This step alone cannot improve the claim payment ability of the companies unless regulators implement the rules in letter and spirit

 20 - 26, 2003

Risk hedging is the key responsibility of management of every business entity. One of the tools used for risk hedging is the insurance. The need for insurance cover becomes all the more necessary when a number of factors affecting profitability of business entity are not controllable or predictable, i.e. accidents, natural calamities, etc. However, it is utterly disappointing that insurance sector is on the lowest priority of the GoP. Previously, the sector was supervised and regulated by the Ministry of Commerce. Lately, Securities and Exchange Commission of Pakistan (SECP) has been assigned the responsibility to regulate the sector. However, due to lack of expertise available at the SECP, most of the time is spent on non-issues rather than improving the way insurance companies are being managed.

It is appreciable that the SECP made it mandatory for the insurance companies (non-life) to enhance their minimum paid-up capital to Rs 50 million by December 31, 2002. All those companies that failed to meet the requirement have been stopped from underwriting new business. This has raised serious apprehensions about the survival of the failing companies. The business houses that acquired insurance cover from these companies are also very upset. The sector experts believe that low paid-up capital is one of the many factors contributing towards vulnerability of an insurance company. While the SECP has been very particular about meeting this requirement, it has not been giving due attention to risk being assumed and claim paying ability of the insurance companies.

As regards the enhanced paid-up requirement, the sector experts believe that this increase alone cannot improve the claim payment ability of the insurance companies. They say, "The SECP has not been giving due attention to some of the key issues. These are: 1) the way most of the insurance companies try to acquire business, 2) underwriting of insurance at very low rates and 3) reinsurance of underwritten business." They also say that the key factors responsible for the prevailing situation are: the 'who cares' attitude of the management of insurance companies and inability of the SECP to quantify the risk to which the insurance companies are exposing to themselves.

According to some sector experts, "Bulk of the non-life insurance business is the outcome of mandatory requirement of financial institutions particularly the banks. The banks' executives play a key role in generating this type of business. The influence of financial institutions has contributed towards formation of a 'cartel'." However, acquiring the insurance cover is considered merely a formality the general perception is 'no claim will be lodged'. Most of the business is distributed partly on merit and partly on 'other consideration'. Some times the other considerations create serious problems. However, in case an issue arises, bank executives very conveniently hush it up. One such example was comprehensive insurance of 'Yellow Cabs'. In most of accident cases the owners were hardly paid any claim and most of the claims were rejected on technical grounds. Simply because the insurance companies never had the claim payment ability.

For those who do not agree with the existence of a cartel, a close look at the sector data provides ample evidence. Till recently, 48 non-life insurance companies were operating in the country. During year 2002, the premium collected was about Rs 11 billion. Out of this, the two companies namely Adamjee Insurance Company and EFU General bagged Rs 4.85 billion and Rs 2.9 billion respectively. Another 5 companies collectively bagged Rs 1.5 billion and 41 small-size companies shared the remaining amount of Rs 1.75 billion.

As regards exposure of insurance companies to risk, two phenomena are in operation simultaneously: 1) most of the insurance companies underwrite business beyond their claim payment ability and 2) reinsurance acquired often falls short of the exposure. Interestingly, the SECP has not been able to identify the phenomena or prefers to keep its eyes closed. The reinsurance issue became a very serious issue after 9/11 incident. Either the local insurance companies are working with highly inadequate reinsurance cover, in the hope that no claims would be, or the reinsurance has never been acquired from companies of good repute.

One of the factors responsible for the prevailing situation is the 'rebate' offered by the insurance companies to their clients. According to an insurance sector expert, "The insurance executives try to underwrite the maximum business by dishing out fabulous rebates. Neither they nor their management think, even for a moment, that assuming such exposure could be disastrous for the companies. Their indifferent attitude is based on the perception that 'claims will never be lodged' and even if a few claims were lodged there would be ample grounds to reject those completely or settle it, at the best, by making part payment only. The non-payment or part payment of the claim by the insurance companies discourages business houses from hedging their risk through insurance cover. This is evident from the fact that except for the mandatory insurance people do not acquire insurance cover generally."

According to an industry expert the central bank has been able to regulate commercial banks efficiently and effectively only because it follows clearly laid down Prudential Regulations. The SECP should also define the rules of the game for the insurance sector. However, the experts say, "There are rules of the game but the SECP has not been able to implement these in letter and spirit only because the regulators are unable to understand the intricacies of insurance business. The regulators are trying to shred their responsibility by issuing various directive."

The SECP issued two directives: 1) to enhance paid-up capital and 2) mandatory credit rating. The sector experts say that enhancing the paid-up capital alone cannot improve the risk payment ability of the insurance companies." As regards mandatory credit rating the general consensus is, "There is no competent authority to evaluate the quantum of risk and the claim paying ability of the insurance companies."

Some of the sector analysts are of the view that the SECP has not been sincere in implementing its own laid-down rules. This is evident from the grant of status of a local company to the branch office of a foreign insurance company operating in Pakistan. At the time this particular foreign insurance company applied for the local registration, it had huge accumulated losses. Technically, the foreign company should have been asked to first clear the accumulated losses. Once the slate had been cleaned, it should have been asked to remit its contribution towards paid-up capital of the company seeking its incorporation in Pakistan.

The GoP, with the help of international financial institutions, has established various regulatory authorities, such as National Electric Power Regulatory Authority (NEPRA), Pakistan Telecommunication Authority (PTA) and Oil & Gas Regulatory Authority (OGRA). Pakistan Insurance Regulatory Authority (PIRA) was also proposed in the past on the recommendations of Asian Development Bank (ADB). Despite approval of the draft ordinance for the establishment, the Authority could not been established due to interministerial rift. Pakistan is not trying to reinvent the wheel. In India, Insurance Regulatory and Development Authority (IRDA) has been operating for decades.

According to an industry expert, "For a long time insurance sector has been demanding the establishment of PIRA. The need was more acute when the Ministry of Commerce was overseeing the operations of insurance sector. The demand is still valid and has not lost its weight. It is strongly believed that the SECP has too many things to do, particularly with reference to capital market reforms. Therefore, proper attention is not being paid to the sector. Another reason for demanding establishment of PIRA is the general perception that the SECP hierarchy has very little knowledge about the insurance business. The general consensus is that, if the regulators do not know about the trade how can they regulate it?"

Scarcity of insurance professionals in the country is a serious impediment in the growth of the sector. Most of the people associated with the insurance business do not possess professional qualification of international standard. At the best, the seniors give to new entrants. The 'blue eyed boys' are those who can raise the maximum premium irrespective of the manners in which the amount has been mobilized. There is a common saying, "I follow the instructions of my boss who has decades of experience in the reputed insurance companies."

For the non-existence and/or poor performance of the training institute established by the Insurance Association of Pakistan (IAP,) both the GoP and the Association are equally responsible. According to a sector analyst, "Unless qualified insurance professionals are produced locally, mediators would continue to generate the maximum business by dishing out handsome rebates."

Yet another important factor demanding immediate attention of the regulators is prevailing tariff. According to an industry expert. "Previously the GoP, through Insurance Department, used to announce the tariff and also ensured its implementation. However, with the introduction of deregulatory policy fixing the tariff and its implementation is no longer the responsibility of the regulator (SECP). This has proved to be the mother of all evils."

It is understood that the companies, facing suspension of business have approached the SECP to extend the deadline for meeting the enhanced paid-up capital requirement and have also suggested plans for meeting the requirement. It is suggested that the SECP should allow the companies to underwrite new business only on the condition that they would implement the plan. The SECP has followed the similar policy in case of leasing companies. It is also demanded that the GoP must establish PIRA without further delay and relieve the SECP from its present responsibility of regulating the insurance sector.