SURVIVING IN THE INSURANCE BUSINESS
Insurance today permeates all economic activity the indirect cost of which is shared by end-users of all types of goods and services although many remain unaware of the built-in cost.
By Syed M. Aslam
Dec 07 - 13, 1996
The trans-global movement of all marine and air cargo requires mandatory marine and flight insurance, that of goods kept in sheds at air and seaports, transportation of goods from one point to another within the same country or from one country to another, cash in the till or cash or valuables in safe, the fire coverage of properties and the contents within, the cash or valuables in transit, the health and the life insurance, insurance of all types of vehicles, and also such insurance against unemployment or that of certain bodypart just proves the importance of insurance in all human activities.
Newspapers everyday are splashed with accidents that result in loss of lives and mega financial losses. Fires, midair collision of planes clashes, road accidents, dacoities, thefts, snatchings, etc., have become a routine part of life---incidents which are related to insurance in one way or other.
Malpractice insurance coverage has become a fact of life for professionals in the medical field in the developed countries of the world. Insurance has permeated into all phases of human activity whether one relaises it or not.
While the mortals could not prevent mishaps, the financial consequences of loss, be it physical or financial, can be alleviated through insurance as insurance in simple terms means sharing of the loss of the few by many.
The socio-economic changes in addition to the deregulation, liberlisation, and privitisation programmes introduced in Pakistan during the last few years have opened up a whole new vista for the insurance industry as a number of new insurance companies have entered into insurance business in the country.
Insurance could be divided into two basic categories; life and non-life which is also called general insurance.
Life insurance provides financial protection to the dependents of the bread winner while non-life insurance covers material posessed and used by a person for his personal comfort and well-being.
With the deregulation of life insurance since early '90s at present there are four private life insurance companies working in the country besides the state owned State Life Insurance Corporation (SLIC) which enjoyed complete monopoly since 1972.
History of insurance in Pakistan
At the time of Independence in 1947 Pakistan inherited a total of 5 indigenous insurance companies and 77 foreign companies. The bulk of business thus remained with the latter till 1952.
Pakistan Insurance Corporation (PIC) was established under Pakistan Insurance Act 1952. Initially, 10 per cent of all business was to be ceded to PIC but the obligatory cession was increased to 30 per cent in 1958. It was reduced to 20 per cent as of January 1, '93. Under the Compulsory Reinsurance Act 1976 all insurers were made to cede 25 per cent of the remaining 70 per cent to PIC which was increased to 35 per cent as of January 1, '93.
In 1955 National Coinsurance Scheme (NCS), a pool of Pakistani insurers, was sponsored to help smaller local companies grow and to retain profits within the country and to present effective and powerful competition to foreign insurers, with PIC as Secretaries. This helped local companies to grow both in terms of numbers and financial and business progress. The total number of foreign companies declined to 25 in 1971 from 77 in 1947 while the premia under NCS increased from Rs 600,000 to Rs 290 million during the same period.
In 1972, as per the nationalisation policy of the government, life insurance was nationalised by establishing State Life Insurance Corporation allowing the private sector to handle only non-life business. Life fund in '72 stood at Rs 1.3 billion and annual receipts at Rs 337 million while total number of ordinary life policies enforced stood at 357,413. Life fund and annual receipts increased to Rs 23.7 billion and Rs 4.88 billion respectively while investments stood at Rs 23 billion, total business enforced at Rs 208.5 billion while the total number of ordinary life policies enforced stood at 1.6 million in 1992. Group policies were over 5 million.
Similarly, in July 1973 the NCS was converted into National Insurance Fund and finally to National Insurance Corporation (NIC) in 1976 to underwrite the property and interest of public sector only.
The new private entrants comprise two local companies, EFU Life and Metropolitan Insurance and two foreign companies American Life Insurance Company (ALICO) and Commercial Union (CU).
EFU Life, the biggest life insurer in the private sector started underwriting group life business in December '92 and started underwriting individual life business in March '94. In '95, which was the first full year of both group and individual life business, EFU Life sustained a loss of Rs 11.7 million compared to Rs 8.4 million the previous year. The chairman of the company shrugged the loss saying that "life insurane is long-term in nature and needs a few years to stabilise before substantial profits could be made", and that "the loss represents new business strains and the initial cost of setting up a field office."
In '95 EFU wrote group premia of Rs 75.7 million which represented 455 policies and over 200,000 lives insured while the gross claims incurred were Rs 38.5 million. Individual life new business in '95 amounted to Rs 37.1 million.
The life fund of EFU increased from Rs 24.9 million in '94 to Rs 42.5 million in '95 which represented a growth of over 70 per cent.
During the first six months of this year EFU's group life business increased by 65 per cent to Rs 45.8 million from Rs 27.8 million during the comparative period in '94. The individual life business increased by 45 per cent to Rs 20.8 million from Rs 14.3 per cent during the same period. The loss decreased from 4.6 million to Rs 1.8 million.
Metropolitan Life Assurance Company of Pakistan is a local life insurer which commenced operations on February 22, 1993.
In '95 Metropolitan registred a total premium earning of over Rs 40 million including at least 25 per cent in renewal premium for 2nd and 3rd years. It sold 11, 319 number of policies compared to 6,683 in '94 while the total number of policies enforced by end '95 were in excess of 20,000.
American Life Insurance Company (ALICO), a foreign company, started operations on May 25, 1995. During the first seven months of operations in '95 Alico's premium income amounted to Rs 2.6 million as at December 31, 95. The company has claimed that it achieved a premium income of Rs 2.8 million during the first six weeks of '96 which exceeded the total premia for 7 months in '95. It suffered a loss of Rs 9.6 million in '95.
The fourth private sector life insurer, Commercial Union (CU) of UK only commenced operations four months ago in July '96. In May this year CU Life Assurance offered Rs 100 million shares to the general public. CU is the biggest foreign general insurer in Pakistan.
While New Jubilee Insurance has also been granted permission to underwrite life business, the company has not yet start operating.
Due to acute competition from the state-owned SLIC in addition to the fact that these are the initial years the performance of EFU, Alico, and Metropolitan life in '95 was comparatively small. EFU suffered, as mentioned above, a loss of Rs 11.7 million, Alico a loss of Rs 9.59 million, and Metropolitan Life a loss of Rs 3.5 million.
SLIC's '94 accounts shows a spectacular performance; life funds rose to Rs 33.5 billion, annual receipts to Rs 10 billion, investment to Rs 32.5 billion, total enforced business increased to Rs 379.6 billion, and the total number of ordinary life stood at 1.782 million.
While SLIC has yet to publish its annual report for '95 the former chairman to claiming in Januray this year that the state-owned corporation crossed the Rs 2 billion new business mark in '95 which reflected a 100 per cent increase over Rs 1.17 billion in the previous year.
He claimed that the total income of SLIC increased to Rs 12.5 billion in '95 compared to Rs 10 billion in '95.
International business, he also claimed, increased by 42 per cent to Rs 46.9 million in '95 compared to Rs 32.8 million in '94 including a mammoth 392 per cent increase in Saudi Arabia and 23 per cent increase in UAE in spite of competition from the multinational companies in these countries.
The total premium from group insurance totalled Rs 1.18 billion which represented a 6.5 per cent increase over '94, he had said.
Insurance sources talking to PAGE put the demand for new life policies in the country at 500,000, 60 per cent or some 300,000 of which has been already captured by the SLIC, said that life insurers in the private sector can share the rest of the 200,000 policies.
By end '94, SLIC had a renewal premium of Rs 3 billion, a total number of policies in force of around 2 million, and 500 offices nationwide.
The new life insurers are fully aware of the formidable competition they have to face from SLIC, the total number of policies in force of which in '95 stood at 2 million.
They have realised that only quality service and products would enable them to grow and expand marketing operations.
Besides the competition from SLIC, they also seem to be worried about the economic conditions of the country--- chairman of Metropolitan Life in Annual Report '95 said while Pakistan, with a huge population of over 120 million is an attractive market, the low income level of an average household and the majority of population living below poverty level with high illiteracy rate make it tough for our business.
Highlighting the company's marketing strategy he added that it would comprise low-cost and high-benefit programmes to suit investment as well as life assurance needs of the insurees whatever their income level may be.
While the local life companies are targeting the domestic public and private companies the foreign life insurers with a proven track record of foreign parent companies enjoy a clear edge over their local counterparts as they are better positioned to woo lucrative business from multinationals operating in Pakistan.
The foreign insurers also benefit from the general psyche which tend to view a foreign name as more dependable and trustworthy.
While the idea of free-markets has been promoted as a cureall for all economic ills, high placed isnurance sources expressed concern that allowing easy access to foreign life insurance to do business in Pakistan is more risky than beneficial.
For instance, there is no guarantee that in case of failure the insurer's well being would not be affected. In addition there are concerns that foreign insurers could repatriate their funds in foreign exchange. And the simple fact that while a national company would not only reinvest its profits into the national economy to generate more funds but would also ensure that no flight of capital out of the country takes place.
Nevertheless, with a population of over 120 million Pakistan is an attractive market for life insurers no matter how severe the competition the SLIC offers to the new entrants in this field. The huge population offers huge potential to be systematically explored by the new entrants by offering new products to woo the prospective insurees in spite of the fact that a low average household income in addition to low rate of savings seems to make it not an easy task.
The total number of general insurers operating in Pakistan at present is 60, including eight foreign companies besides the state-owned National Insurance Corporation (NIC) which is responsible for underwriting general business of the public sector, and the Pakistan Insurance Corporation (PIC) which is mainly looking after the reinsurance business of the local companies.
The total gross non-life premia of both the nationalised and the private sector insurers in '95 accumulated to over Rs 10.6 billion which represented a record growth. The gross premium of PIC was Rs 2.207 billion and that of NIC Rs 1.663 billion. The two state-owned corporations earned profits of Rs 136.2 million and Rs 109 million respectively.
According to the representative body of general insurers, Insurance Association of Pakistan (IAP) the gross direct premium written by its members crossed the Rs 6.15 billion mark for the first time in 1995, denoting a 14.38 increase over Rs 5.37 billion in the previous year.
The total gross direct premium of Rs 6.15 billion written by general insurers in '95 comprised Rs 1.966 billion in Fire, Rs 1.916 billion in Motor and Workmen's Compensation, and Rs 1.210 billion in Marine which added up to total business tariff of Rs 5.093 billion while the rest of Rs 1.057 billion was in non-tariff business.
Thus, of the three tariff businesses Fire accounted for 32 per cent, Motor and Workmen's Compensation a close second at 31 per cent, Marine about 20 per cent while the share of non-tariff business accounted for the rest of the 17 per cent of the total gross premium fo Rs 6.15 billion.
This shows the resilience of general insurers to remain aware to challenges as the volume of gross direct premium declined by 3 per cent to Rs 5.29 billion in '94 compared to Rs 5.46 in '93.
The general insurers wrote total gross direct premium of Rs 6.825 billion in '95 of which the highest Rs 2.4 billion was written by Adamjee followed by EFU Rs 1.2 Billion, East West Rs 400 million, New Jubilee Rs 350 million, and Premier Rs 280 million.
Commercial Union and National Insurance of New Zealand which is also handled by the former jointly wrote Rs 324 million and topped the foreign companies followed by Royal Exchange Rs 153 million, and New Hampshire Rs 99 million.
The combined gross direct premium income of local plus foreign companies has also increased by 65 per cent from Rs 4.14 billion in 1990 to Rs 6.825 billion in '95.
While 52 general insurers are local, the eight foreign companies comprise Royal Insurance which also has registration for Phoenix Insurance, Royal Exchange which also operates Guardian Insurance, Commercial Union which has registration to do underwriting for National Insurance Company of New Zealand, Cigna Insurance, and the New Hampshire.
The private sector in general also performed well profit-wise.
Adamjee, the biggest general insurer, declared a dividend of 60 per cent, EFU 40 per cent, New Jubilee 30 per cent, Premier 22.5 per cent, Central 50 per cent, International 30 per cent, Habib 30 per cent, and Century 40 per cent.
The IAP has been much vocal that the insurance laws have become outdated and need urgent revision to solve such issues as tax on capital gains earned by the general insurers, that the rates on dividend income be charged at the reduced rate at par with other public limited companies, and the premium ceded to foreign insurance companies by the general insurers in Pakistan should not be subjected to taxation.
Sources said that the private sector insurance industry in Pakistan still remains much too regulated.
The strangulation, they added, from all sides has not allowed the industry to develop fast.
For instance, until this week capital gain which is exempted from tax for all other industries is being taxed under corporate tax on the private insurers.
Similar is the case of Khas Deposit Certificates which are also bracketed under corporate tax. In addition any provision made in the annual accounts either for general reserve or even tax reserve are all taxed.
In addition, the private sector insurers expressed serious concerns about the imposition of 40 per cent tax on the reinsurance premium ceded abroad adding that it would have serious repercussions for the insurance industry in Pakistan.
The tax would affect the ability of the private sector insurance to spread the risk over the international market as the wider the geographical spread of the business, the better the result.
As no insurer can function without the facility and support of reinsurance, the sources said that imposition of the said tax, retrospective from 1989 as mentioned in the notices received by many insurance companies, would ultimately result in the closure of all insurers in Pakistan.
The government has decided to exempt the insurance companies from capital gains tax on the shares traded on the stock exchange on December 2. It was also decided that that the income from Rights/Shares issued by companies listed on stock exchange would also be exempted from income tax, income from trading shares would be exempted from levy of the tax on turnover and directed provinces to rationalise the levy of stamp duties on share transactions. Thirty-six insurance companies are listed at Karachi Stock Exchange.
The decisions are aimed reviving the stock market so as to promote capital formation and increase the inflow of portfolio funds from abroad.
While the insurance sector has hailed the decision initially insurance sources told PAGE that they would be in a better position to comment on the issue only after the relevant directives are received and the situation becomes clearer.
Apart from the taxation problems, the IAP is also demanding reduction in the compulsory cession to Pakistan Insurance Corporation (PIC) from 20 per cent to 10 per cent a promise which was made by the relevant authorities in the middle of last year. The PIC, the sources complained, are not being run on commercial lines and usually fails to honour insurers' claims many of which keep pending for years.
In spite of taking up these isuues at various levels with the government and in spite of several assurances not a single promise made by the Central Board of Revenue has materialised, IAP says.
On the contrary, it added, the rate of tax on the income of insurance companies which stood at 33 per cent prior to the Budget '96-97 now stands increased at 36 per cent.
Furthermore, local insurers fear losing hundreds of millions in potential business to international bidders due to the permission extended to the latter to bid for insurance of mega-dollar power plants by the federal department of insurance late last year.
In spite of all the problems the private insurance has contributed substantially towards the economic development of the country which is evident from their performance at the Pakistan stock market; in '91 the number of insurance companies quoted on stock exchanges stood at 30 with a paid up capital of Rs 547.8 million but the number increased to 32 with a paid-up capital of Rs 947.42 million in '94 to 36 at present.
The indicators such as 3.96 per cent overall growth of economy compared to targeted 6.5 per cent, a 13 per cent decrease in total imports, chances that export target of $ 10 billion would not achieved during the current fiscal, a 12 per cent official inflation, and stagnation in industrial sector which has resulted in over 4000 units being declared sick or closed, are discouraging.
Besides, the country is in the grip of severe financial crisis which is evident from the low level of foreign exchange reserves which were not even enough to meet the debt payments last month. The problem is further compounded by the levy of additional taxes which have direct impact on the business community by way of rendering the exports non-competitive in the international market and 18 per cent sales tax along with excise duty which will shy away the foreign investment.
Though the economic indicators are discouraging, the insurance industry, private as well as public, seem undaunted by the gloomy and the bleak economic scenario of the country, a fact which is evident from its vertical growth of 14.38 per cent last year over the previous year.
Moreover, with such development projects as power plants in the private sector, development of new seaports, terminals at existing seaports, an increasing fleet in the private sector air carriers, and other infrastructure developments as highways and other civil and mechanical complexes in the country, the insurance sector would be in an advantageous position to underwrite the insurance business.
Furthermore, the introduction of crop insurance remains a reality as it was on the list of priorities of the president Leghari just a few months ago.
With all this vast insurance potential, the insurance sector in Pakistan, in spite of the tax-related problems that it is facing at present would be able to maintain its growth in the year to come.
Meanwhile the caretaker government has already raised the minimum mandatory paid-up capital of both life and general insurance companies recently toRs 40 million and Rs 100 million respectively. The measure is aimed at improving the financial soundness of the companies and also to help retain more of the insured money in the country to help prevent flight of foreign exchange.
Insurance sources felt that if the discriminatory taxation on the insurance sector is abolished and it is allowed to function without the limitations that the same put on the sector, the local insurance industry has the potential and the know-how to play its due role in the economy of the country.