Plays a major role in the economy

Nov 19 - 25, 2007

Insurance is an important economic activity of any country whereas Pakistan, a thickly populated country of over 160 million people, has a huge potential of growth in insurance industry. This sector remained underdeveloped due to host of reasons. Over the period, insurance companies have tried to diversify their products and to constitute competitive price mechanism. In recent years, Government of Pakistan (GOP) has included insurance sector in its financial sector reforms. Foreign investors are now allowed to hold up to a 51% equity share of companies operating in the life and general insurance sectors. Foreign investors are also required to bring in a minimum of US$2 million in foreign capital and raise an equal amount of equity in the local market. There are also no restrictions on the repatriation of profits, whereas capital investment made in this sector can be repatriated with the permission of the State Bank of Pakistan. GOP has issued new insurance laws in 2000 that raised capital adequacy standards and enhanced policyholder protections. Insurance sector can be categorized in two broad sub-sectors, Life Insurance and Non-Life Insurance sector.

Per capita spending on life insurance in Pakistan is negligible and can be referred as one of the lowest in the world. Besides affordability issue, a significant reason for such low penetration is the lack of awareness of the availability of life insurance as a viable support and its significant role in bringing economic stability and benefiting society at large. In addition to this, another reason is the general perception that insurance, as is being currently practiced, is un-Islamic and this factor is even more pronounced in the case of 'Life' assurance. Due to these factors, people generally tend to opt for insurance coverage only where it is either mandatory by law, as in the case of motor third party insurance, or when it is one of the requirements of lending institutions like banks and DFIs. It wouldn't be wrong to comment that many people tend to call it a necessary evil. It can therefore safely be said that a substantial vacuum exists in the country which can only be filled once the generally negative perception about life insurance is removed and people are made aware of its benefits to the national economy in general and to their own personal well-being in particular.

Being an institutional investor, the life insurance industry is emerging as the largest investor after commercial banks in government securities and other capital market instruments. It is the return to investments that enables life insurance companies to pay its obligations such as claims and other liabilities. Since the tenure of policies is of long-term duration, therefore, the net premium accumulated by the companies is invested in long-term securities and in real-estate. The life insurance companies have accumulated investments at an average growth rate of above 15% over the years from 2004 to 2007.

The life insurance business (that grew very rapidly from a total sum assured of only Rs. 130 million in 1949 to Rs. 51.7 billion in 1972) was nationalized in 1972. Life Insurance Management Board managed the affairs of those newly nationalized life insurance companies. By consolidating the business of 41 nationalized insurance companies in 1973, the government created State Life Insurance Corporation with a purpose of encouraging life insurance business and to safeguard the interests of policyholders. The initial benefits were the reduction in premium rates by 33% and resolution of various outstanding disputes between the policyholders and the insurers.

In contrast to the non-life market, there are only 5 companies presently operating in Pakistan's life insurance industry including one state-owned State Life Insurance Corporation (SLIC), Postal Life Insurance, two foreign companies and two private domestic companies. There has been a consistent decline in the number of life insurance companies operating in this area mainly due to limited demand for life almost a complete monopoly in the market and thus leaves very little share for other companies. There were 9 life insurance companies in 1995 out of which 4 were foreign, 4 private domestic and one state owned corporation. Since some companies incurred considerable amount of losses consistently, most of the foreign companies merged their businesses with other private companies. However, in recent times, merger of foreign life insurance company with the other foreign company was happened due to losses incurred by them and also to meet the increased requirements of paid-up capital of Rs. 150 million, which was earlier set at Rs. 100 million until December 2003.

The life insurance companies deal in many different policies from annuities to death benefits and also health policies. Normally, the event that leads to payment of claim is very straightforward and the amount of benefit is mentioned in the contract as opposed to non-life business in which surveyors and loss adjusters are appointed to measure the loss as third party. The annuity contracts as opposed to life insurance contracts provide a benefit for survival. Therefore annuity provides periodic payments to the survivors as mentioned in the insurance contract.


In response to the regulatory changes, there has been a substantial growth in the capital base of private domestic life insurance companies that resulted in a gradual increase in their share from less than 20% in 2005 to above 25% in 2006. Among foreign life insurance companies, Commercial Union Life Assurance Company was acquired by Aga Khan Fund for Economic Development and the company was re-named as New Jubilee Life Insurance in 2003. This enabled the foreign companies to increase their market share. Meanwhile, the share of SLIC capital in total equity of life insurance rose from 67% in the start of this decade to above 70% in 2002, but fell sharply to around 60% in 2006, mainly due to disproportionate rise in the capital of foreign life insurance companies. Since the number of life insurance companies is relatively small in addition to limited business activities by foreign and private domestic companies, the overall level of equity as percentage of GDP is very low in contrast to the non-life insurance industry. However, with the increasing trend of equity due to regulatory requirements, the ratio of equity to GDP has remained stable in recent years. Most of this reduction was due to the penetration of private domestic life companies, which have come up with new products to attract prospective policyholders.


In order to give a brief back ground about the premium and claim structure, since the majority of life insurance policies cover a long duration, the gross premiums accumulated by life insurance companies include first year premium and the renewal premiums. In order to evaluate the growth and sustainability of the life insurance, one has to analyze the ratio of second year renewal to net premium. This shows the consistency and willingness of the policyholders to continue their policies whereas it also shows the level of interaction of the insurer with the policyholder. By the end of financial year 2006-07, it has grown by around 2% from the preceding year. Moreover, foreign private domestic companies have also shown progress in attracting new business as their ratio of first year premium to total gross premium increased by approximately 5%. This is mainly due to the re-organization and re-capitalization of the foreign companies.


In Pakistan, people are not very much inclined towards insurance that is mainly due to various reasons for example lack of education, religious thoughts, knowledge about insurance, unemployment, lack of understanding of general purposes of life insurance, and ignorance of benefits of life insurance.

One of the reasons of the low effectiveness of the life insurance sector in Pakistan is the too little regulatory framework, few market players, limited types of business, and lack of innovative products. Life insurance sector reforms started back in early 1990's but real development came after the promulgation of the Insurance Ordinance 2000. This was followed by the introduction of New Insurance Regulations by SECP in the form of Insurance Rules 2002, Takaful Rules 2005, prepared by a task force constituted by the Securities and Exchange Commission of Pakistan which has also been issued in September 2005. In addition to this, many Muslims around the world and in Pakistan believe that acquiring insurance is un-Islamic and rationale given by the few religious scholars often keeps people away from getting insurance 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. According to industry experts, less than 15 million out of 160 million lives in Pakistan have been insured by the major insurance companies in Pakistan by the end of fiscal year 2006-07.

Pakistan's life insurance sector is also facing the issue of creditability. People feel hesitant in trusting insurance companies for so many years. On average any policy holder will get returns after paying continuously for more than 15/20 years while keeping in view the overall financial governance and environment they are presently operating put lot of pressure on the ordinarily people. Obviously the financial strength of any company, concerns on corporate governance, country's overall economic and political situation and opening and winding up of operations of foreign companies causing mistrust among people. Due to overall educational system, Pakistan's life insurance sector is also facing quality human resource. Most of the marketing people in the sector are not formally trained and lack marketing skills, this also creates doubts on the credibility of the company both foreign and local.


In case of life insurance, there is no domestic arrangement for re-insurance and all the life insurance business i.e reinsured by the foreign reinsurance companies. There are a number of reinsurance companies doing business in Pakistan, the most reputed are Munich Reinsurance Company, Swiss Reinsurance Company and Scotish Reinsurance. Though international reinsurance firms have their own criteria to accept risks but generally Pakistani life insurance companies get reinsurance coverage on mutually acceptable terms and conditions.


From the customers' perspective, one of the biggest benefits associated with the Life insurance is financial security of the insured person in case of his/her death. This provides level of mental comfort (to some extent) to the person that his family will survive financially in his absence. And from the insurance company's perspective, in addition to this, life insurance develops the habit of savings in people. Insurance companies invest the insurance premium in various business ventures, funds and investments. According to GOP sources, presently assets under management of Life insurance companies are exceeding Rs.200 billion. Hence, these companies are playing an important role in the 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. Life insurance companies are also providing numerous job opportunities in Pakistan like around the world. They require huge human resource and qualified persons due to huge operations of Life insurance companies.


It is important to allow deduction of life insurance premium in determination of taxable income for the individuals as this incentive is one of the main reasons in India, South Korea, Malaysia and Singapore for relatively high life insurance penetration as compared to Pakistan. The new insurance policy is aimed at increasing penetration, removing impediments to insurance industry's development and outlining a more rational role of the public sector in line with international practices. The percentage of life insurance in the country, which presently is 0.28%, is among the lowest in the region and the immediate goal has been set at to enhance it to 1% in a period of three years. Analysis carried out by the Ministry of Commerce indicates that life insurance industry had failed to penetrate rural areas and provide insurance cover to socially deprived people. In order to address this, it should be made mandatory for all the workers to get life insurance schemes on subsidized premiums. In addition to this, government through SLIC should immediately introduce micro-insurance schemes. As said above, people feel hesitant in paying premium for so many years and God knows what would happen after so many years. Because of this mistrust, insurance companies should improve their credit ratings among people and must take measures to strengthen people's trust on them. Moreover, it is important to create more awareness through opening of more branches with added products. It would be a viable suggestion to reach people through NGOs so that they get clarity on the basis conceptual issues like Islamic or un-Islamic. Life insurance companies should also invest in their human development, which is essentially the real cause of the growth of this sector. Even if the companies bring lot many products, but they wouldn't be able to sell their products if they don't have quality marketing people.

Summing up, Pakistan's economy is growing steadily and ignoring this important sector is undermining the overall potential of country's economy. It is therefore, vital to educate people on the importance of life insurance plus clarifying the perception of un-Islamic system of business. It would be much more appropriate to put this sector on the top of the priority list. Bold, unconventional and strategically correct decisions are required. Leaders with vision and administrative competence are the need of the day. A consensus has now built that Life Insurance sector can play a major role in the development of the Pakistan's economy. Economic growth is consistent and will further strengthen if policy makers take market players of this sector on board.