After the expiry of restriction on conventional insurance companies to open up Takaful windows in 2010, the Securities and Exchange Commission of Pakistan (SECP) promulgated rules to facilitate conventional insurance companies to open up Takaful windows. While the regulators and insurance companies were getting ready, Takaful operators filed a suit in the court of law. An intern order was issued restricting Securities and Exchange Commission of Pakistan (SECP) from granting permission for establishing Takaful window while the final judgment is awaited.
A cursory look at the performance of Takaful operators in Pakistan shows that they have hardly been able to earn a decent profit on their investment. Sector experts apprehend that now foreign sponsors, who have invested in local Takaful companies are thinking about selling their stake at any price, if there are buyers. This is a sad state of affairs that demand immediate rectification. Takaful enjoyed the distinction of having attracted huge foreign investment and it is also likely to see major sale of stake by them.
Some of the sector experts say that even the initial decision of the government to impose restriction on conventional insurance companies to open up Takaful windows was imprudent. This statement carries weight if one looks at the growth of designated Islamic banking branches of the conventional commercial banks in the country. The State Bank of Pakistan when granted permission for full service Islamic banks also allowed conventional banks to open up designated Islamic banking branches.
According to the terms and conditions for granting permission, Takaful operators were required to offer their shares to general public. As the conditions were not conducive sponsors enhanced their own stake rather than making initial public offer (IPO). This may have enabled the sponsors to meet minimum capital requirement but also put them under extreme pressure.
However, if one looks at return on investment/equity the numbers are highly disappointing. The decision of sponsors to sell their stake to local investors may look prudent but it also suggests that Takaful is a loss making business in Pakistan, which is a bad omen. Experts say that sponsors are partly responsible for not coming up with a prudent business model, undertake promotion and above all relying on business segments, which are low yielding or loss making.
Over the years, Takaful operators have raised paid up capital to around Rs400 million. At end 2012, Pak Kuwait had the highest paid up capital of Rs400 million, followed by Pak Qatar around Rs337 million and Takaful Pakistan Rs300 million. Against this they carried accumulated losses -- Pak Kuwait (Rs185 million), Pak Qatar (Rs138 million) and Takaful Pakistan (Rs166 million). This is certainly not a satisfactory performance.
One of the factors that hint towards lack of interest of sponsors is that some of the Takaful companies have operated without a full time Chief Executive Officer (CEO). These included almost all the players namely Pak Kuwait Takaful, Pak Qatar General and Life Takaful, Takaful Pakistan and Dawood Family Takaful. Another parameter to evaluate the performance is ‘Gross written Contribution’ (GWC). For year 2011, total GWC of three key Takaful players was Rs1.138 billion as against of Rs41.767 billion for the insurance sector. Pak Kuwait was at the top with Rs642 million, followed by Pak Qatar (Rs330 million) and Takaful Pakistan (Rs165 million).
According to an insurance sector expert, "More than 75 percent of total Takaful collection pertains to auto segment, which is a very low yielding business. The situation prevails mainly because Islamic banks are actively pursuing Car Ijara. In other words it is a captive business of Islamic banks and if they stop Car Ijara business the overall non-life Takaful business will take a nosedive.
During 2011 collection from motor segment of business of Takaful operators was Rs650 million against total of Rs1.138 billion. Pak Kuwait was at the top with Rs324 million followed by Pak Qatar (Rs234 million) and Takaful Pakistan (Rs92 million). In percentage terms it translates to Pak Kuwait (50.5%), Pak Qatar (70.9%) and Takaful Pakistan (55.5%) or 57.1% of total collection.
Even more alarming is the situation if one looks at loss ratios for the year 2012. In Fire and Property segment in gross terms it was Pak Kuwait (26.7%), Pak Qatar (7.4%) and Takaful Pakistan (6.0%). In Marine segment in gross terms it was Pak Kuwait (24.2%), Pak Qatar (20.7%) and Takaful Pakistan (3.2%). In Motor segment in gross terms it was Pak Kuwait (68.6%), Pak Qatar (64.3%) and Takaful Pakistan (71.9%). In Miscellaneous segment in gross terms, it was Pak Kuwait (42.9%), Pak Qatar (62.9%) and Takaful Pakistan (96.1%).
A question arises why the apex court is reluctant in announcing its final verdict that can pave way for the entry of conventional insurance companies in Takaful business? One of the possibilities is that the apex court just doesn’t want the foreign investors to pull their investment out from Pakistan. However, this is totally incorrect perception, because entry of conventional insurance companies in Takaful business will increase the size of pie. This will not only help promote business of Takaful operators but will also benefit the masses and enable them to hedge risk in a Shariah compliant manner, rather than living without any cover and making substantial losses in case of any eventuality.
Most of the Shariah scholars have the consensus that hedging risk is not prohibited by Shariah, there is only a difference in modalities followed by Takaful operators and conventional insurance companies. In fact people living in Pakistan require appropriate risk hedging that can not only help in minimizing their losses in case of any eventuality but also ensure ‘continuity of business as usual’. Therefore, the apex court is very humbly requested to please allow the SECP to grant permission to conventional insurance companies to establish Takaful windows.