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Insurance sector needs conducive working environment

In real life every individual and corporate entity faces certain risks. It may be true that such risk may become eventuality, but the adverse impact can be certainly minimized through risk mitigation. Insurance companies, both conventional and Takaful operators help individuals and corporates in risk mitigation. Pakistan faces one of the lowest insurance penetrations. Those who were able to evade conventional insurance in the past are left with no reason to reject Takaful. To achieve greater penetration of insurance there is a need to change the mind set of policy planners, regulators as well as individuals.

The sector that needs immediate attention of the government is agriculture. Nearly 65% of country’s population is involved in agriculture. Over the years the Government of Pakistan has been aiming at achieving ‘food security’, which has enabled the country to join the club of wheat exporting countries. Other important crops are rice, sugarcane and cotton. For the current financial year State Bank of Pakistan (SBP) has set an indicative lending target of one trillion rupees for the agriculture sector. The amount to be lent has to be secured. At present banks are securing the amount lent to farmers through credit insurance. Experts say the time has come to introduce crop insurance.

Pakistan produces around 25 million tons wheat annually, which is worth more than Rs7.5 trillion. The country suffers from two contentious problems: 1) below global average yield and 2) high postharvest losses. The average yield can be improved substantially through better crop management. This includes buying certified quality seed, applying right mix of fertilizers, spraying pesticides and watering crop timely. For acquiring all these inputs, farmers need money. The lending to farmers has remained paltry because most of the farmers don’t have land tile, which belongs to absentee land lords. Bulk of the amount borrowed by feudal lords is spent on buying expensive cars and urban properties.

According to experts nearly 15% of the total wheatproduced in the country goes stale before reaching the market. To contain this modern grain storage silos have to be constructed in wheat growing areas. SBP offers 60% financing for the construction of civil structure under development loans, which can also be secured through insurance of the infrastructure and wheat stored in the silos. If the quantity going stale can be reduced two immediate objectives will be achieved by increase in the income of farmers and boost in export proceeds through export of exportable surplus.

Yet another area needing immediate attention of the policy planners is ‘health insurance’. The country has over 200 million population. The annual budgetary allocations made by the federal and provincial governments are too paltry and just could not take care of the population. As per international practice this could be done through health insurance. Corporate sector has been able to offer superior quality healthcare facility through health insurance. The facility can also be offered to government employees and employees of state-owned enterprises like PIA, Pakistan Railways and Pakistan Steel Mills, running into thousands.


To enable the insurance companies to expand the outreach for offering quality services, their financial health has to be improved. To improve their claim payment ability following measures can be taken: 1) make listing of Takaful companies mandatory at Pakistan Stock Exchange, 2) exempt insurance companies (conventional as well as Takaful) from payment of capital gains made in the capital market 3) increase minimum paid-up capital of insurance in consultation with Insurance Association of Pakistan and 4) bust the den of fake insurance companies issuing ‘Act Only’ insurance policies. The GoP must announce exemption of insurance companies from payment of capital gains tax in the forthcoming budget.

It is necessary to reiterate that insurance companies play two major roles: 1) they are the largest institutional investor in the capital market and 2) they play the most important role of risk mitigation. To achieve the target of strengthening insurance companies there is a need for an autonomous regulatory authority. According to some insiders, at present insurance companies are being regulated by Ministry of Commerce as well as Securities & Exchange Commission of Pakistan (SECP).

Two of the state-owned insurance entities, State Life Insurance Corporation of Pakistan (SLIC) and National Insurance Company Limited (NICL) have not been listed at the local bourse. One completely fails to understand the logic behind not listing these two entities at the local stock exchange, as many of the state-owned enterprises are listed at the local bourse.

There is a need to reinvigorate Pakistan Reinsurance Company (PRC). It is Pakistan’s only reinsurance company but due to its inadequacies insurers have to approach foreign companies, which is a burden on country’s paltry foreign exchange reserves. It is necessary to reiterate that most of the floors of PRC Building located near PNSC Building have remained unoccupied for years. Some critics say that PRC performance can be improved manifold, if the government appoints a proactive Board of Directors. Often many of the positions remain vacant for months.

To ensure that insurance companies play their desired role, there is an urgent need for establishing Pakistan Insurance Regulatory Authority (PIRA). This is in no way to undermine the working of SECP as regulator of insurance sector, but following the rule that a sector specific authority is required for each sector. The authorities already operating in the country include PTA, PEMRA, NEPRA and OGRA.

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