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Cover Story

"If economy is doing well the insurance is doing well"

By Syed M. Aslam
Dec 06 - 12, 1999

The important role the insurance plays in the lives, and the economy, of people today could hardly be over-emphasised. Insurance is an inbuilt cost of all imported as well as local commodities and products which are insured at all stages of shipment. The ships, aircraft and the vehicles which transport them have to be insured and so is all the inbound or outbound cargoes.

Despite its all pervading influence, the cost of which is ultimately borne by the end consumers, insurance much remains a voluntary business to fulfil legal requirements in Pakistan. This is obvious from the fact that majority of the vehicle owners prefer to buy the Third Party insurance which hardly offers any protection to the victims of accidents, either the personal injury or damage to property. The same is true for all other classes of business— marine cover without which no freight can be lifted and fire business only if its absolutely necessary.

While general insurance was left untouched, the life insurance was nationalised in the early 1970s which was deregularised in the early 1990s. Today, besides the state-owned State Life Insurance Corporation four private life insurance companies are operating in the country two of which are foreign. Some 57 private non-life companies, including seven foreign operators, are catering to the general insurance needs of the Pakistanis. In addition, state-owned Pakistan Insurance Corporation (PIC) provide reinsurance facilities to the private general insurers who by law have to offer a fixed percentage of their premium plus an additional fixed percentage of their business. National Insurance Corporation (NIC), another public sector general insurer, provides coverage to all government properties and assets.

The local insurance companies have come a long way from enjoying a small portion of the business compared to their foreign counterparts till the late 1960s to enjoy a much bigger share to reverse the trend at present. However, a number of foreign general companies manage to keep a presence in the insurance market of the country while the deregulation of the life business has also helped brought foreign investment in the insurance sector. Today a total of four private life insurers are operating in the country including two foreign insurers Commercial Union Life Assurance (CU Life) and American Life Insurance Company (Alico).

Despite an overall growth, observers blame the absence of three basic pre-requisites for the lack of any real growth in the insurance industry., particularly in the general business. These pre-requisites are : the lack of new investments; expansion of business to include all those who have not bought at least one or of many covers; and increased valuation for a particular cover. The fact that these conditions remain unfulfilled primarily as new investments came to a trickle, the declining purchasing power made it difficult to sell insurance not only to the untouched segment of the society but also to enjoy the continued business as those who already had a cover chose to cut down a particular risk to reduce the insurance costs.

According to PAGE Mujeeb Khan, the chief executive of New Hampshire Insurance, "basically we have to start from the fundamental that if economy is doing well the insurance is doing well. The nominal growth in the general insurance business during last couple of years show that the real growth is negative as it has remained much below the inflation rate in the country. As the primary objective of a foreign investor is making a profit, the business environment remains inconducive to attract investment in the insurance sector as well as all other sectors of the economy.

Attributing the nominal growth of the general insurance, Mujeeb emphasised on the need for the concentration of all energies towards the overall uplift of the economy to increase the size of average disposable income to help generate more business.

He said that the foreign non-life insurance companies operating in Pakistan enjoy a small portion of the business compared to their local counterparts, particularly the big ones who have a much deeper penetration of the market. Despite their insignificant share the foreign general insurers pay a much higher taxes and revenues to the government compared to their local counterparts, he added.

In addition, he added, the slowing down of the post nuclear explosion economy has taken a heavy beating on the profitability of the insurance companies, particularly the foreign companies who enjoy a small share of the market.

A well placed source in one of the biggest local insurance company who asked PAGE not to mention his name, slowing down of all economic and development projects in the country as the major reason for the nominal growth in the insurance industry during last two years.

M.I. Ansari, chief of Agro Insurance, said that insurance has remained a neglected industry, fact which he said is obvious from the absence of technocrats in the Department of Insurance and its supervising ministry of finance. He blamed the total lack of self-discipline and rampant unethical practice of tariff-cutting which seriously compromises the interest of the insurees.