Financial health of insurers cannot be improved through regulatory orders

June 25 - July 01, 2007

The insurance sector in Pakistan suffers from some structural weaknesses, which is apparent from the size of total insurance business written annually and the size of insurance companies. While the number of companies underwriting insurance has grown, the difference in size of companies operating in the public and the private sectors just could not create healthy competition. On top of this lack of expertise with the regulators does not help in creating conducive working environment for the insurance companies.

It has been written repeatedly that compared to the total population and the size of economy, the quantum of business underwritten by insurance companies is disappointing. Some of the critics say that the government is responsible for the prevailing state of affairs. However, the companies just cannot deny that they have not been playing their due role. They say that if the government could nationalize various entities including life insurance companies to achieve its 'other objectives' and also create specialized companies to under write insurance business originating from public sector entities, why cannot it undertake awareness programs?

It is also on record that insurance business has always remained lowest on the priority list of the economic managers. Previously, the sector was regulated by Insurance Department, a peripheral of Ministry of Commerce. Though, Securities and Exchange Commission of Pakistan (SECP) has been given mandate to oversee operations of this important sector, the Commission grossly lacks the expertise. Most of the executives the SECP got from the Department have retired and the present hierarchy hardly knows mechanics of the business.

Currently insurance penetration in Pakistan is less than one percent or to be precise at 0.67% of GDP. The state of affairs may be disappointing but also offers tremendous growth potential. The scope for substantial development in the sector is fully supported by the macro environment registering sustained growth and further liberalization of the economy.

The GoP has introduced reforms in virtually all the sectors. Therefore, it was anticipated that the new Insurance Policy would be announced along with the Federal Budget for 2007-08. However, the new insurance policy has yet to be announced. On the contrary the Finance Bill 2007 seeks some amendments in the current Insurance Ordinance.

The following amendments have been proposed in the Finance Bill, 2007 in the Insurance Ordinance, 2000: 1) exemption of tax on capital gains, 2) powers to the SECP to declare any asset as admissible, 3) compulsory re-insurance with Pakistan Re-insurance Company remains withdrawn, 4) SECP to be assigned powers to undertake on-site inspections of an insurer, 5) SECP to have power to intervene and remove an unfit or improper CEO or director and finally (6) to provide additional powers to the SECP to penalize any insurer for non compliance of the provisions set forth.

Some of the analysts believe that the proposed amendments, if implemented would bode well for the insurance industry. It would encourage the insurers to build on their equity base and equally well for the policyholders as it would further stimulate transparency and corporate governance in the industry.

However, some other analysts are of the view that making amendments in the insurance ordinance alone cannot strengthen the sector. One of the issues is disparity in the paid-up capital of the listed companies. This has resulted in less than five insurance companies controlling about 90% of the market share of non-life business. In life insurance the market is virtually in the grip of State Life Insurance Corporation (SLIC). Though, a few life insurance companies are operating in the private they have are still living with a small share. They have not been able to enter into the stronghold of SLIC simply because of the size and more importantly because of their weak marketing plans.

Lately, two Takaful companies have been given a license to underwrite business in Pakistan and for conventional insurance companies to establish Takaful windows. There is strong linkage, interdependence and synergies between Islamic banking, capital market and Takaful (Islamic insurance). There is a need for balanced development of these segments for the development of Islamic financial services industry. While the banking and capital segments have grown tremendously, Takaful is still at early stages of development.

Globally three Takaful models are followed, based on the contractual models Modaraba, Wakalah and Waqf or combination of these. The existence of these models demonstrates the flexible and practical nature of Takaful principals. However, this raises the question of contractual relationship between parties and their respective rights and obligations as well as the need to ascertain the types of risk peculiar to each model.

The Takaful and re-takaful business play a crucial role in managing and mitigating the risks in Islamic finance. Therefore, Takaful operators play an important role as economic and financial intermediaries as they mobilize long-term funds in the form of policyholders' contributions and investment them in available Shariah Compliant investments.

In the absence of clear regulatory framework, prudential standards and codes of good governance, the potential of the Takaful industry for growth and development may be stunted by certain obstacles i.e. lack of regulatory certainty and of transparency, and resultant inadequacies in risk management. These obstacles demand immediate attention for the development of the Takaful industry.

Therefore, it is necessary to follow a strategy for 1) developing a suitable regulatory and supervisory framework to reinforce its affiliation with other segments of financial services industry and 2) adapting the relevant legal, governance, information and liquidity infrastructure for insurance so that it caters for the Takaful industry by accumulating the specificities of Islamic finance.

One of the constraints is outreach of insurance companies. Many of the sector experts are of the view that alternative delivery channels have to be established. The concept has yielded encouraging results in auto insurance segments. Since over 70% vehicles sold are financed by the leasing companies and commercial banks, these financial institutions act as alternate delivery channel.

Similarly corporate entities could be used for promoting life and health insurance business. The ultimate beneficiary would be the employees and the corporations. Since the benefits are directly linked with the number of people being included in the cover, employers buying cover for more employees would have to pay lower premium but employees would get more coverage.


Agriculture credit is constantly on the rise, which includes lending for implements as well as inputs. Therefore, the banks will have to play the lead role in promoting crop insurance, hedging the crops against uncertainties i.e. excessive rains and floods as well drought, pet attack etc. Crop insurance would also help the government minimize its role/expenses in times of natural calamities.

As the government in also undertaking mega infrastructure projects getting insurance cover under engineering insurance could help in saving the government from unseen threats. It is necessary to highlight that work on any project cannot commence without such cover. What are we waiting for?