Purpose of this brief article is to describe the main features and models of Takaful system operating in various parts of the world and its growing industry and prevalent in Pakistan.

All human beings are invariably exposed to the possibility of meeting catastrophes and disasters giving rise to misfortunes and sufferings such as death, loss of limbs, accident, destruction of business or wealth, etc. Notwithstanding the belief of all Muslims in Qadha-o-Qadr, Islam provides that one must find ways and means to avoid such catastrophes and disasters wherever possible, and to minimize his or his family’s financial losses should such events occur.

One possible way out is to buy an insurance cover as in the conventional system. Different views have been expressed about the status of conventional insurance from the point of view of Islam. An overwhelming majority of the Shariah scholars believe that it is unlawful due to the involvement of Riba (interest), Maisir (gambling) and Gharar (uncertainty).

Takaful, the Islamic alternative to insurance is based on the concept of social solidarity, cooperation and mutual indemnification of losses of members. It is a pact among a group of persons who agree to jointly indemnify the loss or damage that may inflict upon any of them, out of the fund they donate collectively.

The Takaful contract so agreed usually involves the concepts of Mudarabah, Tabarru´ (to donate for benefit of others) and mutual sharing of losses with the overall objective of eliminating the element of uncertainty.
Takaful is not a new concept in Islamic commercial law.

The contemporary jurists acknowledge that the foundation of shared responsibility or Takaful was laid down in the system of ‘Aaqilah’, which was an arrangement of mutual help or indemnification customary in some tribes at the time of the Holy Prophet (PBUH).

In case of any natural calamity, everybody used to contribute something until the loss was indemnified. Similarly, the idea of Aaqilah in respect of blood money or any disaster was based on the concept of Takaful wherein payments by the whole tribe distributed the financial burden among the entire tribe (community).

Islam accepted this principle of reciprocal compensation and joint responsibility. The contract of Takaful provides solidarity in respect of any tragedy in human life and loss to the business or property. The policyholders (Takaful partners) pay the subscription to assist and indemnify each other and share the profits earned from business conducted by the Company with the subscribed funds.

Takaful companies normally divide the contributions into two parts, i.e., donations for meeting mortality liability or losses of the fellow policyholders and the other part for investment. Accordingly, the clause of Tabarru (Tabarru’ means a form of sincere donation given to a party without expecting any kind of exchange or return from the party. It is considered as a unilateral contract which only requires one party to express the contribution without requiring any kind of exchange). It is incorporated in the contract. How much of the contribution is meant for mortality liability and how much for investment account is based on a sound technical basis of mortality tables and other actuarial requirements.

Both the accounts are invested and returns thereof distributed on Mudarabah principle between the participants and the Takaful operators.

The profit attributable to the participants is credited into the two accounts separately. To describe from another angle, a Takaful contract may comprise clauses for either protection or savings/investments or both the benefits of protection as well as savings and investment.

The protection part of Takaful works on the donation principle according to which individual rights are given up to indemnify the losses reciprocally.
Takaful is slowly and gradually is becoming the primary way to protect themselves against any uncertainty or losses considering it to be Islamic and Riba free, the Islamic banking and Insurance sector has been growing rapidly expanding its share in the global as well as Pakistani market.

Khurram Zahid

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Two years ago SLIC still had a leading share (57pc) in the pie; today it is divided equally: 50pc with SLIC and 50pc is held by the private insurance companies with varying percentage of market share.

The imposition of an advance tax on life insurance premium would drive away small savers, having an adverse impact on the penetration of life insurance — Javed Ahmed

Asked if that was the case, Javed Ahmed, managing director of Jubilee Life Insurance Co. told that it was indeed so. He presides over Pakistan largest private sector life insurer in terms of gross written premium.

Formerly the New Jubilee Life Insurance Company Limited, Jubilee Life has been in the business for over 18 years as a life and health insurance company. Engaged in both individual life insurance and group insurance business, Jubilee has ventured into several new fields. The company’s initiatives include Bancassurance, Credit Life and Micro-Insurance. The company also started the Takaful business by opening up its Shariah-compliant ‘Window Takaful Operations’ towards the end of June 2015.

Most of the private sector life insurance companies, like banks, have started Takaful alongside their conventional business, hoping to add value and revenue by attracting the segment of the population that is wary of conventional banking and insurance products.

“Jubilee Life has launched 20 – 30 Takaful products through different distribution channels such as Banca Takaful arrangements with the company’s banking partners, direct sales from own branches, and corporates (employee benefits)”, says Javed Ahmed, adding that the results have been encouraging.

“Besides Life, Jubilee is also the largest provider of health insurance in Pakistan”, the company MD tells me and talks about the latest initiative of launching health insurance cover, mainly for the salaried class.” The company is also catering to the lower segment through micro-insurance products, designed to be affordable for the underprivileged section of society.

Jubilee Life Insurance Co. is a subsidiary of the Aga Khan Fund for Economic Development S.A, Switzerland, which holds 57.87pc stake in the company, representing 41.7m shares. Adding the shareholding with associated companies and related parties, the holding company together commands 83.03pc of the company’s capital. The general public holds 8.90pc shares, while foreign shareholders have a 4.71pc stake in the company.

The market price of the Jubilee Life Insurance stock, of a par value of Rs10, which stood at Rs290 two years ago, has currently climbed up to Rs530. The company’s market capitalisation amounts to Rs38bn against the paid-up capital of Rs721m. Total assets of the firm according to last released figures amounted to Rs721m on June 30.

The Jubilee Life MD complains of several measures decreed in the budget 2016-17. These include the imposition of an advance tax on life insurance premium which exceed Rs200,000 per annum.

Mr Javed believes that, although for non-filers, the new measure would drive away small savers, having an adverse impact on the penetration of life insurance in Pakistan, which already is a dismal 0.51pc of the GDP. Life insurance penetration in neighbouring countries such as Bangladesh is 1pc and India 4pc, while in the developed world the penetration goes beyond 10-15pc of the country’s GDP.

The other disconcerting step for insurance companies is the clamping of a uniform corporate tax rate of 31pc on all sources of income; a departure from different tax rates that were applicable for profit on the underwriting business; and considerable lower rates for other sources of income such as dividends and capital gains.

As insurance companies derive much of their income from the investment of surplus funds, the overall effective tax rate had been significantly lower when compared to the current measure; one which will dent the bottom lines of insurance companies. To further add to the burden, the Sindh Revenue Board has withdrawn its earlier exemption and imposed a sales tax on life and health insurance, treating them as ‘services’.

At the ceremony held on Sept 19 by the Pakistan Stock Exchange, Jubilee Life bagged the award of one of the Top 25 Companies for 2014.

For the latest released financial results for the half-year ended June 30, the company wrote gross premium revenue amounting to Rs17.6bn, which was 22pc higher than the premium of Rs14.4bn for the corresponding half year of the previous year.

The combined revenue account of all classes yielded a surplus of Rs1.54bn during the half year, representing growth of 30pc over the same period last year.

The profit after tax for the latest half year amounted to Rs808m, which was 20pc higher than PAT at Rs674m at the same time a year ago. The board of directors have declared an interim cash dividend at Rs3 per share for the year to end on Dec 31.

Khurram Zahid

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