Sep 08 - 14, 2003




ABDUR RAHMAN KHANDIA is a Chartered Insurer. He is Executive Director (Southern Zone), EFU General Insurance Limited. He was born in 1957 in Myanmar. His family migrated to Pakistan in 1967. He got his education in Karachi. He did B.Sc. (Statistics) from University of Karachi. Khandia joined EFU in 1982 as Executive Officer. In 1991, he completed his A.C.I.I. For a number of years he was member of Fire and Marine Committee of Insurance Association of Pakistan (IAP). He has attended a number of seminars and workshops on insurance locally as well as abroad.

PAGE: Why insurance has not become a norm in Pakistan?

ABDUR RAHMAN KHANDIA: In Pakistan, most of the insurance business is out of compulsion and not by choice. Bulk of the business originates from international trade and banking sector. Moveable and immovable properties are insured due to mandatory requirement of financial institutions. Vehicle insurance business has grown due to law and order situation (lifting and snatching of cars at gunpoint) and increase in vehicle leasing business. Most of the people are not aware of the benefits of hedging the risk through insurance cover. A large percentage of people consider even general insurance in contravention with teachings of Islam. Some times, I feel extremely sorry for those, who loose their assets due to fire breakout or any other calamity. Had they acquired insurance cover, they would have not faced doomsday. In all wisdom one must make the best effort to protect his life and business and then leave it at Allah.

PAGE: What are the other reasons for not acquiring insurance cover?

KHANDIA: Apart from the general perception, the two other factors impending the growth of insurance business in Pakistan are lack of awareness about the benefits of insurance and affordability. Only large corporations and medium-size businesses acquire insurance cover, as they are able to treat the premium paid as an expense in profit and loss account. Whereas most of the smaller entities consider insurance 'waste of money'. They often say that they never had fire or any other incidence in the past. Therefore there is no need to acquire insurance cover. However, they tend to forget that any loss emerging in the future may leave them penniless.



PAGE: Are the tariffs affordable?

KHANDIA: The prevailing tariffs were developed many years back and have lost relevance. Therefore, there is an urgent need for revision and rationalization of tariffs to make them competitive in the international market. This can only be done with the joint effort of all the stakeholders.

PAGE: Most of the insurance business in Pakistan comes under 'Tariff segment'. What are the reasons for non-uniformity of tariff?

KHANDIA: There are dozens of insurance companies operating in Pakistan but over 75% of total business goes to less than 6 companies. Some companies are able to solicit business because of their size and quality of services they offer. Others draw business being the 'captive' insurance companies. However, smaller companies try to solicit business by offering higher rebates. Therefore, the margins become so lean that these companies are often unable to make timely payment of claims. Not only that the clients become frustrated but often tend to develop the perception, 'no fun in paying the premium because I never get the claim'.

PAGE: What are the reasons for proliferation of captive insurance companies?

KHANDIA: In my personal opinion the single largest reason for proliferation of captive insurance companies has been the minimum paid-up capital requirement for establishing an insurance company. Many large business groups, most probably, consider establishing their own insurance companies a better business proposal than paying millions of rupees premium to insurance companies. The advantages of having a captive insurance company are numerous, the largest being transfer of funds from one pocket to another. You may find it surprising that annual profit after tax of some of these captive companies is even higher than their paid-up capital.

PAGE: What role the regulators have been playing for strengthening insurance companies?

KHANDIA: Lately the entire focus of SECP has been on enhancing paid-up capital of insurance companies. Many industry experts believe that increase in paid-up capital alone cannot improve financial health of insurance companies. The effort should be to enhance premium retention capacity of insurance companies. The premium retention capacity of insurance companies can be improved through strict monitoring of pricing factor and unhealthy competition. Some of the companies manage to get business by charging below their trash hold price resulting in weakening of their financial strength, which reduces their ability to settle claims promptly.