LIFE AND HEALTH INSURANCE SECTOR
An enormous potential yet to be exploited
By SHABBIR H. KAZMI
Dec 06 - 12, 2004
Interesting people get insurance cover for most of their valuables. However, they ignore the most precious thing on earth, their own lives. They are concerned but most of the time either they do not have the information to get the right cover or simply consider it an expense, which will not yield any benefit as long they are surviving. Ironically they tend to forget the basic fact that the real beneficiaries are their dearest, who will not only miss them but may also face serious problem after the departure of the bread-earner.
The same also goes true about health insurance. People get insurance cover for cars to hedge against total loss as well as to minimize the burden of repair in case of an accident. Falling ill or hospitalization is also part of the life. In case of a serious illness, a person can really go broke by paying hefty medicine and hospitalization bills.
The fundamental purpose of Life Assurance is to provide money to meet financial losses caused by death, disability and illnesses. However, Life Assurance policies may also provide investment benefits that is, money payable on survival of the life assured rather than only on death. In some circumstances, one can also have policies that pay out benefits if the policyholder suffers a critical illness. There are two main elements of Life Assurance.
PROTECTION: income and security for dependents after the death of the life assured
INVESTMENT: the creation of capital from regular savings
A life assurance product can be made up of either or both of these two elements.
Life Assurance policies are paid for by premiums. A premium is made up of three elements.
P = PROTECTION The cost of the life cover or 'risk'
I = INVESTMENT The amount, if any, of the investment content
E = EXPENSES The expenses of the life company
The Proportion of each element of the 'PIE' varies according to the type of policy of which there are many different forms.
There are three basic forms of Life Assurance. These are:-
* Term Assurance
* Endowment Assurance
* Whole of Life Assurance
Term Assurance is the least costly of the three basic types. Term Assurance Premiums do not contain any investment element. The premium merely covers the risk of death and the expenses of the life office. In return for a series of regular premiums a Term Assurance policy will pay out a lump sum of money if death occurs during a chosen term of years. If the policyholder does not die during the term but lives to the end of the term the contract ceases and no money is due to the client nor is there any return of premiums. Term Assurance is like car insurance — if you don't have a claim your premium is "lost". The client simply pays to cover the risk of his/her dying within a certain term.
An endowment is basically an investment policy. The premium contains all three factors — 'protection', 'expenses' and 'investment' but it is the investment content which makes up most of the premium. Endowment Assurance works in roughly the same way as the Term Assurance, i.e. if death occurs within a chosen term then the lump sum is paid out. However, where the Endowment differs is that at the end of the contract, (if the client has not died), a lump sum is also paid out. Thus it is certain that at some point in time the lump sum will be paid. To fund this certain payment, the life office must invest money over the term of the policy — the portion they invest is the investment portion of the premium. Since there is this investment element in the premium, should the policy be stopped for any reason before the end of the term, except in the case of death, then a cash payment will be made of a proportion of the investment elements paid in. This is called a surrender (or encashment value). Should the surrender occur in the early years of the policy life, the value of it will be very small compared with what has been paid in premiums. This is so because the life office has certain expenses to meet like the cost of setting up and issuing the policy document and salary plus commission to the salesman. The life office aims to recoup these expenses by taking back a little of each premium, i.e. the expense loading.
WHOLE OF LIFE ASSURANCE
Unlike either Term Assurance or Endowment Assurance, a Whole of Life Assurance is a permanent policy, i.e. it lasts for the whole of one's life. Premiums are paid right up until death but there can be Whole Life contracts called Limited Premium Whole Life where premiums cease at a specific age, usually 65 or 80, although the contract itself continues until death. Since there is no need to fund at quite so high a level with Whole Life as there is with the Endowment, because the sum assured is paid out on only one eventuality and not two, the investment element in the premium is less than in the Endowment premium. The variations on Whole Life are the same as on Endowment, i.e. Non-Profit, With-Profit and Unit-Linked.
The life insurance industry in Pakistan has come a long way since 1992 when monopoly of State Life Insurance Corporation (SLIC) ended and private sector was allowed to establish life insurance companies. At present the sector comprise of American Life Insurance, EFU Life Assurance, Metropolitan Life and New Jubilee Life Insurance Company, besides the oldest player — SLIC. The state-run company, also on the active list of Privatization Commission, still enjoys lion's share. Among the private sector managed companies EFU Life Assurance enjoys the largest market share. New Jubilee Life Insurance Company, formerly known as Commercial Union Life Assurance Company Pakistan, is growing at a very fast pace. One of the reasons for the substantial increase of the market share is there proactive approach and ability to offer a diversified range of products. As against this, bulk of the SLIC is drawn from conventional products.
Similarly, the size of health insurance sector has been registering a very high growth rate. One of the reasons for this exceptional growth rate is that such products were not being offered in the country. Once these products were introduced and people also realized the benefits the size of pie grew enormous. However, still a large segment of population is outside the umbrella, mainly due to the lack of awareness.
TOTAL PREMIUM OF THE LIFE INSURANCE COMPANIES
EFU LIFE ASSURANCE
In the early 30s, under the inspiration of the Quaid-e-Azam Mohammad Ali Jinnah, there began to appear signs of economic renaissance of the Muslims of India. Shipping, Airline, Banking and Insurance companies made their debut. In 1932 in Calcutta, Mr. Ghulam Mohammed, a far sighted man, who later became Governor General of Pakistan, established an insurance company with financial assistance from the H.H. Aga Khan and H.H. Nawab of Bhopal. The company was named Eastern Federal Union Insurance Company Ltd. It was registered in Calcutta and operated in undivided India and Burma. Its business was both General and Life Insurance. In 1947, on the birth of Pakistan, EFU (as the company was called), found a new country and rapidly established itself as a progressive and innovative insurance company. It provided the emerging insurance industry the leadership, the manpower and the drive needed to grow in a situation where at that time three-fourth of insurance business was held by foreign companies. By 1961, EFU had become the flag bearer of Pakistan's insurance industry on the world stage, and the largest life company in Afro-Asian countries (excluding Japan) under the leadership of our late chairman Mr. Roshen Ali Bhimjee. It remained so until 1972 when Life Insurance industry in Pakistan was nationalized. From that time onwards, EFU operated solely as a general insurance company and was subsequently renamed EFU General Insurance Company Limited.
In 1992, the Government of Pakistan reopened the life insurance business to the private sector organizations and EFU Life Assurance Ltd was incorporated in November 1992 as the first private sector life insurance company. In early 1993, EFU Life commenced writing group life insurance business and by March 1994, the company began writing its individual life business. EFU Life is managed by a team of professionals with extensive life insurance experience in the United Kingdom. This has helped the Company establish a professional culture unique amongst life insurance business in Pakistan. The Company has a growing branch network of 57 branches through out the country with employee strength of over 1,400 personnel in its sales force and around 150 personnel at its main offices in Karachi and Lahore. The company employs 6 full time actuaries and also has an active involvement of one of the leading actuarial firms in the country. EFU Life is the first life insurance company in Pakistan to be awarded the ISO 9001:2000 certification. At present, EFU Life continues to be the largest private sector life insurance company in Pakistan. In 2003, EFU Life's premium income was Rs.2.0 billion. The Company enjoys a market share of over 60% of the private sector life premium income. EFU Life has a comprehensive range of products which has been developed after extensive research of financial services in western countries such as the United Kingdom. These products are designed to meet the varying needs of EFU Life's clients and offer the best in financial services. EFU Life is the pioneer in introducing the following products and features in Pakistan
* Unit-linked products
* Critical illness products
* Education planning product
* Inflation protection benefit
* Tax qualified pension plans
* Extended critical illness product
NEW JUBILEE LIFE
FORMERLY: Commercial Union Life Assurance Company Pakistan commenced operations in June 1996 as subsidiary of CU International Insurance. Later, when CUII merged with a couple of other international insurers, they decided to concentrate in developed markets only, mainly Europe. Accordingly, they sold their holdings in a number of countries including Pakistan. Aga Khan Fund for Economic Development (AKFED), an organization based in Switzerland and New Jubilee Insurance Company purchased the majority shareholding in Commercial Union Life Insurance Company Pakistan and renamed it to New Jubilee Life Insurance Company. Hence, New Jubilee Life is now effectively functioning as a subsidiary of AKFED. New Jubilee Life is now ready to serve its customers with a renewed vision and same unwavering commitment as always. With the financial strength of AKFED combined with New Jubilee Insurance's professional expertise and five decades of excellence in local market, New Jubilee Life brings you the credentials that spell out success. Jubilee Insurance Group's experience in the international market further enhances New Jubilee Life's ability to cope with the challenges in meeting future financial needs of its customers. New Jubilee Insurance Company (NJI), in which AKFED holds a direct shareholding of 14%, is the third largest general insurance company in Pakistan. It is the only company among top three that has 'AA' rating from PACRA. NJI has 50 years of experience in the insurance industry in Pakistan, including life insurance prior to nationalisation. Under the auspicious guidance, leadership and management of AKFED, New Jubilee Life is fettered to become the prominent and leading life insurance company in Pakistan. After the take-over on January 1, 2003, the new shareholders further strengthened the company by injecting additional capital of Rs 225 million. The total paid up capital of the company was increased to Rs 627 million.
Health insurance has been launched in Pakistan by EFU-Allianz to provide medical cover to masses through payment of a nominal annual premium. It is a big incentive especially for those belonging to middle and lower middle classes. The facility could not be offered due to non-availability of financial resources, which now has been overcome with the help of a foreign company. There was a growing need for the launching of such an insurance scheme because the medical expenses have seen a rapid and constant increase over the years. Not only the individuals but the public and private sector organization were also confronted with the problem of paying heavy medical bills to maintain the medical facility of their employees. After getting permission from the Government of Pakistan the foreign company decided to invest around Rs 250 million. The individuals having health insurance policy carry a card with them to enter the hospitals and get the required treatment in free. This was just a start and with the passage of time more people are availing the benefit. The Allianz Group is a leading global provider of insurance and financial services with operations in more than 70 countries, and employing over 173,000 staff. The Group serves more than 60 million customers worldwide, including close to half of all Fortune 500 companies. In Asia Pacific, Allianz is present in 16 markets offering its core businesses of property and casualty insurance, life and health insurance, asset management and banking. It is Pakistan's first and the only specialized health insurance company that offers health insurance solutions to individuals, families, companies and voluntary groups.
The Insurance Division of Securities and Exchange Commission has been given the mandate to regulate the insurance sector. It is fully cognizant of the fact that the entire gamut of regulation of the insurance industry is meant to ensure that the interests of the policyholders are protected. Insurance is a long-term business where it is essential to build up the confidence of the insured. This essentially requires that the solvency of the insurance companies — both on a short and long term basis is ensured. The Insurance Ordinance 2000 specifically calls for stringent Solvency requirements by the insurance companies. Moreover, the rules, which are yet to be finalized, have also prescribed a solvency margin which the companies are required to maintain throughout. An additional feature in the area of prudential supervision is to ensure that the quality of management of the companies conforms to the dictum of "fit and proper". Unstable management and irresponsible behavior will result in market instability and financial chaos. This division enjoys adequate powers to ensure that the companies are properly managed, and also has the powers to change management personnel, if found necessary.
The story of the origin of life insurance is very inspiring. The idea of guarding against risk is almost as old as mankind. One of the prophets, Hazrat Yousauf recommended storing grain during seven fat years in Egypt against the impending seven lean years. Centuries ago in England, little groups banded together into guilds and societies. Members of these guilds and societies by paying small sums were assured that a certain measure of relief would be given to their families if the bread winner was taken away. In 1705, The Amicable Society for a Perpetual Assistance Office was founded and it became England's first successful Life Insurance Company.
Life insurance as we know today, developed from these small beginnings into a gigantic industry which gives people the security they need to maintain financial soundness, morale, and faith. Through war, inflation, deflation, depression, boom, panic, epidemic, and all kinds of catastrophes, life insurance gives the individual the solid financial footing needed to forge ahead as it is based on sound and scientific principles. Its record of service can not be approached by any other financial institution. At the times when Banks failed by the hundreds and the investment companies went under, the Life Insurance Companies paid their dues in full and survived the turmoil. Life insurance companies have maintained an enviable record in the face of almost every conceivable trial.
Life insurance is truly INCOME INSURANCE; a new source of income replacing the earning power of the bread winner if unfortunately he is taken away. It is in a sense, TIME, because it is money a person did not have time to accumulate; an estate that will complete the plans there was not time to finish.
Life insurance is sold not because someone may die, but because someone must live. If people die, the contracts which the life insurance agent has sold are LIFE for the survivors. If people live, the contracts are life for their old age. While people live, their contracts assure effective thrift and accumulation of funds and reserves for emergencies and for opportunities. It is an unsurpassed vehicle of savings, protection and growth which has stood the test of time and given people the security they need to maintain financial soundness and peace of mind.