Increasing the minimum paid-up capital limit may not resulted in genuine investment in the insurance industry

 10 - 16, 2003

A number of factors, internal as well as external, are feared to restrict the growth of Pakistani insurance industry. The industry already reeling from unethical undercutting within and operating without terrorism cover not available at any price by the foreign re-insurers is bracing itself to lose a sizeable business to foreign insurance companies operating in the country.

Sources in the insurance industry attribute the rampant undercutting practices on the abolishment of minimum tariffs in the new insurance law, the Insurance Ordinance 2000, two-and-half years ago in August. They say that it has resulted in unethical undercutting practices in all classes of business, particularly motor the top revenue earner. The insurance companies can now fix their own motor insurance rates resulting in extremely irrational and uneconomic tariffs to offer little or no protection. The price of uneconomic competition, they say, is ultimately borne by the people in more ways than one inferior service and claim payments.

One of the salient feature of the Insurance Ordinance 2000, which replaced the Insurance Act 1938, was the phased increase of the paid-up capital from Rs 60 million to Rs 150 million for life and from mere Rs 1.5 million to Rs 80 million for general business by December 31, 2004. The non-life companies were required to raise their paid-up capital to a minimum level of Rs 50 million by December 31 last year and over a dozen of them were stopped to carryout the underwriting business for their failure to fulfill the requirement.

Talking to PAGE M.I. Ansari, a former chairman of Insurance Association of Pakistan (IAP), the representative body of insurance companies both local and foreign, said that permitting the general insurance companies to fix their own tariffs has resulted in unhealthy competition which seriously undermines the very foundation of the local insurance industry. "The unethical competition is resulting in low motor insurance rates which do not offer any protection to the policy holders seriously undermining the ability of many companies to cut corners in paying the claims. On the surface, the competition has resulted in bringing down the tariffs for the benefits of the insurance buyers but in reality the uneconomic rates are compromising their interests in term of settlement of claims. The rampant undercutting practices have already pushed the tariffs to irrational levels and is feared to restrict the growth of the insurance industry."

Sources also expressed concerns that increasing the minimum paid-up capital limit may not resulted in genuine investment in the insurance industry. "Only an in-depth study of the balance sheets of the insurance companies to be issued by the end of this fiscal year would be able to show whether the increased paid-up capital limit resulted in real investment as insurance companies have many ways to doctor the figures in the books."

Besides the internal problems a number of external problems are also feared to take a heavy toll on the local insurance industry. As is, the local insurance companies are forced to underwrite business without the availability of terrorism cover. Since January 1, last year the foreign re-insurers have declined to include the cover at any cost to the local companies and today even the leading insurance companies in the country have to make-do without it. However, the issue remains a well guarded fact known only within the insurance circles itself as all foreign trade to and from Pakistan is conducted as if usual.

Asked to comment the impact of a war in Iraq, Ansari feared that it would result in immense loss to the Pakistani insurers due to drastic increase in re-insurance rates. "Any increase in re-insurance rates by the foreign re-insurance companies on whom the local companies depend heavily to pass their risks would result in increased costs for the local companies. This would push the insurance costs the ripples of which would be felt by the industry, trade and business. Insurance being an inbuilt cost of all economic activities, and like all other economic activities, would also feel the shock of a war if the imminent war erupts in the Gulf region close to the country."

Ansari also accused the SECP to negate one of the very objective of the new insurance law protecting the interests of the insurance buyers. "The SECP seems interested almost entire in protecting the interest of the shareholders instead of the consumers which is much too evident from rampant unethical undercutting undermining the good business practices essential to provide quality service. It has done nothing to check the reduction of motor insurance tariffs to uneconomic and unaffordable level as low as a mere 2 per cent for a comprehensive coverage. What kind of protection a buyer can expect from such throw-away tariffs?"

Sources also expressed concerns that the cost of extra war risk coverage already levied on sea and airborne cargoes to and from the country after 9/11 would push an already high insurance costs. "In case a war breaks out in Iraq the cost of war risk premium is feared to increase sharply by as much as ten-fold the real beneficiary of which would be the foreign reinsurers and the real victims of which would be exports from and imports to the country. The local insurance companies would have to bear high reinsurance costs they could not be able to absorb and it would also render exports incompetitive and imports costly for the financial inconvenience of the people.