The promulgation of Insurance
Ordinance 2000 has created more confusion rather than resolving the key
issues faced by the companies
By SHABBIR H. KAZMI
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 The GoP repealed Insurance Act 1938 by promulgating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
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.