Conventional insurance companies are preparing to extend their reach and expand business volumes following the Securities and Exchange Commission of Pakistan’s approval to launch Takaful operations.

Prior to May 2014, only dedicated companies were supposed to undertake Takaful operations. Some leading conventional insurance companies are in advance stages of launching Takaful, while others are busy doing their homework.

The board of directors of EFU Life Insurance has already approved the required changes in its memorandum of association to start Takaful window operations, and has officially informed the Karachi Stock Exchange about it.

Jubilee Life Insurance has taken the same step, and, according to its senior officials, it intends to get involved in both Takaful and re-Takaful businesses.

Adamjee Life Insurance Company and, most recently, IGI Life Insurance have also decided to establish Takaful windows. The state-owned State Life Insurance Company, too, plans to introduce Takaful.

Executives of insurance companies say the demand for Islamic insurance services is greater among those seeking life insurance cover, which explains why general insurance companies are not as much enthusiastic about Takaful. The development and marketing of Takaful-based general insurance products also requires greater expertise, they point out.

The success of dedicated Takaful companies has prompted conventional companies to go for Takaful services through specialised windows.

Dedicated Takaful companies see no immediate threat from the entry of conventional insurance companies into the business and believe this will increase awareness about Takaful and boost demand for Islamic insurance products

But it took the SECP years to finally grant them permission because dedicated Takaful companies had objected to the idea, and a legal battle had ensued between the contending parties, which delayed the regulator’s approval.

The dedicated Takaful companies have a history of less than a decade. They hit their break-even point around 2012, and reported growth in profits in 2013 and 2014 as awareness about Takaful increased and the companies got used to regulatory and tax issues.

The net profit of Takaful Pakistan Ltd, for example, more than doubled to Rs16.2m in January-September 2014, from Rs7.3m in the same period a year ago.

The bulk of the company’s earning came in the shape of a Wakala fee that it charges for managing general Takaful operations of a fund known as the Participants Takaful Fund and from its share as Modarib in the profit booked on the PTF’s investments.

In 2013, the Pak-Kuwait Takaful Company earned a net profit of Rs81.6m, up from Rs55m in 2012. However, industry sources say the growth in profit chiefly originated from overdue tax refunds in this case.

Similarly, the net profit of the Pak-Qatar Family Takaful soared to Rs50.3m in 2013 from Rs26.7m in 2012. And the net profit of the Pak-Qatar General Takaful shot up to Rs33.3m from Rs18.8m in 2012.

Dawood Family Takaful, which had booked losses till 2013, is believed to have come out of the red last year — its fifth year of operations — but its latest accounts have yet to be made public.

Senior executives of dedicated Takaful companies see no immediate threat from the entry of conventional insurance companies into the Takaful business through window operations. Many of them believe this will increase awareness about Takaful, and, thus boost demand for Islamic insurance products.

This has happened in the case of Islamic banking, where initially full-fledged Islamic banks began operating and grew modestly; however, the industry’s growth accelerated when conventional banks set up their Islamic banking divisions.

“While domestic demand for Takaful is strong, it does not mean the target market is also capable of appreciating the right features of Takaful products,” says a senior executive of the Pak-Kuwait Takaful Company. “This is one of two factors that make it difficult for Takaful operators to roll out new products; the other is the dearth of expertise needed for product development.”

Executives of dedicated Takaful companies say the most complex part of developing products is to ensure that they are Shariah-compliant, as well as simple enough for the market.

They pointed out that risk management in the Takaful industry is also a bit more complex than in other segments of the financial sector. “Our risk-management strategies are aimed at protecting the Takaful fund, ensuring enough resources to pay out claims, maximising investment return and creating liquidity backups — all at the same time,” says one executive.

“With international oil prices having fallen by about 60pc since June 2014, some GCC-based Takaful companies’ investment in oil funds is bound to shrink, thus affecting their services’ outreach. This gives us an opportunity to win those corporate clients that prefer getting Takaful cover from companies in the Gulf region,” says another executive.

Published in Dawn, Economic & Business, January 19th , 2015

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