replaced the Insurance Act 1938. The major objectives of the new law was to bring the much needed discipline in the insurance industry through better regulating to better the interests of policy-holders and to help develop the insurance industry on sound professional lines.

Two years later, Pakistani insurance industry still reels from inherent weaknesses primarily due to a culture which treats insurance as an obligatory expense good only when necessitated by the law. The Third Party motor insurance being its most glaring example which offers no protection to victim of an accident. Despite being better regulated the industry shows few signs of development on sound footing, the most important objective of the new law. In the post-September-eleven world the industry seems to be reeling from many external as well as internal factors — the first due to heavy reliance on foreign re-insurance companies to share the risk, and the second due to insurance being the first casualty in expense resorted to by the corporate sector as well as the individuals.

The salient features of the Ordinance was the enhancement of the paid up capital of in phases. The life insurance companies were required to increase the paid-up capital to Rs 150 million while the general insurance companies were required to Rs 80 million by December 31, 2004. By December 31 this year the non-life companies are required to enhance their paid-up capital by Rs 50 million while the companies conducting life operations would have to increase their paid-up capital by Rs 100 million.

The Solvency Margin was also increased from Rs 500,000, in the Insurance Act 1938, to a minimum of Rs 5 million over liabilities or assets of an individual non-life company. In addition, every life company has to keep at least Rs 10 million as statutory deposit with the central bank, the State Bank of Pakistan, compared to Rs 3.5 million previously.

Abolished also was the Department of Insurance looked over by the Ministry of Commerce which was replaced by Securities and Exchange Commission of Pakistan (SECP) as the regulatory authority. The Ordinance also addressed the increasing complaints of non-payment of claims by the insurance companies and provided a number of venues to the policy-holders to redress their complaints through the establishment of Tribunal and creation of a Commission, office of Insurance Ombudsman and Small Disputes Resolution Committee for the first time in the country.

The new law also attempted to address the problem of lack of professionalism, latest business practices and technical know-how it felt hindering the development of the industry on modern lines. It laid down a well-defined criteria for the recruitment of insurance agents, brokers, surveyors, to encourage professionalism within the industry and to better protect the interests of the policy-holders.

DEVELOPING THE INDUSTRY

One of the important aspect of the Law was that it changed the status of the PIC and NIC from that of a Corporation to a Company. In simple language it meant that this would turn both these state-owned giants into a company like any other to be treated as per the Companies Ordinance. The PIC was renamed Pakistan Reinsurance Company Limited (PRCL) while NIC was renamed National Insurance Company Limited (NICL). The name-change, however, has changed little in practice — the public sector insurance business still remains closed to the private insurance companies as NICL still enjoys the status of the government's insurer. On the other hand, the insurance companies have to still offer all under-writing business to PICL as compulsory cession though at a reduced rate of 15 per cent compared to 20 per cent previously. However, the private companies are still required to offer 35 per cent of the remaining gross premium as optional cession. The compulsory cession to the PICL will be reduced to 10 per cent from January 1, 2003 and will be altogether abolished from January 1, 2004.

High placed sources in the insurance industry who talked to PAGE on the condition of anonymity said the law has not been able to fulfil one of its most important premise — developing the industry. Instead, they said, the replacing the Department of Insurance, which nonetheless was welcomed by the industry, by SECP has done little good to the industry. They alleged that the SECP is serving only as a strict regulator to impose conditions without paying attention to the ground realities of the market.

For instance, the chairman of Federation of Pakistan Chambers of Commerce and Industry's (FPCCI) standing committee on Insurance, Humayun Saeed, told PAGE that issuing of show cause notices by SECP to a dozen of insurance companies for their failure to comply its earlier directive to arrange reinsurance from foreign companies who have at least "A" rating is harsh indeed. "The rating of our country fluctuates from time to time and even at the best of times it can hardly expect to get an 'A' rating. So why do SECP is so adamant to ask the companies, a majority of which are small, to make reinsurance arrangements only from 'A' foreign companies."

The sources said that the law and the strict regulation by SECP has failed to induct professionalism in the industry which had never been there all along. "The question is: what is more important- the development or the regulation? While much has been done to strictly regulate the insurance industry through the SECP nothing has been done to develop the sector as envisioned by the new law."

Humayun also agreed. "The capital markets are bleeding for last 5-7 years and there have been but a few new listings in the stock market in last half decade and the market is under a slump. SECP's vision is good but it should avoid harsh implementation of the regulations because insurance sector, like the rest of the economy, has been operating without documentation during last half century. Yes the industry has to grow and yes it is imperative to induct latest technology, know-how, expertise and professionalism but the time limit for the enhancement of the paid-up capital should be extended. Otherwise it will result in the closure of the majority of the companies except a few big ones thus leaving little choice to spread of the risk and the choice of insurance rates which in turn will result in monopolistic tendencies negating the very objective of the new law, development of the industry and better protecting the interests of the policy-holders.

Sources also said that enhancing the paid-up capital limit may discourage many small companies to wrap up their operations as many of them would not find it economical in a market where the volume of business is too low from all international standards. "Asking these companies to buy re-insurance only from 'A' rated foreign companies would not only cost them dearly to a point of being unaffordable but mean extreme hardship for them as reputable foreign re-insurers do not view the Pakistani market as attractive due to small overall business volume. While the insurance companies have to increase their paid-up capital nothing has been done to help develop the industry to ensure that there is enough business for all the insurance companies in the country. The question is: Has the increase in the paid-up capital resulted in increased business for the individual companies?"

The new law places no restriction on insurance tariff for various classes of the business. While this was aimed at abolishing the rampant unethical under-cutting of the minimum official tariff previously, the same has only resulted in a cut-throat competition at present. "This has indeed benefited the insurance buyers but the negative fallout of it is also much serious as it undermines the risk and the claim payment capacity of an insurer."

UN-NATURAL MERGERS & WEAK ACQUISITIONS

By now most of us are aware of the first ever hostile takeover attempt of an insurance company in the country. The issue now under litigation involves the accumulating of as much as 40 per cent shares of the biggest general insurance company of the country, Adamjee, by influential Mansha Group. The interest is evident from the fact that the rally at the Karachi Stock Exchange on the 8th of this month was initiated by Adamjee Insurance amid rumors that Mansha Group was considering floating its stocks to force a say into the company's management. Adamjee's share gained Rs 2.70 and 3.097 million shares of it were traded making it the top fourth volume leader that day.

Increasing the paid-up capital, despite being allowed in phases, has also reportedly taken a toll on the industry as many small and medium size companies just don't have the financial strength to raise that kind of money. Sources in the industry claimed that in last two years about 6 insurance companies have closed their operations and a number of mergers are in the process. For instance, Karachi-based Orient Insurance and Islamabad-based Business and Industrial Insurance have applied to the SECP for a merger. According to sources mergers driven by necessity would result in un-natural and weak and so would be all such acquisitions. According to sources while both the companies have a paid-up capital of Rs 40 million each the value of their assets are less than satisfactory. "Orient's assets include Rs 6.3 million worth of receivables, Rs 20 million worth of deposits, Rs 2.8 million revenues and ordinary shares of Rs 2.3 million. On the other hand, Business and Industrial Insurance Company's assets total Rs 40 million at par with its paid-up capital. However, its liabilities are Rs 6 million and the question is who will pay its liabilities?

"Weak and un-natural mergers would only encourage the mushrooming of financial unsound companies thus negating one of the most important objective of the new law- the development of the strong insurance industry and individual companies. However, the above merger is actually much better than many others which are in the pipeline.

"The general insurance business in the private sector has crossed Rs 10 billion mark and has registered an average annual growth rate of around 15 per cent during the last decade but insurance business in the country still lacks quality, know-how and professionalism. This could be blamed on the fact that insurance has never been accorded the attention it deserved and prior to August 19, 2000 was regulated by only a department in the ministry of commerce. In the same year, in neighbouring India whose insurance industry was regulated by the same law previously here, namely Insurance Act 1938, enacted a law to create Insurance Regulatory and Development Authority (IRDA). They, however, did not altogether abolished the Insurance Act 1938 but only amended it and retained the parts thereof. Though they enhanced the security deposit to Rs 100 million (the paid-up capital limit has been fixed at Rs 1 billion for general and life insurance companies) the same was related to the volume of gross premiums of an individual companies over a phased period. It is imperative to first develop the financials before getting strict with the regulatory part of the law so as to give time to insurance companies many of whom are operating in the country for the last five decades."

Talking to PAGE, the member of the Central Committee of Insurance Association of Pakistan (IAP), M.I. Ansari, expressed concerns that while the SECP is working under the Ministry of finance the Insurance itself is the purview of the Ministry of Commerce. "The SECP, thus, has two primary functions — to serve as a regulatory body for the corporate sector under the Companies Ordinance 1984 and also as the regulatory body for the insurance industry under the Insurance Ordinance 2000. In its capacity in the first case its primary responsibility is to protect the interest of the share holders while in the second it is responsible for safeguarding the interests of the policy holders. So SECP is only playing a role of insurance regulator without playing any role whatsoever as the developer as envisioned by the law. This highlights the need for the establishment of an independent insurance regulator to be not only a regulator but also a developer."

RECENT DEVELOPMENTS

Another recent development in the insurance industry is the closure of general operations of foreign Commercial Union. The CU general is taken over by local New Jubilees Insurance, the second biggest company in term of paid-up capital ( Rs 241 million in 2001) and the first in term of underwriting profit (Rs 38 million last year). The biggest general insurer of the country, Adamjee which has a paid-up capital of Rs 543 million suffered an underwriting loss of Rs 671 million last year. New Jubilee is also reported to be taking over the life operations of Commercial Union Assurance.

It takes hardly any burst of genius to understand that the remaining part of this year would witness an increase in further mergers and amalgamations as many of the smaller companies would be racing against time to enhance the paid-up capital by Rs 50 million by December 31. This is particularly true as many of the companies, including many medium and big ones, have found it convenient over the years to post profits making no distinction between underwriting and administrative profit. To better understand this financial weakness particular to insurance business an elaboration is necessary.

Unlike many other type businesses it is much more easier to flaunt a profit to mask, or at least lessen, low or altogether no profitability. This is so as profit in the insurance industry falls strictly under two categories. It can come from underwriting a business, the underwriting profit, and also from investment mainly in stock exchange which is called administrative profit. While the real barometer of the financial health of the company regarding the profitability, retention, protection to share-holders should be calculated on the basis of the underwriting profit on an individual company the convenience with which a company can post a profit despite earning a low underwriting profit or an altogether absence of it help mask an otherwise bad fiscal portfolio. One should take a good hard look at the underwriting profit, or otherwise, of an insurance company to ascertain its financial health as overall profitability alone does not represent a true picture. That's the reason that while many companies operating in the country and posting a profit are in reality not in good financial health making the situation even more dangerous from the point of view of protecting the interests of the unaware policyholders.

Despite the name change both PRCL and NICL keep on enjoying the monopoly on the captive business- the former enjoying the status of sole local re-insurer lavishing on statutory cessions from the insurance companies and the latter serving as the sole general insurer of all government, public, autonomous and semi-autonomous properties and assets. The government and public sector general insurance business still remains outside the reach of the private insurance companies.

Humayun stressed on the need for opening up the sector not only for the foreign operators but also the public sector business for those operating in the country. "The private sector is denied of immense government and public business which can play a crucial role to let the national insurance grow and develop by creating economies of scale."

Though the general insurance business was left untouched when the life insurance business was nationalised in the early 1970s depriving it the immense public sector business can hardly provide any kind of consolation. In the early 1990s the life business was deregulated and today four private life insurance companies, two local and two foreign, are competing with the state-owned SLIC which enjoys an envious edge made possible primarily due to the monopoly it enjoyed for almost two decades.

Though non-life business was left untouched by the nationalisation policy in the 1970s the fact is the private sector till today has no role to play whatsoever as NIC has all along been the sole insurer to enjoy its captive business of governmental properties and assets. The private sector insurance has become increasingly vocal about the compulsory as well as voluntary cessions to the PRCL accusing it of earning easy revenue without really working for it.

BUSINESS

In country where a dozen companies enjoy the 90 per cent portion of the entire general insurance business and where the overall growth is led consistently by motor insurance weak mergers should not be encouraged. The demand of the insurance industry to open the public sector business to the private insurance companies and to restructure NICL and PRCL on sound professional lines should be given a sympathetic hearing.

Despite the name change NICL and PRCL keeps enjoying their respective monopolies at the expense and inconvenience of the private insurance companies. The monopoly of the PRCL has not only been left intact but it has also been given additional powers such as the one to impose fines up to Rs 10,000 and an additional Rs 1000 a day penalty on the insurance companies for non-compliance of its orders. The private sector remains still devoid of a level playing field amidst the continued privileges enjoyed by the two state-owned giants despite semblance of change.

The sword keeps hanging over the head of the private insurance companies now regulated with an iron hand by the SECP which according to the insiders has no role to play in developing the industry.