Unlocking Takaful’s potential: A strategic priority for public sector insurers

Takaful, an Islamic insurance model rooted in the principles of mutual help, offers a compelling global alternative. However, its potential remains largely untapped in Pakistan, a nation with a robust Islamic finance sector and a predominantly Muslim population.

Complex regulatory frameworks, divergent Shariah interpretations, and limited public awareness constitute significant barriers to its growth.

Overcoming these obstacles is paramount to unlocking Takaful’s potential as a sustainable and ethical insurance solution for the Pakistani market.

Pakistan’s insurance sector as a whole lags considerably behind its peers, characterized by low insurance penetration and density. In 2024, the Takaful sector’s contribution to Pakistan’s insurance market was modest, accounting for merely 2-3 percent, translating to a meager 1 percent penetration rate, significantly trailing other countries in the Asia-Pacific region and the wider Islamic world. Within this nascent landscape, Family Takaful holds a 12 percent share of the life insurance segment, while General Takaful constitutes 11 percent of the non-life insurance market (Dawn, Nov 10, 2024).

Takaful global market

The global Takaful market is projected to experience a significant growth, expanding from USD 30 billion in 2024 to an estimated USD 34 billion in 2025, translating to a robust 12.3 percent CAGR. This growth is driven by factors such as the rise of Islamic finance, increased consumer awareness, supportive government policies, and collaborations with Islamic banking institutions.

The market’s global reach encompasses a diverse range of countries, including Australia, Brazil, China, India, Indonesia, the USA, and the UK (Islamic Financial Services Industry, Stability Report 2023).

Saudi Arabia, Iran, and Sudan, fully comply with Islamic insurance principles, with Takaful market shares reaching 100 percent, these nations collectively managed assets totaling USD 75 billion in 2022.

Globally, Saudi Arabia, Iran, and Malaysia dominate the Takaful sector, accounting for 83 percent of global premiums. Saudi Arabia leads this group, holding 48 percent of global premiums in 2022, according to Atlas Magazine (2023).

Boosting Takaful: SECP’s recent initiatives

The Securities and Exchange Commission of Pakistan (SECP) recently convened a pivotal roundtable discussion in Karachi, aptly titled “Takaful: Unlocking the Growth Potential,” as an integral component of its ambitious “Insured Pakistan” 5-year strategic plan.

This high-level gathering served as a platform to foster collaborative synergies, drive digital transformation, and enhance the skill-set of professionals within the dynamic Takaful sector.

The SECP underscored its strategic partnership with the Asian Development Bank, emphasizing the imminent approval of a comprehensive insurance and Takaful development programme. Concurrently, the SECP is actively engaging with the Federal Government to advocate for crucial reforms that will foster sustainable growth and stability within the insurance sector.

Challenges classified by Takaful discipline

The evolving regulatory environment and rising competition in Pakistan’s Takaful sector demand strategic transformation. Compliance with expanding regulations requires improved customer interaction processes, while competition from conventional insurers necessitates refined pricing models and tailored Takaful solutions for a broader customer base.

To align with regulatory and Sharia’a principles, Takaful operators must enhance product governance, strengthen Sharia’a advisory and audit frameworks, and ensure stakeholder fairness.

Additionally, robust risk management governance, supported by an enterprise-wide risk strategy and strong board oversight, is essential for building a sustainable, risk-based business model.

Ten challenges in Takaful: A categorisation by discipline

Leveraging global best practices

“To unlock Pakistan’s Takaful potential, Pakistan must draw inspiration from Takaful pioneers like Malaysia, Saudi Arabia, and the UAE, their success stories, marked by financial inclusion, economic growth, and social welfare, offer invaluable lessons. By analyzing their regulatory frameworks, innovative products, and effective distribution channels, Pakistan can pave the way for a thriving Takaful industry.

Unlocking Takaful’s Potential: A Public Sector Catalyst

For two decades, Takaful in Pakistan has faced headwinds. But with surging demand for Shariah-compliant finance and global Takaful success, the time for action is now.

A leading state-owned insurer, with its deep market knowledge, experienced leadership, and robust resources, is ideally positioned to spearhead this transformation. By establishing a dedicated Islamic insurance arm, it can leverage its strengths to drive innovation, address evolving needs, and unlock the full potential of Takaful in Pakistan.

The strategic imperative: Contributions of the public sector

The public sector can cultivate profound customer trust by strictly adhering to Islamic principles. This unwavering commitment to Shariah compliance not only enhances consumer confidence but also sets a higher standard for the industry.

Leveraging its expertise and resources, the public sector can spearhead the development of innovative Shariah-compliant insurance products tailored to the diverse needs of the Pakistani population.

A dedicated Islamic insurance subsidiary, operating under specialized regulatory oversight, will ensure adherence to both local and global Islamic finance standards. With a team of highly qualified professionals, the public sector is well-positioned to lead the industry in developing innovative solutions and delivering exceptional service. By establishing a strong and recognizable brand for Islamic insurance, the public sector can solidify its position as a socially responsible and ethical market leader.

Transforming challenges into opportunities

Addressing the challenges that have historically impeded the growth of Takaful, the establishment of a dedicated Islamic insurance company presents a strategic opportunity for the public sector to diversify its revenue streams, enhance its market position, and contribute significantly to the broader Islamic finance ecosystem. This initiative holds the potential to unlock the vast opportunities within Pakistan’s Takaful sector while extending financial security and protection to underserved segments of the population.

In conclusion, the public sector’s proactive leadership in advancing Takaful promises substantial and far-reaching benefits. This initiative not only drives growth within Pakistan’s Islamic finance industry but also aligns seamlessly with global trends towards ethical and sustainable finance, creating new avenues for expansion in an increasingly interconnected world.

Copyright Business Recorder, 2024