INSURANCE SECTOR

HAMADULLAH ABRO
Research Analyst
, PAGE
Apr 14 - 20, 2008

The Insurance sector plays a significant role of supplementing the economic growth. It provides hedge against potential risks faced by the individuals or companies which could adversely impact their economics if not covered well by the insurance sector. This sector also helps stabilizing the macro economic environment as well as movement. In developed economies, the Insurance industry has been a necessary part of daily life that's why insurance sector has reached to the greater heights there. Whereas in developing countries, the insurance still in its infancy primarily due to its dependence upon an individual's net disposable income, religious belief and government policies, which can be attributed as the main factor of low penetration of insurance. However these countries have realized the benefits the insurance sector offers and have undertaken number of initiatives to develop this sector, as a result insurance industry has been growing at phenomenal rate in the developing countries as well.

GLOBAL SCENARIO

The global insurance industry saw an increase in insurance premiums in FY06 particularly in life insurance premiums. During FY06 both emerging and industrialized countries showed notable growth. Industrialized countries exhibited 6.6% growth in life insurance premiums and non-life sector grew at 0.6% in FY06. In emerging markets, life insurance premiums grew at 21.1% and non-life at 10.8% in FY06. Growth in premiums in Pakistan's insurance sector is the second highest after India among emerging markets which is quite impressive. Besides, the bullish stock markets in emerging countries supported insurance industry to grow due to positive correlation between them. This favored the profitability of life insurance companies during the year. Overall, the growth in the insurance sector was more articulated in emerging markets than in industrialized countries. Relatively low growth in industrialized countries is because of the fact insurance sector there have reached a saturation point.

For last few years emerging markets have been growing at impressive rates along with exponential population growth, due to positive relationship between economic growth and insurance, same goes to insurance industry.

PREMIUM GROWTH RATE IN FY-06

COUNTRIES

LIFE%

NON-LIFE%

Industrialized

6.6

0.6

Emerging

21.1

10.8

Egypt

5.6

-5.9

India

60.1

17.1

Indonesia

10.5

-11.1

Malaysia

1.6

-0.4

Pakistan

29.3

13.8

Thailand

0.6

1.9

Total world wide

7.7

1.5

Source: SBP

Impressive growth rate has gained the focus of insurance companies in industrialized world as a result of it foreign capital has been flowing in to emerging markets. To reap benefits out of it, policy markers are required to pursue conducive investment policies to create business friendly environment and to attract more foreign capital.

PAKISTAN INSURANCE SECTOR

Past few years proved to be a spectacular years for insurance sector. The insurance industry has been reaping the benefits of sustained GDP growth and increased economic activities, especially in the industrial and consumer finance sectors. Moreover, the regulatory requirements set forth by regulators and insurance sector reforms undertaken also strengthened the financial soundness of the sector. As a result assets of insurance industry have grown tremendously.

ASSETS STRUCTURE OF THE PAKISTAN INSURANCE AND REINSURANCE INDUSTRY

 

2004

2005

2006

Share of Life Insurance (Rs bn)

123.91

142.38

164.61

Public Sector%

69.43

67.39

63.14

Private domestic%

2.7

3.19

3.39

Private foreign%

1.66

2.06

2.36

Share of non-Life Insurance (Rs bn)

44.01

53.63

74.33

Public sector%

6.86

7.49

9.68

Private domestic%

18.52

19

20.59

Private foreign%

0.82

0.87

0.84

Share of Total Insurance%

100

100

100

Total Insurance industry assets (Rs bn)

167.92

196.01

238.94

Share in Reinsurance

     

Public Sector%

100

100

100

Total Reinsurance assets (Rs bn)

6.61

5.63

6.64

Grand total Insurance Industry Assets (Rs bn)

174.53

201.64

245.4

Source: SBP

Sector in Pakistan is divided into Life and Non-Life Insurance. An upcoming area is Takaful (Islamic Insurance). As of today, there are 46 non-life insurance companies (2 foreign, 43 private and one state owned), 5 life insurers (2 private, 2 foreign and 1 state owned), 4 Takaful (3 non-life and 1 family) and I state owned reinsurer. Out of these 49 companies are listed at Karachi stock exchange. [Source: SECP]

Total assets of insurance industry stood at Rs 245.4 bn in FY06 increased from 201.64 bn in FY05 showing growth of 22%. All subsector, represented by private, foreign and public owned companies operating in life, non-life and reinsurance segments, contributed to this astounding growth in assets. Non-life insurance assets which stood at 164.4bn in FY06 represented 67% of total assets, non-insurance assets stood at Rs 74.33bn represented 30% of total assets and reinsurance assets stood at Rs 6.64bn represented 3%. 63% of total life insurance segment assets are owned by public sector, still penetration of foreign and private sector is low in this segment. In non-life insurance segment private domestic companies owned 20.6% of assets of non-life insurance segment followed by 9.6% assets owned by public sector. 100% assets reinsurance segment is owned by public sector, which grew at 22% in FY06 over last year.

FUTURE VISTA

The concept of insurance in Pakistan is not acceptable to that extent on account of many reasons like cultural and religious factors, economic environment, and interest rates scenario and premium rates. But for last few years' Insurance industry has been growing due to growing economy, increasing awareness, insurance reforms, competition, improving marketing and distribution by insurance companies but still it is paltry part of country's GDP.

Except for last year FY07, insurance sector did not face any dreadful shock. The recent political instability followed by the assassination of former Prime Minister, elections and its violence in the last year has given the tuff time to insurance sector.

Future of insurance industry is promising in Pakistan. Introduction of Takaful insurance in Pakistan is expected to increase insurance penetration, its assets due to its acceptability and increasing awareness of benefits insurance offers.