INSURANCE AND ECONOMY GO TOGETHER

SHAMIM AHMED RIZVI
Nov 19 - 25, 2007

The Insurance Industry in Pakistan has performed exceptionally well during the last few year as a result of liberal polices and incentive provided by the government. Actually the performance of insurance industry is linked with the national economy, which has taken a turn around during recent years and so the trickle down effect on the health of insurance industry is significantly visible.

Despite this growth in the last few years, the performance is far behind the real potential and as such there is much room for improvement. Pakistan is one of the largest Muslim states in the world with a population of about 160 million. For a country the size of Pakistan, the insurance sector is underdeveloped. Insurance penetration as percentage of GDP is 0.6% (for life and non-life business). This is far below the levels achieved by many other developing countries such as India (2.85%), Malaysia (5.35%), Iran (1.16%) and UAE (1.12%). According to official estimates, less than 2% of the population is covered by any form of insurance in Pakistan.

The Security & Exchange Commission of Pakistan, as a regulatory authority of the insurance sector, has taken many initiatives to harness the developed potential in this sector by providing level playing fields to government and private sector. Important amendments were made in the Insurance Ordinance, 2000 through the Finance act, 2007, which has empowered the commission to conduct on site inspection of an insurance/takaful company, and if needed so, to enter the company's premises for search and take possession of such records and documents etc. that it may require as evidence and to remove a person holding the office of chairman, chief executive, director, manager or principal officer.

An official of the SECP told this correspondent that after independence, there were more than 70 foreign and only a few domestic insurance companies in Pakistan. To protect the newly established local non-life insurance companies and to curtail outflow of foreign exchange by way of reinsurance premiums, Pakistan Reinsurance Company Limited (PRCL) was formed in 1952. PRCL's monopoly right to a pro-rata treaty share, as a part of liberalization, has now been limited to its right of first refusal to the extent of 35 percent of any cession made by non-life insurers to their reinsurance treaties. As on June 30, 2007, there were 50 insurers including 46 non-life and 4 life and 2 general takaful companies transacting insurance and general takaful business, respectively in the private sector. There was a state owned National Insurance Company Limited (incorporated in 1976), having exclusive right to insure all public property and interest. State Life Insurance Corporation of Pakistan (SLIC), an outcome of the nationalization of private sector life insurers in 1972, has gradually been losing its life market share to private sector life insurers (In 2006, SLIC held over 70%) of the life market as against 76% and 75% in 2004 and 2005, respectively, who, as a part of the government's liberalization policy were allowed in early nineties.

INSURANCE/TAKAFUL COMPANIES

Prior to processing an application for registration to act as an insurance or takaful company, the essential pre-requisite, after obtaining the ID's consent, is incorporation of a company under the companies ordinance. By June 30, 2007, out of 9 permissions granted to the interested applicants including 4 non-life, 1 general takaful and 4 family takaful, 2 applications for registration including 1 general takaful and 1 family takaful were in the final stage for issuance of the licenses. In addition, one license to write non-life insurance business and one license to transact general takaful business were also granted by the ID.

After promulgation of the Insurance Ordinance, foreign life and non-life firms are required to be locally incorporated and establishment of any new branch of a foreign insurance company is prohibited. Vide the decision taken in 1993 by the Government of Pakistan, 1 percent participation in the equity was allowed to foreign insurers, but now fully foreign insurance companies have been permitted. However, foreign companies are required to arrange minimum foreign exchange of US$ 4 million (of which at least US$ 2 million must be brought from abroad). Towards meeting the minimum paid up capital requirements under the Insurance Ordinance while maintaining 100 percent foreign equity, the balance can be raised locally.

CROP INSURANCE

As member of SBP's Committee on Crop Insurance, the commission has contributed towards development and introduction of crop insurance products.

MOTOR THIRD PARTY INSURANCE

More than 90 percent of the vehicles plying on the roads either do not carry motor third party compulsory insurance cover obtained from the registered insurers or have certificates issued by non-authorized entities. The commission has been in dialogue with the Insurance Association of Pakistan and is in the process of finalizing its recommendations for an effective arrangement curbing the illegal issuance of the motor certificate for the benefit of the road victims.

According to the record maintained in the Securities & Exchange Commission of Pakistan following is the position of registration of companies in various categories of Insurance sector.

 

NUMBER OF COMPANIES

DESCRIPTION

30 JUNE 2006

30 June 2007

LIFE

Public

1

1

Private

4

4

Sub-Total

5

5

NON-LIFE

Public

1

1

Private

45

46

Sub-Total

46

47

GENERAL TAKAFUL

Public

-

-

Private

1

2

Sub-Total

1

2

Grand Total

52

54

REINSURANCE

Public

1

1