Takaful MarkeT Profile SouTh aSia

Takaful in Pakistan

The untapped growth potential

Given its impressive growth rates, the takaful sector in Pakistan presents tremendous
opportunities for foreign investors, says Mr Abdul Rahim Abdul Wahab, FSA .

Impressive growth rates

The takaful industry generates a total contribution of
about US$52 million, of which family takaful contributes
about $40 million.
Graphs 1 and 2 show the premium figures for past years.
The growth in life insurance is particularly impressive.
The growth in takaful is even more impressive, at about
63% in 2012 which is fairly decent after five to seven
years of operations of different companies, despite the
numbers still being small. The growth of the conventional
insurance industry for 2012 was 26%.
Family takaful contributions for 2012 showed a growth
of 76%. New business, including single contributions,
increased by almost 100%. The two family takaful players
captured 15% of the private sector (excluding state-owned
State Life) new business in 2012, though it is a mere 5% if
we include State Life. It must also be seen that Pakistans
private sector life insurance industry has, in 20 years,

Life insurance
New business 2012
Including State Life

Excluding State Life

(US$ million)

Takaful
5%

Takaful
$13
Conventional
33%

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State
62%

December 2013

Conventional
$74

(US$ million)

Graph 1: Conventional insurance premiums

1,000

Life

800

600
Non-life
400

200

2006

(US$ million)

t comes as a surprise to most people when they come

to know that takaful started in Pakistan only seven
years back. I recall that the visit of Brother Rafik
Kassim, Chairman of Amana Takaful in 2003, led us to
realise that Sri Lanka, with a small Muslim population,
had had takaful for many years, but Pakistan with 98%
Muslims still had conventional insurance only.
The Takaful Rules 2005 were promulgated by the
Securities and Exchange Commission of Pakistan. I had
the privilege to be a member of the three-person task
force responsible for drafting these rules. Pak Kuwait
Investment, along with Meezan Bank the only dedicated
Islamic bank at that time then took the initiative to set
up the first general takaful company which commenced
operations at the end of 2005. Five takaful companies
were established between 2005 and 2008 three providing
general takaful and two providing family takaful services.

50

2008

2010

2012

Graph 2:Takaful contributions

40
Family

30

20
General
10

2008

2009

2010

2011

2012

Source: Annual reports of major companies

(US$1=PKR100)

captured a 33% market share with the state-owned

company still dominating with 62% of total premiums.
Given the above scenario, the family takaful figures
are very encouraging, considering a short span of just
over five years. Pak Qatar started late in 2007 and the
company has already shown a profit for the year 2012.
Although the dynamics of Malaysia are entirely
different, the first takaful company was established there
in 1985. After 27 years, takaful has a market share of 30%
of new business, as per 2012 figures from Bank Negara
Malaysia. Pakistan is a very recent entrant in takaful,
and hence the early players which are able to establish
themselves at this stage are sure to benefit tremendously
from the growth potential this country offers.
Adding to the potential in the Pakistani insurance
sector, insurance penetration is quite low, contributing

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Takaful MarkeT Profile SouTh aSia

Potential for foreign investors

he well-established GCC and Malaysian takaful

players should seriously look at Pakistan as an
emerging takaful market which has yet to show its true
potential and can show explosive growth with more
serious long-term players.
Most GCC players struggle due to lack of critical mass
business volume despite very capable management and
state-of-the-art systems and processes in place, as they
serve only a small customer base.
Further, in the thirst to write larger business volumes,
they tend to underprice, leading to deficits in the takaful
funds that they operate, with wakala fees on the one hand
generating income but increasing Qard Hassan on the
other hand.
This further hurts shareholder returns and the cycle
seems to be worsening over the past few years with larger
deficits and higher Qard Hassan which may eventually
not be recovered.
The business plan of some of the earlier GCC players
was to have the parent company in Bahrain, the UAE or
Qatar and subsidiaries or branch operations throughout
the Middle East and elsewhere in the region, including
Pakistan and later, certain western countries like the US,
France and the UK.

only 0.7% of the GDP. This is attributed to religion and

people not taking up conventional life insurance, which
is prohibited in Islam. It remains to be seen how much
increase in penetration takaful players can achieve. The
concern is that with just two family takaful companies,
the job of creating takaful awareness and the large
distribution networks required to reach the masses
cannot be achieved given the size of the country. It
is therefore, again, an opportunity for multinational
players to make their presence known in this market.

Recent regulations impacting takaful

The SECP has been playing a very active role in the
progress of the insurance industry. Recent regulations
impacting takaful which are in the process of obtaining
public comments or regulatory approval include:

Modifications in Takaful Rules in 2012

The Takaful Rules 2012 allow conventional insurers to set
up takaful window operations. The five takaful players
had filed a petition against certain points to ensure a
level playing field. These include separate capital required
for window operators to have independent statutory
deposit, separate solvency and complete infrastructure
requirements.
They also suggest that there is a need to have a
dedicated sales force, as with Islamic banking. Their
argument is that window operations, with the same

Unfortunately, the political and economic environment

in Pakistan has kept them away till now. I believe
that Pakistan has its ups and downs but long-term
takaful players would benefit from the sheer volume
opportunities.
The recent growth in the insurance sector, the
improvement in the regulator y environment to
promote insurance awareness, regulatory controls
to develop a sound industry, consumer protectionrelated regulations in recent months and the interest
in Shariah-compliant services by the public at large
would offer opportunities for growth in the takaful
sector which may not be matched in other countries.

sales force, may create problems in terms of the public

getting confused, which may hurt the development of
the takaful industry. With separate capital and dedicated
sales teams, the concept would develop better and overall
penetration may increase further.

Bancassurance
The bancassurance guidelines 2010 were recently reviewed,
and proposed draft amendments were announced for
public comments. The basic aim of these amendments is
to improve customer value and protection, for instance
by revising the whole remuneration structure, applying
restrictions to recycling life insurance policies, introducing
commission claw back provisions, maintaining minimum
surrender values, increasing financial underwriting
requirements, and ensuring mandatory after-sales callback requirement.
The regulation also aims to help policyholders better
understand their policies by introducing a need analysis
document which requires illustrations to be given in
Urdu and provided at the point of sale.
According to SECPs survey in 2012, bancassurance had
a compound annual growth rate of 95% in the last five
years, but it faces issues ranging from mis-selling, renewal
persistency and an inappropriate remuneration structure,
hence requiring regulators intervention to protect and
provide sustainable growth for this sector. This is being
addressed gradually by the regulator.
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Takaful MarkeT Profile SouTh aSia

Shariah board
The SECP established a Shariah board in May 2013 to
advise on Shariah matters, development and promotion
of Islamic financial institutions (IFIs), which include
Islamic mutual funds, Islamic pension funds and takaful
operators and other financial institutions. The boards
key function is to validate products of IFIs, ensuring
their compatibility with the Shariah principles and also
to recommend guidelines on the criteria for investment
by Islamic capital institutions. Mufti Hassan Kaleem is
the Chairman of the Shariah Board.

Centralised Insurance Information System

Sharing policyholders information through a centralised
information system accessible to all insurance players
is a major initiative by the regulator. Expected to be
functional by end of this year, the system will ensure
availability of information relating to individual life and
group life policyholders.

Issues and challenges

Stakeholders in the Pakistan and the Middle Eastern
markets should benchmark against the steps taken by
the Malaysian regulator and takaful industry. An overall
market analysis, using Porters five forces model for
example, needs to be carried out by the government and
industry to develop a solid takaful industry and promote
its rapid growth as an industry. Key steps adopted in
Malaysia include:
Support for certified Islamic financial professionals;
Designing proper regulatory framework and research

institutes, such as the International Shariah Research

Academy for Islamic Finance (ISRA);
Establishing a strong sukuk sector;
Clear message that takaful system is Islamic and
conventional is not;
Only full-fledged takaful players are allowed;
Mandating takaful companies to go for retakaful;
Creating an association of Shariah professionals,
supported and financed by the central bank which
creates regular forums for discussion of Shariah-related
matters;
Central Bank working together with the industry
association the Malaysian Takaful Association; and
Coordination wit h t he Malay sian Accounting
Standards Board (MASB) to cater to changes needed
by Islamic finance and takaful.

Pakistan has its challenges but at the same time,

offers tremendous opportunities. Issues include the
availability of human resources, creating awareness with
low literacy rates and low savings rates, availability of
general retakaful, etc. However, the sheer volumes that
can be achieved surpass the concerns about issues and
provide ample opportunities for success. The rewards
are high: the ability to earn returns for shareholders and
offer Shariah-compliant protection and savings to a very
large Muslim community.
Mr Abdul Rahim Abdul Wahab is Actuarial Practice Segment
Leader, Partner, Director and Consulting Actuary with SHMA/
Sidat Hyder. The views expressed are his personal views. He may
be contacted at araw1992@gmail.com.

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