The growth of takaful over the years has been underwhelming and takaful penetration around the world remains noticeably lower than that of conventional insurance. In a Muslim-majority country like Pakistan, this has resulted in a very sizeable protection gap.
The parametric solution
To help close this gap, Pakistan-based Islamic InsurTech Salaam Takaful has turned to a parametric model and earlier this year launched a parametric-based crop takaful product.
Speaking to Middle East Insurance Review, Salaam Takaful head of specialty and transformation Umair Ismail said one of the reasons it decided to introduce the parametric model was that it would be easier for people to understand compared to an indemnity-based model.
“It is very simple to understand, and we have tested it out with the farmers and the common folks who perhaps don’t have the [greatest] level of education or literacy rates. And even to them it makes sense. So, we felt that this is something we can get deeper into and try and develop products around parametric solutions,” he said.
The company selected crop insurance as its pilot for the parametric model as the agriculture sector makes up a significant part of Pakistan’s economy, with an estimated 35% of the country’s workforce and 20% of its GDP tied to the sector.
It is also in line with the company’s commitment to the United Nations Sustainable Development Goals, particularly on poverty, hunger and food security.
How it works
Salaam Takaful’s parametric solution for crop insurance makes use of a weather-based index to track certain parameters such as rainfall, temperatures, wind and humidity, all of which can reduce crop yields directly or indirectly, as certain conditions can result in pest outbreaks or reduce the effectiveness of pesticides.
When certain parametric triggers are met, the respective claims pay outs are automatically transferred to the policyholder.
The company also provides real-time satellite coverage to all the covered farmers who will get a monetary benefit in case of excessive rainfall and drought, for example, that exceeds a certain threshold without the need for claims documentation.
“Even if they’re within the crop cycle, if there is a certain rainfall level that has been triggered, they do get a pay-out. They don’t need to wait for the crop cycle to end before they can make a claim to the insurance company or takaful operator before getting paid,” he said.
The datasets and satellite imagery the company receives come from a partnership with farm management technology services providers Watersprint and Infarmers.
Potential applications
Mr Umair firmly believes that the parametric model has a crucial role to play in the future of takaful and that it can be applied to a variety of segments given that it is powered by data and information, which are abundantly available in today’s world.
“Parametric technology is being utilised for almost every takaful product in the world. Companies have started to embed and are trying to incorporate parametric into products which are being offered to increase accuracy and eliminate human error, especially at the time of processing claims,” he said. “These developments will help in the penetration of takaful products and their acceptability among customers.”
Beyond agriculture, Salaam Takaful is also working with an international InsurTech to launch flight disruption coverage on a parametric basis.
“The travel industry has significantly geared itself with technology,” he said. “There’s a lot of data and insights now that are available which can be worked on and leveraged to develop a parametric solution. So that’s an area we feel is a low hanging fruit – we can move into that area faster and provide coverage there.”
Energy is also a segment that he feels is ripe for the development of parametric takaful, with the company now evaluating potential pilots that it could develop in that area. He brought up how there is currently a lot of activity around solar panels in Pakistan, both in rural and urban areas.
“There are many households which are now transitioning to using solar electricity. That’s an area which is still in its infancy, but I see that it has a lot of potential for the use of a parametric model based on energy efficiency or availability of sunlight, or even for full home coverage on a parametric basis,” he said.
Another area that could benefit from the parametric model is disaster takaful coverage. Mr Umair, however, conceded that while the technology exists for such a product to be developed, some form of government scheme or disaster management programme would be required to create a large enough pool.
Improving takaful penetration
One of the main benefits of the parametric model is how simple it is to understand – a customer knows exactly when they will receive a pay-out – and this simplicity could go a long way in improving the take-up of takaful.
“At times, the feedback from the farmers and the customers is that it’s a very complicated product. ‘How will I even get a claim? There’s so much fine print’. We hear this sort of feedback not just in Pakistan, but all around the world. And I think that’s where parametric comes into play in terms of providing a simpler solution that leverages technology and is accessible across multiple geographies and regions,” said Mr Umair.
At the same time, he also believes that takaful operators need to reassess what they are doing and make sure their products and services are targeted towards solving common problems.
“My personal view on what has happened with the takaful industry is that we have simply emulated what the conventional insurers are doing. If they were offering a certain product, we just went in and replicated that product and we started offering it to the same customers who have been using conventional insurance,” he said.
“Now, if you look at the conventional insurance market share, obviously when you are coming in, competing with them, you will only be able to get a fraction of that market share because you are just going after the same set of customers.”
He said the industry needs to realign itself with the fundamentals of takaful – to create shariah-compliant products centred on brotherhood, solidarity and helping one another out – and focus on innovating and developing products for the communities and common man rather than the industrial or corporate customer, for whom such concepts are a secondary concern. M