FUTURE OF TAKAFUL IN PAKISTAN

SAID GUL,
MANAGING DIRECTOR,
PAK-QATAR FAMILY AND GENERAL TAKAFUL

(feedback@pgeconomist.com)

Sep 10 - 16, 20
12

From Sudan in 1979 to the Middle East and Asia-Pacific, Takaful entered Pakistan at the promulgation of Takaful Rules in 2005. Pakistan hosts 5 Takaful companies out of more than 130 globally according to the latest Ernst & Young Takaful Report. International insurance and reinsurance giants such as American Insurance Group (AIG), Allianz, ACE Groups (UK), AXA Insurance, Aviva, Lloyd (UK), Munich Re and Hannover Re are all part of the burgeoning market. Today, professional certifications such as CIMA (), IIBI (Institute of Islamic Banking and Insurance), and CII (Chartered Insurance Institute) academically engage in studying Takaful; such has been Takaful's popularity and success.

Pakistan has an underdeveloped insurance market, contributing no more than a mere 0.7% into the GDP (0.3% Life Insurance and 0.4% General). This does not compare well to India's 3.5% or Malaysia's 6%. Pakistan's insurance industry first suffered when it was nationalized in the 1970s. However, the real reason for below par performance has been low market capital mobilization which has led to host of real and perceived problems. The nail in the coffin has been Shari'ah juristic objections which declare conventional insurance impermissible. Consequently, less than 10% of Pakistan's families have any coverage, at once disturbing in its reality for the industry as a whole and exciting in its opportunities for the Takaful industry. This is the environment in which Takaful has had to establish its identity since its arrival in Pakistan.

For more than a decade prior to 2005, there were no new entrants in the Life insurance sector and very few new players initiated General insurance operations in Pakistan. However, with "Takaful Rules" of 2005, five dedicated Takaful operators entered the local industry, with three in General and two in Family Takaful. Commencing operations in 2008, Pak-Qatar Family and General Takaful and other Takaful companies seeks to provide all the usual benefits of conventional insurance but with a value-added ethical dimension, Shari'ah compliance. With unique features such as Waqf (religious endowment) and surplus-sharing, Takaful has taken off in Pakistan despite the historically low insurance density, vindicating the trust and confidence of investors from GCC states where the growth of Takaful has been phenomenal.

Pakistan's dependency ratio of 65.76 reflects the inordinately large burden on the breadwinners to financially support their loved ones. Likewise, while Pakistan's total estimated insurance market is worth Rs. 450 billion, the industry's actual worth is not more than Rs. 60 billion. It is hoped that more new players will generate public awareness about risk mitigation and formal savings. Takaful in Pakistan is striving to provide competitively priced products and impeccable service to its existing and potential clientele, and the infant industry stands at a point where innovation will further speed up the process of Takaful's penetration into the market.

Debuting in largely unchartered waters, Takaful companies in Pakistan started operations in a very uncertain environment. In addition to the market realities already described, Pakistan has experienced very turbulent times socially, economically and politically. There was the added pressure of extremely savvy GCC as well as domestic investors keeping a close watch on the fledgling companies. Takaful companies were willing to play the waiting game, investing prudently and generating solid, if a bit unhurried, returns. It was also recognized that Takaful could only really make a mark in Pakistan if it was successful in tapping new markets, as the existing market was small and heavily congested with conventional players doing nothing tangible to increase the size of the pie. For instance, nearly three-quarters of life/family insurance business in Pakistan before 2005 had been underwritten by State Life Insurance Company, a state-owned company which enjoys better leverage than its private sector competition. The ensuing years have been a testament to the power and potential of Takaful in Pakistan, and the experience has been positively mirrored in most markets Takaful has set foot in.

Takaful Rules 2005, issued by the Securities and Exchange Commission of Pakistan, was a landmark occasion for Pakistan's financial industry for its sagacity and far-sightedness. One of its salient features was the lack of room for window operations by conventional insurers. This decision was balanced by a high paid-up capital requirement for Takaful operators. The manoeuvre achieved the desired goal of ensuring capital formation which in turn has already resulted in appreciable investments in technology and development of the required human resources. This development also naturally allowed only the most confident and well-planned operations to be initiated under the most prudent, yet aggressive, managers. Indeed, even going public was initially advised for Takaful, primarily to facilitate companies in mobilizing capital. This decision had much to do with the track record of conventional insurance companies, which has largely failed to influence the national market and have not been able to generate the desired levels of savings and investments, the current national savings ratio being roughly 11% compared to India's 26%. The decision to bar window operations was to be reviewed in time, with the promotion of a savings culture and the continued health and vitality of the national insurance and Takaful industry being the only considerations.

Consequently, a curious combination of turbulent political, social and economic conditions, far-sightedness on Securities and Exchange Commission's part, and confidence, perseverance and dynamism in Takaful's cavalry, have allowed Takaful companies to grow at a much faster pace compared to conventional insurers. For instance, Pak-Qatar Family Takaful Ltd. created an industry record in terms of business submitted by any Takaful or conventional insurance company ever in Pakistan in its first year of operations. Pak-Qatar Group's Corporate Division, offering the ideal Group Life and Group Health products, has been consistently leading the national industry in terms of persistency and growth, with many foreign embassies and large multinational companies on board. The branch network and distribution force has exploded dramatically, with fund rates consistently out-performing their conventional counterparts despite domestic and international recessionary trends. Pak-Qatar General Takaful also has forged intricate partnerships with leading corporations in Pakistan, and is quickly moving into the retail business in a bid to explore alternative methods of distribution of Takaful products. Other Takaful companies also have done very well, giving a very wholesome outlook on the future of Takaful in Pakistan.

The Family Takaful segment still has the potential to absorb more active players, while it would be slightly difficult in General Takaful. General insurance in Pakistan has traditionally focused on a corporate clientele. Although this has led to huge business portfolios for insurance giants who have managed to secure big corporate clients, this has also resulted in the stagnation of the overall market. General Takaful, on the other hand, cannot afford to run its business on these lines. Instead, it should venture on personal lines towards retail products to capture a completely untapped market, leading to a broader clientele beyond the already available.

Pakistan's Takaful industry is still young but no longer fragile. It has competed in the same universal insurance market, offering competitive financial products at competitive prices. However, Takaful still needs industry-wide innovation in terms of product distribution channels, training and retention of quality human resource, large-scale awareness programs and official oversight and at time, patronage. Takaful can easily become the engine of economic growth for Pakistan; indeed, that should be considered to be Takaful's ultimate goal. Care should be taken not to sacrifice Takaful's spirit and unique flavour at the altar of quick profits, and a visionary approach coupled with industry-wide coordination will make Pakistan into compelling evidence for Takaful's innate promises.