The challenges and opportunities for

Takaful industry in Pakistan

Sanaullah Ansari
Assistant Professor
Shaheed Zulfikar Ali Bhutto Institute of Science &
Technology (SZABIST), Islamabad

Introduction
The concept of insurance is very old in the world
In early times, the protection system against risk and
security on loans were present before 2250 B.C.
Contract of Bottomry (loan for voyage) and
Respondentia (loan on good leden on board a ship) were
also in practice in 1600 B.C. in Phoencia for sea trade
and around 4000 B.C. for land and before 600 B.C. for
sea and land trade in India
The modern form of insurance started from Northwest
Europe in 8th century

Introduction
The concept of marine insurance was started in 12 th century
It was formally formulated in 17 th century when sea trade was at
its peak
Later, insurance industry developed rapidly and modern insurance
systems were implemented throughout the world
Currently, there are several types of insurance contracts including:

Marine Insurance
Health Insurance
Agriculture Insurance
Life Insurance
Vehicle Insurance

Insurance Industry in Pakistan

Insurance industry is working since 1947 in Pakistan
Controller of Insurance was operating Insurance industry
under Ministry of Commerce, Government of Pakistan
Securities and Exchange Commission of Pakistan (SECP) is
regulating the Insurance industry since January 2001
The SECP regulates and monitors the Insurance industry in
the country through powers vested in the Insurance
Ordinance 2000 and the Companies Ordinance 1984
Total premium revenue of Pakistan Reinsurance Company
Limited was Pak Rupees 9 billion by the end of 2014

Conventional Insurance in Pakistan

Conventional Insurance
Working in Pakistan since 1947
Following Conventional Insurance Models based on Riba (Interest)
By the end of 2014, 7 Life Insurance Companies with Gross
premium of Pak Rupees 122 Billion
38 General Insurance Companies with Gross Premium of Pak
Rupees 62 Billion
Total Gross Premium of Pak rupees 184 Billion

Islamic Insurance (Takaful) in

Pakistan
Islamic Insurance (Takaful)
Government of Pakistan assigned the task to Council of Islamic Ideology in
1983 to draw a framework of Islamic Insurance (Takaful)
Under the recommendations of Council, Takaful Rules were established in 2005
First Takaful Company was established in 2006 in Pakistan (Pak-Kuwait Takaful
Company Limited)
Following Wakala-Waqf Model which are Riba-Free
By the end of 2014, 2 Family Takaful Companies with Gross premium of Pak
Rupees 6 Billion
3 General Takaful Companies with Gross Premium of Pak Rupees 2 Billion
Total Gross Premium of Pak Rupees 8 Billion

Insurance Industry and GDP of

Pakistan
The contribution of overall insurance industry in
countrys GDP was 0.61% in 2008
Life insurance industrys contribution was 0.28%
Non-life insurance industrys contribution was 0.33%
Overall insurance industrys contribution was increased
to 0.77% in 2014
Life insurance industrys contribution was 0.51%
Non-life insurance industrys contribution was 0.26%

Contribution of Insurance
Industry in Pakistans Economy
Contribution of insurance industry in Pakistans
economy from the period of 2010 to 2014 is as follows:
Total premium written by all insurance companies
was Pak Rupees 732 Billion
Total claims paid were Pak Rupees 294 Billion
Tax contributions to government exchequer was Pak
Rupees 45 Billion
In 2014, total number of employees working in
insurance companies was 14,488

Growth Rate of Insurance

Industry
The overall industrys growth rate was 14% in
2008, 12% in 2009, 18% in 2010, 23% in 2011,
18% in 2012, 22% in 2013 and 13% in 2014
Life insurance growth rate was 25% in 2008, 22%
in 2009, 27% in 2010, 30% in 2011, 22% in 2012,
40% in 2013 and 16% in 2014
Non-life insurance industrys growth rate was 7%
in 2008, 4% in 2009, 9% in 2010, 16% in 2011,
14% in 2012, 0% in 2013 and 6% in 2014

Takaful (Islamic Insurance)

The concept of modern Takaful (Islamic Insurance) is
not very old as it started with the beginning of Islamic
banking in the world in 20th century
The basic principles of Takaful are Taawun (mutual
assistance) and Tabarru (donations, gift, give away)
All these terms are the part of Kafala concept which
means to help each other
Therefore, the mechanism of Takaful is based on
Wakala-Waqf Model

Wakala-Waqf Model

Wakala-Waqf Model
All the products of Takaful strictly follow Shariah rules, regulations
and laws
Shariah Advisory Board is responsible to watch the business
decisions and activities
In Takaful, individuals of a community gather on a common platform
to contribute reasonable amounts into Waqf Fund to protect
themselves and others from future losses
In case of any loss, it is compensated by Waqf Fund and Takaful
Operator is not responsible for the compensation
At every year end, the excess amount which is left after paying all
claims and expenses can be distributed among all the participants
of the Waqf Fund with the advice of Shariah Advisory

Wakala-Waqf Model
Shareholders of a Takaful company are not entitled to get the
profits which are generated by the insurance operators which is
in contrast with conventional insurance companies where profit
generations from insurance transactions is the primary objective
Similarly, the policyholders of Takaful Company have the right to
cast their vote in the elections of companys directors and they
have the access to the final accounts of the company as well
However, these rights are not available to the policyholders of
conventional insurance companies
These differences are making Takaful industry more popular than
conventional insurance among Muslim population in Pakistan

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
As roots of conventional insurance are very deep in the country, it is very

difficult for Takaful companies to penetrate in the market

Therefore, these companies have to face many challenges for their survival in
the market
Many of the consumers are tempted towards Takaful due to religious reasons
which provide great opportunities to this industry in Pakistan
A vast majority of consumers also keep in mind the products and benefits being
offered by these companies
To investigate about these challenges and opportunities, open ended interviews
were conducted from the employees and consumers of Takaful companies
50 employees and 50 consumers were interviewed to get their feedback and
opinions
In the light of the interviews, many challenges and opportunities for Takaful
companies in Pakistan are found

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
Lack of Awareness
According to the respondents, consumers are fully aware about
the mechanism, products and benefits of conventional insurance
However, it is the major challenge for Takaful companies that
consumers are not fully aware about the Islamic principles of
insurance
Very low literacy rate plays vital role in the creation of this
problem
Those, who are responsible to provide full information about
Islamic principles of business, are not performing their role
Therefore, there is a very big knowledge gap in the country

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
Lack of Awareness
Consumers who want to switch from conventional to Islamic mode of
insurance are very much confused
Takaful companies are also responsible for this ignorance as they are
not providing proper knowledge to their current and potential
consumers
Even, employees of Takaful companies are not fully trained and aware
about their system and products, they are also misguiding their
consumers
Takaful companies should play their role positively and effectively to
provide proper and complete knowledge to the consumers
If they will do it, there is a huge market waiting for these companies.

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
Unclear Practices by Takaful Companies
In the light of the answers by the respondents, it is found that the practical
system of Takaful is being partially understood by the consumers
As Takaful companies are following Wakala-Waqf Model, there is still ambiguity
about the practices being followed by them
Similarly, the products of conventional and Islamic insurance are almost same;
questions arise about the practicality of these products of Takaful companies
The operational staff of Takaful companies is also not able to answer the
practicality of their respective company
This is the responsibility of Takaful companies that they should provide proper
information about the mechanism and practices which they are following
If consumers would know about the practices being followed by these
companies, their trust will boost and they will switch from conventional to
Islamic insurance

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
Business Volume
Respondents were also very keen about the comparison of business volume in between
conventional insurance companies and Takaful companies
Business volume of insurance companies is measured by total premium revenue
By the end of December 2014, total premium revenue of insurance industry in Pakistan
was Pak Rupees 192 billion which consists of Pak Rupees 64 billion of non-life
companies and Pak Rupees 128 billion of life insurance companies
In this total business volume, the proportion of Takaful companies is Pak Rupees 8
billion which is only 4.2% of the total insurance industry
As Takaful companies are trying hard to increase their business volume but they are
not succeeding due to the reason that they are not marketing their products efficiently
Both employees and consumers suggest that Takaful companies should work
aggressively to increase their business volume
Unless these companies capture the larger proportion of the market, their survival and
growth will be at stake

Challenges and Opportunities

for
Takaful Industry in Pakistan

Re-Investments

All insurance companies reinvest pooled funds of their premiums in different sectors to
generate profits which are required by them to manage their expenditures, payment of
dividends to shareholders and for the settlement of claims
Conventional insurance companies reinvest their funds in every type of business
sectors whether they are Shariah compliant or not
Whereas, this is an ethical, moral and legal obligation for Takaful companies to invest
only in those business sectors which are Shariah compliant
Takaful companies are claiming that they are reinvesting their funds in such business
sectors but as consumers do not have complete access to the information and records,
there is still an ambiguity in their minds that these companies are not properly
following Shariah principles
Similarly, Takaful companies are also not trying to satisfy their consumers on this
particular issue, which is creating a gap between these two
Consumers suggested that Takaful companies should make it clear that in which
business sectors they are reinvesting so that they could be satisfied.

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
Claims Settlements
According to the respondents, the services performance of insurance companies is
checked by their claims settlements
Claims are cross verified by insurance companies to complete their legal obligations
and then these are decided to be settled completely, partially or refused
The processing time of this verification plays vital role in whole process
Unnecessary delay in this process loses the confidence of the consumers towards
the company as they expect quick settlement of their claims
Therefore, conventional insurance companies are trying their best to lessen the
processing time for the satisfaction of their consumers
However, Takaful companies are still facing this problem as their processing for
claims settlement is not satisfactory due to several reasons
These companies are suggested by their employees and consumers to make
valuable reforms in their claims settlement process so that their trust towards
consumers can be strengthen further

Challenges and Opportunities

for
Takaful
Industry
in
Pakistan
Tough Market Competition
As conventional insurance is the major share holder of insurance
industry in Pakistan, it is giving tough competition to Takaful industry
Being a small part of this huge industry (only 4.2%), Takaful companies
are facing large number of challenges to overcome the monopolistic
position of conventional insurance in the country
The respondents suggested that the only way to be in this competition
and to gain a reasonable proportion, Takaful companies have to develop
further by providing new Shariah compliant products and to provide
excellent services to their consumers
In their opinion, new product development, establishment of new
companies, extension in current branch network and provision of better
quality services would be helpful for Takaful companies to grow in future

Conclusion
In the light of the responses by the employees and consumers of
Takaful companies, it is concluded that there is a huge market of
insurance in Pakistan as people want to avail life and non-life
insurance services
But, majority of the Muslim consumers are avoiding from it due to
religious reasons as conventional insurance is based on Interest
(Riba)
Whereas, the basis of Takaful is Shariah compliant and this industry
is working according to the guidance and teachings of Islam
Therefore, there is a huge potential of Takaful business in the
country as vast majority of Muslim population want to join it due to
religious reasons

Conclusion
As a tiny part of the overall insurance industry in the country,
Takaful companies are trying their level best to provide
Islamic insurance services to their consumers
But, due to several limitations, they are not performing as per
the expectations of the market and consumers
There are several challenges which are negatively impacting
the progress, development and growth of this industry
Lack of awareness, unclear practices by these companies,
business volume, re-investments, claims settlements and
tough market competition are the major problems being
faced by Takaful companies

Conclusion
These can be overcome by providing awareness about
Islamic Insurance to the vast majority of consumers,
developing new and Shariah compliant products,
aggressive marketing of services, establishment of new
Takaful companies, increasing branch network of
existing companies and by satisfying the consumers by
all means
If Takaful companies would succeed to overcome these
challenges, there will be a revolutionary development in
Pakistan as there are unlimited opportunities and huge
potential for Takaful industry in this market

Thank You