The biggest challenges is to develop the professional human
resources
By Syed M. Aslam
May 08 - 21, 2000
The insurance industry of Pakistan is looking at an unprecedented wave
of mergers and acquisitions in the years to come. The prophecy, or rather a calculated
prediction, is based on the announcement of the Proposed Insurance Ordinance 2000 shortly
which will replace the Insurance Act 1938.
The Act, enacted over six decades ago has lost its significance and
relevance to undermine the protection of the interests of policy holders on the one hand
and the development of the insurance industry on the other hand. For instance, the minimum
paid-up capital requirement for the general insurance companies as per the Act remained
unchanged at Rs 1.5 million despite an immense corrosion in the value of money in last 62
years. This is not withstanding the fact that paid-up capital of a few general insurance
companies exceeds this minimum requirement at present.
Observers also link the announcement of the Insurance Ordinance 2000 at
this point in time to the release of $ 125 million loan from the Asian Development Bank.
The loan is the part of the $ 250 million package under the Capital Market Reform the half
or $ 125 million has already been released for Stock Market Reforms.
Deregulation
The deregulation in the early 1990s helped open the life insurance
business to private companies. Today, besides the state-owned State Life Insurance
Corporation which enjoyed complete monopoly till the deregulation of four private life
insurance companies are also operating nationwide. These four companies comprise two local
companies; EFU Life and Metropolitan Life, and two foreign operators namely Commercial
Union Life Assurance of Pakistan and American Life Insurance Company.
There are some 58 general insurers operating in Pakistan which also
include about half a dozen foreign companies. For the last many years the general
insurance business is growing at an average annual rate of 10-15 per cent. The bulk of the
business is enjoyed by the local companies, two of which Adamjee and EFU General sharing
some 65 per cent of the general business between them.
High placed sources in the insurance industry told PAGE that
general insurance business in Pakistan is lead by motor insurance which grew at an
unprecedented rate of 15-20 per cent last year. They attributed the substantial growth in
the auto insurance, which helped pushed the overall growth of the non-life business
despite stagnation in the two other main sub-businesses of fire and marine, on a 40 per
cent reduction in car thefts and snatching in the country, particularly in Karachi.
The high incidents of car thefts/snatching discouraged many to replace
older models with a newer ones for those who already had a car and it also discouraged
many others not to buy a new car altogether in the previous year. In addition, the high
risks forced almost all major insurance companies to charge a high 7.5 per cent premium
which was above the minimum tariff of 6.5 per cent prescribed by the Insurance Association
of Pakistan (IAP), the representative body of some 58 general insurers operating in
Pakistan.
The reduction in car theft/snatching in last year not only resulted in
increased new car sales in the country but also made it possible for the insurers to
reduce the premium to 5 per cent to make it affordable for car buyers, sources said. The
auto insurance business also got a boost from the introduction of many new car financing
schemes which have an inbuilt comprehensive car insurance covers. The improvement in the
law and order situation boosted the overall car insurance business by 40 per cent last
year and even with a 25 per cent reduction in comprehensive car premium from 7.5 to 5 per
cent the business still managed to increase by 15-20 per cent depending on an individual
company. Despite the reduction in auto premiums in a price-driven market the higher volume
of turnover in the auto insurance due to the factors listed above the overall auto
insurance business was able to grow substantially last year.
Negligible growth
Sources said that if it were not for the substantial growth in the car
insurance business helped push the overall general business despite a negligible growth in
fire and marine business primarily due to reduction in the import of plant and machinery
and reluctance of the industry and business for expansion or revision of the sum already
insured. The lack of new business as well as expansion or revision of an already existing
one are the major causes for the negligible growth of marine and fire business, sources
added.
Coming back to the increased mergers and acquisitions. The insurance
industry of Pakistan is anxiously waiting for the proposed Insurance Ordinance 2000 which
will replace the antiquated Insurance Act 1938 to better regulate the insurance business
ensuring the protection of the interests of policy holders and to promote sound
development of the insurance industry. Sources told PAGE that the Insurance
Ordinance 2000 has already approved by the cabinet and has been sent to the Law Division
for comments.
However, some of them also expressed concerns about the final draft of
the Ordinance fearing that many of the proposals would either altogether be taken out and
others may be changed to the detriment of the industry. Another uncertainty worrying the
industry is if the Ordinance would be implemented in letter and spirit.
One of the major recommendation of the Proposed Ordinance is to
increase the minimum paid-up capital for the life insurance companies to Rs 150 million
and Rs 80 million for the non-life companies. For the existing life insurers the minimum
paid-up capital shall be Rs 100 million by December 31, 2002 and Rs 150 million by
December 31, 2004. Similarly, non-life insurance business shall require minimum paid-up
capital of Rs 50 million by December 31, 2002 and Rs 80 million by December 31, 2004.
While the paid-up capital of a few general insurance companies at
present exceeds Rs 80 million minimum requirement as per the Proposed Insurance Ordinance,
the majority of the general insurance companies have to increase their paid-up capital
substantially in next 43 months. Many small companies would not be able to enhance their
paid-up capital forcing some 15 per cent of the existing general insurance companies
either out of business, takeover or mergers.
Talking to PAGE, Moin M. Fudda, the Country Chief of Commercial
Union Pakistan said that the measures would help only serious entrepreneurs to enter the
insurance business to ensure better protection to policy holders and development of the
insurance industry on sound lines. He added that the final draft of the Act, alongwith the
draft rules, should be made public for at least 30 days for comments, since same period
was given when any change in the rules was made in the past.
Political patronage
Fudda said that the key to the success of Insurance Ordinance 2000 will
be its implementation. This is necessary to ensure that the insurance business will be
taken seriously by the government as in the past the political patronage in granting
insurance licenses has already taken a heavy toll on the industry resulting in unethical
business practices to the disadvantage of shareholders, policy holders and the overall
insurance sector of the economy.
The biggest challenge for the Pakistani insurance industry, be it life
or non-life, in the new millennium is to develop the senior professional human resources
to narrow the existing gap which is visible in a number of companies. Besides priority
should also be given to the development and training of professional middle management
professionals.
He said that in an era of networking and computerisation, the Pakistani
insurance industry lacks good technical know-how as the prevailing insurance scenario
fails to assure a lucrative career to the potential human resources which are being lured
by better incentives in many other related fields as banking, leasing, etc.
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