Apr 14 - 20, 2008

As such reforms in Pakistan's insurance sector that is registering a sluggish but improving growth rate following the promulgation of insurance ordinance 2000 are not needed across the board but implementation of Security and Exchange Commission of Pakistan (insurance) Rules-2002 in its true essence with stringent approach can transform the entire outlook of the insurance sector, which at present is tainted with the higher probability of corruption compared to other businesses because of its being perceived as money minting occupation and regulator's sheer negligence. Even if required addition of few clauses guiding corporate restructuring in detail, these insurance rules chalked out in the light of insurance ordinance 2000-corrigendum of insurance act 1938-can provide a befitted panacea to cure deformations in the present structure of the insurance sector of the country as well as to increase insurance [life and general] product's penetration which has snail pace in comparison with the regional and global markets.

According to an estimate of insurance density, Pakistan's insurance sector premium per capita is crisscrossing $4.6 while in India it is $22.7, Iran 36.1, Sri Lanka 16.3, Japan 3,746, and UK $4,599. Similarly, in terms of premium in percent of GDP, Pakistan has the lowest share of 0.67%, India 3.1, Sri Lanka 1.4, Iran 1.2, UK 12.4, and Japan 10.6%. Among them, insurance industry of India presents an ideal model to be emulated. India introduced insurance reforms in 2001 and since then 17 life insurance companies have set up there while numbers of life insurance companies in Pakistan still revolves around pentose despite undergone first revamp back in 1992, when private sector was allowed life insurance business.

Insurance business is considered as a safe and less risky venture for its propensity to deal with the insured's prospective untoward condition in return of money periodically collected in advance. And, therefore execution of the agreement between insurer and insured taking place mostly after arsing need of the later has turned the insurance sector into a nursery prospering multitude of aberrations in premium, bogus and fake insurance policies and unscrupulous policy makers. While only top general and life insurance companies form an understanding to share certain profits with the insured on deposited premium upon maturity of the policy, numerous classes of insurance like marine, third party motor insurance, fire, etc. usually undertaking term insurances nullify worth of premiums after a predefined period of time. "This makes the fire and miscellanea classes risk aversive," remarked Tahir Hussain, Zonal Manager, Asian Mutual Insurance Company. The frequency of claims in these kinds of insurances is quite unnumbered, he said and added owing to their invalidation upon maturity the flow of money tilts toward one side [insurer]. Thereby, often sale agents of insurance policies use fake insurance certificates to churn out money for themselves, he underscored.

"Besides, insurance companies have also a vast space to determine tariff of the policy according to the size of the risk associated with the financial security." Designated employees of companies have backdoor relationship with insurance agents to get their companies shipments deceivably insured and in return get hold of a variable commission, said Mujib Ahmed, manager of an insurance company. They do not release the premium until shipments arrive, if arrived in undamaged, the proportion of commissions slice a big chunk out of premium. Seldom has the claim emerged, he confides. If vice versa, entertaining claims is excused at the behest of one reason or another. Normally, the unresolved case goes into litigation to take long to be resolved.

It is incomprehensible that how these unscrupulous insurers mange to fulfil the minimum paid-up capital requirement of Rs. 80 million in order to carry forward non-life insurance business? Doubtful also is their arrangements with reinsurers. While it is mandatory for non-life insurers to reinsure 66.6% of their liabilities (insurances) annual report of few insurance companies show outflow of premiums to reinsurer well below the defined limit. For example, one famous non-life insurance company underwrote Rs. 8.4 billion premiums in 2007 while net of reinsurance it did Rs. 5.7 billion. Despite SECP recently announced to crack down on insurers issuing bogus third party insurance certificates, such companies are still operating in the market and hoodwinking insured besides evading significant taxes with impunity.

Hamad Javed, Assistant Director (Insurance), SECP told this scribe, a framework to wipe out especially the fraudulent motor third party insurance companies is under way. "Timeline has not been decided," he said. "Motor third party insurance companies, which are registered with the SECP and members of Insurance Association of Pakistan, will only be allowed to operate." The prevailing law and order situation and uncertainty in governing system elongate the process of implementing reforms, he pinpointed. Responding to a question, he said, SECP formulates and enforces regulations at macro level and SBP has an equal responsibility to check bank managers indulged in violation of insurance rules. When asked if SECP exclusively monitors claim repayments status of insurance companies, he replied, "IAP has the statistics."

Previously, premium charged on insurance [general and life] policies by tariff insurance companies was annually determined by the Insurance Association of Pakistan. But, presently insurance companies are fully independent in terms of calculating their premiums according to the market operation. While talking to this scribe, N.A. Usmani, Secretary IAP says right now there is neither any tariff formula applicable in the market nor is the distinction between tariff and non tariff companies. "We no more can set tariffs of insurance policies after the advent of competition commission of Pakistan. Now, the premiums on insurance products are market driven." However, this issue is further scrutinized by SECP in consultation with IAP, he added. He expressed his unknowingness of any major sectoral reforms. However, there are many problems, he promoted.

Apparently, SECP is not actively dealing with the glitches that may be instated in the current framework of insurance sector otherwise growth perspective should have been different. If the issue is to curb unfair practices from the market then inter-organizational supports may be effective. If it is unskilled workforce then academic assistance should unhesitatingly be called on. Alternatively, if it is with the inability to begin with then better it would be to yield authority to someone else.