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Insurance Sector in Pakistan

oday’s financial and economic setup. It relates to both the business part of the economy as well as to the individual savers. Because of its ability to cater various types of customers efficiently, insurance sector evolved, developed and prospered throughout the world. But due to the presence of some shariah non-compliant elements in conventional insurance, a need was felt to develop a shariah compliant insurance system known as takaful. Pakistan being the late starter of takaful products still witnesses its takaful industry as infant. In this paper we discussed takaful as a theoretical concept. In addition to that we used regression, co-relation and statistical modeling estimates to calculate the demand of insurance in Pakistan. Variables used include premium, GDP, Interest rates, Inflation rate, Saving rate and stock market index.


Insurance is a contract whose origins are can be traced back to very olden times. Contracts, known as bottomry, were used by money lenders to shift the burden of risk from owners of ships or cargoes to themselves. The loan was cancelled, if the ship or cargo was lost during a voyage. The charge for the bottomry loan, if the voyage was successful, was very high because it included the amount of interest and cost of risk. The contract of bottomry loan in fact sowed the seed of the insurance idea.

According to extant records, loans in the form of bottomry were known to the merchants of Babylon during 4000-3000 B.C. It is also recorded that bottomry was practiced by the Hindus in 6000 B.C. Even in ancient Europe, the Greeks and the Romans also adopted this commercial practice. Therefore, the origin of insurance is very old and man, somehow or the other, has continued his earnest efforts to tide over all hurdles that came in his way to make his life easy and comfortable.

The history of insurance continues to develop over the years till we reached the present times where insurance is regarded as a very well developed contract with many forms and kinds, operating proudly in 4.061 trillion US$ industry as per 2007 Swiss reports.

Presently we are in a very good position of defining insurance. Insurance can be defined as: “A provision, which the prudent man makes against fortuitous or inevitable contingencies, loss or misfortune.” By Thomas.

Insurance is a way to make an individual’s financial losses more affordable by transferring them to a large group of people through an intermediary called an insurance company and a legal contract called a policy.

Contracts of Insurance are mostly regarded as risk mitigation and risk transfer mechanism whereby individuals and companies shift the responsibility for losses to specialists (insurance companies) who handle this risk by spreading it over a large number of people or firms who face the similar type of risks. This system of protection against loss buds when a number of individuals agree to pay certain sums of money, called premium payments, to create a money-pool. Later this money-pool will be used to pay the losses of the few caused by events such as fire, accident, illness, or death of the breed winner.

With the advent of Islam, the concept of insurance took an Islamic turn which we may call the right turn and Islamic modes of risk mitigation started to evolve. Some scholars justify the starting of a mutual indemnification system i.e. Takaful to Meesaaq e Madina the first constitution and later the system of Zakat and Bait ul mal in which all the members of a society contribute to help those who are not in a position to support themselves.

The word takaful comes from the Arabic root word Kafala, meaning “guarantee”. Takaful therefore is the practice whereby individuals in the community jointly guarantee themselves against loss or damage. For example, individuals can make charitable donations to a common fund from which they may each draw in the event that they suffer loss to their houses or livelihoods. It was first established in the early Islamic era with the purpose of promoting mutual solidarity and co-operation among the Muslim community. In Takaful the elements of riba (interest), maisir (gambling), gharar (uncertainty) are removed from the operations.

Takaful is a system of Islamic insurance based on the principle of Ta’awun (mutual assistance) and Tabarru (voluntary contribution), where the risk is shared collectively by the group. It is operated on the basis of shared responsibility, brotherhood, solidarity and mutual cooperation or assistance, which provides for mutual financial security and assistance to safeguard participants against a defined risk.

Overview of the Insurance sector in Pakistan

Witnessing insurance from the lens of history, the greatest setback for the insurance industry of Pakistan was nationalization since it halted creativity, competitiveness and growth in the industry. Overall fate of the insurance industry came down to one state owned insurance company and this feeling of monopoly hampered the urge to develop and expand in that company which became the fate of the industry. Even after financial liberalization, the state owned company tends to dominate the insurance sector of Pakistan because of the deep outreach, huge customer base, large sales force and low premium products. Despite the demise of nationalization in 1991, insurance sector grew as what can be called mushroom growth whereby small firms both private domestic and foreign, all with limited outreach, less expertise and financial soundness impede the growth of the sector. However the decade starting 2001 showed significant developments in the insurance sector. In 2002, rules for insurance companies were introduced which were amended and improved from time to time. Paid up capital requirement was raised, which reduced the number of insurance companies leaving the most efficient in the industry. This reduction was significantly seen in the non-life insurance sector where 58 companies were operating in 2001 which later reduced to 46 in 2005.

Structure of the Insurance Sector in Pakistan

Asset structure of Insurance sector of Pakistan is depicted in the annexure. Life insurance sector continues to occupy the largest share in the insurance sector though its share continues to decline. Share of state owned insurance companies also declines but domestic life insurance companies showed an increasing trend. General insurance sector continues its growth and reached to a fair figure of 37.3billion rupees. Share of State owned general insurance also showed a decreasing trend but domestic companies performed brilliantly by increasing 57.67% from 2001 to 2007. Foreign general insurance stayed almost at the same level.

The one and only Reinsurance Company in Pakistan which is state owned. Its asset share in overall insurance sector showed moderately variable trend with an average of about 3.23 billion rupees.

Total Assets of the insurance sector showed a very positive sign for the insurance climate. Total Assets increase with a fairly good rate reaching 325.06 billion from a mere 113.41 billion rupees.

Takaful companies a recent player in the industry showed a positive signal by increasing there asset base and aiming to compete with conventional insurance companies in the industry.

Difference between Conventional Insurance and Takaful

Conventional insurance is first considered by Islamic jurists on the request of Muslim merchants who wanted to indemnify there object of trade through marine insurance. Syed Ibn Abdin discussed the essence of Marine insurance and concluded “I see that it is not permitted to any merchant to get indemnity for his damaged property against the payment of a certain sum of money known as insurance premium; because this is a commitment for what should not be committed to”.

Despite Ibn Abdin’s declaration of insurance as unlawful in Islamic Principles, the discussion on Importance and need of insurance continues because it is always considered to be very attractive to merchants and traders because through insurance they could mitigate the voyage risk which was the main risk they face. Oceans and marine travels were not safe enough due to lack of ocean knowledge and the risk of pirates.

This situation continued until 1976, when the First International Conference on Islamic Economics was organized in Makkah. This conference is considered a milestone in the development of Islamic economics. More than 200 economists and jurists from all over the world attended this conference and declared that “The Conference sees that the commercial insurance which is practiced by the commercial insurance companies in this era does not conform to the Shariah principle of cooperation and solidarity because it does not fulfill the Shariah conditions which would make it valid and acceptable”.

Later in 1983, Council of Islamic Ideology, Pakistan also considered the matter and gave its discretion about conventional insurance. They regarded all the well-known forms of insurance in conflict to the Islamic injunctions.

Objections on conventional insurance from Islamic perspective are mainly because of the breach of three laws of shariah. Islamic principles and practices do not allow any commercial transaction in which there is any element of either interest (riba), gambling (maisir), uncertainty (gharar), any two or all. Unfortunately the transaction of conventional insurance contains all the three prohibited.

Premiums received by insurance companies are invested in interest bearing activities to provide premium providers with ensured incomes at the predetermined time. But this indulgence in interest makes the insurance contract doubtful. Interest is not allowed in Islam whatsoever. But this objection on the business of insurance is practice based i.e. the practice used by insurance companies is not right. It does not effect the nature of business of insurance companies. If insurance companies stop earning by investing premiums in interest based activities this objection will be removed.

The element of gambling emerge in the insurance contract with the fact that a person may receive full amount with very less invested. This game of chance or gambling is prohibited in Islam because it is exploiter in nature.

Uncertainty (gharar) is present in the concept of insurance because no party is certain about the events upon which contract is made, nor the object of contract is certain. Moreover the time to pay is also not final.

Following differences between takaful and Conventional Insurance are based on there operation and are referred to as operational differences.

In conventional insurance, any surplus is the property of the insurance company while in takaful, the surplus belongs to takaful participants.

The objective of conventional insurance is to earn profits whereas the objective of takaful companies is to facilitate mutual cooperation

Takaful companies are supervised by a shariah board which is considered a central part of the company while conventional insurance companies are not supervised by any such board.

Premiums paid by customers are considered to be the property of insurance company while takaful companies consider it the property of the waqf fund rather than takaful operator.

Conventional Insurance companies are the owners of the business while takaful companies act as agent (wakeel).

Conventional insurance companies retain all the additional profits from investment of premiums whereas takaful companies return the profits to waqf rather than takaful operator.

Fatawa against Conventional system of insurance are mentioned in the Annexure VI.

Types of Takaful

Like conventional insurance, which is divided into two types of life and general, Takaful can also be broadly divided into two types namely General Takaful and Family Takaful.

General Takaful

In general Takaful, the Waqf’s memberships are assigned to those who need to mitigate risks to their assets like airplanes, motors, and houses etc. in an event of any defined loss to the asset, the Waqf pool compensates. The company sets up the Waqf pool, manages it, invests the fund available in the pool in Shariah compliant businesses, and charges a fixed Wakala fee in return. Furthermore, the Waqf pool is also the:

Rabul-ul-Maal (Sleeping Partner)

Company act as Mudarib (Working Partner)

Family Takaful

The participants of family Takaful mitigate their risks pertaining to their lives by acquiring the membership of Waqf fund. In addition to the protection element, participants can also use Family Takaful for their investments need through another fund called Participant’s Investment Account (PIA).

Contribution received is first credited to the PIA which is used to buy Shari’ah complaints investment units for the participants. From PIA, units are allocated for the participant’s Takaful Fund (PTF) or the Waqf Fund. The units from the PIA are received by the PTF in the form Taburru. The amount is different for each participant since it is based on their health, age, occupation and lifestyle. The amount available in the PIA, after meeting various expenses (such as participant medical check-up), is used by the operator in the capacity of Wakeel, under the supervision of Shari’ah Board, for investment purposes. The operator charges a fixed Wakala fee (which in not related to investment profits and is called wakalatu-Istismar) for the services rendered in investment management the fee is paid from PIA. Investment profits are shared between the Takaful participants. The Waqf Funds compensates for any mishap to the life of Takaful Participant.

Business Models of Takaful

There are basically three different types of Takaful models, namely,

The Mudaraba model,

The Wakala model and

The Wakala-Waqf model.

The Mudaraba model is based on Mudaraba, an Islamic mode of equity partnership and is basically a risk-sharing mechanism where the surplus is shared between the Takaful company and the participants in a predetermined manner. The sharing of such surplus and the profit so generated may be in a ratio of 5:5, 6:4 etc as mutually agreed between the contracting parties. Generally these risk-sharing arrangements allow the Takaful operator to share in the underwriting results from operations as well as the favourable performance returns on invested premiums. This model started off in Malaysia, the reason being that in Malaysia they started with Life Takaful and the Mudaraba model was more appropriate for life investments. This same model was continued when they entered general Takaful.

* Idea adopted Pak-Qatar website

Meanwhile, the scholars in the Middle East formulated the Wakala or Agency model which is still the predominant form of Takaful in that part of the world. The Wakala model is a fee-based mechanism where the Takaful operator is only entitled to take out a fee upfront as the contribution, though it may also charge a fund management fee and performance incentive fee. Unlike in the Mudaraba model, it is not entitled to any part of the surplus, all of which belongs to the participants. It does not participate or share in any underwriting results as these belong to the participants as surplus or deficit.

In Pakistan, one benefit of being a late starter is that its scholars have been able to have a close look at both models and have refined these further to constitute what is known as the Wakala-Waqf model. The scholars who formulated this model felt that there should be a separate legal entity on whose behalf the Takaful operator should act as an agent (Wakil) and were inspired by the Islamic institution of Waqf or Perpetual Endowment to serve the purpose.

The Waqf is created by the shareholders of the Takaful company who would put in the seed money. Such seed money must remain as Waqf and cannot be used for claims, though it could be utilized for investments. The contributions received would also be a part of this fund and the combined amount would be used for investment, with the profits so earned being deposited into the same fund. Losses to the participants are paid by the company from the same fund while operational expenses incurred for providing the service are also met from it. Here, both the Takaful operator and the participants share a relationship through the Waqf. Since the Takaful operator will manage the enterprise on behalf of the Waqf it is entitled to a Wakala or agency fee. The participants are also governed by the Waqf rules, so that whatever claims they have, they get by virtue of being a member of that Waqf.

Objective of the Study

The research is aimed to unearth the prospects of takaful in Pakistani market. Under this umbrella, takaful models are discussed. Moreover Trend analysis and current position of the insurance sector is illustrated. In addition to that the current research seeks to investigate whether there exist any relationship between income, saving, interest rates, inflation and the demand for takaful. This study also aims to determine the demand and supply of the insurance services in Pakistan to illuminate the gap. Some challenges in increasing outreach of insurance sector are analyzed and their solutions are also suggested.


This study will help the individuals to clarify and understand the concept of takaful. The prospects of takaful will be helpful for the current and to be players of the insurance industry. The demand of insurance will pave way for other researchers to work in this direction. No such effort is made on these lines in Pakistan. Moreover the demarcation of challenges will help the regulators of the industry to know the problems prevailing there. Solutions will be aimed to benefit both the providers and users of the insurance services in Pakistan.

Literature Review

Author (s)

Year of Publication

Study Type

No. of countries

Data Range

Data Range

Main Results

Kwon W. Jean, Maysami R. Cooper



Takaful is becoming increasingly popular in countries having majority of Muslims.

Ayub Muhammad


Discusses the Developments in Islamic Banking and Takaful.

Liaquat Ali Khan


Conventional Insurance is non-permissible by Shariah and Takaful insurance is expected to grow.

Patel Sabbir


Discusses Takaful, micro insurance and its role in poverty alleviation.

Ali K. M. Mourtuza



Discusses Religious, Philosophical and Operational basis of Takaful and emphasize the need for Ijtehad.

Wahab A. A. Rahim, Lewis K. Mervyn, Hassan M. Kabir



Discusses Business Models of Takaful and there viability.

Hendon Redzuan






Demand for takaful is significantly related to income per capita, interest rate and composite stock index

Rehman Z. Abdul, Yusof R. Mohd, Majid M. S. Abdul






Study investigates the relationship between Goods, Money and Securities markets with family takaful and finds Goods and Money Markets to be significantly related to Family Takaful.

The summary of Literature on Islamic Insurance (Takaful) is given in the above table. It is clear that Takaful is a topic that needs more attention from researchers especially in the empirical dimension as there are only Two Empirical studies conducted. Most of the emphasis of researchers is on the theoretical dimension of the Topic since it is in the developmental stage researchers tend to grasp the theory well. Maysami and Know (1999) went to find the application of Islamic finance and ended up in insurance (Takaful) emphasizing the absence of conceptsof riba, gharar and maisar in Islamic form of Insurance. Moreover they gave an overall picture of the Takaful industry and gave suggestions for better takaful operations. Ayub in his writings gave a very brief introduction of takaful and its standing in shariah. Liaquat Ali Khan in his paper discussed the difference between conventional insurance and Takaful and proposed Takaful as shariah compliant alternative for conventional insurance. He also emphasized the developments of Takaful in Muslim and Non Muslim countries. Sabbir Patel gave a new dimension to the study of Takaful as a tool for poverty alleviation in the world. He discussed the advantages of providing Takaful products to the less privileged and potential challenges in the pursuit. Later in his paper he linked Takaful with microfinance and emphasized the need to develop micro takaful products for the mentioned cause. Ali Mortuza in his article discussed the standing of Takaful on various grounds. He proved the validity of Takaful on religious grounds providing evidence from Quran and Sunnah. On his philosophical ground he considered Takaful as a welfare scheme rather than an investment avenue. The goal of Takaful is joining hands for mutual protection n well being. He also discussed the operational aspects of Takaful and the day to day practices prevalent in the Takaful industry. Towards the end he emphasized the need for further ijtehaad in this area. Wahab A. A. Rahim, Lewis K. Mervyn and Hassan M. Kabir (2007) in there paper discussed in detail the models applicable for shariah compliant insurance system (Takaful). Hendon Redzuan (2008) in his paper gave an empirical touch to the study of Takaful and estimated the demand for takaful in Malaysia by applying a model comprising of relationships with income per capita, interest rate, inflation, saving and stock market index. His study was limited to Malaysian market. Rehman Z. Abdul, Yusof R. Mohd and Majid M. S. Abdul (2009) in there study estimated the relationship of Takaful with macro economic variables in Malaysia. They estimated the impact of Goods, Money and Securities Market on demand for takaful and found Goods and Money markets to be significantly related to the demand for Family Takaful in Malaysia.

Research Design

A conceptual and analysis based research in which conceptual base and economic data will be used to determine the demand of insurance services in Pakistan. For this purpose, we will use the model used by Hendon Redzuan in his paper, Economic Determinants of Family Takaful Consumption: Evidence from Malaysia.

A conceptual and analysis based research in which conceptual base and economic data is used to determine the demand of insurance services in Pakistan. For this purpose, we employed the model used by Hendon Redzuan (2008)*.

Hypothesis to be Investigated

Based on the functional relationship as expressed by the theoretical framework, five hypotheses are formulated as follows:

Hypothesis I: There is a positive relationship between the level of income and the demand for takaful in Pakistan.

Hypothesis II: There is a positive relationship between the level of interest rate and the demand for takaful in Pakistan.

Hypothesis III: There is a statistically significant relationship between the level of savings and the demand for takaful in Pakistan.

Hypothesis IV: The level of inflation is negatively related to the demand for takaful in Pakistan.


Demand for takaful plans can be explained by income, interest rate, inflation rate and savings rate. In a general form of a functional relationship between takaful demand and the theorized determinants are as follows:

* Hendon Redzuan (2008), Economic Determinants of Family Takaful Consumption: Evidence from Malaysia.

Demand = f (income, interest, savings, inflation) + ε

Dependent Variable

Premium Per Capita

Life insurance demand has used a proxy of premium per capita as the measure of insurance demand. The life insurance premium provide a consistent standard for life insurance demand although it is not exactly the perfect measure of insurance ownership because premium may vary significantly from country to country due to differences in the types of policies sold, insurance markets, issuing costs and regulations.

Independent Variables

(a) Income

The level of a country’s income is the most important factor in explaining the level of insurance consumption. The demand for insurance is positively related to income. GDP per Capita is used as the proxy for income.

(b) Interest Rate

The relationship between long-term interest rate and insurance demand is positive as with the increase in interest rate the overall level of saving increases which will lead to increase in premiums per capita.

(c) Savings

The relationship between the demand for life insurance and other financial assets such as savings is also positive as if the effective return on saving will increase compared with the return of other savings instruments, life insurance would look more attractive to prospective savers, given its other features such as the protection it provides.

(d) Inflation

The impact of inflation rate on life insurance demand is positive as with the increase in inflation rate the value of money goes down and people tries to save more and avoid the future risks through insurances. But the demand for insurance can also be decreased during volatile economic times. So, the relationship between the demand for insurance and inflation is ambiguous.

Empirical Model

A general multiple regression model is designed to test the relationships between the “premium per capita” proxy to demand for takaful as the dependent variable and the level of income, interest rate, inflation rate, and saving rate composite as the explanatory variables. The regression model is expressed as a log linear equation as follows:

Ln [PPC] t = β0 + β1Ln[GDP]1t + β2 Ln[INT] 2t + β3Ln[SAV] 3t + β4 Ln[INF] + εt


PPCt: The premium per capita in time period t,

INCt: Per capita income of the population during the period under study,

INT t: Prevailing market interest rate in period t,

SAVt : Rate of return for savings in period t,

INFt : Inflation rate during the period t,

εt is a stochastic error term,

t is the subscript used for time series data,

β0 is an intercept and the regression coefficients β1, β2, β3, β4, β5, are unknown parameters.

For having empirical results, we have used the data on all these variables from 1972 to 2007, and used the Ordinary Least Square (OLS) regression technique for funding the required results.

Empirical Results

Through analysis we have obtained the following estimated model.

LNPPC = -12.98685+0.988175(LNGDP)+0.040912(LNINT)+ 0.842585(LNSAV )+ 0.223873(LNINF).


The intercept term is causing a significant negative change in PPC when all other explanatory variable are having no effect on explained variable. The estimated regression coefficients show a positive relationship between demands for takaful and the explanatory variables income, inflation rate and saving rate. The coefficients of income and savings are highly significant at 10% and 1% level of significance respectively and strongly predictive of the demand for takaful. That is with 1% change in income and saving, 0.988% and 0.84% change will come in PPC. The coefficient of the interest variable is not statistically significant under the estimated demand function using premium per capita. The coefficient of the inflation variable is also significant as with 1% change in inflation rate 0.2238% change will appear in PPC. The coefficient of determination indicates that 98% variations in the demand function using premium per capita (PPC) as a proxy is being explained by the independent variables Income, Inflation rate and saving rate. The overall model is statistically significant at 1% level of significance as the value of F-statistics is very high. The correlation table also support the findings mentioned above

Challenges in Increasing Outreach

The challenges faced by takaful operators can be grouped into three categories.

Awareness Problems is the most important barrier because still a significant sector of the population is either unaware of the availability of Takaful products or else is not fully convinced about takaful as an alternative to the conventional insurance. This is a major problem since perceptions are hard to change. To change perception of customers is a long and hard task. Complete set of effective marketing tactics are needed for this purpose.

Internal Factors such as skilled and motivated staff, management style, level of capitalization and relatively small retention levels particularly for the new, emerging companies of this emerging industry pose a major challenge for Takaful operators in Pakistan. Moreover problems like lack of trust of investors, lack of entrepreneurial confidence also create major problems for the industry.

External factors as regulatory framework, competitive environment, treatment of Takaful vs. conventional insurers, role of governments, and maturity level of insurance industry and non-availability of suitable retakaful program pose problems for this infant industry.


The three faceted problems of the takful insurance industry is deep rooted in nature. For the mitigation of such drawbacks, a comprehensive plan is needed involving all the stake holders of the insurance industry. Such a program can be started from a government platform where all the stakeholders are invited. Together they should sit together to find ways to help takaful industry emerge and compete with conventional insurance system on equal basis.

For the solution of Awareness problems a comprehensive marketing plan must be initiated. This plan should aim to create a demand for takaful by focusing on need for insurance and by explaining the concept of takaful and its lawfulness. Since the mindsets of Pakistani people possess a religious touch, takaful companies can capitalize this opportunity and take the industry to new heights.

The problem of outreach is also significant to takaful industry. Presently there are only three takaful companies operating in Pakistan. Moreover there is a very low number of outlets from where takaful services can be obtained. Takaful companies should try to increase the number of there outlets to be in a better position to compete with conventional insurance companies. If insurance companies are not willing or able to increase there outreach then this objective can also be achieved by government forcing this through regulation.

Takaful companies have a great opportunity in the form of low income group. They can target this group by developing products suiting to the needs of this group. This will enhance market share of takful companies in the industry as well as promotion and awareness will be enhanced.

Diversified channels for the supply of insurance services can also be used for increasing the outreach. Systems like ‘Bancassurance’ can also be developed for takaful companies. These mechanisms are known as bancatakaful. Takaful companies should coordinate with Islamic banks. This will help takaful companies and Islamic banks too. Moreover it is also helpful for the development of Islamic financial system in the country.

A combined training and development effort can be initiated to help employees of takaful companies better understand there task and increase in there abilities to achieve more. Management should become more aggressiv

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