CODE OF GOVERNANCE FOR INSURANCE COMPANIES
A lot more needs to be done to improve the operations of risk management companies
By SHABBIR H. KAZMI
Feb 10 - 23, 2003
Since regulating the insurance sector has become the responsibility of Securities and Exchange Commission of Pakistan (SECP), the Commission has been making efforts to improve the working of insurance companies operating in the country. The Commission has made the latest move by introducing the Code of Governance for the Insurance Companies. In the recent past those insurance companies that failed to meet the enhanced paid-up capital requirement were stopped from underwriting insurance business by the SECP.
There are two opinions about the Code. Some analysts believe that by following the Code, performance and claim payment ability of the insurance companies will be improved. Some other analysts believe that the Code documentation/paperwork of the companies will increase tremendously but probability of improvement in performance and claim payment ability is very low.
However, it is necessary to have a closer look at the general insurance business in Pakistan before accepting either of the point of views. Till recently, 48 general insurance companies were operating in the country. During year 2002, the premium collected by the companies amounted to about Rs 11 billion. Out of this, Adjamjee Insurance Company and EFU General bagged Rs 4.85 billion and Rs 2.9 billion respectively. Another five companies collectively bagged Rs 1.5 billion and remaining Rs. 1.75 was shared by 41 companies.
The insurance business can be dividend into four categories: 1) fire, 2) marine, 3) vehicles and 4) miscellaneous. On the basis of gross premium collected, assuming an average tariff of Rs 0.50 per thousand of amount insured, the quantum of risk underwritten works out to Rs 22 trillion — are you surprised? The exact amount may be slightly higher or lower than this estimation. About 40% of gross premium collected, at an average, is paid back to clients in the form of claims only. Therefore, it is necessary to monitor claim payment ability of each and every insurance company, how big or small it may be.
Despite the sensitivity of this business, both the management of insurance companies and the regulators, do not seem to be giving enough attention to the risk management practices. A key area that has been left at the discretion of insurance companies is the fixation of tariff; previously the government fixed tariff. One may say that it is a positive move as the insurance companies are free to fix their own tariff. However, very few people may know that the insurance business is underwritten at much lower rates. Despite this payment of commission and rebates runs into billions.
Some one may say if both the insurance companies and clients are happy, why should any one bother? This is the attitude that has been responsible for the fragible status of the insurance companies operating in the country. Are you surprised once gain by calling these companies fragile? Most of the people believe that the companies paying handsome dividend as well as prompt and 'full' claims are financially strong. This impression is grossly incorrect, as almost 90 to 95 per cent of the revenue is generated through premium.
Whereas, the real strength of any insurance company is in generating bulk of the revenue from return on investment, including portfolio investment. The large insurance companies of Pakistan take great pride in paying high dividend. Ironically, the SECP emphasis also seems to be on protecting the interest of shareholders rather than the policyholders. Realistically talking, the SECP should protect the interest of all the stakeholders of insurance companies, i.e. shareholders, policyholders, government and employees of the insurance companies.
Fixing and asking the insurance companies to comply with minimum paid-up capital requirement is a positive move by the SECP. However, enhancing the capital base alone cannot improve the claim payment ability of insurance companies. Similarly, asking the insurance companies to follow code of governance cannot improve their risk management practices.
It may be pertinent to bring to the SECP notice the current practice of 'third party insurance' of vehicles. No vehicle can be brought on road with out this type of insurance. According to some sector experts, it is billions of rupees business but mostly underwritten by 'briefcase' type companies. They say the annual business done by 'briefcase' type companies is around 2-3 billion rupees. However, the SECP has not been able to bust the gang. Should this business was done by real insurance companies the government would have got millions of rupees as excise duty, federal insurance fee, stamp duty and income tax.
It is good that the SECP wants to streamline claim payment. However, it is necessary to point out that there is need to curb payment of fraudulent claims. At present claims are approved by the surveyors but the industry needs to train and groom claim investigators to stop payment of fraudulent claims.