Jan 14 - 20, 2008

Burning and looting in the aftermath of assassination of Benazir Bhutto has once again highlighted the importance of insurance. The need was felt after the earthquake hit the northern areas of Pakistan. However, Pakistanis have a very short memory and are in the habit of forgetting. As regards hedging the risk the nation stands divided, some quarters consider conventional insurance against Shraiah but are also fail in taking benefit from Takaful option.

The assets burnt or looted on 27th December 2007 are being estimated around Rs 200 billion but only 10% of the total assets destroyed / damaged were insured. It is estimated that more than 1,000 vehicles (cars, buses, trucks, trawlers, mini buses and taxis) were burnt completely or partially. However, the regrettable point is that less than 30% of these vehicles were insured and the remaining brunt has to be borne by the poor.

It is estimated that out of the 30% vehicles insured the largest number consisted of private cars acquired by people through auto finance facility. Therefore, it may not be wrong to say that the largest beneficiary of insurance has been the financial institutions, offering lease or auto finance.

A review of the track record of insurance companies operating in the country shows that companies have being managing the risk efficiently and will get a hit of nominal amount or less than 5 per cent of the total claims filed. It is estimated that total claims for damaged vehicles may not exceed two billion rupees and five percent of this amount would translate into a hit of approximately Rs 100 million only. The risk is also adequately distributed among less than half a dozen insurance companies.

A little probe regarding the vehicles not insured shows that these were very old and insurance companies do not provide insurance cover for such vehicles. However, it is also found that some of the new/latest vehicles were not insured because the owners consider insurance in conflict with Caries. However, such a debate should have not been there after the establishment of Takaful companies.

Another important observation is that Islamic banks undertake auto leasing business under Ijarah. Till recently they were covering the risk through conventional insurance companies. One has a right to ask the Caries scholars sitting as advisors on the Caries Boards, if conventional insurance was against Caries why did they approve it in case of Ijarah? According to some insiders, it was "selecting the lesser evil". It seems a paradox that institutions accept the lesser evil to protect their interest but do not allow an average person to use the same option to hedge his/her assets.

Since vehicles will continue to be used for public and private journey and transportation, it is imperative for the financial institutions and the insurance companies, including Takaful operators to create awareness about the benefits of hedging risk. While the affluent people may be ready to take a hit, poor cannot bear this. A taxi/bus/truck is an asset as well as a source of income for the owner partial or complete loss of this asset could bring him on street.

Auto insurance business was already under cut-throat competition and the recent losses have forced the insurance companies to revise the tariff upwards. The rule of tub in insurance business is "larger the pool of assets being insured lower the tariff". This is because in case of any mishap the amount of claim filed will always be much lower compared to the premium collected.

With the increase in cars sold under hire-purchase agreement, insurance companies were able to lower the premium rate. In the past car snatching incidence were high particularly in large cities. However, CPLC helped the police in containing the crime as well as improving recovery of stolen vehicle. This enabled the insurance companies to bring down the tariff. Whatever happened on 27th December was exceptional and just cannot become precedence for charging higher tariff.

According to insurance sector experts one of the most important segments of auto insurance "Act Only" has become an exclusive domain of the cheaters. These fake entities not only deprive the insurance companies of billions of rupees business but also rob the national exchequer. Insurance companies are liable to pay a fix rate of stamp duty on each insurance policy issued but these fake companies do not pay a paisa. Ironically, these criminals operate right under the nose of law enforcing authorities, motor registration offices and police.

Insurance companies have repeatedly raised the issue with the regulator Securities and Exchange Commission of Pakistan (SECP) but all in vain. The SECP wants the insurance companies to improve their coverage but does not seem to be willing to help them by catching the culprits and giving them exemplary punishment.

The stake of commercial banks in the insurance companies has been increasing. Now almost all the commercial banks have associate insurance companies. Any factor resulting in losses to insurance companies also affect the other income of banks. Therefore, now commercial banks and insurance companies must join their hands together the resolve this long outstanding issue.

Caries scholars and Takaful operators should also join hands to create awareness among the masses regarding hedging the risk in the light of Caries. It is also the responsibility of the state to protect the interest of each and every citizen. In case of any calamity there is always pressure on the government to pay compensation to the aggrieved. Appropriate risk coverage could also save the government from such financial shocks.