Business prospects are linked with performance of the economy

Sep 27 - Oct 03, 1999

The economic downturn in Pakistan had an adverse impact on the insurance industry, particularly general insurance segments but the bigger companies were able to increase the level of gross premium collection. Despite the increase in overall premium collected, the profit margin shrank. This was because the rates came down to almost one third of the level prevailing couple of years ago. With the revival of the economy, insurance business is expected to grow.

However, the most talked about issue by the sector specialists is the draft of proposed Insurance Act, prepared by Ernst & Young of Australia. The Government of Pakistan (GoP) had distributed the draft for comments from the industry in July this year. The first draft is now in the process of revision following industry's comments.

This draft has been prepared pursuant to the Capital Markets Development Programme of the Government of Pakistan and the Asian Development Bank, by a team of domestic and international consultants led by Ernst & Young, following examination of the findings and recommendations of the National Insurance Reforms Commission and the Task Force appointed by the Minister of Commerce in 1997 and following examination of insurance legislation in other countries.

The proposal regarding Lloyd's entry into Pakistan faced the strongest opposition from the insurance companies. It is believed that the proposal has been withdrawn since the issuance of this draft. While at the time of preparation of original draft this was thought to be a minor matter, by Ernst & Young, it seems that the provisions objected to, would be deleted from the second draft.

The proposal for allowing Lloyd's to carry out insurance business in Pakistan without meeting any of the requirement normally applicable on foreign and local insurance companies, operating in the country, has shocked every player. Not only that, it raised questions about the wisdom of this proposal but some other suggestions are being viewed as prejudice. The Insurance Act of 1938, governing insurance business in Pakistan, was introduced during the British rule but no such preference was given to Lloyd's.

Another point of concern is that the GoP was expected to establish the Pakistan Insurance Regulatory Authority (PIRA). However, now it appears that with the handing over of insurance sector control from Ministry of Commerce to the Securities and Exchange Authority of Pakistan (SECP) the establishment of PIRA has been deferred. It is being termed as a major deviation from the restructuring plan of the financial sector in the country.

While the companies continue to perform at low margins, the GoP, in the proposed Insurance Act, intends to raise the minimum paid-up capital requirement to Rs 100 million and Rs 200 million for general and life insurance companies respectively. Whereas at present paid-up capital of a large number of companies is less than half of the proposed limit.

An effort was made in 1998 to enhance minimum paid-up capital of insurance companies to Rs 40 million but no notification was issued. While some of the companies made efforts to enhance their capital a large number of companies were not able to do so. It was mainly due to downturn of the economy and persistent sluggish sentiments prevailing in the capital markets. Therefore, raising the capital upto the proposed limit in three years appears to be a remote possibility. Either the GoP would have to bring it down to a realistically achievable target or the companies would be forced to merge.

With the proposal of raising paid-up capital of insurance companies, mergers and acquisitions are being suggested. Some of the players do not agree with the strategy. They suggest to let these companies struggle for their own existence. If the GoP has ignored the recommendations of Insurance Advisory Board submitted in 1998 to ask the insurance companies to raise their paid-up capital to Rs 40 million in four years why the GoP is keen to raise more than double the limit now. However, it is to be noted that while some of the companies made the effort voluntarily to raise the capital, others took the advantage of GoP failure and did not bother to do so. At the same time, some analysts believe that no company will make any serious effort unless the GoP pushes them really hard — through change in legislation.

Some of analysts believe that mergers and acquisitions are just not possible in insurance sector. It is mainly due to existence of 'captive' companies. Fairly large number of captive companies are off-shoots of the business groups and sponsors would not like to sell them to another group simply because of business rivalries.

The other source of concern is the change in tax rates applicable on insurance companies. Since the revised rates will be applicable on the income of 1998-99, it is feared that tax liability of many companies will be increased considerably. It is estimated that the additional tax liability of Adamjee Insurance company will be millions of rupees. The other companies will also be affected in a similar way.

Key players

According to the nature of business, companies can be divided into two groups — general and life insurance. After the nationalization of insurance companies in early seventies, the life insurance business remained an exclusive domain of State Life Insurance Corporation (SLIC). But after nearly two decades private sector was once again allowed to establish life insurance companies.

There are 52 local and 5 foreign general insurance companies operating in the country and competition has been intense. Due to slower pace of economic growth, the volume of business has remained around Rs 10 billion per annum. The overall premium rates have gone down considerably. Therefore, unless the economic growth rate picks up the profit margins of insurance companies are expected to remain under pressure.

In the life insurance segment 2 local and 2 foreign insurance companies besides SLIC are in operation. Apart from these, National Insurance Corporation (NIC) and Pakistan Insurance Corporation (PIC) are operating in the public sector. While NIC is responsible to underwrite property and interest of public sector companies, PIC acts as a reinsurer. It enjoys a monopoly status in reinsurance business. PIC should play a more active role rather than demanding a mandatory share in the reinsurance business.

Although life insurance has long remained a monopoly business of SLIC, it has worked, may be not efficiently, to offer a range of products to suit the needs of various income groups. However, with the entry of private sector insurance companies, with foreign equity participation, SLIC has come up with more innovative products. It is expected that variety of products and quality of service would improve further with the passage of time.

In general insurance business, Adamjee Insurance Company emerges not as the largest company in terms of paid-up capital but also in terms of premium collected in 1998. Its paid-up capital exceeded Rs 390 million at the end of 1998 and premium collected for the year was more than Rs 3.2 billion. The business operations in the UAE and Kingdom of Saudi Arabia continue to grow. The overseas premium income contributes over 19 per cent of the overall premium of the Company.

In life insurance segment Commercial Union Life Assurance Company (Pakistan) Limited has a capital base of Rs 300 million. The Company commenced group life insurance business in Pakistan in June 1996 and in the first six months of operation generated premiums of about Rs 8 million. Since then business growth has been commendable with premium income increasing to nearly Rs 60 million for the year 1998. Business turnover is expected to increase further with the introduction of group health and group pension schemes. Commercial Union plc. the parent company of Commercial Union Assurance Company plc of UK merged with General Accident plc in June 1998 to create one of the world's leading international insurers. The enlarged group employs around 52,000 people in over 60 countries around the world, has a premium income of 18 billion and assets under management in excess of 120 billion.

Guardian Royal Exchange Assurance operates as a fully-owned branch office and has been active in Pakistan since 1952. It offers complete range of general insurance covers which include fire, marine, theft, engineering, besides providing personal accident and health cover. The Company enjoys extensive support from Guardian in terms of financial security and technical assistance. Guardian, after merger with AXA Group has acquired further strength. AXA is one of the largest insurance companies in the world. Its global assets touches US$ one trillion and annual revenues touch US$ 100 billion. It is listed on almost all the leading stock exchanges around the world. AXA has been rated "AA" by Standards & Poor. The Company operates in more than 60 countries and serves over 35 million customers.

EFU General Insurance has a capital base of Rs 120 million and EFU Life Assurance has a paid up capital of Rs 100 million. EFU General has entered into non-conventional insurance business. As a first step has developed group health insurance plans for the corporate sector, the gross premium collected by EFU General in 1998 was Rs 1.6 billion. The equity investment portfolio of the Company continued to grow and touched Rs 197 million as on December 31, 1998.

EFU Life continued to consolidate its position in both the group and individual life markets, and emerged as a clear leader amongst the private sector life insurance companies. Premiums underwritten amounted to Rs 145 million representing 700 policies and over 300,000 insured lives. Individual life business registered an increase of about 44 per cent during the year, with new annual premiums written during 1998 amounting to Rs 77 million. The Company continues to carry out an annual actuarial valuation and sets up full actuarial reserves at the end of each year.

Habib Insurance Company has a history of nearly 57 years of operation. It was established in 1942 in Bombay. The Company was among the top 25 companies selected for Karachi Stock Exchange Award in 1997. Despite 1998 being a difficult year, the Company registered growth in gross and net premium, underwriting profits and maintained high level of dividend payout for the year. The gross premium collected in 1998 was more than Rs 140 million as compared to Rs 123 million collected in 1997. Similarly underwriting profit increased from Rs 12 million in 1997 to Rs 14.7 million in 1998.

SLIC enjoys nearly 95 per cent of the individual life market. It has achieved such a market share due to its monopoly for nearly twenty years. Besides an extensive network of branches in Pakistan SLIC also operates in UAE, Kuwait, Saudi Arabia and UK. With the entry of private sector life insurance companies, SLIC has redefined its strategy to maintain its market share — though these companies were never considered to be a threat to state-owned giant. The Corporation enjoys a very strong capital base, investment portfolio and dedicated and professional field staff.

One of the factors responsible for low level of business in life insurance segment is that majority of the population is neither insured nor conscious of the benefits of such cover. Bulk of the business is generated from urban areas.

In the present situation, small size insurance companies find it increasingly difficult to compete with the larger counterparts. There are some small and medium size companies performing well but they fall in the category of captive insurance companies and draw more than 75 per cent business from the group


Although there is initial resistance against raising paid-up capital, there should be concerted efforts to enhance the existing low level. This is essential to proliferate the business and at the same time maintain a high level of standard in the local market.

It is also suggested that Lloyd's should not be given any preference over insurance companies operating in Pakistan, both local and foreign. The country must do away with all aspects of servitude. However, there is also a need to strengthen the companies and improve the regulatory framework.

The industry experts strongly recommend repealing of the Act that governs State Life Insurance Corporation of Pakistan, National Insurance Corporation and Pakistan Insurance Corporation. They also suggest merger of NIC and PIC and to eliminate a captive market for them. If their status as public sector enterprise has to be maintained they should also be governed by the same laws which are applicable to all other insurance companies.

Many of the players are of the opinion that premium is the basic evidence for the assumption of risk and this cannot be replaced by any other instrument. It is therefore, recommended that general cover-notes and multiple risk covers should be abolished with immediate effect. These two are said to be the root cause for reversal entries and are counter productive for the insurance industry.

According to Mohammed Sharif, Finance Director, Heritage Insurance, there must be provision for pre-insurance 'evaluation of risk' and declaring level of 'securitization'. Evaluators should be given licences by the PIRA and should be employed by all the insurance companies.

It was suggested that laws governing mergers and acquisitions should be made simple to facilitate possible mergers. This can help in weeding out the traditional portfolio investors and replace them with professional managers.

At present State Bank of Pakistan (SBP) does not offer any return on deposit of insurance companies. It was suggested that the sanctity of a deposit with the SBP should be maintained. This amount should be refunded to the insurance company on winding-up or declaration of insolvency with profit by the SBP.

According to Sharif, creation of local reinsurance pool will help domestic companies in resource mobilization in various currencies. This on the one hand can help in making insurance companies financially strong and on the other hand raising funds for infrastructure projects.