INSURANCE : MERGERS & ACQUISITIONS
The biggest challenges is to develop the professional human resources
By Syed M. Aslam
May 08 - 21, 2000
The insurance industry of Pakistan is looking at an unprecedented wave of mergers and acquisitions in the years to come. The prophecy, or rather a calculated prediction, is based on the announcement of the Proposed Insurance Ordinance 2000 shortly which will replace the Insurance Act 1938.
The Act, enacted over six decades ago has lost its significance and relevance to undermine the protection of the interests of policy holders on the one hand and the development of the insurance industry on the other hand. For instance, the minimum paid-up capital requirement for the general insurance companies as per the Act remained unchanged at Rs 1.5 million despite an immense corrosion in the value of money in last 62 years. This is not withstanding the fact that paid-up capital of a few general insurance companies exceeds this minimum requirement at present.
Observers also link the announcement of the Insurance Ordinance 2000 at this point in time to the release of $ 125 million loan from the Asian Development Bank. The loan is the part of the $ 250 million package under the Capital Market Reform the half or $ 125 million has already been released for Stock Market Reforms.
The deregulation in the early 1990s helped open the life insurance business to private companies. Today, besides the state-owned State Life Insurance Corporation which enjoyed complete monopoly till the deregulation of four private life insurance companies are also operating nationwide. These four companies comprise two local companies; EFU Life and Metropolitan Life, and two foreign operators namely Commercial Union Life Assurance of Pakistan and American Life Insurance Company.
There are some 58 general insurers operating in Pakistan which also include about half a dozen foreign companies. For the last many years the general insurance business is growing at an average annual rate of 10-15 per cent. The bulk of the business is enjoyed by the local companies, two of which Adamjee and EFU General sharing some 65 per cent of the general business between them.
High placed sources in the insurance industry told PAGE that general insurance business in Pakistan is lead by motor insurance which grew at an unprecedented rate of 15-20 per cent last year. They attributed the substantial growth in the auto insurance, which helped pushed the overall growth of the non-life business despite stagnation in the two other main sub-businesses of fire and marine, on a 40 per cent reduction in car thefts and snatching in the country, particularly in Karachi.
The high incidents of car thefts/snatching discouraged many to replace older models with a newer ones for those who already had a car and it also discouraged many others not to buy a new car altogether in the previous year. In addition, the high risks forced almost all major insurance companies to charge a high 7.5 per cent premium which was above the minimum tariff of 6.5 per cent prescribed by the Insurance Association of Pakistan (IAP), the representative body of some 58 general insurers operating in Pakistan.
The reduction in car theft/snatching in last year not only resulted in increased new car sales in the country but also made it possible for the insurers to reduce the premium to 5 per cent to make it affordable for car buyers, sources said. The auto insurance business also got a boost from the introduction of many new car financing schemes which have an inbuilt comprehensive car insurance covers. The improvement in the law and order situation boosted the overall car insurance business by 40 per cent last year and even with a 25 per cent reduction in comprehensive car premium from 7.5 to 5 per cent the business still managed to increase by 15-20 per cent depending on an individual company. Despite the reduction in auto premiums in a price-driven market the higher volume of turnover in the auto insurance due to the factors listed above the overall auto insurance business was able to grow substantially last year.
Sources said that if it were not for the substantial growth in the car insurance business helped push the overall general business despite a negligible growth in fire and marine business primarily due to reduction in the import of plant and machinery and reluctance of the industry and business for expansion or revision of the sum already insured. The lack of new business as well as expansion or revision of an already existing one are the major causes for the negligible growth of marine and fire business, sources added.
Coming back to the increased mergers and acquisitions. The insurance industry of Pakistan is anxiously waiting for the proposed Insurance Ordinance 2000 which will replace the antiquated Insurance Act 1938 to better regulate the insurance business ensuring the protection of the interests of policy holders and to promote sound development of the insurance industry. Sources told PAGE that the Insurance Ordinance 2000 has already approved by the cabinet and has been sent to the Law Division for comments.
However, some of them also expressed concerns about the final draft of the Ordinance fearing that many of the proposals would either altogether be taken out and others may be changed to the detriment of the industry. Another uncertainty worrying the industry is if the Ordinance would be implemented in letter and spirit.
One of the major recommendation of the Proposed Ordinance is to increase the minimum paid-up capital for the life insurance companies to Rs 150 million and Rs 80 million for the non-life companies. For the existing life insurers the minimum paid-up capital shall be Rs 100 million by December 31, 2002 and Rs 150 million by December 31, 2004. Similarly, non-life insurance business shall require minimum paid-up capital of Rs 50 million by December 31, 2002 and Rs 80 million by December 31, 2004.
While the paid-up capital of a few general insurance companies at present exceeds Rs 80 million minimum requirement as per the Proposed Insurance Ordinance, the majority of the general insurance companies have to increase their paid-up capital substantially in next 43 months. Many small companies would not be able to enhance their paid-up capital forcing some 15 per cent of the existing general insurance companies either out of business, takeover or mergers.
Talking to PAGE, Moin M. Fudda, the Country Chief of Commercial Union Pakistan said that the measures would help only serious entrepreneurs to enter the insurance business to ensure better protection to policy holders and development of the insurance industry on sound lines. He added that the final draft of the Act, alongwith the draft rules, should be made public for at least 30 days for comments, since same period was given when any change in the rules was made in the past.
Fudda said that the key to the success of Insurance Ordinance 2000 will be its implementation. This is necessary to ensure that the insurance business will be taken seriously by the government as in the past the political patronage in granting insurance licenses has already taken a heavy toll on the industry resulting in unethical business practices to the disadvantage of shareholders, policy holders and the overall insurance sector of the economy.
The biggest challenge for the Pakistani insurance industry, be it life or non-life, in the new millennium is to develop the senior professional human resources to narrow the existing gap which is visible in a number of companies. Besides priority should also be given to the development and training of professional middle management professionals.
He said that in an era of networking and computerisation, the Pakistani insurance industry lacks good technical know-how as the prevailing insurance scenario fails to assure a lucrative career to the potential human resources which are being lured by better incentives in many other related fields as banking, leasing, etc.
Kalia Group has introduced the modern concept of in financial services with the inauguration of 'KALVAULT' lockers. These lockers are safe, convenient and private. Kalvault offers the unique features like:
- Total structural safety ensured through design based on "Fortress Formula".
- Inbuilt Facilities for Humidity & Temperature control, Hi-fi system, cable TV and fire fighting provisions.
- All floors served through automatic lift & stairs as alternate entry/exit.
- Specially trained armed guards on duty round the clock in addition to auto security system & closed-circuit TV from Brinks.
- Brink's transitory service for transportation of valuables to customer's residence & vice-versa in their Armoured Vehicles if desired so.
- "All-Risk Insurance" cover from Adamjee Insurance Company upto Rs. 1 million per locker. Provision of additional as well as Transit Insurance at reasonable premium, if desired so.
- Computerized Access Procedure and Accounting System, secure yet quick.
- Standby Generators sustaining full load with Auto Switch on system.
- Ideal location, car parking and very convenient service hours for all 365 days of the year.
- Five varieties/sizes of lockers with inner steel box having separate locking facility of own choice and an additional lock (optional) on locker's door.
- Private and semi private Booths for total Privacy.
- Reasonable tariff charges with maximum concession on three years booking.
- The entire system is entrusted upon professionals and placed under direct command of a Brigadier (Retd) for effective control.