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The promulgation of Insurance Ordinance 2000 has created more confusion rather than resolving the key issues faced by the companies

April 22 - 28, 2002

It is not the law but its implementation which makes it good or bad. The GoP repealed Insurance Act 1938 by promulgating Insurance Ordinance 2000 believing that it would resolve all the issues faced by the insurance sector. However, the Ordinance has not only added to the miseries but also created confusion among the players. On top of this, assigning the regulatory mandate to Securities and Exchange Commission of Pakistan (SECP) has created further problems.

Insurance sector plays very important role in the operations and development of industries, trade and commerce by minimizing the potential risk. However, the sector has always been on the lowest priority of the government. For decades the sector was regulated by the Insurance Department of Ministry of Commerce. Lately, the SECP has been given mandate to regulate insurance sector also. The sector experts say, "SECP does not have sufficient expertise to regulate the sector. On top of this, the conflict of interest does not allow the regulator to do justice either with the insurer or the insured."

Before going further, it is important to explain this conflict of interest. The prime duty of the SECP is to protect the interest of shareholders by discouraging claim payment. Whereas, the insurance regulator has to protect the interest of insured/policyholders by ensuring prompt and full payment of claims lodged with the insurer. Therefore, there is a clear conflict of interest in the mandate assigned to the SECP.

On top of this, the experts say, "SECP also lack required expertise, for the time being to regulate insurance sector. The Commissioner responsible for overseeing this sector does not have the required exposure and the Executive Director also does not have sufficient exposure of the insurance business. The result is insurance companies are able to thrive at the cost and loss to insured.

To further reinforce their point of view, these experts refer to Adamjee Insurance case. Its annual report for year 2000 was studded with qualifications by auditors. The same is also true about 2001 annual report. It appears that the SECP was not able to comprehend the level of gravity of situation. Had the SECP taken prompt and appropriate measures Adamjee Insurance would have been saved from posting nearly half a billion rupee loss.

These analysts also say that the performance and financial position of Adamjee Insurance is much better as compared to the condition of some other players. Any one, who has the ability to scrutinize annual reports of insurance companies, can find out the factual position if he/she does not agree with the opinion of experts. These experts also say that the content and format of annual reports of insurance companies is very different from the data provided in the reports of manufacturing and services sector companies.

Saying this, experts refer to another misdirected policy of the SECP. Many years ago it was proposed that paid up capital of commercial banks, leasing and insurance companies should be enhanced. While paid up capital of commercial banks and leasing companies has been increased, hardly any effort, by the SECP, has been made to ensure increase in paid up capital of insurance companies. The reason, increase in paid up capital was demanded, was the fragile nature of small capital-base insurance companies.

The SECP was very firm in its decision regarding increase in paid up capital of commercial banks and leasing companies. However, in case of insurance companies, it has come up with a novel policy. Insurance companies have been directed to obtain claim payment ability rated. The question is, cannot the SECP staff gauge this ability after analyzing the annual reports of insurance companies? The sector experts say, "By issuing this instruction/directive the SECP has accepted its inadequacy. They want to shift the burden and/or blame to a third party." The other pertinent questions are, who can perform such a rating? Is the required expertise available in the country?

The Ordinance also has a chapter on Market Conduct. All restrictions have been imposed upon the insurers only and the insured have been treated innocent. Whereas, the experience and data shows that incidence of fraudulent or highly exaggerated claims are on the rise. Therefore, some provisions should have been included to discourage policyholders from making misrepresentations and making fraudulent or highly exaggerated claims.

These are some of the glaring examples of inadequacy of the SECP to regulate insurance sector. Therefore, the appropriate step is to establish an independent body Pakistan Insurance Development and Regulatory Authority to regulate the sector. This Authority must be established without any delay.