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
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:
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
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
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.