The Insurance Sector
A PAGE survey of the new Insurance Policy
By Syed M. Aslam
Sep 18 - 24, 2000
Insurance leaves no part of our lives untouched today in ways only some of which are visible — it is one of the legality to own and operate a motor vehicle. Being an integral expense of all imports — be it finished or semi-finished goods, raw materials, edibles, commodities, etc., etc., it is an in-built part of price of almost everything the ultimate cost of which is borne by the end users.
Despite its immense presence at every level of economy; be it industrial, commercial or individual, insurance still much remains an involuntary expense in Pakistan considered good only if necessitated by the law. The prime example can that be of Motor insurance — less than 5 per cent of some 4 million vehicles of all sorts plying the roads nationwide have comprehensive insurance covers while the rest opt to carry useless Third-Party cover just to fulfil a legality providing no protection whatsoever to the victims of road accidents.
This attitude has taken a heavy toll on the insurance business in Pakistan where only the buyers of new cars chose to buy comprehensive insurance and that too for the first few years; where only a small percentage of the population care to buy life insurance; where buying fire insurance to protect property and assets, personal as well as industrial , is seen as an unwelcome expense. It has also resulted in a general preference on the part of the industry not to renew the insurance policies on plant and machinery once they are just a few years old. Insurance is usually the first casualty when it comes to cutting expenses by an industry, business and trade. It doesn't command any better respect from individuals be it life, auto or else. Despite the deteriorating law and order situation the volume of household insurance remains much negligible — not even 1 per cent of the people choose to buy this particular cover.
The Insurance Ordinance 2000 was promulgated last month. The primary objective of the Ordinance is to better regulate the business, ensure better protection and interests of the policy holders and promote sound development of the insurance industry. The salient features of the Ordinance include phased increase in the paid up capital of the life insurance companies to Rs 150 million and Rs 80 million for the non-life companies by December 31, 2004. The Solvency Margin has also been increased from Rs 500,000 in the Insurance Act 1938 to a minimum of Rs 5 million over liabilities or assets of an individual non-life company. In addition every life company has to keep at least Rs 10 million as statutory deposit with the central bank, the State Bank of Pakistan, compared to Rs 3.5 million previously.
The Insurance business will now be regulated by the Securities and Exchange Commission of Pakistan and not by the Ministry of Commerce through the Department of Controller of Insurance as in the past. However, the policy making powers would still remain with the Ministry.
The Ordinance has tried to address the concerns of the insurees amid increasing complaints about the payment of claims. A number of venues would now be available to the insurees to redress their complaints through the establishment of Tribunal and creation of a Commission, office of Insurance Ombudsman and Small Disputes Resolution Committee. The Tribunal, established for the first time in Pakistan to deal exclusively with matters pertaining to insurance, will have a civil jurisdiction in case of a claim filed by a policy holder against an insurance company. The Tribunal will also exercise criminal jurisdiction having the power to try the offences punishable under the Ordinance and have the same powers as vested under the Code of Civil Procedure.
The Ordinance has also laid down a well-defined criteria for the recruitment of insurance agents, brokers, surveyors, to encourage professionalism within the industry to better protect the interests of the insurees.
Perhaps the most important aspect of the Ordinance is the changing of the status of the PIC and NIC from that of Corporations to Company. In simple language it means that this will turn both these state-owned corporations into companies like any others as per the Companies Ordinance, at least in theory. The PIC will be rechristened as Pakistan Reinsurance Company while NIC will be National Insurance Company — not Corporations as previously. However, before discussing the impact that the new Ordinance would have on the insurance industry it is imperative here to take a look at the Pakistani insurance industry.
The insurance industry of Pakistan comprises of some five dozen companies — both life and general, local and foreign. There are 55 private general insurance companies — 49 local and 6 foreign and 5 life insurers — the state-owned State Life Insurance Corporation (SLIC) and 4 private companies, two local and two foreign. In addition, there are Pakistan Insurance Corporation and National Insurance Corporation — the former primarily functioning as a sole reinsurance company to which all insurance companies in the country have to cede 20 per cent compulsory cession plus 35 per cent of the voluntary cession while the latter insures all government assets and properties. Both PIC and NIC enjoy a complete monopoly in their respective fields — the former enjoying the statutory cession from the insurance companies and the latter having no fear of competition from the private sector to enjoy the immense captive business.
Like many other industries, the life insurance business was nationalised in the early 1970s though the general insurance business was left untouched. In the early 1990s the life business was deregulated and today four private life insurance companies, two local and two foreign, are competing with the state-owned SLIC which enjoys an envious edge made possible primarily due to the monopoly it enjoyed for almost two decades.
Though non-life business was left untouched by the nationalisation policy in the 1970s the fact is the private sector till today has no role to play whatsoever as NIC has all along been the sole insurer to enjoy its captive business of governmental properties and assets. This has left this vast amount of business out of reach for the private general insurers, a point which it does not fail to mention at any given opportunity. The private insurance sector has become increasingly vocal about the 20 per cent compulsory cession and 35 per cent as voluntary cession to the PIC saying that it is unjust that PIC has been allowed to generate easy revenue without really working for it. It has also called the arrangement which benefits PIC at the cost of the insurers who have to put in an immense amount of time, money and leg work to secure the business to pay for a reinsurance arrangement which reeks of unprofessionalism.
The gross direct premium written by the members of Insurance Association of Pakistan, the representative body of over 50 general insurers, has increased by almost 50 per cent from Rs 6.15 billion to Rs 9.18 billion in 1999, sources told PAGE.
The overall growth in the business over the years is lead primarily by a motor insurance despite sluggish economy and industrial stagnation in the other two classes — fire and marine.
A huge 90 per cent of the business is a dozen general insurance companies
Talking to PAGE the Chairman of Standing Committee on Insurance of the Federation of Pakistan Chambers of Commerce and Industry, Humayun Sayeed, expressed a number of concerns about the Ordinance. Number one, he said, it would not to change the current status of the PIC and NIC except the change of names by adding a 're' prefix to the former and Companies instead of corporation for the both. The same is the case with state-owned State Life Insurance which enjoys a whopping 95 per cent of all life business in Pakistan, he added.
Despite the change in their names PIC and NIC will keep enjoying monopoly in their respective work at the expense and inconvenience of the private insurance companies. For instance, the general insurance companies in the private sector would keep on paying 20 per cent compulsory as well as keep offering 35 per cent of the voluntary cession to the PIC to enjoy a captive business without investing any amount of money, energy or leg work.
The monopoly of the PIC has not only been left intact but it has been given such added powers to impose upto Rs 10,000 fines and an additional Rs 1000 a day penalty on the insurance companies for non-compliance of orders.
This has been done contrary to the recommendation of the Asian Development Bank which called for the phased elimination of the compulsory as well voluntary cession. The Bank had recommended that the compulsory cession imposed by section 26 of the Pakistan Insurance Corporation Act 1952 was contrary to the principles of prudential supervision in insurance. It had based its recommendation at the concerns regarding the lack of credible technical engagement on this issue. The Bank has expressed concerns that despite its concerns the compulsory cession has been preserved in the new Ordinance.
The vice chairman of the FPCCI standing committee on Insurance, M.I. Ansari, said that despite the change of name the PIC has been given additional powers to impose penalty on the insurance companies on this or that pretext. The PIC and NIC would keep on enjoying the privileges at the expense of the insurance industry which will remain deprived of the level playing field despite the semblance of change that the work 'company' implies.
He further said that while the insurance companies are made much more answerable to the insurees vide Tribunal, Commission, Insurance Ombudsman, and Small Disputes Claims Court the PIC has been left unanswerable to the insurance companies despite getting 20 per cent compulsory and 35 per cent voluntary cession. This is all the more disturbing as PIC is not known to fulfil its financial commitments when approached by the insurance companies to pay insurance claims. While the insurance companies are made more answerable to the insurees, the failure of PIC to honour its commitments as the major national reinsurance company i.e. the prime insurer's insurer has regrettably failed to draw the attention of the Ordinance. If an insurance company fails to pay the claims it is primarily due to the fact that despite enjoying the massive business it has developed the habit of not paying the claims on one pretext or the other, he added.
Both Humayun and Ansari demanded the deregulation of PIC and NIC at the earliest to encourage and promote insurance industry on solid professional lines. This is also necessary to bring real competition in the insurance industry by helping the insurance agencies to make their reinsurance arrangements on purely commercial lines and let the private general and life insurers make forays in corporate sectors which thus far have been denied to them. It is imperative to privatise PIC, NIC and SLIC at the earliest for the benefit of the industry as well as the insurees. The privatisation will also help check the much rampant practice of undercutting in the industry by stabilising the insurance rates in a market which have many players but only a limited number of buyers, he added.
Will the tremendous increase in minimum paid-up capital limit would result in mergers and acquisitions? Humanyun said that this would not be case as Pakistan is not a market of mergers and acquisitions. However, he expressed fears that it would result in closures of operations by as many as 20 general insurance companies by January next year to further aggravate an already worsening unemployment situation within the country. The foreign companies enjoying the financial backing and technical expertise of their principals would the real beneficiary of the ordinance to gain a leading edge over their local counterparts in next few years as the new Ordinance no more allows insurance risks to be insured in Pakistan, at least at governmental levels and the surface it seems for the benefit of foreign companies, he added.
Humayun was also critical about the statutory deposit to the State Bank of Pakistan which would deprive the smaller companies the level playing field. Asking the small companies to make a statutory deposit with the State Bank at par with the big companies is unfair as it put enormous financial pressure on them unlike a handful of big companies. A better approach would have been allowing all the companies irrespective of their sizes to deposit a certain affordable percentage of the gross premiums with the State Bank.
This has been done in India where recently the government has allowed the non-life and life companies to deposit 3 and 1 per cent of their gross premiums respectively with the Central Bank till it reaches Rs 100 million. Without touching the paid-up capital or solvency margin the Indian government allowed both the life and non-life companies to enhance the required statutory deposit with the central bank in a way which was far for all the players irrespective of their size. Asking both the small and big companies to enhance statutory deposit with the State Bank in the Ordinance is discriminatory as enhancing the statutory deposit would pose immense financial problems for a great number of small companies, he added.
While its true that years of neglect, low savings rate and non-conducive business environment over the years have been some of the major factors detrimental to the insurance business, there are also those who feel that the high tariff rates have also taken a heavy toll on the insurance business. Humayun agreed that insurance tariffs are slightly higher than the international rates in Pakistan. He said that the new Ordinance does not mention anything about the tariff implying that the traditional tariff rates would no more be applicable and that each company would now be allowed to fix its own tariff pertaining to its particular business to encourage a free market business. However, he added that this will not happen immediately and the tariffs will be phased out over a period of time.
Humayun and Ansari expressed concerns that the new law is over-regulated particularly as the Securities Exchange Commission of Pakistan has been vested with the power to frame the rules and regulations. As the rules and regulations are yet not made the new law could not be discussed in its totality thus giving too much of discretionary powers to the SECP.
Secondly, while the insureds have been provided with four avenues to seek redressal of their grievances against an insurance company which has not been provided with any such forum except going to the court of law. Similarly, while previously the Tribunal was for the insurer to go for any complaint against the decision of the competent authority now it will be hearing the cases against the insurers on complaints lodged by the insureds.
Thirdly, the creation of the office of Insurance Ombudsman would be unable to serve the desired purpose since Ombudsman, a judge, would have to report to the SECP making the whole process of little practical use.
For the first time the insureds have been provided with four different venues to address their complaints pertaining to any dispute with the insurance companies. The phased increase in the paid-up capital in phases — Rs 100 million by December 21,2002 and Rs 150 million by December 31, 2004 for life companies and Rs 50 million by December 31, 2002 and Rs 80 million by December 31,2004 by the non-life companies would help strengthen the foundation of the local insurance industry. It will also help better protect the interests and safety of the insured by allowing only the financially fit companies to operate the delicate insurance business.
However, given the present scenario where the majority of the companies have to enhance their paid-up capital, solvency margin and statutory deposit to the SBP and the fact that most of the local companies would have a hard time to meet these requirements it may be proposed that the policy makers should remain open to any and all suggestions from the industry to solve the issues to their satisfaction.
The change of names by replacing the word 'Corporation' with the word 'Company' — as is the case with PIC, NIC and SLIC — and the addition of prefix 'Re' before 'Insurance' in the case of PIC, alone would not help create a level playing field. It is imperative that measures should be taken to reorganise the PIC and NIC on solid professional lines to help retain the flow of reinsurance dollars to foreign companies on one hand and to better protect the interests of the insureds on the other by ensuring prompt payment of claims to the insurance companies. The similar should be the strategy for the NIC the sole insurer of government assets and properties for the utmost benefit of the exchequers. Failure to revamp PIC, NIC and SLIC, the state-owned life insurance company enjoying the unfair benefit and massive lead over the private competitors and holding the insurance policies of millions would be in the overall benefit of the Pakistani insurance industry.
A Brief History of Insurance
From the early days of civilisation men have formed societies whose members promised to help each other in the event of a misfortune. As early as 900 BC, the merchants of the Rhodes Island in the Mediterranean agreed to share certain risks among themselves.
The modern concept of insurance — where insurers collect small premiums from their policy holders, pay claims to those of them who had incurred losses and make a profit for taking the risks after deducting business expenses — dates back to as early as thirteenth century.
Life insurance dates back to as early as 1500s while fire insurance as early as second half of 1600s while the concept of Accident insurance was developed in Britain when in 1840, the Guarantee Society was formed to insure employers against embezzlement by their employees. The British became the principal marine insurers when Sir Thomas Gresham established the Royal Exchange in London in 1570 to transact the marine insurance. With the invention of automobile early this century a new clause 'Motor' was developed by the insurance industry to provide insurance cover for automobiles which included such other clauses as accidental insurance.
From its modest beginning in a 17th century coffee-house in London Lloyd's today is the world's leading insurance market. Although an insurance market, Lloyd's is not an insurance company which produce global results and an annual report. Lloyd's also operates under certain conditions in the USA.
Lloyd's market is a unique service provider — though not a company it offers a competitive insurance market in which over 130 businesses both compete and cooperate. This combination of choice, information, experience and expertise under one roof enables Lloyd's to provide expert opinion of leading underwriters for many speciality classes of business including such diverse coverages as marine, aviation, catastrophy cover and professional indemnity.
Commonly used insurance terms
A mathematician who makes calculations of probability, particularly in life insurance
An expert employed to settle claims
Compensation for a loss
In case of big insurance the insurance companies decide not to risk too much money on a single policy. By Reinsuring the loss it passes on the risk by placing some of its insurances to a reinsurer. There are companies which sell only reinsurance cover to the insurance companies
Someone other than the insured or the insurer, such as an injured person, making a claim
The person who considers proposals for insurance whether or not to grant the insurance and the terms on which it may be granted.