LIFE INSURANCE

AROOJ ASGHAR (arooj.asghar@hotmail.com)
Apr 14 - 20, 2008

Pakistan has a huge potential of growth in life insurance industry which has remained underdeveloped due to various reasons. Insurance companies are trying to diversify their products while making their prices competitive. Since last few years, government has included insurance sector in its financial sector reforms before that it was not given due consideration. In an interesting move, foreign investors have been allowed to hold up to a 51% equity share of companies operating in the life and general insurance sectors. The good thing is that foreign investors are made mandatory to bring in a minimum of US$2 million in the shape of capital in foreign currency and raise an equal amount of equity in the local market while there are also no restrictions on the repatriation of profits.

Pakistan is among the lowest in the world in terms of per capita spending on life insurance. One of the reasons 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 besides affordability. Moreover, general perception is also a contributing factor in low life insurance coverage ratio, Pakistan being an Islamic country, life insurance is widely considered as un-Islamic and this factor is even more pronounced in the case of "Life" assurance. Resultantly people in general get insurance coverage only where it is either mandatory by law or where it is one of the requirements of the lending institutions. There exists a substantial vacuum 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.

The life insurance industry has the potential to emerge as the largest investor after commercial banks in government securities and other capital market instruments. This sector is highly lucrative and has high returns that enable life insurance companies to pay its claims and other liabilities. Tenor of life insurance policies is mostly spread over decades which allow the companies to invest the net premium in long-term securities and in real-estate. Investment of life insurance companies have grown at an average growth rate of above 15% in last four years.

There are only five companies presently operating in life insurance industry in Pakistan including one state-owned State Life Insurance Corporation (SLIC), Postal Life Insurance, two foreign companies and two private domestic companies.

The life insurance companies deal in many different policies from annuities to death benefits and health policies. Payment of claim clauses in the life insurance polices are quite simple and straightforward as compared to non-life business. In Pakistan, people are not very much inclined towards life insurance mainly because of lack of education, religious thoughts, knowledge about insurance, unemployment, lack of understanding of general purposes of life insurance, and ignorance of related benefits.

Moreover, regulatory framework for life insurance sector in Pakistan is not adequate with few market players, limited types of business, and lack of innovative products. Reforms in the sector started in early nineties 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. 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. Insurance companies have not done enough marketing campaigns for their insurance products. According to one estimate, less than 15 million out of 160 million have insurance coverage by the end of fiscal year 2006-07 which will not drastically changed by the end of current fiscal year.

As the tenor of life insurance is for many years it creates doubts in the minds of people to invest in these companies. The issue of creditability in life insurance sector is not only confined to Pakistan but all the developing countries and the countries which have loose corporate governance are facing the same. Quite naturally, people feel hesitant in paying premium to these companies for so many years. On an average any policy holder will get returns after paying continuously for more than 15/20 years whereas his personal financial condition might not remain the same over this period thus this forced ordinary individuals to avoid indulging in this business. Pakistan's educational system is also not very supportive for life insurance sector. Due to this, the sector is facing shortage of quality human resource. Most of the people dealing with formation of policies and policy executors and the marketing people in the sector are not formally trained rather they lack marketing skills which create doubts in the minds of people.

In case of life insurance, there is no domestic arrangement for re-insurance and all the life insurance business is reinsured by the foreign reinsurance companies. Life insurance provides financial security to the insured in case of his death. One of the biggest concerns one can has is how his family will financially survive after his death. But life insurance policy provides mental comfort (to some extent) to the person that his family will survive financially in his absence. Investment in life insurance sector also develops the habit of savings in people. According to GOP sources, presently assets under management of Life insurance companies are exceeding Rs.200 billion. Therefore, it wouldn't wrong to say that these companies are playing an important role in the capital formation as well as providing much needed liquidity to the stock market. Nevertheless, the size of insurance sector in Pakistan is still not in the right proportion and is very small in comparison of the prevailing opportunities.

It would be good if life insurance sector of India, Malaysia and other peer countries are studied and Pakistan adopts their legislations. Interestingly, India, South Korea, Malaysia and Singapore allows deduction of life insurance premium in determination of taxable income for the individuals as this incentive which has become one of the main reasons for relatively high life insurance penetration. According to the Ministry of Commerce life insurance industry has failed so far to penetrate rural areas and in providing insurance cover to socially deprived people. It would be appropriate to made it mandatory for all the workers to get life insurance schemes on significantly lower rates. Insurance companies should enhance their credibility among masses so that people could invest without fear of liquidity of insurance companies. Further, insurance companies should also create more awareness of their products through opening of branches on the pattern of commercial banks.

Summing up, it is vital for Pakistan's economy to include this important sector in the progress of economy. It is equally important to create awareness among people on the importance of life insurance and clarify the perception of un-Islamic system of this business. Last but not the least, life insurance companies should also invest in their human resource development which will help them in selling their products otherwise they wouldn't be able to market their even new products. Like in many other sectors, bold, unconventional and strategically correct decisions are also required in this sector by the regulators and ministry.