Business prospects are linked with performance of
By SHABBIR H. KAZMI
Sep 27 - Oct 03, 1999
The economic downturn in Pakistan had an adverse impact on the
insurance industry, particularly general insurance segments but the bigger companies were
able to increase the level of gross premium collection. Despite the increase in overall
premium collected, the profit margin shrank. This was because the rates came down to
almost one third of the level prevailing couple of years ago. With the revival of the
economy, insurance business is expected to grow.
However, the most talked about issue by the sector specialists is the
draft of proposed Insurance Act, prepared by Ernst & Young of Australia. The
Government of Pakistan (GoP) had distributed the draft for comments from the industry in
July this year. The first draft is now in the process of revision following industry's
This draft has been prepared pursuant to the Capital Markets
Development Programme of the Government of Pakistan and the Asian Development Bank, by a
team of domestic and international consultants led by Ernst & Young, following
examination of the findings and recommendations of the National Insurance Reforms
Commission and the Task Force appointed by the Minister of Commerce in 1997 and following
examination of insurance legislation in other countries.
The proposal regarding Lloyd's entry into Pakistan faced the strongest
opposition from the insurance companies. It is believed that the proposal has been
withdrawn since the issuance of this draft. While at the time of preparation of original
draft this was thought to be a minor matter, by Ernst & Young, it seems that the
provisions objected to, would be deleted from the second draft.
The proposal for allowing Lloyd's to carry out insurance business in
Pakistan without meeting any of the requirement normally applicable on foreign and local
insurance companies, operating in the country, has shocked every player. Not only that, it
raised questions about the wisdom of this proposal but some other suggestions are being
viewed as prejudice. The Insurance Act of 1938, governing insurance business in Pakistan,
was introduced during the British rule but no such preference was given to Lloyd's.
Another point of concern is that the GoP was expected to establish the
Pakistan Insurance Regulatory Authority (PIRA). However, now it appears that with the
handing over of insurance sector control from Ministry of Commerce to the Securities and
Exchange Authority of Pakistan (SECP) the establishment of PIRA has been deferred. It is
being termed as a major deviation from the restructuring plan of the financial sector in
While the companies continue to perform at low margins, the GoP, in the
proposed Insurance Act, intends to raise the minimum paid-up capital requirement to Rs 100
million and Rs 200 million for general and life insurance companies respectively. Whereas
at present paid-up capital of a large number of companies is less than half of the
An effort was made in 1998 to enhance minimum paid-up capital of
insurance companies to Rs 40 million but no notification was issued. While some of the
companies made efforts to enhance their capital a large number of companies were not able
to do so. It was mainly due to downturn of the economy and persistent sluggish sentiments
prevailing in the capital markets. Therefore, raising the capital upto the proposed limit
in three years appears to be a remote possibility. Either the GoP would have to bring it
down to a realistically achievable target or the companies would be forced to merge.
With the proposal of raising paid-up capital of insurance companies,
mergers and acquisitions are being suggested. Some of the players do not agree with the
strategy. They suggest to let these companies struggle for their own existence. If the GoP
has ignored the recommendations of Insurance Advisory Board submitted in 1998 to ask the
insurance companies to raise their paid-up capital to Rs 40 million in four years why the
GoP is keen to raise more than double the limit now. However, it is to be noted that while
some of the companies made the effort voluntarily to raise the capital, others took the
advantage of GoP failure and did not bother to do so. At the same time, some analysts
believe that no company will make any serious effort unless the GoP pushes them really
hard through change in legislation.
Some of analysts believe that mergers and acquisitions are just not
possible in insurance sector. It is mainly due to existence of 'captive' companies. Fairly
large number of captive companies are off-shoots of the business groups and sponsors would
not like to sell them to another group simply because of business rivalries.
The other source of concern is the change in tax rates applicable on
insurance companies. Since the revised rates will be applicable on the income of 1998-99,
it is feared that tax liability of many companies will be increased considerably. It is
estimated that the additional tax liability of Adamjee Insurance company will be millions
of rupees. The other companies will also be affected in a similar way.
According to the nature of business, companies can be divided into two
groups general and life insurance. After the nationalization of insurance companies
in early seventies, the life insurance business remained an exclusive domain of State Life
Insurance Corporation (SLIC). But after nearly two decades private sector was once again
allowed to establish life insurance companies.
There are 52 local and 5 foreign general insurance companies operating
in the country and competition has been intense. Due to slower pace of economic growth,
the volume of business has remained around Rs 10 billion per annum. The overall premium
rates have gone down considerably. Therefore, unless the economic growth rate picks up the
profit margins of insurance companies are expected to remain under pressure.
In the life insurance segment 2 local and 2 foreign insurance companies
besides SLIC are in operation. Apart from these, National Insurance Corporation (NIC) and
Pakistan Insurance Corporation (PIC) are operating in the public sector. While NIC is
responsible to underwrite property and interest of public sector companies, PIC acts as a
reinsurer. It enjoys a monopoly status in reinsurance business. PIC should play a more
active role rather than demanding a mandatory share in the reinsurance business.
Although life insurance has long remained a monopoly business of SLIC,
it has worked, may be not efficiently, to offer a range of products to suit the needs of
various income groups. However, with the entry of private sector insurance companies, with
foreign equity participation, SLIC has come up with more innovative products. It is
expected that variety of products and quality of service would improve further with the
passage of time.
In general insurance business, Adamjee Insurance Company emerges not as
the largest company in terms of paid-up capital but also in terms of premium collected in
1998. Its paid-up capital exceeded Rs 390 million at the end of 1998 and premium collected
for the year was more than Rs 3.2 billion. The business operations in the UAE and Kingdom
of Saudi Arabia continue to grow. The overseas premium income contributes over 19 per cent
of the overall premium of the Company.
In life insurance segment Commercial Union Life Assurance Company
(Pakistan) Limited has a capital base of Rs 300 million. The Company commenced group life
insurance business in Pakistan in June 1996 and in the first six months of operation
generated premiums of about Rs 8 million. Since then business growth has been commendable
with premium income increasing to nearly Rs 60 million for the year 1998. Business
turnover is expected to increase further with the introduction of group health and group
pension schemes. Commercial Union plc. the parent company of Commercial Union Assurance
Company plc of UK merged with General Accident plc in June 1998 to create one of the
world's leading international insurers. The enlarged group employs around 52,000 people in
over 60 countries around the world, has a premium income of £18 billion and assets under
management in excess of £120 billion.
Guardian Royal Exchange Assurance operates as a fully-owned branch
office and has been active in Pakistan since 1952. It offers complete range of general
insurance covers which include fire, marine, theft, engineering, besides providing
personal accident and health cover. The Company enjoys extensive support from Guardian in
terms of financial security and technical assistance. Guardian, after merger with AXA
Group has acquired further strength. AXA is one of the largest insurance companies in the
world. Its global assets touches US$ one trillion and annual revenues touch US$ 100
billion. It is listed on almost all the leading stock exchanges around the world. AXA has
been rated "AA" by Standards & Poor. The Company operates in more than 60
countries and serves over 35 million customers.
EFU General Insurance has a capital base of Rs 120 million and EFU Life
Assurance has a paid up capital of Rs 100 million. EFU General has entered into
non-conventional insurance business. As a first step has developed group health insurance
plans for the corporate sector, the gross premium collected by EFU General in 1998 was Rs
1.6 billion. The equity investment portfolio of the Company continued to grow and touched
Rs 197 million as on December 31, 1998.
EFU Life continued to consolidate its position in both the group and
individual life markets, and emerged as a clear leader amongst the private sector life
insurance companies. Premiums underwritten amounted to Rs 145 million representing 700
policies and over 300,000 insured lives. Individual life business registered an increase
of about 44 per cent during the year, with new annual premiums written during 1998
amounting to Rs 77 million. The Company continues to carry out an annual actuarial
valuation and sets up full actuarial reserves at the end of each year.
Habib Insurance Company has a history of nearly 57 years of operation.
It was established in 1942 in Bombay. The Company was among the top 25 companies selected
for Karachi Stock Exchange Award in 1997. Despite 1998 being a difficult year, the Company
registered growth in gross and net premium, underwriting profits and maintained high level
of dividend payout for the year. The gross premium collected in 1998 was more than Rs 140
million as compared to Rs 123 million collected in 1997. Similarly underwriting profit
increased from Rs 12 million in 1997 to Rs 14.7 million in 1998.
SLIC enjoys nearly 95 per cent of the individual life market. It has
achieved such a market share due to its monopoly for nearly twenty years. Besides an
extensive network of branches in Pakistan SLIC also operates in UAE, Kuwait, Saudi Arabia
and UK. With the entry of private sector life insurance companies, SLIC has redefined its
strategy to maintain its market share though these companies were never considered
to be a threat to state-owned giant. The Corporation enjoys a very strong capital base,
investment portfolio and dedicated and professional field staff.
One of the factors responsible for low level of business in life
insurance segment is that majority of the population is neither insured nor conscious of
the benefits of such cover. Bulk of the business is generated from urban areas.
In the present situation, small size insurance companies find it
increasingly difficult to compete with the larger counterparts. There are some small and
medium size companies performing well but they fall in the category of captive insurance
companies and draw more than 75 per cent business from the group
Although there is initial resistance against raising paid-up capital,
there should be concerted efforts to enhance the existing low level. This is essential to
proliferate the business and at the same time maintain a high level of standard in the
It is also suggested that Lloyd's should not be given any preference
over insurance companies operating in Pakistan, both local and foreign. The country must
do away with all aspects of servitude. However, there is also a need to strengthen the
companies and improve the regulatory framework.
The industry experts strongly recommend repealing of the Act that
governs State Life Insurance Corporation of Pakistan, National Insurance Corporation and
Pakistan Insurance Corporation. They also suggest merger of NIC and PIC and to eliminate a
captive market for them. If their status as public sector enterprise has to be maintained
they should also be governed by the same laws which are applicable to all other insurance
Many of the players are of the opinion that premium is the basic
evidence for the assumption of risk and this cannot be replaced by any other instrument.
It is therefore, recommended that general cover-notes and multiple risk covers should be
abolished with immediate effect. These two are said to be the root cause for reversal
entries and are counter productive for the insurance industry.
According to Mohammed Sharif, Finance Director, Heritage Insurance,
there must be provision for pre-insurance 'evaluation of risk' and declaring level of
'securitization'. Evaluators should be given licences by the PIRA and should be employed
by all the insurance companies.
It was suggested that laws governing mergers and acquisitions should be
made simple to facilitate possible mergers. This can help in weeding out the traditional
portfolio investors and replace them with professional managers.
At present State Bank of Pakistan (SBP) does not offer any return on
deposit of insurance companies. It was suggested that the sanctity of a deposit with the
SBP should be maintained. This amount should be refunded to the insurance company on
winding-up or declaration of insolvency with profit by the SBP.
According to Sharif, creation of local reinsurance pool will help
domestic companies in resource mobilization in various currencies. This on the one hand
can help in making insurance companies financially strong and on the other hand raising
funds for infrastructure projects.