Consumer Protection at the Crux of Takaful Islamic Insurance

Three pioneering insurance supervisors from Ghana, Pakistan and South Africa were asked to share their experience regulating inclusive insurance vis-à-vis the work of the A2ii and the IAIS, around the A2ii, IAIS, CGAP Expert Symposium on proportional regulatory approaches in inclusive insurance markets. The author of this blog, Faraz U. Amjad, is a Joint Director at the Securities and Exchange Commission of Pakistan (SECP).

Mumtaz Bibi is a single mother of four, and a small farmer in the southern part of Pakistan’s Punjab province. In 2010 when Pakistan was hit with a series of devastating floods, Mumtaz, along with many other smallholder farmers, lost her hard-earned assets, mainly her small crops and some livestock.  A few months earlier, Mumtaz and her peers had signed up for a Takaful insurance product that was offered by one of the local microfinance institutions. Takaful insurance is a type of Islamic insurance, where members contribute money into a pooling system to guarantee each other against loss or damage. Upon informing the loan officer about her plight, Mumtaz was told that she could claim on her Takaful product to cover the losses from the flood. According to Mumtaz, she would never have bought the insurance if it was not Takaful due to her religious beliefs, and now she truly realizes the value and proposition of it.

Globally, there is very little take up of insurance among the world’s more than 2 billion Muslims, and this population remains largely unprotected against risk. There is a growing need to design insurance products that meet the needs of these excluded adults to provide better risk protection. Takaful is one possible solution for people who would not otherwise use conventional insurance products, but after 30 years, take up of Takaful worldwide is still relatively low. The greatest potential for Takaful may be in countries with predominantly Muslim populations. However, these countries also tend to be ones with some of the lowest levels of financial literacy. This situation creates a significant challenge for supervisors looking to support inclusive insurance markets in these locations.

Photo: Huma Akram/2012 CGAP Photo Contest

One specific challenge facing providers of Takaful insurance products is around consumer protection. It is important for all lines of insurance, but the need for consumer education, awareness, and protection is magnified for potential Takaful customers because of their low levels of income, low levels of financial literacy, and overall unfamiliarity with formal financial services. This was confirmed by a 2012 diagnostic study into the microinsurance market in Pakistan. The report revealed that the most vulnerable adults were in the low-income market and that a significant portion of these adults have a preference for Takaful products over conventional insurance products. The bottom line is that Takaful has to have simple products with minimum “ifs” and “buts” so that anyone, whatever their income or education level is, can easily understand and purchase it. 

Complicating the consumer protection issue is that Takaful is a cooperative model of insurance. In Pakistan, this approach to insurance may give potential customers pause when they are learning about it because there have been several scandals of racket and deception (see here or here) in other cooperative schemes in the country. Providers of Takaful insurance have to carefully market and explain their product to differentiate it from other fraudulent products.

Another challenge to providing Takaful insurance successfully in Pakistan and other countries is the issue of achieving scale. To encourage conventional insurance companies to offer Takaful products, the SECP introduced the “Takaful Rules” in 2012.  Since June 2014, some of the conventional insurers have started to offer Takaful through the new specialized departments created under these rules. This has helped offer Takaful in additional areas where specialized Takaful-only companies could not have otherwise reached. However, conventional insurance companies may find it difficult to remain compliant with the Shariah elements of 2012 Takaful rules.

Over the last three years in Pakistan, total premiums from Takaful have averaged year over year growth of 55%. Much of this has been possible due to the introduction of the Takaful Rules and the increased focus on consumer education under the microinsurance regulation which is applicable to most Takaful offerings. This includes increased transparency, emphasizing fair practices, simplifying disclosures and creating client recourse mechanism requirements.

With the help of an enabling regulatory environment, Takaful can deliver on the promise of necessary products at the right price.  If the Takaful products are effectively delivered with the highest standards of service, the people who prefer Takaful over conventional insurance will surely consider it as ‘product of choice.'