The Insurance Industry
Affordable insurance tariff is important
By Syed M. Aslam
May 21 - Jun 03, 2001
Lets start with a blunt preamble — the insurance industry of Pakistan is its own worst enemy miserably failing to exploit the underlying potential in a thickly populated country of 140 million people. External factors included, it has failed to promote insurance as a voluntary necessity, the least of which outdated tariffs on the extremely high side by all international standards. This is obvious from the rampant undercutting of mutually agreed, and drafted, tariffs for all classes of non-life business by members of Insurance Association of Pakistan?
While it's true that the successive policy makers have never been inclined to accord insurance the priority which it deserved, the insurance industry can hardly defend its share for the failure. It keeps on selling almost the same products at more or less the same prices. The relevant question is: What has stopped the insurance companies, particularly non-life which remained untouched by the nationalisation fiasco of the early 1970s, to offer new and value-added products at affordable prices? Why did the insurance companies, collectively as well as individually, fail to invest in human resources resulting in the serious dearth of qualified and technical staff today, expand its paid-up capital base, invest its funds more prudently, and last but not the least to devise ways to settle claims in a more satisfactory manner?
The importance of affordable insurance tariffs can hardly be over-stated in a country like Pakistan where per capital insurance expense remains pathetically low and where insurance expense is considered good only to meet a legal requirement. A prime example is the Third Party motor insurance — less than 5 per cent of some 4 million vehicles nationwide carry comprehensive cover while the rest opt to buy the useless Third-Party cover which does not provide protection whatsoever to the victims of road accidents.
What is also true is that insurance companies in the private sector has never been allowed an access to the business of public sector. The general insurance needs of the government, public and autonomous organisations remain the exclusive domain of the National Insurance Corporation, renamed Company last year. On the other hand Pakistan Insurance Corporation, renamed Pakistan Re-insurance Company recently, established to act as the sole national reinsurer wasted no time in converting itself in to 'policeman' instead of a professional and commercial organisation which it meant to be. The guaranteed monopoly allowing PIC to get a fixed compulsory cession of every single premium written in the country plus a fixed obligatory cession offered to it, be it accepted it or not, turned PIC into professionaly incompetent and commercially incompetitive organisation.
On the other hand, life insurance was nationalised in the early 1970s allowing the state-owned State Life Insurance Corporation to enjoy a complete monopoly till its deregulation in the early 1990s. Since then four private life insurers, two local and two foreign, have started operations. The country chief of CU Life Assurance Moin Fudda said that life insurance companies can play a vital role to mobilise the national savings — it was only 12.2 per cent of the GDP in 1999-2000 which was significantly lower than other countries in the region — provided the premiums paid by self-employed persons should be allowed as income tax deduction.
However, insurance still much remains an involuntary expense — only the new car buyers prefer to buy comprehensive cover and that too for the first few years; only negligible percentage of the population care to buy life and general insurance like fire insurance ó industrial, commercial or personal. It has become a general practice for the industry not to renew the insurance policies on plant and machinery once they are few years old. Less than one per cent of the population choose to buy household insurance despite the persistently deteriorating law and order.
The year 2000 would be remembered as an eventful year for Pakistani insurance industry. It was the year when the Insurance Ordinance 2000 was promulgated to better regulate the business, ensure better protection and interests of the policy holders and promote sound development of the insurance industry. The life insurance companies have to enhance the paid-up capital from Rs 60 million to Rs 150 million and non-life companies from Rs 1.5 million to Rs 80 million by December 31, 2004.
The long standing demand of the insurance industry to reduce and ultimately abolish the compulsory cession to PIC, now PRC, has been accepted and the authorities have agreed to reduce the compulsory cession by 5 per cent to 15 per cent recently and to altogether abolish it in stages by 2004. Whether the 35 per cent obligatory cession would remain in force beyond 2004 is not yet decided.
In the final analysis, however, the insurance industry of Pakistan comprising some five dozen private companies — both life and general, local and foreign — have to play a much greater role to promote and develop insurance business on professional and technical lines of today. Blaming the past hardly deserve any energies on their part which otherwise should be used to bringing insurance tariffs at par with the international market so that a much deeper penetration can be made in a huge market of Pakistan..