All stakeholders have to play their role to popularize the concept among the masses

SHABBIR H. KAZMI, Special Correspondent
Dec 11 - 17, 2006

Insurance companies provide cover against a variety of risks. In this process they mobilize millions of rupees premium part of which goes towards reinsurance, claims payment and management expenses but a substantial percentage is reinvested. Therefore, these companies also play very import role in capital formation as well as providing much needed liquidity to the stock market. However, the size of insurance sector in Pakistan has remained very small compared to the prevailing opportunities.

To start with, many Muslims strongly believe that acquiring insurance is against Shariah injunctions. This may not be a fact but the rationale given by the religious scholars often keeps people away from obtaining such cover. Then there is lack of understanding about the benefits of insurance, for which the government as well as the insurance companies are jointly responsible. Whatever business is generated in the country bulk of it comes out of compulsion, not out of sweet will of people/business houses.

The largest percentage of total premium is generated through marine and auto insurance. This is because of the requirement of financial institutions. A large percentage of business comes from international trade, where the business houses also get financing from the banks. Therefore, these institutions make insurance mandatory to minimize their risk. The same is also true about auto insurance. At present more than 70% of total cars are sold under lease or auto financing arrangement. The banks providing auto loans demand comprehensive insurance of vehicles, including car theft.

In this regard, it is important to highlight that motor insurance acquired by owners of thousands of four, three and two wheelers is nothing but loss of billions of rupees. Most of companies issuing 'Act Only' insurance cover exist on papers. The irony is that the traffic police as well as the owners of vehicles know this but the business is proliferating due to patronage by the groups having vested interest. General insurance companies have been demanding the government to rectify the situation but all in vein.

The regrettable situation is because this most important sector has never been given due importance. In the past it Insurance Division was part of Ministry of Commerce. Now Securities and Exchange Commission of Pakistan (SECP) is the regulator for insurance sector. However, the situation has not improved much, mainly because of lack of expertise at the Commission.

One may agree that the SECP is making effort to strengthen the insurance sector but often the measures taken are not the right ones. For example insurance companies have been asked to enhance their paid up capital to improve their claim payment ability. However, many sector experts are of the opinion that paid-up capital and claim payment ability have no relevance. Claim payment ability is directly dependent on reinsurance arrangements. Some analysts are also of the opinion that Insurance Ordinance suffers from certain inherent weaknesses. These weaknesses can only be removed if regulators improve their understanding of this important business.

Though it may be too late to cry on split milk, it is a fact that the worst damage to insurance sector was caused when the government of Zulfikar Bhutto decided to nationalize life insurance business. The sponsors of general insurance companies also lost their interest. Then came the phenomenon of 'captive' insurance companies. Now bulk of the general insurance business is concentrated with these captive companies. There may be any number of general insurance companies operating in the country, both local and foreign, the fact is over 70% business is controlled by less than five companies. This results in unfair competition and big ones are getting bigger and smaller companies are facing extinction.

In the past insurance tariff was fixed by the government but now players are allowed to fix their own tariffs. This gives bigger companies an undue advantage of size. They charge a tariff, which smaller companies just cannot afford mainly because of the volume. However, big players refute this allegation. They say, "We are always exploring new types of businesses and finding alternate delivery channels. This allows us to enhance volume, which is the key to success".

One can recall that at one time motor insurance tariff was too high but with the increase in auto lease/auto finance business the tariff has come down substantially. This is because of the volume. However, some smaller insurance companies claim that the cartel of bid players has monopolized this business. The banks are of the view that by involving smaller companies in 'Yellow Cabs' they have lost millions and learnt the lesson to become extremely selective in selecting an insurance business.

The concepts of crop insurance and health insurance have not got popular because of lack of government support. The concept of crop insurance has lately got some acceptance but health insurance remains a far cry. One tends to agree with Saifuddin Zoomkawala when he says, "The government has to provide some kind of subsidy on health insurance because of low disposable income of people." The fact is that healthcare in the country has gradually shifted from public sector to private sector. And to make it affordable the government has to play its role.

The bottom line is that all the stakeholders have to play their role, with the government bearing the biggest responsibility. It is also suggested that corporates instead of spending billions as medical expenses should also opt health insurance. On one hand it will help them optimize their expense and on the other hand improve the quality of healthcare of their employees. It is also suggested that awareness programs should also be initiated in print and electronic media.