakistan. As reported in the press, Pak Kuwait Investment Corporation has been allowed through SEC to organize a Takaful Company in Pakistan under the name of ‘First Takaful Insurance Company Limited’ with authorized capital of Rs 100 million.