The insurance industry in Pakistan still keeps reeling from a number of inherent weaknesses
By SYED M. ASLAM
May 19 - 25, 2003
The 19th of this month marks the completion of the 33 months of the new insurance law — the Insurance Ordinance 2000 promulgated on August 19, 2000. It replaced the outdated Insurance Act of 1938 and was aimed at better regulating the business to protect the interests of the policy-holders including rampant grievances of non-settlement of claims by the insurers, improving the standards and inducting professionalism in the industry.
It also required the insurance companies, both general and life, to increase their paid-up capital in phases by December 31, 2004. The general insurance companies have to enhance their paid-up capital limit to Rs 80 million while life insurance companies have to enhance the limit to Rs 150 million by December next year. In the first phase ended December 31, 2002 companies conducting life insurance business were required to enhance their paid-up capital to Rs 100 million while general insurance companies had to enhance their paid-up capital to Rs 50 million. The first phase was completed successfully and all general and life insurance companies operating in the country today fulfil the minimum paid-up capital limit.
The insurance business in Pakistan is now regulated by Securities and Exchange Commission of Pakistan instead of Department of Insurance, Ministry of Commerce. Today, the general insurance companies are allowed to fix their own insurance tariffs to compete in a free market environment. This has resulted in brining motor insurance rates to affordable levels for the buyers which many industry insiders say undermine the capacities of the insurance companies to honour the claims.
However, the insurance industry in Pakistan still keeps reeling from a number of inherent weaknesses due primary to neglecting the sector for too long a period. This is most evident from the failure to establish a reliable re-insurance company within the country the absence of which has resulted in heavy dependence on foreign reinsurers. The heavy dependence is also blamed for providing foreign reinsurers the pretext to dictate their terms and conditions to increase the rates, tighten the capacities, reducing the covers and slashing the rates of commission payable to local companies.
In addition, the foreign reinsurers refuse to provide terrorism cover which previously used to be a part of the overall coverage. Sources in the insurance industry claim that war risk cover, which previously used to be a part of the reinsurance treaties, is just not available at any cost to the local insurance companies. They also say that while big insurance companies can afford to take risks the smaller ones keep on underwriting the risks without having a cover from the foreign reinsurers.
All companies underwriting business in the country have to offer 10 per cent of gross premium to Pakistan Reinsurance Company Limited (PRCL), the public sector reinsurer. They have to offer an additional 35 per cent of the remaining premium to the PRCL which can accept or reject it. The biggest volume of business is reinsured outside the country.
Over the years the foreign reinsurers have also reduced the rates of commissions they pay to local insurance companies to give them the business. Foreign reinsurers used to pay as much as 40-50 per cent commission to local insurance companies for the business provided which has been lowered to as low as between 5-15 per cent in many cases which is not enough even to cover the underwriting costs of 40-50 per cent.
While foreign reinsurers refuse to provide terrorism cover and slashed the rates of commissions paid to the local insurance companies, commissions paid by the companies to their agents as well as commissions received by them by the foreign reinsurers are subjected to a 10 per cent withholding tax. Former chairman of Insurance Association of Pakistan, M.I. Ansari said that the insurance companies are also subjected to unfair taxation. "The Pakistan Reinsurance Company Limited (PRCL) insists to levy the 10 per cent withholding tax on all commissions the insurance companies pay to their agents and also on all commissions that they receive from reinsurers. We insist that withholding tax on these commissions are not subject to taxation in the first place. It amounts to double taxation because insurance companies already pay tax on their respective turnovers which includes commission received from reinsurers."
The abolishment of minimum tariffs in the new insurance law has resulted in unethical undercutting practices in all classes of business, particularly motor business, the biggest revenue earner. Ansari said that though general insurance companies have benefited from lease-led growth in car sales volume to pushed the share of comprehensive insurance business to 40 per cent of the total motor business, the removal of tariff barriers have resulted in unethical undercutting. "The massive undercutting has resulted in uneconomically comprehensive motor insurance rates — it is available for as low as 1.5-2 per cent — which undermines the quality of protection. The irrational, and uneconomic tariffs, offer little or no protection to the buyers and the price of uneconomic competition is ultimately borne by the people in the form of inferior service and settlement of claims."