It has been observed throughout the world that insurance contracts are one of the very important contracts in today’s financial and economic setup. It relates to both the business part of the economy as well as to the individual savers. Because of its ability to cater various types of customers efficiently, insurance sector evolved, developed and prospered throughout the world. But due to the presence of some shariah non-compliant elements in conventional insurance, a need was felt to develop a shariah compliant insurance system known as takaful. Pakistan being the late starter of takaful products still witnesses its takaful industry as infant. In this paper we discussed takaful as a theoretical concept. In addition to that we used regression, co-relation and statistical modeling estimates to calculate the demand of insurance in Pakistan. Variables used include premium, GDP, Interest rates, Inflation rate, Saving rate and stock market index.

Introduction

Insurance is a contract whose origins are can be traced back to very olden times. Contracts, known as bottomry, were used by money lenders to shift the burden of risk from owners of ships or cargoes to themselves. The loan was cancelled, if the ship or cargo was lost during a voyage. The charge for the bottomry loan, if the voyage was successful, was very high because it included the amount of interest and cost of risk. The contract of bottomry loan in fact sowed the seed of the insurance idea.

According to extant records, loans in the form of bottomry were known to the merchants of Babylon during 4000-3000 B.C. It is also recorded that bottomry was practiced by the Hindus in 6000 B.C. Even in ancient Europe, the Greeks and the Romans also adopted this commercial practice. Therefore, the origin of insurance is very old and man, somehow or the other, has continued his earnest efforts to tide over all hurdles that came in his way to make his life easy and comfortable.

The history of insurance continues to develop over the years till we reached the present times where insurance is regarded as a very well developed contract with many forms and kinds, operating proudly in 4.061 trillion US$ industry as per 2007 Swiss reports.

Presently we are in a very good position of defining insurance. Insurance can be defined as: “A provision, which the prudent man makes against fortuitous or inevitable contingencies, loss or misfortune.” By Thomas.

Insurance is a way to make an individual’s financial losses more affordable by transferring them to a large group of people through an intermediary called an insurance company and a legal contract called a policy.

Contracts of Insurance are mostly regarded as risk mitigation and risk transfer mechanism whereby individuals and companies shift the responsibility for losses to specialists (insurance companies) who handle this risk by spreading it over a large number of people or firms who face the similar type of risks. This system of protection against loss buds when a number of individuals agree to pay certain sums of money, called premium payments, to create a money-pool. Later this money-pool will be used to pay the losses of the few caused by events such as fire, accident, illness, or death of the breed winner.

With the advent of Islam, the concept of insurance took an Islamic turn which we may call the right turn and Islamic modes of risk mitigation started to evolve. Some scholars justify the starting of a mutual indemnification system i.e. Takaful to Meesaaq e Madina the first constitution and later the system of Zakat and Bait ul mal in which all the members of a society contribute to help those who are not in a position to support themselves.

The word takaful comes from the Arabic root word Kafala, meaning “guarantee”. Takaful therefore is the practice whereby individuals in the community jointly guarantee themselves against loss or damage. For example, individuals can make charitable donations to a common fund from which they may each draw in the event that they suffer loss to their houses or livelihoods. It was first established in the early Islamic era with the purpose of promoting mutual solidarity and co-operation among the Muslim community. In Takaful the elements of riba (interest), maisir (gambling), gharar (uncertainty) are removed from the operations.

Takaful is a system of Islamic insurance based on the principle of Ta’awun (mutual assistance) and Tabarru (voluntary contribution), where the risk is shared collectively by the group. It is operated on the basis of shared responsibility, brotherhood, solidarity and mutual cooperation or assistance, which provides for mutual financial security and assistance to safeguard participants against a defined risk.

Overview of the Insurance sector in Pakistan

Witnessing insurance from the lens of history, the greatest setback for the insurance industry of Pakistan was nationalization since it halted creativity, competitiveness and growth in the industry. Overall fate of the insurance industry came down to one state owned insurance company and this feeling of monopoly hampered the urge to develop and expand in that company which became the fate of the industry. Even after financial liberalization, the state owned company tends to dominate the insurance sector of Pakistan because of the deep outreach, huge customer base, large sales force and low premium products. Despite the demise of nationalization in 1991, insurance sector grew as what can be called mushroom growth whereby small firms both private domestic and foreign, all with limited outreach, less expertise and financial soundness impede the growth of the sector. However the decade starting 2001 showed significant developments in the insurance sector. In 2002, rules for insurance companies were introduced which were amended and improved from time to time. Paid up capital requirement was raised, which reduced the number of insurance companies leaving the most efficient in the industry. This reduction was significantly seen in the non-life insurance sector where 58 companies were operating in 2001 which later reduced to 46 in 2005.

Structure of the Insurance Sector in Pakistan

Asset structure of Insurance sector of Pakistan is depicted in the annexure. Life insurance sector continues to occupy the largest share in the insurance sector though its share continues to decline. Share of state owned insurance companies also declines but domestic life insurance companies showed an increasing trend. General insurance sector continues its growth and reached to a fair figure of 37.3billion rupees. Share of State owned general insurance also showed a decreasing trend but domestic companies performed brilliantly by increasing 57.67% from 2001 to 2007. Foreign general insurance stayed almost at the same level.

The one and only Reinsurance Company in Pakistan which is state owned. Its asset share in overall insurance sector showed moderately variable trend with an average of about 3.23 billion rupees.

Total Assets of the insurance sector showed a very positive sign for the insurance climate. Total Assets increase with a fairly good rate reaching 325.06 billion from a mere 113.41 billion rupees.

Takaful companies a recent player in the industry showed a positive signal by increasing there asset base and aiming to compete with conventional insurance companies in the industry.

Difference between Conventional Insurance and Takaful

Conventional insurance is first considered by Islamic jurists on the request of Muslim merchants who wanted to indemnify there object of trade through marine insurance. Syed Ibn Abdin discussed the essence of Marine insurance and concluded “I see that it is not permitted to any merchant to get indemnity for his damaged property against the payment of a certain sum of money known as insurance premium; because this is a commitment for what should not be committed to”.

Despite Ibn Abdin’s declaration of insurance as unlawful in Islamic Principles, the discussion on Importance and need of insurance continues because it is always considered to be very attractive to merchants and traders because through insurance they could mitigate the voyage risk which was the main risk they face. Oceans and marine travels were not safe enough due to lack of ocean knowledge and the risk of pirates.

This situation continued until 1976, when the First International Conference on Islamic Economics was organized in Makkah. This conference is considered a milestone in the development of Islamic economics. More than 200 economists and jurists from all over the world attended this conference and declared that “The Conference sees that the commercial insurance which is practiced by the commercial insurance companies in this era does not conform to the Shariah principle of cooperation and solidarity because it does not fulfill the Shariah conditions which would make it valid and acceptable”.

Later in 1983, Council of Islamic Ideology, Pakistan also considered the matter and gave its discretion about conventional insurance. They regar