Pakistan’s Islamic insurance industry landscape set for makeover

KARACHI: Thanks to a regulatory action last year, the landscape of the country’s Islamic insurance industry is set to change forever with the entry of conventional insurance giants in the Takaful market.

Jubilee Life Insurance and EFU Life Assurance, which control over Rs115 billion in total assets between them, have just launched Takaful products – a development that analysts call a game-changer in the country’s nascent Islamic insurance market.

After the introduction of regulations governing the Islamic insurance market, two full-fledged Takaful companies started operating in Pakistan in 2007. Although these companies have grown substantially in the last eight years, their size relative to the conventional insurance footprint in Pakistan is still miniscule.

Total assets of Pak-Qatar Family Takaful and Dawood Family Takaful at the end of 2014 amounted to a little over Rs9 billion. It equalled only 6.5% of the total assets of private conventional life insurance companies, which equalled Rs139.1 billion in 2014.

The first set of rules governing the Islamic insurance industry did not allow conventional insurance companies to enter the Takaful market unless they set up stand-alone subsidiaries with separate paid-up share capital.

However, the Securities and Exchange Commission of Pakistan (SECP) replaced Takaful Rules 2005 with Takaful Rules 2012 three years ago, which allowed conventional insurance companies to set up Islamic ‘windows’ to conduct Shariah-compliant business.

But the existing players in the Islamic insurance industry resisted the SECP’s move, resulting in a two-year-long legal battle. Their plea that allowing conventional insurance companies to sell Takaful products would distort the Islamic insurance market won them a stay on the implementation of Takaful Rules 2012 from the Sindh High Court.

Last year, however, conventional insurance companies received the permission to enter the Shariah-compliant segment when the stay order was finally lifted following an out-of-court settlement among conventional and Islamic insurance companies.

Speaking to The Express Tribune, Jubilee Life Insurance CEO Javed Ahmed said the entry of conventional insurance companies into the Takaful market by means of window operations will not lead to cannibalisation in the insurance industry.

“Life insurance penetration is very low in Pakistan. To say that Takaful companies will lose their share because of conventional companies makes little sense, as the latter already control over 90% of the market,” he said.

Life insurance penetration

The exact level of life insurance penetration in Pakistan cannot be determined because State Life Insurance, which controlled 65% share in 2011, has not published its financial accounts for the last two years. Ahmed says life insurance penetration – defined as premiums from life policies as a percentage of the GDP – is estimated to be just 0.45% in Pakistan as opposed to 3.1% in India.

The SECP mandates that a conventional insurance company must set aside at least Rs50 million as capital contribution to the statutory fund if it wants to set up a Takaful window operation. Jubilee Life, which is the second largest insurance player in the private sector in terms of total assets, has entered the Shariah-compliant business with the intention of allocating Rs200 million to the statutory fund, Ahmed said.

Jubilee Life is expecting a three-year gestation period for its Takaful business because it is going to use its existing infrastructure to sell Islamic products. Otherwise, the average gestation period for a stand-alone Islamic insurance company is between eight and 12 years, Ahmed said.

“We’ll be adding more than 1,000 jobs for our Takaful operations by the end of the year,” he said, adding the company already employs over 150 people at three dedicated branches it has set up for Islamic window operations so far.

The compound annual growth rate (CAGR) of gross contributions received by the full-fledged Islamic companies has been 39.2% for the last three years. The CAGR for gross premiums generated by conventional insurance companies in the private sector over the same three-year period has been 28.6%.

However, gross premiums of Jubilee Life alone have registered annualised growth of 38.5% in the last three years, official data shows. Jubilee Life is a subsidiary of Aga Khan Fund for Economic Development, which is the majority shareholder in the country’s largest commercial bank by total assets, Habib Bank.

No wonder approximately 65% of gross premiums generated by Jubilee Life come from the bancassurance channel, which uses banking partnerships to sell insurance through retail bank branch networks.

“We have already been contacted by almost every banking partner. They want to sell our Takaful products through their Islamic branches. We have 12 relationships and I see potential in all of them,” Ahmed said.

The writer is a staff correspondent