May 12 - 18, 2008

The insurance industry of Pakistan makes a nominal contribution of 0.8% to GDP as against 4.8% in case of India and 8% in case of Malaysia. The developed economies of Europe, Japan and US contribute around 14%. Out of 0.8%, only 0.3% comes from life insurance, while the rest 0.5% is contributed by non-life insurance. With such a low penetration, the industry is still in its nascent stage in a consequence of very low demand. The insurance density (premium per capita) in case of Pakistan is only $5.9 as against $38.4 in case of India.

The potential of this sector has not been tapped as it should have been. The deteriorating law and order situation has spurred the insurance companies to raise tariff and in consequence inflate their bottom line. The beneficiary base has not been broadened with the result that the sector is living in a state of dormancy. On the contrary, the counter-part banking sector, has flourished during the same period. With the dramatic economic expansion and boom in the service sector, the slow paced growth of insurance sector is a countervailing influence.

The under-performance of insurance sector in our country, particularly the life segment, can be attributed mainly to a narrow beneficiary base which in turn is the outcome of a number of factors for example lack of awareness, high tariffs, insufficient disposable income, religious misgivings etc.

Lack of awareness is closely linked with the low literacy rate. Small businessman and traders with a low educational background fail to appreciate the importance of insurance as a business risk transfer instrument. Religious misgivings find their roots in the tribal culture. One, from this background, may not like to listen to the logical side of an insurance cover as one has been taught not to "interfere with the ways of Lord" and take the loss and profit as they come. Life insurance in particular has suffered in consequence of such religious misgivings. There are people who undertake huge commercial transactions without benefiting from a variety of risk transferring options available to them. .

The lack of sufficient disposable income and higher tariffs are combined together to drive a prospective beneficiary away. In most of the cases, insurance is taken as a necessary evil - a compulsion rather than a necessity. Our insurance tariffs are possibly the highest in the world. These need to be scaled down to make insurance an attractive option. With a slight worsening of the law and order situation, the vehicle insurance premium rates are raised exorbitantly with the result that the beneficiary base is further narrowed down. Despite the growing menace of car snatching, more than 75% private non-lease vehicles are plying without comprehensive insurance. The ever rising fuel and maintenance costs hardly allow the car owners to take out an insurance policy worth the name. Insurance companies should take lead from the booming success of telecom sector. The competitive price cuts offered day in day out by the market players have served to expand the business many fold.

Certain malpractices have also tarnished the image of an otherwise reputable industry. Inflated and false claims, kickbacks, unethical cuts, back-date insurance, low premium non-claim policies etc. are there to serve the vested interests.


The concept of Takaful dates back to ancient Arab tribal practice of joining together of tribal members for some gainful commercial occupation and joint loss bearing in adverse circumstances. The two relevant roots to the term Takaful are Kafala meaning assurance or guarantee and Takafi meaning equality or equity. A fund is developed through equity participation. The Takaful company is the Takaful operator. All business profits and losses are attributable to the fund. Takaful is recognized by the entire Islamic world as Riba free and Shariah compliant insurance option. Due to the lack of proper legislation, Takaful made a late entry into Pakistan. Having made its debut in Sudan and Bahrain in late seventies, the idea has found its roots in 35 countries of the world with more than 100 Takaful companies in operation. The business appeal of the idea has attracted a number of non-Muslim nations and multi national companies as well. The world's leading reinsurance company Munich-Re has established a Re-Takaful subsidiary at Kuala Lumpur. Takaful companies are operational in Russia and South Africa. The countries planning to "Go Takaful" are US, China, India, UK and Canada.

The positioning of the product in the large Islamic market holds great promise for the global success of the concept. The predominantly Muslim population of Pakistan can give the required boost to the new born Islamic insurance sector. Attractive pricing, serious promotional efforts and easy access to distributional network can change the mindset of a nation not so insurance friendly.

Life insurance business in Pakistan has remained under stress despite having immense growth potential. It has been assigned the role of a noted under-performer by our failure to create mass awareness on the importance of insurance in human life. A new range of products based on Takaful needs to be designed. Pak-Kuwait Takaful Company is known to have launched its Umrah and Hajj Travel Takaful policy that provides cover against death, injury and disability. The success of this product will set ground for Islamic life insurance. .


As repeatedly stressed by this scribe, banks are in an envious position to develop synergy with the insurance sector, both Islamic and conventional. The lives of small depositors (say up to an amount of Rs.500,000 may be insured under a Takaful or conventional life policy depending on the choice of the depositor, without involving him in any sort of complicated documentation and formalities. The insurance and Takaful companies should offer a very competitive premium rate to the banks. This premium expense should be borne by the bank. In case a depositor expires. an amount equal to the amount of deposit in his account at the time of his death should be paid by the insurance company to the legal heirs of the deceased depositor. This will not only encourage the depositor to maintain a decent balance in his bank account but will also result in increased bank and insurance business. Country's dwindling saving rate will also stabilize and get a boost with the passage of time. The idea can be used in case of borrowers as well.

The suggestion made by certain quarters to set a deadline for the Islamization of the entire banking and insurance industry appears hurriedly thought out. The two systems have to exist unobtrusively for an unlimited period. After some considerable time, may be 20 or 25 years or even more, we may like to take stock of the situation and decide on our future strategy.