INSURANCE BUSINESS IN PAKISTAN

Enormous growth potential yet to be exploited

By SHABBIR H. KAZMI
 Apr 04 - 10, 2005

Every valuable item must be protected from all types of threats should be the motto of any sensible person. Generally such threats are hedged by taking protective measures. Still there are certain factors which are beyond human control and the eminent loss has to be minimized by taking additional measures. One such measure is acquiring insurance cover against the unforeseen factors, be it loss of property caused by any happening including natural calamity or death of a human being, which is unavoidable.

It is a common observation that people do take some measures to minimize the losses to tangible assets but often ignore the most precious asset, the human life. In no way one can compensate the loss resulting from the death of a person but efforts should always be made to minimize the miseries of the dependents after the demise of the bread earner for the family.

It is sad to note that whatever insurance business is done in Pakistan is mainly out of compulsion. However, the volume of business generated through voluntary act is almost negligible. It may also be said that both the state and the insurance companies are responsible for the prevailing situation. The laws/rules do demand mandatory insurance cover but hardly any effort has been made to highlight the benefits of insurance. On top of this, the various misconceptions created by certain segments off-set whatever efforts are being made by some insurance companies.

It is on record that bulk of the insurance business in Pakistan pertains to general insurance. Almost all the business is generated due to mandatory requirements. Marine insurance is only due to the requirement of financial institutions. Car insurance business is also mostly because of auto financing. One of the basic conditions for auto financing is insurance cover for the vehicles. According to the data available nearly 75% of the total cars sold in the country are under lease/auto finance. As regards insurance of factories and the stock of goods produced and raw material, it is also due to compulsory insurance coverage.

The volume of general insurance business is directly dependent on economic growth. With the revival of economy, the import of plant and machinery and raw materials is on the rise. Export volume is also on the rise. Therefore, there has been a natural growth in the business. The rise in per capita income and availability of financing of consumer durables is also generating the additional business. At the back of further acceleration in economic activities and increase in per capita income the volume of insurance business is expected to rise further at a substantial rate.

It will be unfair to ignore the efforts of companies offering health insurance. It is a recent phenomenon but the growth has been substantial. It is only because there was a latent demand but such services/facilities were not available. With the commencement of operations by these companies and availability of service, certain volume of business started poring in automatically. However, less than one percent of total population enjoys such cover and bulk of the business is generated from corporate employees.

There are two institutions responsible for the welfare of workers in the country. These are Employees Old Age Benefits Institution and Social Security Institution. The first institution collects funds from employees as well as employers to provide pension once a worker is retired. The second entity also collects funds from employees and employers to provide health care services to the workers and their dependent. Social Security Institution also owns and operates dispensaries and hospitals. However, the level of services is rather low and bulk of the expenses goes towards administrative cost rather than healthcare. Therefore, one of the suggestions could be that government transfers these hospitals and dispensaries to the private sector and only buys the health insurance cover, either directly or through the employers.

Crop insurance is conspicuous by its absence in the country. It is often said that Pakistan's economy is highly dependent of agriculture but no effort has been made to protect the farmers if any natural calamity hits them. In the absence of such covers the government has to bear the brunt. The government has to compensate the losses caused to farmers, which is often not only highly inadequate but the adverse impact often cripple the farmers leading to inability to buy seeds and other inputs in the forthcoming years.

Though, there has been a lot of talk nothing concrete has been done as yet to introduce comprehensive crop insurance in the country. Some insurance companies tried to offer insurance cover in the past but the results were haunting, which prompted them to discontinue this business. It is necessary to reiterate that crop insurance is a must for poverty alleviation. It is heartening to note that financial institutions are now providing substantial loans to the farmers. However, if the crop is not insured properly the farmers would not be able to payback the loans.

It is also on record that in the past most of the banks were ready to pay penalty rather than providing loans to the farmers. They have just started extending such loans and may God forbid if any calamity hits recovery of these loans will be in doldrums. According to the State Bank of Pakistan the total disbursement of agriculture credit is expected to surpass 100 billion rupees during the current financial year. Therefore, the central bank must convince the government to make crop insurance mandatory.

Crop insurance is not a new concept to be introduced in Pakistan. It is common in many countries around the globe and any model can be customized to suit the local conditions. Fearing losses should not stop the government as well as the insurance companies from undertaking this business. Four major crops, wheat, rice, sugarcane and cotton enjoy very substantial share in Pakistan's GDP. These crops provide food for the people and raw material for the industries.

Having burnt their fingers, insurance companies may be hesitant in undertaking crop insurance business. One of the possible options could be that part of the insurance premium is contributed by the government and it also undertakes the responsibility of reinsurance. Since the government and the financial institutions will be the major beneficiaries, it is also their responsibility to work out the mechanism for initiating crop insurance in the country.

Some of the critics as well as the regulators are of the opinion that the major reason for the slow development of insurance sector is low capital base of insurance companies. This does not allow the companies to expand their business. To support their argument they say that bulk of the general insurance is shared by less than half a dozen companies and often the smaller companies are not able to compete with the large players. Therefore, the first step to strengthen the smaller companies is enhancement of their paid-up capital.

However, the sector experts have a contrary point of view. They say, "Small capital base is not the real constraint. The risk of an insurance company is hedges through reinsurance. Even if a company has a small capital base, it can cover the risk by getting a reinsurance cover from a reputed reinsurance company." As against this, the regulators are of the opinion that the enhancement of minimum paid-up requirement is aimed at consolidating the sector by weeding out the weak players. If the sponsors are serious in expanding their business their intent should be fully supported by injection of additional liquidity.

The sponsors of smaller companies say, "We cater a small niche market and our clients are fully satisfied with the level of our service and we enjoy claim repayment ability. Therefore, meeting the minimum capital requirement would not help us in expanding our business but our shareholders will not get a decent return." They also say, "If the government is serious in the consolidation of insurance sector, it should ensure that all the payments are settled in full and in time. The key factor which discourages people from getting insurance cover is delay in getting the claims. Unless this problem is overcome there is no incentive for getting the insurance cover."

It is also alleged that big players enjoy an undue advantage. They often offer rates at which smaller companies cannot compete. In the past tariff was approved, implemented and monitors by the regulators. However, now the situation has changed entirely. Large players, in attempt to acquire new business offer ridiculously low rates. The ultimate result is that they do succeed in acquiring a business but also follow delay tactics in payment of claims. The worst sufferers are small businesses who acquire insurance cover from big players expecting better treatment and end up getting no claim or only a part of the claim lodged.

The government has decided to liberalize and deregulate most of the business and established autonomous regulatory authorities to oversee the affairs of various sector. It was suggested that the government should also establish 'Pakistan Insurance Regulatory Authority'. However, it seems that the bureaucrats have become the biggest opponents of the proposed authority. At present, Ministry of Commerce as well as Securities and Exchange Commission is overseeing the affairs of insurance sector. According to a critic, "Neither of the two has the expertise and time to effectively and efficiently regulate the insurance sector. The real issues are often slipped under the carpet and most of the time is wasted on non-issues."

There is an old saying, 'wherever there is smoke there is a fire'. If the government is really serious in consolidating and growth of insurance sector, it should change the rules of the game in full consultation with all the stakeholders. Strangely the whole emphasis of the regulators seems to be at protecting the interest of shareholders of insurance companies rather than protecting the interest of those who acquire insurance cover. Unless there is an incentive for acquiring the insurance cover the insurance sector is not expected to grow and prosper.

WHAT IS INSURANCE?

Insurance is a risk transfer mechanism. It's a method of shifting the responsibility for losses to specialists (insurance companies) who handle the risk by spreading it over a large number of people or firms.

A system of protection against loss in which a number of individuals agree to pay certain sums of money, called premiums, to create a pool of money which will use the contribution of these individual to pay the losses of the few caused by events such as fire, accident, illness, or death.

TYPES OF INSURANCE

Life insurance is an essential part of financial planning. The main purpose of purchasing life insurance is to ensure that dependents of a person are financially protected in the event of his/her death. Life insurance is a way to plan for the future and to be sure that the coverage purchased serves the needs.

NON-LIFE/GENERAL INSURANCE

All sorts of non-life insurance business are covered under general insurance business are:

* Fire and property damage
* Marine, aviation and transport
* Motor third party compulsory business
* Liability
* Workmen compensation
* Credit and surety ship
* Accident and health
* Agriculture insurance
* Miscellaneous

DIFFERENCE BETWEEN LIFE AND NON-LIFE INSURANCE

* Non-life insurance is short-termed contract (for a year or so) while life assurance is a long-term contract.

* In non-life insurance subject matter being insured is tangible i.e. factory, vehicles, goods etc., whereas in life assurance the subject matter being inured is the timing of death which is intangible.

* As the name suggests non-life insurance deals with the non-human aspects, whereas life assurance deals mostly with the human aspects of the life.

* In non-life insurance the sum insured (value of the subject matter insured) is only payable in the event of loss, whereas in life assurance the sum insured is payable at the maturity of policy in respective of the loss producing event such as death.

Nos.

NAME OF COMPANY

PAIDUP CAPITAL

1

Adamjee

826.000

2

New Jubilee

318.000

3

EFU

210.000

4

Habib

130.000

5

Century

125.000

6

East West

122.977

7

I G I

122.811

8

Premier

115.444

9

Muslim

111.823

10

Central

105.000

11

United

102.533

12

Askari

102.183

13

Reliance

88.395

14

Alpha

88.000

15

Business & Industrial

85.000

16

Cooperative

84.146

17

Agro

80.000

18

Asia

80.000

19

Capital

80.000

20

Credit

80.000

21

Crescent Star

80.000

22

Excel

80.000

24

Pak. Equity

80.000

25

Pak. Gen

80.000

26

Shaheen

80.000

27

Silver Star

80.000

28

Union

80.000

29

Universal

80.000

TOTAL

3,697.312

Source:IAP

 


 

NO

NAME OF COMPANIES

GROSS PREMIUM

NET PREMIUM

GROSS CLAIM

1

Adamjee

5,585.097

3,186.202

3,101.309

2

Agro

16.500

8.400

13.000

3

Alpha

105.900

59.600

53.400

4

Asia

26.100

13.170

11.700

5

Askari

371.900

210.100

187.900

6

Business & Industrial

47.000

30.400

10.800

7

Capital

16.960

69.670

4.126

8

Central

52.800

10.000

64.900

9

Century

371.900

213.900

193.600

10

Co-operative

12.100

7.800

2.900

11

Credit

8.891

2.393

10.033

12

Crescent Star

73.500

32.000

21.700

13

East West

282.300

181.700

160.900

14

EFU

3,943.600

1,662.100

1,447.400

15

Excel

2.000

3.400

0.900

16

Habib

320.500

150.800

136.000

17

I G I

358.700

142.200

73.000

18

Muslim

212.700

93.200

43.700

19

New Jubilee

1,263.300

638.700

601.400

20

Pak. Equity

0.000

0.000

0.000

21

Pak. Gen.

52.200

27.900

13.700

22

Premier

406.900

132.100

140.700

23

Reliance

237.400

136.200

76.700

24

Seafield

0.185

0.060

1.000

25

Security General

189.011

50.015

58.358

26

Shaheen

395.300

205.200

169.600

27

Silver Star

28.600

14.800

10.300

28

Union

11.300

4.800

6.700

29

United

67.700

35.600

19.200

30

Universal

301.300

161.600

121.500

TOTAL

14,761.644

7,484.010

6,756.426