Apr 14 - 20, 2008

Most probably a new chapter in the history of insurance sector has been written by the companies for the year ending 31st December 2007. However, it seems a paradox that companies posting huge earning per share have either posted marginal profit or loss in their core business. The exceptionally high EPS is the result of realization of one off capital gains. One wonders, what sort of profit & loss accounts will be released by these companies for the year 2008.

A closer look at the profit & loss accounts of most of the insurance companies shows a rare story. For example one of the companies has posted EPS of around Rs 145 out of which nearly Rs 142 has been contributed by the capital gains. The point worth noting is that this company had posted Rs 7 EPS for the year 2006.

Analysts rationalize this sort of earnings in different ways. One of the groups believes that expected end to capital gains exemption is the sole reason for posting of mind boggling EPS figures. It is certain that these companies will not be able to get such wind windfall profit in the future. It would be extremely disappointing for the shareholders to see companies posting EPS ranging from 2 to 5 rupees in the near future, keeping in view the economic turmoil being faced by the country.

The other group believes that this was for the first times that insurance companies were forced to book capital gains in one go because of fear of termination of capital gains tax exemption. These fears have started coming true because of mounting pressure on the new government to end this exemption. The FPCCI in its budget recommendations has asked the government to impose tax on capital gains.

There is also resentment on this act of insurance companies by the shareholders. They say though the companies have posted fabulous EPS they have not declared dividend in the corresponding ratio. Despite this windfall profit the companies have announced to distribute only nominal dividend.

However, companies are of the view that it is only a paper entry. It could have increased the value of equities held by the companies but has not really translated into actual gains because the securities have not been sold. Besides, the companies could not afford to distribute this kind of windfall profit because it cannot replicate this in the future.

The detailed analysis of profit & loss statements of insurance companies indicates that auto insurance has become the major business for these companies. While they earn bulk of the premium from this segment they also have to pay the largest percentage of claims under this head.

According to some of the sector analysts, auto insurance has always been a very risky business. In an attempt to solicit more business insurance companies indulge in cutthroat competition. On top of this huge claims of this segment break the back. Ironically, some of the companies getting the worst hit are those, which do not reinsure this risk due to cost cutting measures but actually end up getting the worst hit.

The real impact of 27th December 2007 carnage, looting and burning has not reflected in the profit & loss statements of insurance companies for the year ended 31st December 2007. The companies had not paid any claim pertaining to this trauma till the year end because of closure of all types of business due to three days mourning. A glimpse of this trauma may reflect in the first quarter accounts, period ending 31st March 2008. Still it will be only part of the total impact.

According to an analyst the cause of all these ills is too many regulators trying to regulate a business, which they hardly understand. Some of the aspects of the insurance business are overseen by Ministry of Commerce. Securities and Exchange Commission of Pakistan ensures compliance to Companies Ordinance and Insurance Ordinance. The players have been demanding establishing Pakistan Insurance Regulatory Authority to monitor and regulate operations of the insurance companies. However, neither the ministry nor the SECP is willing to let this important sector go out of their hands.

One of the factors affecting profitability of the insurance companies is tariff. Some time back the government used to fix tariff but now companies are at liberty to charge any tariff and even discriminate among various types of customers, an individual and an institution. This has also created uneven playing field for the small players because of special tariff for large institutional customers. This disparity is most pronounced in auto insurance business.

The other reason for the suffering of insurance companies is the perception that insurance is in contravention with Shariah. It is interesting to note that till recently Islamic banks were accepting insurance cover issued by the conventional insurance companies. On top of this the opponents of conventional insurance are also resisting Takaful.

One also wonders on the duality of standards. Conventional commercial banks were allowed to operate designated Islamic banking branches but conventional insurance companies were denied this option. Sector experts were of the view that as such insurance business is very small and out of this Takaful component will be highly insignificant and dedicated Takaful operators will take years to breakeven their operations.

It is once again reiterated that the government should establish a fully autonomous Pakistan Insurance Regulatory Authority to oversee and regulate insurance companies. Hike in the minimum paid-up capital requirement for insurance companies cannot improve their claim payment ability. If local insurance companies are required to meet the minimum paid-up capital requirements then similar restrictions should also be on the branch offices of foreign insurance companies in Pakistan.

Last but not the least regulators and players should jointly initiate awareness programs for the benefit of general public. Islam does not stop people from hedging the risk. This point should also be propagated by the Takaful operators. Now Pakistan has four Takaful operators, three for general and one for family Takaful.

It is also suggested that Takaful companies should also be immediately listed at the local stock exchanges and their shares should also be offered to general public at the earliest.