'Insurance industry will see a major breakthrough in coming years,' Commissioner Insurance, SECP

Muhammad Asif Arif has over 25 years of experience in insurance, claims, reinsurance, management and finance! He is a qualified chartered insurer from the Chartered Insurance Institute, London. Besides, he is also an MBA from IBA, Karachi. Asif has also served on various committees of the Insurance Association of Pakistan and Karachi Insurance Institute.
Last week, BR Research sat down with Arif and held a discussion on the latest developments in the insurance industry and their prospects.
Following are the edited excerpts of the conversation:
BR Research: What major development has taken place in the insurance industry recently?
Muhammad Asif Arif: Conventional Insurers have now been allowed to offer takaful through window operations. However, there are certain requirements that ought to be met before any conventional insurer starts offering takaful window facility. These requirements include Shariah compliance, separation of funds, appointment of Shariah advisors and compliance officer.
With the allowance of takaful window operations, we are anticipating at least 10 conventional insurance companies to have takaful operations by December this year. Many insurance companies have appointed Shariah advisors, conducted EOGMs for the purpose of changing the object clause and allocated funds to meet the capital requirement. So, things are moving in that direction.
BRR: Will the allowance of window takaful operations give a rapid boost to the takaful industry?
MAA: Currently, the issue with takaful operators is that they don't have sufficient resources; hence, they haven't been able to reach to the masses. On the flipside, existing conventional insurers have strong footprints; they have adequate reach and have enormous resources available. Also, all Islamic banks in their reports have one qualitification which says that they can get insurance from commercial insurers only where they are unable to get takaful owing to their capacity restrictions. Now, window operations will become a quick fix for this setback, thus giving a boost to Islamic banking as well. On the retail side, there is a big chunk of population that has been turning down insurance products based on religious grounds, now they have a Shariah compliant alternative available.
BRR: In order for a conventional insurer to start offering a window facility, what are the key prerequisites that it must fulfil?
MAA: To set off, a conventional insurer needs to allocate 50 million rupees from their existing paid up capital for takaful operations, and segregate funds while putting them in different accounts. All takaful expenses will then be paid out of this account. Further, a head of takaful operations who will be acting as the CEO of any takaful companies needs to be appointed.
Then there is a requirement to appoint a Shariah advisor and Shariah compliance officer whose core responsibility is to ensure that whatever policies are laid down by the Shariah advisor are followed in letter and spirit. The back office which is the 'insurance underwriting' would be common so these takaful windows will not have to incur additional expenses as they can initially deploy conventional staff. So, the mechanism has been defined already.
BRR: Is Pakistan the first country to introduce takaful window mechanism?
MAA: Years ago, this mechanism was introduced in Malaysia but due to loopholes in the firewall requirement it did not prove out to be successful and later in 'nineties the model was ruled out. Here, Pakistan will be the first country to offer takaful window operations. Also, the beauty of our model has drawn appreciations from around the world. Countries like South Africa, Sri Lanka and Tanzanaia are studying our models.
BRR: Will there be any difference in terms of profitability and working margins?
MAA: The only difference in takaful is that in the case of conventional insurers, shareholders are the owners of all the funds. On the other hand, there are two separate funds in takaful: one is owned by the shareholders and the other by takaful itself.
So, all claims and expenses are paid out of takaful funds and shareholders fund get a fee to manage the funds and its operations. This way, shareholders funds have fixed stream of income and operation of core income will depend on the takaful fund.
BRR: Besides takaful window allowance what major developments have taken place in recent times in Pakistan's insurance industry?
MAA: We have also launched Microinsurance regulations and it has received a tremendous response. Companies especially in life and health have started marketing Microinsurance products. Two institutions namely, MicroEnsure and BIMA have come to Pakistan. These institutions have played an eminent role in the development of Microinsurance in recent times.
Their basic objective is to develop Microinsurance products and simultaneously design IT solutions and then approach distribution companies (eg telecommunication, courier, or utility companies) to market their products. These institutions have a huge marketing network which has enabled them to enter into this market.
In this regard, some pilot projects have been started which have been very successful like with TPL Insurance and with some other insurance and telecom companies particularly Telenor. Micro life-insurance has already started and micro health insurance has also been launched, Tameer bank has joined hands with TPL Insurance to head out a pilot project to launch health card system for offering micro health. Their target is to initially sell 2,000 policies per month in the first three months and then will take it to 20,000 policies per month.
So, these institutions have essentially emerged as a solution provider as for an insurance company, it involves massive costs to develop new products and these institutions by having hands-on experience round the globe have provided the products and solutions which is, in effect, a cost-effective solution for any insurance companies planning to enter into Microinsurance.
BRR: Are there any regulatory issues in microinsurance?
MAA: Mircroinsurance regulations have been issued where microinsurance has been clearly defined and rules regarding consumer protection and product development have been laid out.
BRR: Will microinsurance be any bigger than conventional insurance?
MAA: Both will go side by side. First, issue of insurance being in conflict with religious beliefs has now been addressed with the launch of takaful window. Secondly, the reach was mainly limited to business and corporate circle, where common man had reservations if he would be cheated. Here, the basis of microinsurance is that it should have a strong mechanism of consumer protection requiring pre-product approval by SECP where conditions and warranties are kept at the minimum level to avoid complexities for a common man. And through telecom solutions, the process can be simplified further.
BRR: With these developments taking place have you seen any interest coming in from foreign investors?
MAA: Rosewood (a Swiss Venture Capital) has acquired 79 percent holding of TPL Insurance and will be going for two other insurance companies in the next six months; one from life and the other from non-life. It's a new initiative that foreign direct investment in insurance is coming after a very lapse. In Africa, they have picked seven companies and are further interested in other nine companies in Asia. Starting from Pakistan, it will then be approaching Sri Lanka then Bangladesh. It essentially picks companies with a market share of three to five percent and by providing the right products and support systems; it aims to increase the market share to 15-20 percent over a span of five years. This way, the penetration is bound to increase.
It's a good omen for Pakistan that technical expertise and foreign investment is coming to Pakistan. Coming to the fact that our industry which was once at a standstill position where there was lack of out-of-the-box thinking, these developments will be a major breakthrough in taking our industry to new levels.
On the regulatory front, the main thing presently happening is that we are revamping the entire insurance law in collaboration with the World Bank. In this regard, consultants have already been appointed and the first draft of the report is underway which is expected to be finished off within the next one month. Once the first draft is formulated, there will be a whole round of deliberations and debates. There are certain areas that are high on the priority list when it comes to the remodeling of insurance laws including consumer protection enhancement, electronic transaction, alternative distribution channels and focus on specialised companies (eg a health or liability specialised company).