Pakistan’s insurance sector is set for a boost in competition which could help spread the uptake of insurance after the industry regulator allowed conventional firms to offer sharia-compliant products (takaful) earlier this year.

The regulator, the Securities and Exchange Commission of Pakistan (SECP), has now granted two takaful licenses and has up to 10 applications currently being finalised, said Faraz Uddin Amjad, Joint Director of the SECP’s insurance division.

“In another one year we are expecting 20 to 25 new takaful window operators in the market. Competition will increase, but also the size of the market,” Amjad said on the sidelines of an industry conference.

Pakistan introduced new takaful rules in 2012, allowing the use of takaful windows, which enables insurers to offer sharia-compliant and conventional products side by side, provided client money is segregated.

This prompted a legal challenge by the country’s five full-fledged takaful firms claiming the rules gave conventional insurers an unfair advantage, with the legal dispute finally being resolved in May of this year.

The regulator expects at least half of Pakistan’s 50 conventional insurers will eventually offer takaful products.

Takaful is seen as a bellwether of consumer appetite for Islamic finance products. It is based on the concept of mutuality: The takaful company oversees a pool of funds contributed by all policyholders, and from which claims are paid.

Pakistan’s conventional insurers have been barred from offering Islamic products since the first takaful rules were introduced in 2005, but regulators have been keen to increase overall insurance coverage in the country.

Insurance penetration, measured as total premiums to gross domestic product, has hovered at 0.7 percent of GDP for the last decade and now stands at 0.9 percent of GDP, Amjad said.

This ranks as the third-lowest level in Asia, against 4.1 percent of GDP for India, a report by Swiss Re said.

Takaful has contributed marginally, the sector represents about five percent of the total insurance market, although this is expected to change in the coming year.

“At least in the first year (2015) it should go into double digits. On price and service I think it will have a lot of impact,” Amjad said.

United Insurance Company of Pakistan has said it plans to enter the takaful market. EFU Group, Pakistan’s largest insurer, plans takaful windows for both its life and general businesses .

Conventional insurers are bigger in size and have operated for longer, whereas takaful companies are on average five to six years old, but sharia compliant products can have greater appeal to consumers, Amjad said.

“The conventional ones have a bigger branch network, more outreach, more assets – because of that they would be able to provide the products to a larger part of the population.

“Individuals would, of course, care about price and service, but they would be more concerned about the religious ethos.”

The regulator sees greater opportunity in life insurance although commercial lines of business could also find appeal in rural markets where the demand for products like crop, agricultural, livestock insurance is increasing, said Amjad.

Such an increase in activity could face challenges, in particular a lack of experienced staff as well as the need for Islamic re-insurance products to help manage excess risk.

“The risk which I see is capacity risk, both at insurer level and the regulatory level, technical capacity, human capacity.”

Conventional insurers must allocate 50 million rupees ($506,000) in capital to their window operations, a requirement that was not in the original rules introduced in 2012. (Reporting by Al-Zaquan Amer Hamzah and Bernardo Vizcaino; Editing by Eric Meijer)