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What is covered. Gap in Islamic Finance Conventional Insurance Takaful Concept Takaful Rules Retakaful Market Potential Islamic Banks and BancaTakaful. Gap in Islamic Finance. Islamic Banks contracts require assets to be insured with a Takaful company as per Shariah requirement.

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what is covered
What is covered
  • Gap in Islamic Finance
  • Conventional Insurance
  • Takaful Concept
  • Takaful Rules
  • Retakaful
  • Market Potential
  • Islamic Banks and BancaTakaful
gap in islamic finance
Gap in Islamic Finance
  • Islamic Banks contracts require assets to be insured with a Takaful company as per Shariah requirement.
    • Many potential consumers of Islamic Finance stay away due to Insurance being on conventional basis.
    • Doctrine of Necessity applied till Takaful was not available.
    • Takaful Rules promulgated in September 2005.
    • One General takaful operator since last one year. More to follow in coming months giving consumers a choice within takaful.
    • Takaful exists for almost 30 years – typically with 2 to 3 years lag with Islamic banking development. Started with Sudan, later ME and Malaysia.
  • Also number of synergies could be created with Islamic banks distributing takaful products (BancaTakaful) or setting up takaful companies with equity participation.
    • Standing requirement of Islamic Banks for Islamic House Mortgage schemes, Car Ijarah schemes as integrated benefits.
    • Distribution of Takaful Savings and Protection plans in different forms.
conventional insurance
  • Indemnification against unforeseen financial losses (not to profit from loss)
  • Commercial Risk Transfer
  • Law of Large numbers - Insurance company pools risks/reinsures above capacity.
  • Recovers expenses for managing the pool
  • Investment return under life insurance shared with PHs based on Actuarial Valuation or otherwise.
  • Profit for the shareholders based on Underwriting results and Investment income
objections to conventional ins


Objections to Conventional Ins
  • Elements of:
    • Uncertainty – Gharrar (non-existence of goods, un-known quantity, timing) in a commercial risk transfer contract.
    • Interest – Riba
basic concept of takaful
  • Takaful means “Joint Guarantee” for mutual assistance within a group. Each member of the group pools to support the needy within the group.
  • Mutual protection contains elements of cooperation, shared responsibility joint help – all encompassing in takaful concept
  • Principle objective is the same as Insurance - to indemnify against unforeseen financial losses.
  • Mechanism followed is however different.
  • An economic institution whereby the losses of the unfortunate few are shared by the contribution of the fortunate many who are exposed to the same risk on

“Co-operative Risk Sharing” basis.

how is it different from insurance
  • Concept of “Risk Manager” NOT “Risk Taker”
  • Underwriting Surplus belong to Participants
  • Underwriting Deficit may be shared by participants
  • Risk Management
    • Underwriting as usual
    • Ensure Risk premium adequate – not commercial driven
    • Retakaful Pool instead of Reinsurance
    • Interest free loan by SH (Qard Hasnah)
  • Investments compatible with Shariah based on Profit Sharing principles
takaful rules 2005
Takaful Rules 2005
  • Capital requirement – 80 m for General and 150 m for Family. Likely to be increased to Rs.300m for General and Rs.500 m for Family. Board of Investment requirement is $4 million (Rs. 240 million) at present.
  • Composite companies not allowed
  • Wakalah Model for Risk Protection
  • 100% Surplus distribution for participants (after reserves etc)
  • Underwriting deficit – Qard Hasnah by SH or recover
  • Mudaraba or Wakala Model for Investment Sharing.
takaful rules 200510
Takaful Rules 2005
  • Takaful company can also share risks on coinsurance basis from outside Pakistan
  • Can use conventional reinsurance, only if retakaful is not available and if Shariah Board permits. Wakala based would be preferred.
  • Windows not allowed for atleast 5 years
  • Transformation of existing conventional general companies is allowed in one year
  • Three member Shariah Board and Annual Shariah Audit


  • Retakaful solutions evolving although not enough capacity available.
  • Best Re (Tunisia), Asean Re (Labuan) and Tokyo Marine are providing retakaful based on Mudaraba model. Shariah scholars and SECP have objections to Mudaraba model. Need to look for Wakala based Retakaful solutions as a preferred route.
  • Lloyds syndicate is setting up a Retakaful solution for General Takaful.


  • Takaful Re launched in Dubai by ARIG with $125 m capital. Recently rated BBB by S&P becoming the 1st Retakaful operator with a rating and Wakala based model.
  • Swiss Re recently launched Wakala based Family Retakaful Fund.
  • Hannover Re is working on Retakaful solutions.
  • Munich Re has also incorporated its Retakaful subsidiary in Malaysia.
  • “Doctrine of Necessity” may no longer be justified hopefully leading to Takaful being backed by RETAKAFUL rather than Reinsurance.
  • Government/ SECP needs to encourage setting up of Retakaful pools.
    • Possibly within NICL / PRCL for General Retakaful
    • State Life for Family Retakaful
market potential
Market Potential
  • Pakistan’s insurance density and insurance penetration rates low.
  • Reasons – Lack of awareness and religious concerns.
  • Takaful can help push the penetration rates up.
roe of insurance industry



islamic banking
Islamic Banking

Number of Branches expected to grow exponentially

Two new banks Emirates Global Islamic Bank Limited and First Dawood Islamic Bank Limited

State Bank growth estimates for Islamic Banks

islamic banking growth
Islamic Banking Growth

Rs. In billion

Source: SBP Publication June 2006

opportunities general takaful
Opportunities – General Takaful
  • Islamic Banks have a mandated requirement / moral obligation to insure assets from a takaful company if available.
    • Islamic Banks had disbursed Rs.58 billion (approx) – June 2006 in various assets
  • General Insurance market size 2005– GWP Rs. 20 Billion (approx.), 38 companies
    • Even if 10% switch to this basis it is more than Rs. 2.0 billion.
  • Untapped Market - Individuals do not take insurance - Motor, PA, Health, Home
    • Even if 10% of existing market do not insure for religious reasons, its over 2 billion.
  • A large number of industrial groups have shown interest in takaful.
  • Only one Takaful operator licensed in Pakistan, so far!! – More to follow
opportunities family takaful
Opportunities – Family Takaful
  • Islamic Banks require life cover for House financing etc.
  • Life Insurance market size 2005– GWP Rs. 18 Billion (approx.), 4 private sector companies. Talks of SLIC being privatised in some form.
    • Even if 10% switch to this basis it is more than Rs. 1.8 billion.
  • Untapped Market - Individuals do not take insurance – Just 2.5 million individual life policies
    • Even if 10% of existing market do not insure for religious reasons, its almost 2 billion.
  • A large number of industrial groups are interested in group life and health benefits based on takaful.
  • No Life takaful operator so far!! – Some under formation
takaful in the world
  • World Takaful Conference Dubai April 2006
  • Around 70-80 companies are now operating in 28 countries.
  • Takaful is one of the fastest growing sectors of the insurance industry with around 20 per cent annual growth compared to less than 10% for conventional.
  • Global Takaful premiums are estimated at $3 billion, of which 60 per cent is general takaful and the remaining is family takaful.
  • Middle East accounts for 36 per cent of premiums and about 56 per cent is generated in South East Asia.
synergies amongst islamic finance participants

Takaful Operators, banks and Capital market players continuously focus on product building to offer more attractive products that fulfill the differentiated needs of the customers.

synergies in islamic financial system
Synergies in Islamic Financial System
  • Islamic Banks, Capital Markets and Takaful Operators work together to develop products using each others strengths leading to competitive products.
  • Takaful Operators fill the gap by providing Shariah compliant protection for Islamic Financing Products.
  • Islamic Banks and takaful operators work together to distribute takaful savings and protection products under bancatakaful arrangements in a more cost effective manner leading to better consumer values.
  • Takaful Operators need longer term investments which fulfill the long term financing needs of Islamic financial institutions
  • Long term investments enable takaful operators to offer better returns to its customers and shareholders.
  • A mechanism for distribution of takaful products through banks. Advantages for banks:
    • Additional fee income from existing customers received upfront.
    • Additional product offering
    • Increase customer retention by offering long term plans
  • Simple examples are:
    • Motor Takaful policy with Car Ijarah of Islamic Bank
    • Family Takaful cover with Housing or other financing facility.
    • Depositors protection
    • Credit card protection
  • More complex products include:
    • Savings products
    • Education products
    • Retirement products
    • Protection products
bancatakaful trends in asia
  • Based on research conducted by Swiss Re Sigma report (2002) “…by 2006, bancassurance could potentially account for 13% of total premiums collected in Asia’s life insurance sector and 6% in the non-life sector”.
  • A large interest from insurers at this time as they seek to diversify from traditional and less productive agency channels.
  • Distribution agreements appear to be increasingly common as a business model in Asia Pacific but increasing focus by major banks in JVs and ownership models.
  • Most of the larger banks in each country have an interest in a bancassurance operation, or plans to enter the ‘manufacturing’ area – moving from ‘fee income’ to ‘value creation’, by setting up its own insurance company.
  • Protection against unforeseen financial losses is a concern for many. Religious prohibition stops.
  • Takaful Offers a huge potential market by filling the gap which remains untapped at present.
  • Competitive Pricing of Takaful products would remain a key factor along with quality service.
  • Bancatakaful could fast track efficient distribution and better customer value.
  • Adherence to Shariah principles in operational practices would be the long term driver for success.
thank you

Abdul Rahim Abdul Wahab, FSA

Director & Actuary

Actuarial Services Division

Sidat Hyder Morshed Associates (Pvt) Ltd

Islamic Finance & Investment Symposium 6 - 7 Dec 2006, Karachi