May 12 - 18, 2008

Pakistan is identified as one of the countries where per capita expenditure on insurance services is significantly small. Only 0.6% of the total GDP what country fellows spend on protecting themselves against future untoward situation is even less than the other regional nations' insurance expenditure-GDP ratio. As a matter of fact, in Indian market about 3.1% of GDP is spent on insurance services while in Malaysia the ratio is of around 8%. In Pakistan's financial sector position of general and life insurance can neutrally be termed as bleak given the people's abysmal propensity to save. But, industry players are optimistic about the potential chances of progress in the general as well as the life insurance business that has not been as prosperous in the country as compared to general.

The mindset of average Pakistanis suspecting the western idea of insurance of non-Islamic has proved itself a main obstacle in the way of progressive insurance sector. Particularly in case of life insurance the perception has not life insurers earned the scale. And, therefore cost of acquisition in life insurance business may not be distributed in the annual sales turnover; hence investment is less likely to flow in this sector owing to inadequate return on investment. At present there are four private and one public sector life insurance or assurance companies operating in Pakistan. Of them, State Life Insurance holds the major market share. It was only after 2005 that life insurance sector had caught its actual speed; otherwise since then it was moving at a snail pace.

In Pakistan, the common objection about the insurance sector is its non-compliance to the principles of Islam. Conventional life insurance mostly falls prey to this because of its following risk transfer mechanism. Usually, conventional insurance (general and life) work under risk transfer system, which according to Takaful is repugnant to the Shariah. On the contrary in Islamic insurance, insurers undertake the responsibility of managing pooled investment of insured and ensure unalloyed sharing in place. They invest these funds into interest-free resources in contrast to conventional insurance funds that normally are deposited in the marketable securities having certain markup. But, few critics have reservations about the likelihood of funds being absolutely untouched of markups in the predominant conventional financial system of the country. Another characteristic of premium reimbursement that albeit draws line in between these two classifications of insurance is often misperceived. It is said that premium deposited in the conventional insurance policy if not called for till the expiry of the agreement or saved thereof becomes insurer's asset not to be reimbursed to policyholder.

Instead, upon maturity of the policy or otherwise unit linked insurance-a product of conventional life insurance-reimburses certain amount to policy holder. Notably, individual Life Unit linked has been the major revenue generator for considerable life insurance companies in 2007. At the year end remaining premium on policy is returned back to the insured in Takaful. It is the internal mechanism of the conventional insurance companies, which operate in contrast to the Shariah principles. In conventional insurance, policy is like a sale contract wherein insured and insurer agree on certain premium. It is money for money exchange that induces uncertainty and gambling, and usury elements. Gambling element is enacted when gain of one party becomes contingent upon the loss to other party(s).

The mindset of local market about the conventional insurance explicitly gives Islamic insurance a comparative advantage to expanding operation around the country. Since the Takaful sector of the country is on its very initial stage of development-started roughly three year ago-penetration of its products has yet to make its way. But, Takaful experts criticize the permission given to conventional insurance companies to commence Takaful window operations. They think it is like selling of Haram (forbidden) and Halal (allowed) things from a unified sale outlet. They fear this would impact inflow of foreign investment in this sector.

While one can contend that window operation will help promote public awareness about Takaful, Takaful operators anticipate unfair competition following the window operation. Mainly there are two Takaful companies are operating in the country. Too, there are several Takaful companies on the anvil in Pakistan with foreign collaboration. Foreign investors are vying to invest in the promising insurance industry of Pakistan. According to an estimate of insurance density worldwide, Pakistan's insurance sector premium per capita is about $4.6 while in India it is $22.7, Iran 36.1, Sri Lanka 16.3, Japan 3,746, and UK $4,599. Similarly, in terms of premium in percent of GDP, Pakistan has the lowest share of 0.67%, India 3.1, Sri Lanka 1.4, Iran 1.2, UK 12.4, and Japan 10.6%.

Insurance regulatory framework in Pakistan is now towards improving the outlook of insurance sector as after insurance divisional restructuring recently occurred in the apex body. But, there is a doubt that how effectively a single authority could manage the affairs of diversified sectors. SECP has to regulate number of sectors simultaneously. In approaching future insurance sector will confront a great demand from the market. And, industrial specialized rules and regulations for long term implementation will only be workable. Especially, for sensitive insurance system like Takaful meticulous study of the market can bring about effective regulations. Level playing field should also be provided to Takaful operators so that Takaful products can be marketed exactly in conformity with the Islamic finance doctrine and without adapting to financial manipulation that will not be possible even internally until dependence over conventional system offloads. In fact, ideal insurance system for the welfare of society as a whole must be promoted.