The 19th of this month
marks the completion of the 33 months of the new insurance law — the
Insurance Ordinance 2000 promulgated on August 19, 2000. It replaced the
outdated Insurance Act of 1938 and was aimed at better regulating the
business to protect the interests of the policy-holders including
rampant grievances of non-settlement of claims by the insurers,
improving the standards and inducting professionalism in the industry.
It also required the
insurance companies, both general and life, to increase their paid-up
capital in phases by December 31, 2004. The general insurance companies
have to enhance their paid-up capital limit to Rs 80 million while life
insurance companies have to enhance the limit to Rs 150 million by
December next year. In the first phase ended December 31, 2002 companies
conducting life insurance business were required to enhance their
paid-up capital to Rs 100 million while general insurance companies had
to enhance their paid-up capital to Rs 50 million. The first phase was
completed successfully and all general and life insurance companies
operating in the country today fulfil the minimum paid-up capital limit.
The insurance business in
Pakistan is now regulated by Securities and Exchange Commission of
Pakistan instead of Department of Insurance, Ministry of Commerce.
Today, the general insurance companies are allowed to fix their own
insurance tariffs to compete in a free market environment. This has
resulted in brining motor insurance rates to affordable levels for the
buyers which many industry insiders say undermine the capacities of the
insurance companies to honour the claims.
However, the insurance
industry in Pakistan still keeps reeling from a number of inherent
weaknesses due primary to neglecting the sector for too long a period.
This is most evident from the failure to establish a reliable
re-insurance company within the country the absence of which has
resulted in heavy dependence on foreign reinsurers. The heavy dependence
is also blamed for providing foreign reinsurers the pretext to dictate
their terms and conditions to increase the rates, tighten the
capacities, reducing the covers and slashing the rates of commission
payable to local companies.
In addition, the foreign
reinsurers refuse to provide terrorism cover which previously used to be
a part of the overall coverage. Sources in the insurance industry claim
that war risk cover, which previously used to be a part of the
reinsurance treaties, is just not available at any cost to the local
insurance companies. They also say that while big insurance companies
can afford to take risks the smaller ones keep on underwriting the risks
without having a cover from the foreign reinsurers.
underwriting business in the country have to offer 10 per cent of gross
premium to Pakistan Reinsurance Company Limited (PRCL), the public
sector reinsurer. They have to offer an additional 35 per cent of the
remaining premium to the PRCL which can accept or reject it. The biggest
volume of business is reinsured outside the country.
Over the years the
foreign reinsurers have also reduced the rates of commissions they pay
to local insurance companies to give them the business. Foreign
reinsurers used to pay as much as 40-50 per cent commission to local
insurance companies for the business provided which has been lowered to
as low as between 5-15 per cent in many cases which is not enough even
to cover the underwriting costs of 40-50 per cent.
While foreign reinsurers
refuse to provide terrorism cover and slashed the rates of commissions
paid to the local insurance companies, commissions paid by the companies
to their agents as well as commissions received by them by the foreign
reinsurers are subjected to a 10 per cent withholding tax. Former
chairman of Insurance Association of Pakistan, M.I. Ansari said that the
insurance companies are also subjected to unfair taxation. "The
Pakistan Reinsurance Company Limited (PRCL) insists to levy the 10 per
cent withholding tax on all commissions the insurance companies pay to
their agents and also on all commissions that they receive from
reinsurers. We insist that withholding tax on these commissions are not
subject to taxation in the first place. It amounts to double taxation
because insurance companies already pay tax on their respective
turnovers which includes commission received from reinsurers."
The abolishment of
minimum tariffs in the new insurance law has resulted in unethical
undercutting practices in all classes of business, particularly motor
business, the biggest revenue earner. Ansari said that though general
insurance companies have benefited from lease-led growth in car sales
volume to pushed the share of comprehensive insurance business to 40 per
cent of the total motor business, the removal of tariff barriers have
resulted in unethical undercutting. "The massive undercutting has
resulted in uneconomically comprehensive motor insurance rates — it is
available for as low as 1.5-2 per cent — which undermines the quality
of protection. The irrational, and uneconomic tariffs, offer little or
no protection to the buyers and the price of uneconomic competition is
ultimately borne by the people in the form of inferior service and
settlement of claims."