Takaful: Rules of Islamic insurance

Published: August 7, 2012

The Takaful segment is indeed minuscule compared to the conventional insurance market, but it is not because it lacks potential for growth. DESIGN: JAMAL KHURSHID

With the recent launch of Takaful rules, 2012, the Securities and Exchange Commission Pakistan (SECP) has allowed conventional insurance companies to roll out Takaful, or Islamic insurance, products through window operations. Irked by the SECP’s move, existing Takaful operators went to court and got a restraining order over the implementation of the new rules from the Sindh High Court on August 2.

Takaful operators say, the decision to allow conventional insurance companies to launch Islamic products will “distort” the segment, as window operators will conduct the Takaful business “in a manner against the principles of Sharia”.

Insurance is undervalued in Pakistan. While some people consider it un-Islamic, others think of their sons as solid retirement plans, and don’t bother to buy insurance policies or invest in mutual funds. No wonder then that out of 180 million Pakistanis, only 4.1 million are individual life insurance policyholders.

The rationale behind the provision in the SECP’s earlier Takaful rules of 2005 — which barred conventional insurance companies from operating in Islamic insurance — was to attract new players and bring investment into the country. However, seven years on, we have just two family Takaful and three general Takaful companies in Pakistan.

The Takaful segment is indeed minuscule compared to the conventional insurance market, but it is not because it lacks potential for growth. In fact, premiums of Takaful companies grew at an astonishing rate of 91.6% annually, between 2006 and 2011.

Yet, the gross premiums of Takaful operators in 2011 were Rs3.3 billion, which was just 2.8% of the gross premiums amounting to Rs119.7 billion that conventional insurance collected in the same year. The comparison of growth rates — and the persisting gap between the gross premiums of the two insurance segments — suggests that while the Takaful market has a huge potential for growth, it is in desperate need of big players with large resources at their disposal.  An insurance giant like State Life, with an asset base of roughly Rs300 billion, can really turn around the Takaful segment. While I believe that reservations of Takaful operators are legitimate regarding paid-up capital requirements — and should be revised by the SECP — allowing conventional insurance companies to start Takaful operations will certainly lead to a rapid expansion of the country’s insurance sector.

Read more by Kazim here.

Kazim.Alam

Kazim Alam

The writer is a business reporter for The Express Tribune.

The views expressed by the writer and the reader comments do not necessarily reflect the views and policies of The Express Tribune.

  • http://NewYork Falcon

    I have to read up on more details on the business model but one of the reasons traditional insurance companies will find it difficult to attract conservative consumer segment is because of the issue of compartmentalization. If they run both models (supposedly the Islamic one and the non-Islamic one) side by side, their capital streams will be mixed. Unless they can completely isolate their takaful business units, they won’t be able to attract a non-traditional consumer. If I were in their position, I would rather build a new brand ground-up under a different name and keep it completely separate from the rest of the business.Recommend