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The savings rate in Pakistan which is the lowest in Asia should also be improved

Sep 27 - Oct 03, 1999

After nuclear explosions the economy of Pakistan faced a downturn due to economic sanctions and freezing of foreign currency accounts. These factors affected the insurance industry. However, the positive point was that the rupee has stabilized around Rs 55 to a dollar in kerb market after touching the highest exchange rate at Rs 72. Informal economy has been the main source of support in the present circumstances. There is no shortage of goods even after sanctions had been imposed. Local markets are still flooded with local and foreign goods. However, the purchasing power has been largely reduced together with ever increasing unemployment. Low savings rate will continue to affect the gross premium collection as the premium rates are going down. These were the expressions of Moin M. Fudda, the Country Chief of Commercial Union Group, while talking to PAGE.

Dilating on his point Fudda said, "Growth of insurance business is dependent on replacement costs, revaluation of assets, import of new plant and machinery for BMR and new projects. There has been hardly any fresh investment in the country during last two years. The law and order situation has remained precarious. Industry has not been able to re-value its assets, based on current dollar conversion rate. Insurance rates have gone down due to cut-throat competition. All these factors are causing a negative impact on insurance business.

As opposed to general insurance, life insurance segment has a greater potential as a very low percentage of total population is covered under group and individual life insurance policies. But declining purchasing power, poor savings rate and want of incentives have adversely affected life insurance market. To further explain this point Fudda said, "In a country where savings rate is low, exemption on life insurance premiums from taxation available in the past encouraged people to invest their savings in insurance. However, on withdrawal of that exemption life insurance business has suffered a set back. Investment in insurance was a direct boost to the economy as the premium collections made by insurance companies are invested in development projects."

While talking about the proposed Insurance Act, Fudda said, "I have the highest regard for Ernst & Young and their professional competence. A number of recommendations made by them are worth considering but I was shocked to find in it a provision for allowing Lloyds to carry out insurance business in Pakistan without meeting any of the requirements normally applicable to all insurance companies — foreign or local. Although, they are understood to have perhaps withdrawn this proposal due to resentment by all concerned it has raised many questions in the minds of professionals about the wisdom in initiating it at all. "The Insurance Act of 1938, still in force in Pakistan, was introduced during the British rule but no such exemption was given to Lloyds."

He was also critical of the proposed solvency margin requirements for both general and life insurance companies. The proposed requirement demands holding of 'liquid assets' equivalent to paid-up capital. If implemented, this clause can only lead to collapse of most of the existing players.

With the proposal of raising paid-up capital of insurance companies, mergers and acquisitions are being suggested. Fudda does not think this strategy will work in Pakistan since these companies belong to one industrial group or the other. He is of the opinion that if government has given permission to a large number of companies based on their capital of Rs 2.5 million in 1982, raised to Rs 20 million (unofficially in 1997, then it is unfair to demand an increase of capital to Rs 100 million in three years. Fudda who has worked on National Insurance Reform Commission and was a member of the Task Force supports capital requirement of Rs 40 million and Rs 100 million for existing general and life insurance companies respectively to be met gradually within four years. That proposal was approved at a cabinet meeting in 1998 but no notification was issued. Thus delay is on the part of government. Having a strong belief in free market mechanism his view is, "Let these companies struggle for their own existence." After all in these difficult times when unemployment is rising we also have to be considerate to those working in small companies.

Despite all adversities, Fudda strongly believes that if proper long term policies are implemented and there is economic turnaround insurance companies have a potential for growth. It is also important that implementation of insurance laws in letter and spirit should be ensured not only for the sake of good governance but also to protect and promote the interests of shareholders as well as policyholders.

Fudda believes that while a multitude of efforts are being made by setting up committees, commission and task force to amend, update and frame laws hardly has attention been paid to implementation of existing laws. Had that been done things would have not come to such a pass. Fudda say that the Pakistan code is not lacking in the number and variety of laws. It is the will to enforce the same which is wanting.