Solid growth prospects but much remains to be done to increase life insurance business
By SYED M. ASLAM
Sep 15 - 21, 1997
The insurance industry in Pakistan comprises 57 general insurers, five life insurers, the state-owned Pakistan Insurance Corporation (PIC) and National Insurance Corporation (NIC).
When Pakistan gained independence 50 years ago it inherited a total of five indigenous insurance companies and 77 foreign companies which enjoyed the bulk of the business, a situation which is being reversed at present.
While general insurance was left untouched, the life insurance business was nationalised in 1972 and the State Life Insurance Corporation (SLIC) was established.
SLIC enjoyed complete monopoly of the life business till 1990 when the life insurance business was reopened to the local private sector local insurers and to private foreign insurers in 1994. At present four life insurers, two local and two foreign, are operating in the country besides SLIC.
Though the general insurance business is growing at an average annual rate of 15 per cent, vast potential still remains untapped in the country primarily due to a general lack of awareness about the importance of insurance, sharp increase in the cost of living, low savings rate and high inflation.
High-placed insurance sources, talking to PAGE, agreed that the insurance industry has failed to project itself to create a public awareness about the protection which insurance offers.
Nevertheless, the sources expressed concern about the inconsistent policies, particularly the tax related issues, which hamper the growth of the insurance industry.
While some of the tax related problems of general insurers such as taxing their dividend income at corporate rate of 33 per cent instead of reduced rate of 5 per cent for all other companies has been resolved by a favourable decision by Supreme Court judgement in June. Similarly, the government has also allowed tax exemption on capital gains and the issuance of bonus shares.
But there are other issues which need to be resolved. For instance, the Insurance Association of Pakistan (IAP), the representative body of general insurers is demanding the withdrawal of 20 per cent compulsory cession to PIC, expansion of capital gains, exemption till the year 2001 as allowed to all other companies, exemption from the withholding tax on reinsurance commission at the rate of 10 per cent within Pakistan, restoration of exceptional loss reserve withdrawn in 1979.
The 57 IAP members wrote a gross direct premium of Rs 7.2 billion in 1996 which depicted a 16.24 per cent increase over 1995.
While the absence of statistics does not permit to provide a genuine breakdown of general insurance business, it is possible to make a rudimentary calculation. IAP figures show that of the three tariff business, Fire is the top contributor which is followed by Motor, a close second, and Marine. The non-tariff business contributes about 20 per cent to the total business.
Marine insurance is a totally captive business as insurance is a legal requirement and an inbuilt cost of all imports. On the other hand, the huge potential for Motor insurance has yet to be exploited as less than five per cent of the total vehicle population carry a comprehensive insurance while the majority choose to buy only the Third-Party insurance for the sake of legality only.
Some 45,000 passenger cars are produced in the country annually and with the rise in the carjacking and thefts the bulk of new car owners now choose to buy comprehensive insurance. This has resulted in a fierce competition between the general insurers to acquire the share of the lucrative business. The rest of the 31 million strong vehicle population including taxis, buses, trucks, wagons, mini buses, rickshaws offers no comprehensive business to the insurance companies.
Similarly, the comparative small amount of non-tariff business clearly shows that much is required to be done to create awareness about the importance of home and contents insurance, insurance of valuables and cash, property and assets etc.
The state of life insurance in Pakistan is no different than that of general insurance in Pakistan. Sources informed PAGE that less than 2 per cent of the population in the country buys the life insurance.
The life insurance industry in Pakistan comprises State Life Insurance Corporation in the public sector and four companies in the private sector: local EFU and Metropolitan and foreign Commercial Union (CU) and American Life Insurance Company (Alico).
EFU commenced operations in 1992, Metropolitan in February 1993, Alico in May 1995 and CU in July 1996. As not unusual in case of life insurance companies, the four private sector life insurers posted losses for the half year ended June 30EFU a net loss of Rs 800,000 down 58 per cent during the comparative period last year and Metropolitan Rs 2.9 million which was 7.4 per cent more than during the comparative period. Alicos loss increased by 32 per cent to 4.1 million while CU suffered a loss of Rs 16.2 million.
While SLIC enjoys an enviable 97 per cent share of the life market in the country, CU which has the largest capitalisation of Rs 300 million puts the annual demand for new life policies at 500,000 the sixty per cent or 300,000 of which is held by SLIC. The company is optimistic that the remaining 200,000 policies could be shared by the private sector insurers.
According to SLIC statistics Individual life first year premium increased from Rs 1.197 billion in 1994 to Rs 2.2026 billion in 1995 but declined to Rs 1.7 billion in 1996. Group premium increased from Rs 1.11 billion in 1994 to Rs 1.17 billion in 1995 and to Rs 1.24 billion in 1996. Renewal premium was Rs 3.3 billion, Rs 3.9 billion in 1995 and Rs 4.1 billion in 1996.
SLIC s income, including the investment income rose to Rs 13 billion in 1996 compared to Rs 12.2 billion in 1995 and Rs 10 billion in 1994.
With an authorised capital of Rs 200 million and a paid up capital of Rs 100 million, SLICs total individual life and group life business in force (sum insured plus bonuses) rose to Rs 420 billion in 1996 from Rs 380 billion in 1973.
Besides a wide network of branches in Pakistan is also operating in UAE, Kuwait, Saudi Arabia and UK (catering to renewal only).
Life insurance being long term business helps in capital formation and the performance of SLIC during last 25 years show that it has made a tangible progress by accelerating the growth of savings through insurance.
But much remains to be done to increase the life insurance business in Pakistan not only in cities but also in towns where the bulk of the population still resides.
Insurance sources told PAGE that apart from a general lack of awareness and economic conditions the lack of infrastructure such as roads, utilities, etc., makes it costly for the insurance companies to sell policies in the rural areas.
PAGE put a number of questions pertaining to basic issues related to insurance industry to understand the issues from the perspective of the insurance industry.
The questions were:
The potential for growth of the insurance industry.
Factors restricting the growth.
Measures required to remove these barriers.
Taxation problems faced by the industry.
Why foreign insurers were allowed to insure power projects at the cost of the local insurers?
What is required to create public awareness about the importance of insurance?
CU, Agro and Delta Insurance replied to the questionnaire in writing while PAGE talked to the EFU General and Habib Insurance. The verbal replies are included in the text of the article while the written replies are displayed in boxes. The number identifies the answer to the question number.
M. Fasihuddin, deputy managing director of EFU General Insurance, talking to PAGE at his office said that while there is big potential for growth for the insurance industry, both life and general, it would only come with increased literacy and economic prosperity.
In addition, it is hard to convince people faced with rising cost of living and high inflation to set aside funds for insurance when they are facing problems to have even the basic amenities, he said. Lack of infrastructure is also restricting the growth, he added.
The bulk of the insurance business is involuntary as insurance is part of banks policies as in the case of LCs and loans including loans by House Building Finance Corporation. Besides this captive business, the regular business has also increased a little over the years due to rise in robberies and car snatchings. Though almost all new car owners choose to buy comprehensive insurance only 25-30 per cent of the private cars in Pakistan choose to buy comprehensive insurance.
He said that while there is huge untapped potential for insurance the responsibility to create awareness lies with the insurance industry itself.
He said that while the local general insurers have the know-how to insure power projects they were deprived of the mega million rupee business which was passed on to the non-resident foreign insurers in contravention to Insurance Act. This was done under the pretext that local insurers did not have the capacity to insure such costly projects which holds no water as insurance companies the world over pass risks to reinsurance and the local companies could have done the same, he added.
He stressed that such practices, if spread to other sectors, would be disastrous to the local insurance industry and the general insurers have taken the issue with the government.
Talking to PAGE a high placed source at Habib Insurance, a private general insurer said that insurance companies have failed to project themselves to create public awareness about the importance of insurance.
He agreed that in spite of the big potential the country offers the insurance industry has made no collective effort to tap the potential. While insurance can provide financial protection at a small price an impression has somehow been created about the insurance companies that not only limits them to play their due role but also deprives them of professional managers as insurance companies are not on the priority list of fresh MBAs.
While, he said, the insurance industry has been unable to create the public awareness, the unclear government policies also tend to discourage investment by the insurance companies.
For instance, the tax on capital gains discouraged the insurance companies to invest in government securities which offer fixed returns leaving them the only other option, the equity market. Even the investment in the equity market is confusing as the government has yet to make itself clear about the issue pertaining to tax on capital gains which was last adjusted in December.
He said that local insurers should benefit from the mega million power projects in Pakistan but it seems that they failed to get the business due to their low capacity though the same could be arranged by the local companies through facultative insurance.
He expressed concern at the lack of importance accorded to insurance pointing out that while the University of Karachi offers a course no such course is being offered by institute of such repute as IBA.
He stressed that there is a large market for insurance in Pakistan and his company aims to provide the ultimate service as its policy is to take only the business that it could handle.
The insurance industry should not only sell but also provide guidance to the people to show that it cares, he concluded.
The country chief of Commercial Union, Moin M. Fudda faxed his reply from London. The following were his answers:
1, 2 & 3. General Insurance
Real growth in the insurance industry of 3% is less than the GDP growth rate of 4%. The industrial activity is very slow due to delay in expansion of existing projects and no new foreign investment is coming into the country except power projects. The replacement value of the existing plants and machinery is much higher than the insured value. Therefore an effort is required by insurance companies to convince the clients and lending agencies to increase the sum insured of the policies which would enhance the growth of premiums.
For life insurance until early 80s there was tax exemption upto Rs 50,000 for investment made in shares and purchase of insurance policies. This was removed by the government and since then life insurance premiums have not increased in line with GDP growth. As a result the saving rate has declined and Pakistan has the lowest saving rate of 14% in Asia whereas in India it is 18% and most of the far eastern countries above 20%. To encourage the life insurance activity and to increase the saving rate the government must restore that exemption with the condition that the policies must be bought for a period of 10 years or more. Private sector companies have introduced new products and they may be encouraged to introduce pension and health insurance.
While Pakistani residents can open foreign currency accounts they cannot buy life insurance policies in foreign currency. State Bank must give permission to life insurance companies for issuance of foreign currency policies which would increase the growth rate and savings in foreign currency and discourage buying of foreign currency policies from off shore insurers.
4. It is gratifying to note that the government has accepted the demand of insurance industry to exempt it from the capital gains tax. Moreover CBR has not pressed for tax on reinsurance premiums but it would be more appropriate if a circular is issued to exempt the reinsurance premium from withholding tax. CBR in 1980 withdrew the tax exemption available for exceptional loss reserves. This has discouraged insurers from building reserves which is very much necessary for the growth of insurance industry. Government must consider restoring that exemption.
5. I must correct you that these power projects are not being underwritten by foreign companies based in Pakistan rather they are being insured outside the country in contravention of the Insurance Act. Section 3D of the Insurance Act allows risks located in Pakistan to be insured outside the country if these cannot be insured within the country. The exemption was not obtained from the insurance companies rather Ministry of Commerce granted permission on power policy of the government. In fact neither Ministry of Power nor Ministry of Commerce has the authority to grant such permission. Insurance Act has the approval of the Parliament and not even President can issue an Ordinance beyond six months. I fail to understand that if the desire was to grant freedom to foreign investors for arranging the insurance cover outside the country then amendment should have been made in Insurance Act, in the absence of which all policies issued can be construed as null and void.
6. Unfortunately insurance industry does not have a full fledged institution on the pattern of Banking. There is a need to establish a College of Insurance on the one to encourage students to take insurance as career. To create awareness of insurance it is essential on the part of private and public sector organisations to arrange seminars, lectures and workshops for the benefit of public at large.
The following was the reply from M.A. Chishti, the managing director of Delta Insurance.
1, 2 &3. There is a great potential for growth of insurance industry in Pakistan because Pakistan is a developing country. In a developing country there is, and will always be, development. When there is development, there is an investment from within as well as from foreign countries. This constant development in Pakistan has been boosting the insurance industry since partition.
Performance of the Insurance Industry has been spectacular since 1947. In 1947 the number of Pakistani companies were five and now it is 55; and foreign insurers in 1947 were 77 and now these are five. Premiumwise Pakistan produced Rs. 19.70 million in non-life business during 1949 and in 1996 the premia was Rs. 7.264 billion. (out of Rs. 7. 264 billion the share of foreign companies is 11.25%). This growth has been achieved by the private sector despite nationalisation of life insurance business in 1972, fall of East Pakistan in 1971, conversion of National Co-insurance Scheme (NCIS), a pool of Pakistani companies, into National Insurance Corporation in 1976, and nationalisation of shipping sector, banks, ghee mills, automobile industry and petroleum marketing companies. The loss of premia suffered by private sector insurers on account of the above measures amounted to Rs. 350 million. The insurance industry did not lose heart but continued its efforts. It shows the resilience of this sector as well as the professional competence and managerial skill of the experts who are heading Pakistani insurers. It demonstrates that the insurance industry has attained maturity. It is keeping the pace with the pace of international insurers. Pakistan inspite of all its shortcomings is forging ahead, especially economically. Most of the people of Pakistan have lost faith in the country, but I forsee a great development in the near future. The reasons are privatisation, deregulation and liberalisation policy of the present Government. Shipping and aviation sectors are opened to private sector. Energy sector has become very active. New seaports are coming up and modernisation of Karachi Port and Port Qasim is being done. Oil refineries are being set up with foreign collaboration. Oil and gas exploration has been accelerated. Roads, bridges and dams are constructed to boost the infrastructure. All this would contribute towards fast development of the country. Recent sweeping changes in tariffs structure, and taxation would provide a great impetus to trade and industry of Pakistan. Agrarian reforms are also being done which would certainly make the country self-sufficient in food grains. All these changes would attract several billions of dollars of investment and its insurance naturally would go to the private sector insurers. By the end of the century the premium income of the industry would cross the figure of one billion US dollars.
There are four factors that are decelerating the fast pace of the growth of insurance industry. First is the withdrawal of tax exemption in 1979 by the government on exceptional loss reserves. It was a great blow and it has affected the strength of insurers. These reserves were invested through stock exchanges thereby contributing to capital formation and also increasing solvency and retention of insurers. It should be exempted from the tax net.
The second snag is the discriminative policy of taxation. Income on dividends, Khas Deposits, National Saving Certificates etc are taxed on corporate basis, whereas in other industries it is not. This discrimination affects the profitability of insurers.
The third hurdle is the foreign exchange regulation. Insurers, at present, have to obtain permission from State Bank for reinsurance remittances to overseas reinsurers, when the movement of foreign currency in our country at present is free and open. There is no restriction in bringing or taking out of foreign currency in our country. This restriction entails a lot of delay and thus, foreign exchange fluctuation loss is sustained by insurers. It should be exempted.
The last but not the least problem is the taxation of provisions made in balance sheets of insurers respecting general reserves, or catastrophic reserves or claims reserves or tax reserves. It should be exempted from taxation.
5. Foreign companies have been allowed to insure their projects because when they negotiate for power projects etc with the government of Pakistan, they get a clause incorporated in the contract document that all insurances would be at their option. Since all investments are done by those owners and our country is short of scarce foreign exchange, our government has no choice but to yield to their request.
6. It can be done by improving the standard of education not only in schools and colleges but also in insurance profession. How many commerce college teach the subject of insurance in their institutions? None. In sixties all commerce colleges in the country used to have one subject of insurance which was done away long ago. How many Universities and Institutes of Business Administration provide teaching of insurance subject?. None. How can you make insurance popular among masses without taking the message of insurance to the door step of each home? It can only be done by nurturing at the grass root level and which is at present not available in our country. There is only one Pakistan Insurance Institute (PII) in the country, which is unfortunately meeting the same fate as our other educational institutions are confronted with. Lack of funds, lack of support from their own sector i.e. insurance. PII is in a bad shape. It has no proper office, no adequate funds and no regular faculties. Education among the insurance sector as well as masses is the only answer to create public awareness. The official literacy rate at present is 27 percent but factually it is not even 10 per cent. The people who can sign their name only, can not be termed as a literate person. Only 2.5 per cent of GDP is spent on education. What an apathy. Expenditure per soldier exceeds US$ 2,500/- per annum whereas yearly expenditure on education per adult is US$4.
M.I. Ansari, managing director of Agro General Insurance who is also vice chairman of IAP replied as follows:
1. The potential for growth of the Insurance Industry is intimately related to the economic growth of the country. Now the question arises as to what are the prospects of economic development of our country in the years to come, I personally feel that the growth prospects are simply tremendous. Now that the trend for globalization of economy has set in and the pace is bound to get accelerated with the passage of time the economy of our country shall have to convert into an open economy in which event investments in industries of all denominations will start flowing in whether initiated by the local entrepreneurs or foreign investors by way of joint ventures or otherwise. The natural and human resources of our country are indeed vast and because of our financial and technological deficiencies it may be affirmed without fear of being contradicted that we may have been able just to scratch the surface of out real potential for economic development. It is a truism that vacuum is not tolerated by Nature and this vacuum I believe is surely going to be filled up partly by the local entrepreneurs and the gap left over by foreign investors. The developed countries have surfeit of capital and technological know-how to invest in third world countries for larger profit margins and for securing for themselves stabilized markets for future years. The geographical situation of Pakistan is such that it is a gate-way to the Central Asian States including Afghanistan and the next door neighbour to the middle eastern countries on the West and the South Asian Region on the East. We will see in the time to come and sooner than later the tempo of economic activity in various directions will gain a rapid momentum and in that scenario the premium income whether of life or of general insurance business will multiply correspondingly with the overall economic growth.
2. For the last fifty years the insurance industry of our country has been developing through the normal evolutionary process without being subjected to tough competition within the market. The big business generating relatively big premium would be picked up by the big companies, the small business of the country by the small size companies and the insurance business of multinationals by the foreign companies each one of them being relatively contented with their respective pickings. That phase is going to be over soon if it is not already over. However during the last half a century of our existence there was no real competitive challenge and corresponding opportunity as a result of which there was no necessity for the insurance industry to concentrate on developing human resources and financial resources to the appropriate level. It was but a natural process over which one need not have to lament much. In any case it may be noted with a sense of satisfaction that the insurance industry as a whole has reached to a self-generating stage.
3.The insurance industry has entered into the second phase of its existence where there will be no choice before it but to be innovative, creative and competitive. May be, many more foreign companies get inducted into our country in whatever shape, joint venture or otherwise over and above the foreign companies already operating in our market. Resultantly tough competition will be generated for insurance business. Necessity being the mother of invention financial resources as well as human resources development would be accelerated. To meet with the requirements of fast developing economy new and innovative products will be introduced into the market. Not only the marketing force but also the technical personnel with the office for back up service would be elevated to a higher level of technical knowledge of the subject and overall competency that they could cope with the ever growing and changing needs of their clients. We will see the time when the insurance industry would have earnestly concentrated on research and development producing technical personnel of rear talent and caliber which will be the demand .of the market. With the evolving circumstances the insurance industry will rise to the occasion removing the barriers confronted from time to time. Not that it is a one time stroke but a continuing process which I have no doubt will be properly taken care of by the insurance industry as per the needs of the market.
4. The present regime has agreed very kindly to our demand that capital gains should be tax exempt until 1998 in line with the other corporate bodies. The withholding tax of bonus shares has also been exempted from the levy of withholding tax. So far so good.
Lately there was a move on the part of tax authorities that reinsurance commission arising out of transactions within the country should be subjected to withholding tax. My personal view is that the said move is devoid of any business logic and bereft of any lawful justification. The question of commission arises when where are three parties to a business transaction whereas in the case of reinsurance commission commission in this context being a misnomer there are only two parties the ceding company (Reassured) and the reinsurer. I strongly urge that this move be withdrawn and done away with for obvious reasons.
Since an insurance company doing general business will in course of time develop itself into a financial institution having built up a substantial investment portfolio. I consider it deserved every encouragement by the government to enable the company to become a really sound financial institution so as to make a solid contribution to the stock exchanges functioning. In this connection I may suggest for the consideration of the government that not only that the capital gains for insurance companies be exempted from tax forever but also that the tax exemption on exceptional loss reserves which was available until before 1979 be restored. Any other incentive as may be thought of towards strengthening the financial position of insurance companies may be extended ungrudgingly. The beneficial effects that will thereby accrue will be far-reaching.
5. It is the foreign money that is invested in the big power projects. It is their technological expertise that is invested in such projects. If the foreign investors want to get the project insured by the insurers of their choice to the exclusion of local companies, I suppose we shall not grudge. But we need not have to despair. Time will soon come when some of our local companies would have reached to a level in relation to financial resources and technical know-how that the foreign investors in such projects may come forward unhesitatingly to include the local companies on their approved panel for the projects insurances partly on co-insurance basis or fully as the case may be.
6. The insurance industry would feel the necessity of launching a campaign to create public awareness about the importance of insurance if only to generate greater volume of premium income.
Individually they may set apart a fund to be spent on such campaign and very likely they will launch a campaign through the auspices of IAP as a common and practical forum after having contributed their moneys into a common pool to be handled by IAP for the purpose on behalf of the member companies.