GENERAL INSURANCE IN PAKISTAN
FOZIA ISHAQUE (FOZIA.ISHAQUE@HOTMAIL.COM)
Nov 19 - 25, 2007
The financial soundness of insurance companies in Pakistan has been strengthened by austere statutory requirements and regulatory parameters set forth by Securities and Exchange Commission of Pakistan (SECP) which is mainly reflected by the requirement of increased paid up capital base. As an implication of these measures several companies that were unable to meet the obligation of paid-up capital remained suspended from undertaking new insurance business, while some new companies started business in the non-life insurance sector. One of these companies offers Islamic insurance facilities also. The total assets of insurance companies have seen a consistent improvement since year 2004-05 with an average growth of over 20 percent in the last four years. The non-life sector has shown a faster growth of 21 percent for the same period, as compared to 14.6 percent growth in life and a moderate 6.1 percent growth in reinsurance. This growth in the assets of the insurance sector has primarily been due to the enhanced paid-up capital requirements which ultimately increased the risk management capacity of the insurance companies and enabled them to undertake increased insurance business with improved retention capabilities. The asset structure of insurance companies shows that the assets of the non-life business are increasing at a faster pace than the life insurance business mainly due to increased international trade and escalating volume of commerce and bank borrowing which also creates a sizeable demand for non-life insurance business.
Being an institutional investor the insurance industry has been playing a critical role in economic growth and development. It refers to a significant element of business and social sector by providing indemnification of risks faced by both individuals and companies. According to Economic survey of Pakistan in the year 2007 the real GDP growth was largely powered by the stellar growth in banking and insurance sectors respectively growing by 17.2percent and 18.2percent. The insurance industry in turn reinforced its position by capturing the advantages and pros of escalating GDP growth at the rate of over 7 percent p.a. It greatly reaped the benefits of increased economic activities, especially in the industrial and consumer finance sectors. The service sector continued to perform strongly for third year in a row and grew by 8 percent in the year 2006-07. Amongst the whole sector insurance and finance showed robust growth and spearheaded the race and registered record growth of 18.2percent during the current fiscal year 2006-07 which is slightly lower than 33percent of last year. If we analyze aggregate contributions for this year it comes to surface that finance and insurance contributed 13percent or 0.9 percentage points to the economic growth.
The insurance business has strengthened its profitability worldwide. A global outlook delineates that insurance industry had undergone a major set back since the year 2001 but managed to make a come back from year 2004 onwards. The performance of the leading global insurance and reinsurance companies has been impressive since then, and can be largely attributed to the full-bodied growth rate of the world GDP and a intermediate level of inflation prevalent in most of the countries. There exist two different measures of insurance penetration in national economies. It is evident that a country with a more developed financial system tends to accumulate more premiums. Pakistan's gross premium per capita has improved from more than US$ 3 in year 2005-06 to over US$ 4 in the year 2006-07 but it is still at a lower side if compared with other countries in the region other than Bangladesh only. More importantly, the share of gross premiums of the Pakistani market is only 0.02 percent of the global market whereas India accounts for 0.61 percent of global insurance premiums, USA has a hefty share of almost 36 percent and UK's share is 8.6 percent.
NON-LIFE INSURANCE INDUSTRY IN PAKISTAN
The total number of private sector Insurance companies operating in Pakistan has increased from 49 in the year 2004 to 55 at the end of 2005 of which four are foreign while fifty are local enterprises while one company is registered as Takaful operator. Of the fifty local companies, forty-eight are engaged in non-life insurance business and two in life insurance business. In case of foreign insurers, two companies operate in non-life and two in life insurance sectors. As of the close of the year, thirty-four companies are listed on the KSE, having paid-up capital of Rs.5,687 million.
The private sector, non-life insurance business is largely dominated by top ten insurance companies, which account for almost 84 percent of the total premium written by the sector. Fire and property damage insurance portfolio of non-life insurance sector increased to over Rs.10 billion while marine, aviation and transport insurance increased to over Rs.8 billion. The motor business insurance, accident and health and miscellaneous insurance increased to approximately Rs.8 billion, Rs.1 billion and Rs.3 billion respectively, during the year ended 31 December 2006.
CATEGORIES OF NON-LIFE INSURANCE
There are four main classes of non-life insurance in the country: Fire, Marine, Motor and miscellaneous, whereas Health insurance is a separate category. The Miscellaneous Insurance category includes hundreds of other prospective insurance classes such as Aviation, cash related insurance, travel insurance etc. Due to higher growth in industrial infrastructure fire and allied insurance business has seen good business during the current fiscal year but a relative decline if compared with other components of the sector. Marine insurance which is associated with trade of goods and services has increased due to the increase in imports and exports of goods. Motor insurance has been broadly enhanced in its two major sub-components: comprehensive motor insurance and third party or liability insurance. With the rapid growth in car loans in the recent past, Motor insurance premiums have also increased.
The percent-wise contribution of each insurance class with respect to net insurance premiums: Net Fire insurance premiums have declined in the year 2006-07. This has been due to large unearned provisions in Fire insurance premiums. In the year 2003-04, the share was 20.2 percent. Similarly, Marine insurance also has a decreasing share in net premiums, whereas Motor insurance premiums have increased substantially primarily due to the easy availability of auto financing. Health insurance, which depends extensively on individual's preferences, has attracted considerable attention in the recent past. Public awareness of Health insurance has also increased on account of the increasing cost of private medical treatment and the deteriorating state of public health facilities. All these factors have contributed in increasing the share of Health insurance premiums.
The claim ratio, which is the ratio of net claims to net premiums, also showed a tremendous increase (on an overall basis) in the year 2005-06. Most of the claims were related to Fire and Motor insurance, which also justifies the huge provisioning of premiums in these categories. In case of Fire insurance, total claims outweigh the net premiums, which reflect a net loss to the insurance companies. Moreover, Motor claims were also on the rise during the year. If it is assumed that the share of Motor premiums will continue to dominate the total premiums, in addition to the fact that Motor claims contribute significantly to the overall claim ratio, the core income of non-life insurance is expected to be vulnerable in the future, unless there is a drastic improvement in the law and order situation.
During the year ended 31 December 2006, total assets of non-life insurance sector increased significantly out of which investments in shares and debentures, including government securities, constituted the largest component. As compared to the previous year, investments showed an increase of 12 percent.
Furthermore, besides a decline in the amount of premiums, the gap between Gross and Net Premiums has also widened. The decline in net premiums as a percentage of gross premiums is mainly due to a large share of unearned premiums of the insurance companies with other insurance and reinsurance companies and business entities. Moreover, the insurance premium rates have declined considerably over time on account of competition in the non-life market, thus creating a decline in the overall premium amount.
PROBLEMS OF NON LIFE INSURANCE SECTOR:
The magnitude and size of insurance companies in Pakistan has been limited due to many reasons including government neglect and lack of public awareness. Insurance sector had been initially regulated and managed by Ministry of Commerce but due to certain reasons government changed the regulator and it came under direct control of SECP. The management pattern, inconsistent policies and abrupt changes made it evident that the commission did not have required expertise for the sector to operate it in an efficient manner.
There is an inherent reluctance prevalent amongst the people as to religious status and forbiddness of insurance in Islam due to involvement of fixed rate of interest. People elaborate divine commandments differently regarding the matter and there are various interpretations. This school of thought reduces the social acceptability and curtails business volume.
Tariff fixation mechanism is another apple of discord as it is not stable in the industry. Previously the charges used to be fixed and issued by the government and were equal for all enterprises. However the amendments in regulations have now allowed all the companies to determine and offer a different rate to the clients. This change has added to the difficulties of prospective insured and insurers are at large to manipulate every opportunity by enhancing the premiums. As far as motor insurance is concerned a cross section of data from different companies shows that there is a broad slab of annual premium rate from 2percent per anum to 5percent per anum which is reflective the discriminatory powers of the companies to adjust the charges as they deem fit. These malpractices are exploiting the users unsympathetically.
In addition the wrecked credibility of some companies generates a dubious pulse amongst public. Only some companies are operating up to the mark. Rest of the industry does not enjoy a sound reputation and people avoid entering the business. This factor hampers the existing growth and intimidates potential business.
The insurance laws have improved but for further improvement need continuous revision to solve issues. The private sector insurance industry in Pakistan still remains too much regulated. The strangulation from all sides has not allowed the industry to develop fast. Nevertheless in spite of all the problems the private insurance has contributed substantially towards the economic development of the country which is evident from their performance at the stock market.
The local insurance industry has the potential and the know-how to play its due role in the economy of the country. Government ought to take further measures aimed at improving the financial soundness of the companies and also to help retain the insured money in the country to help increase productivity and efficiency. With all this vast potential, the insurance sector in Pakistan, in spite of stated problems would be able to maintain and accelerate its growth in the year to come.