Pakistan’s regulator the Securities and Exchange Commission of Pakistan (SECP) has introduced new takaful (Islamic insurance) rules designed to boost competition and lift the sector’s market share by allowing the entry of conventional insurers, prompting a legal challenge from specialised takaful providers.
The rules, launched last month, make Pakistan the second country after Indonesia to officially allow takaful windows, which enable firms to offer Shariah-compliant and conventional products side-by-side, provided client money is segregated.
Takaful has operated without conventional competitors in Pakistan since the first rules were introduced in 2005.
Conventional insurance firms could serve a broader share of the takaful market “with their larger sales force and vast branch network”, the SECP said in a statement last month.
Takaful is seen as a bellwether of consumer appetite for Islamic finance products. It is based on the concept of mutuality; the takaful company oversees a pool of funds contributed by all policy holders, but does not necessarily bear risk itself.
In their investments, takaful firms must follow religious guidelines, including bans on interest and pure monetary speculation. Global takaful contributions are forecast to reach $12 billion this year, according to consultants Ernst and Young.
Although Pakistan is the world’s second most populous Muslim nation, takaful’s share of the total insurance market is only 2% to 3%, said Omar Mustafa Ansari, Karachi-based partner at Ernst and Young Ford Rhodes Sidat Hyder.
In contrast, the average takaful share in Muslim countries stood at 5% in 2010 and is expected to reach 7% by 2015, according to a report last September by Swiss Re.
The overall share of takaful in Pakistan could reach 25% to 30% for general coverage and 15% to 20% in family/life coverage within five to seven years, Ansari said, with much of that growth being captured by windows.
“Takaful companies did not have the capacity to serve the Islamic banks, let alone the overall corporate and personal needs for insurance,” Ansari said, noting that no new takaful firms had entered the market in the last four years.
Conventional players appear keen to enter the market to increase their business volumes. At least four to five companies have prepared working papers.
State Life Insurance Corporation - the largest insurance company in Pakistan - made clear its intentions of launching its own brand of Shariah-compliant insurance products.
State Life said that the insurance giant will launch its new range of Islamic insurance within a year after assessing the target market for takaful and satisfying conditions that the SECP imposed for the takaful window operators
Pakistan’s insurance penetration, measured as total premiums to gross domestic product, was the third-lowest in Asia last year at 0.7%, against 4.1% for India, another report by Swiss Re showed.
Opportunity lies in Pakistan’s rural belts where there are high growth prospects, said Muhammad Ashfaq Ur Rehman, a Dubai-based management consultant. “It depends how interested conventional insurers devise their marketing strategy.”
But Pakistan’s five takaful operators last week filed a petition in a court in Sindh province, the country’s second-largest Islamic banking market, to challenge the new rules.
The Sindh High Court on August 2, 2012 restrained the SECP from implementing the Takaful Rules, 2012 while hearing a constitutional petition filed by the takaful operators challenging the Takaful Rules, 2012.
If authorities decide to introduce a minimum capital requirement for takaful windows, that could create a level playing field for pure takaful and conventional insurance companies, Ansari said.
The takaful industry’s lobby may not be powerful enough to persuade the authorities to cancel the reforms entirely. Any reversal might be hard to justify because Pakistan’s conventional banks operate Islamic windows under the same methodology, a source at one of the takaful firms said.
The petition may delay the opening of takaful windows or prompt the regulator to make some amendments to the rules, but the decision to open windows is “guaranteed” to go ahead, the source acknowledged.
Published in The Express Tribune, August 8th, 2012.