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SECP's reforms agenda

A new Division, Insurance Division has been created in the Commission

From Shamim Ahmed Rizvi,
 May 07 - 13, 2001

In the second phase of its reforms agenda the Securities and Exchange Commission of Pakistan (SECP) intends to focus its efforts on carrying out long overdue reforms in the Insurance sector, Modarabas and Leasing companies. During the first phase spread over a year and a half, the Commission concentrated mainly on stock markets and took momentous decisions to cleanse the markets and laying down a solid foundation to ensure a healthy growth of the capital market in a transparent manner.

Insurance can be defined into two categories: one is life insurance, essentially a long term business, and other is non-life or general insurance which relates to insurance of property and pecuniary interest therein. Life insurance being the long term business helps in capital formation. In Pakistan, it is still dominated by the state owned-state life insurance corporation of Pakistan which controls above 92% volume of business in this sector. In general insurance sector the only state owned National Insurance Company Ltd controls about 17% of total business while about 7% is handled by 53 local companies and about 9% by four foreign companies.

At the time of independence, our insurance market was dominated by foreign insurers. They were 77 in comparison with the local insurers who were only 07. As the national economy grew, the local enterprises followed the pace in the field of insurance. The number of local insurance companies went on increasing while that of foreign companies decreased constantly. The year 1970 witnessed the market in a different shape when there were 26 local and 23 foreign insurers and thus the local companies over took the foreign companies, both in business and in number. In order to promote the local insurance industry and check the outgo of foreign exchange on account of insurance as well as reinsurances abroad a "reinsurance" corporation in public sector namely Pakistan Insurance Corporation (PIC) was established in 1953. Every insurer in Pakistan is required to cede to it a prescribed proportion of sums assured on all policies. Till March, 1972, both life and non-life insurance were free and none of them was state controlled. In March, 1972, the life insurance business was nationalized and all the private companies till then carrying on that business were merged into the State Life Insurance Corporation (SLIC). In August, 1990, the life insurance business was deregularised/opened to the private sector. Till 1992, to protect the local industry, foreign investment in the insurance sector was not encouraged. In October, 1993, the Government allowed employment of foreign capital in insurance, subject to the following conditions:

i) Foreign insurers desirous of operating in Pakistan shall be entitled to hold 51% share; and
ii) Foreign companies should bring a minimum amount of US$ 02 million in foreign exchange and raise an equivalent amount from the local market. The access of new foreign entrants to our insurance market is now no more restricted.

The policy of liberalization of this sector called for a professional approach for regulation. A task force was constituted for this purpose whose recommendations were discussed and debated at various levels. Ultimately, the Government of Pakistan, in consultation/collaboration with the Asian Development Bank (ADB), decided to undertake reforms of the insurance sector. To redress the weaknesses of the then existing Insurance Law and strengthen the regulatory system of insurance, the Government with the assistance of International Consultants of ADB prepared the revised Insurance Law i.e. Insurance Ordmance 2000, which has since been enforced in the country. From 1st January this year, it also replaced the Department of Insurance which was regulating the insurance business, with a new autonomous/independent regulatory authority i.e. SECP, with a view to strengthening the role of Regulator for effective enforcement of new insurance laws and regulating the insurance industry in the country.

In order to carry out the reforms and purposes of the new insurance law, a new Division, Insurance Division has been created in the Commission. The new insurance law i.e. Insurance Ordinance, 2000 although promulgated but could not be implemented in toto for want of the Rules, which are required to be prescribed almost under one hundred (100) provisions of the said law. Realizing the need and urgency in the introduction of the new Rules, the newly created Insurance Division drafted these rules in consultation with the Experts and Representatives of the Insurance Industry/Insurance Association of Pakistan (IAP). These have already been sent to the Ministry of Commerce seeking approval of the Federal Government which is still awaited. After the necessary approval the Draft Rules will also be published for public comments before final enforcement.

Under the Insurance Ordinance, 2000, all insurers before registration are required to fulfil certain conditions. To bind all those insurers which were registered prior to the promulgation of the said Law were also required to meet these conditions before having a new Registration Certificate from the SECP. Almost all such companies have met the requirements of the new Insurance Law.

Main features of new Insurance Ordinance are:

Financial Standards:

a) Capital requirements for life insurance and non-life insurance companies have been raised from Rs. 100 million to Rs. 150 million and from Rs. 40 million to Rs. 80 million respectively.
b) The minimum solvency margin i.e. excess of assets over liabilities under the repealed Act was Rs. 5 lac or 10% of the net premium income which has been enhanced to Rs. 50 million.
c) Statutory deposits have been raised from Rs. 3,50,000/- to Rs. 5 million to be kept in the State Bank of Pakistan.


a) The licensing of insurance agents which was done by the Controller of Insurance under the repealed Act stands abolished. The insurance companies will now register their own agents and be responsible for their conduct.
b) The insurance surveyors will be corporate bodies to be licensed by the Commission with improved financial standards and quality of service.
c) The new institution of insurance brokers being introduced for the first time in Pakistan. Licensing will be done by Commission.

Market Conduct: New market conduct provisions to improve market conditions and develop capital market. Detailed provisions have been made to prevent insurers from indulging in practices prejudicial to the interest of policyholders.

Insurance Ombudsman: Provision has been made for the institution of an Insurance Ombudsman who shall have the authority to investigate maladministration of insurance companies and to redress grievances of the insurers.

Small Disputes Resolutions Committee: Special provisions have been made for the establishment of a Small Disputes Resolution Committee for speedy settlement of minor claims.

Penalties: Severe penalties for contravention of the Insurance Law have been provided.

Reporting: Adequate disclosure requirements by insurance companies have been prescribed for purposes of reporting to the regulator.

Investigations: Enforcement of the Insurance Law has been made more effective by giving to the Commission powers of investigation and issuance of directive.

One of the important areas of concern for the SECP is to eliminate the fake insurance companies which are functioning only for providing "compulsory motor vehicle insurance certificates" to the general public. In fact, this abuse is continuing with the connivance of certain Government Departments including Police, and operating mostly within the premises of Motor Registration Offices/Excise and Taxation Offices in the country. According to an estimate there is a leakage of around Rs. over 1 billion premium annually in motor vehicles insurance business through the operations of such fake insurance companies. The government is gaining not a single penny in terms of taxes while owners are paying this huge sum of money on by to fulfil a legal requirement. Under a proposal made by the commisssion the Insurance Association of Pakistan shall notify the names of registered insurance companies authorized to issue third party insurance certificate for the motor vehicles and the police and taxation department be strictly warned to accept only such certificate. With the implementation of these rules the menace would be substantially checked.

Neither the repealed nor the new Law, has any provision for fixing tariff rates, for any class of insurance business in the country. In fact, tariff rates are never governed by the Law but decided/fixed (minimum level) by the Insurance Association of Pakistan (IAP) in consultation with all the general insurance companies which are its members. Nevertheless, the role of regulator in this regard is to ensure competitive rates with fair competition in order to protect the interest of the policyholders in the country. The SECP being regulator can intervene only if the IAP requires it as and when any insurance company violates the agreement.