Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss from one entity to another in exchange for a premium. An insurer is a company selling the insurance. The insurance rate is a factor used to determine the amount called premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk has evolved as a discrete field of study and practice.


Insurance appears simultaneously with the appearance of human society. We know of two types of economies in human societies: money economies (with markets, money, financial instruments and so on) and non-money or natural economies (without money, markets, financial instruments and so on). The second type is a more ancient form than the first. In such an economy and community, we can see insurance in the form of people helping each other. For example, if a house burns down, the members of the community help build a new one. Should the same thing happen to one's neighbor, the other neighbors must help. Otherwise, neighbors will not receive help in the future. This type of insurance has survived to the present day in some countries where modern money economy with its financial instruments is not widespread (for example countries in the territory of the former Soviet Union).

The Greeks and Romans introduced the origins of health and life insurance in 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. Before insurance was established in the late 17th century, "friendly societies" existed in England, in which people donated amounts of money to a general sum that could be used for emergencies. Insurance became far more sophisticated in post-Renaissance Europe, and specialized varieties developed.

The first insurance company in the United States underwrote fire insurance and was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Benjamin Franklin helped to popularize and make standard the practice of insurance, particularly against fire in the form of perpetual insurance. In 1752, he founded the Philadelphia Contribution ship for the Insurance of Houses from Loss by Fire. Franklin's company was the first to make contributions toward fire prevention. Not only did his company warn against certain fire hazards, it refused to insure certain buildings where the risk of fire was too great, such as all wooden houses. In the United States, regulation of the insurance industry is highly Balkanized, with primary responsibility assumed by individual state insurance departments. Whereas insurance markets have become centralized nationally and internationally, state insurance commissioners operate individually, though at times in concert through a national insurance commissioners' organization. In recent years, some have called for a dual state and federal regulatory system (commonly referred to as the Optional Federal Charter (OFC)) for insurance similar to that which oversees state banks and national banks.


Pakistan is in the process of reshaping its economy to meet the challenges of a global marketplace. The government has introduced a range of reforms designed to promote and consolidate Pakistan’s position as an emerging market in the region. The changes have resulted in a deregulated and liberalized financial sector marketplace.

Pakistan's life insurance sector, nationalized in 1972, operated under the aegis of the State Life Insurance Corp. and Postal Life Insurance until 1992, when the government opened it to private sector participation. Foreign companies are no longer barred from the life insurance business, but they are restricted to minority ownership. Private companies function in nonlife insurance areas, but the government insurance business is controlled by the National Insurance Corp. One of the state's first steps was to standardize and reduce premium rates and to encourage coverage among a wider segment of the population. In 2001, there was US$$168 million of life insurance written in Pakistan.

Although filing of rates is no longer required, there are, however, separate parts in the Ordinance on Market Conduct & Intermediaries which lay down the duties/responsibilities of Direct Insurance Companies and of Intermediaries. The developments in the regulatory environment in Pakistan are in line with those in the International markets. Compliance with regulations is becoming exceedingly important.


Ibn Abidin (1784-1836) was the first scholar in the Muslim world to discuss the meaning and legal character of insurance Islamicity of insurance has been under discussion since then. Opinions regarding legitimacy, adoption, and adaptability of insurance are numerous. Recently, however, a consensus was emerging for adapting insurance in the name of takaful and solidarity. As a result, several Islamic takaful and solidarity companies have been established since 1979.

A prime purpose of Takaful system and its products is to strike the right chord with Muslim customers who may find conventional products unacceptable and buy them reluctantly. The takaful system and product may be appealing to them.

The global takaful premium was US$ 1.3 bn. in 2002, although this excludes premium in Iran. Including Iran, the figure was US$ 2.1 bn. It is estimated that about 40% of global of global takaful business relates to family takaful. In 2002 there were an estimated 41 companies offering Islamic Insurance (either as takaful companies or through Islamic windows) in some 23 countries around the world. The number of takaful companies more than doubled to 87 companies in just four years (by mid 2006) across 29 countries.

In a new report from Celent, An Overview of Islamic Insurance: The potential for takaful is enormous given that insurance penetration in most Islamic countries does not exceed 1% of gross domestic product. Many of the challenges facing takaful operators are strategic. This market is trying to establish itself. While skills and resources can be borrowed from conventional insurance markets, there is significant investment required creating the business.


The takaful market is still in a formative stage and market projections estimate growth rates between 15% and 20% over the next 10 years, reaching US$7.4 billion in premium by 2015. With challenges around customer service and productivity, technology can enable this growing industry through its formative stage.

Pakistan is among the top 10 most populous nations in the world. This makes it a very fertile market for Takaful, one with some interesting challenges. Takaful is the latest “wave” in financial protection. Pakistan saw its first Takaful operator, in the General side, start in 2006. Since then, another two operators in General and two in Family have entered the picture. Dawood Family Takaful being the most recent entrant is the only Pakistani Owned Takaful Company and is highly capitalized. Takaful is not just another tool for risk mitigation and financial protection. Rather, it is a system which works as a source of good for those that use it and the community at large. Tools like these are critical for developing nations, especially those seeing rapid economic growth. Increasing personal debt, the widening divide between the haves and have-nots, and other such issues regularly plague those in rapidly growing developing nations. Pakistan is one of those countries.

To truly comprehend the opportunities for Takaful in Pakistan, we need to see where the present insurance sector stands and. The best way to understand this by comparing it to another nation which shares many traits with Pakistan. India, a much larger neighbor, has an insurance penetration of 4.8%, against Pakistan’s 0.8%, and its insurance density is US$38.40, against Pakistan’s US$5.90. These values make it very clear that there exists a significant gap in Pakistan for financial protection tools. As we know, achieving expectations is not as easy as formulating them.

There are significant challenges for Takaful in Pakistan.

Education and awareness

Is it because of Shariah issues? Or is it due to the fact that as a nation, Pakistanis are conservative spenders? Given the low GDP per capita, spending on something additional with uncertain benefits is not easy. Or perhaps it is because Pakistanis do not know the benefits of using these tools and that little effort has been made to educate the masses about this aspect of the financial industry. It would be safe to assume that the answer consists of a combination of the above elements. In order to deal with the issues, significant investments will be required to reach out to the public and educate them.

Ambiguity in regulatory statutes

Given how recently the rules were formulated by the Securities and Exchange Commission, a lot of aspects need clarity.

Thin margins

Unlike the insurance companies, the Takaful operators’ primary source of revenue is the Wakala fee. This has relatively little room to maneuver and so they will need to work very hard to ensure that their operations are not just effective but also lean. Thus we see that the challenges are not small by any measure but they can definitely be overcome. If the present and future Takaful operators are not just looking at going after those individuals who are “religion-centric”, they need to look at positioning their offerings in a slightly different manner. The key selling proposition would have to be that Takaful products should be based on the following variables: need-based, appropriate pricing and immaculate customer service. An additional feature would be that the products are Shariah compliant and so, customers need not compromise on their beliefs to be able to get the best in financial protection.

Effectively dealing with the challenges present and properly positioning their offering will allow Takaful operators to achieve levels that even existing insurance companies have thus far been unable to reach.

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