May 11 - 17, 2009

Globally the year 2008 proved fatal for the insurance companies but Pakistani insurers did not face similar situation because of a relatively stringent regulatory framework. However, prolonged bearish sentiments engulfing equities market and imposition of floor plunged equities value to exceptionally low. This necessitated recording of impairment cost eroding bottom line of most of the companies.

Despite year 2007 and 2008 marked by exceptionally high claims the leading insurers absorbed the shock. In 2007 insurers enjoyed windfall of exceptionally very high investment income but benefit was largely eroded in 2008. However, the remarkable feature was that in 2008 most of the insurers posted profit from core activity. Historically, even the large companies have been posting loss in underwriting business and posting profit due to high investment income and capital gains.

Most of the companies involved in non-life insurance faced subdued business mainly because of massive decline in motor insurance business. According to a sector expert, though companies faced fierce competition in this segment, it was a major source of cash flow, supporting investment. Similarly, subdued economic activities resulted in lower international trade. However, some of the major fires and terrorist attacks on Marriott Hotel, Islamabad resulted in huge claims. The situation was further aggravated because reinsurance companies also raised their tariff.

Fully cognizant of low insurance penetration and their limited outreach insurance companies and takaful operators are entering into agreement with banks for the distribution of their products. This strategy is likely to help the insurance companies is ensuring availability of their products to a wider range of customers but results will be achieved with time lag.

According to sector experts with the growing terrorist activities many of the businesses i.e. hotels and commercial buildings housing offices of multinational companies have seriously started examining pros and cons of acquiring terrorist cover. This is additional cover to be acquired along with property insurance against natural calamities, fires and earthquake. However, it has also been realized that cost of terrorism cover is too high and cannot be reduced unless certain measures are taken, first and the utmost being creation of terrorism pool.

Another area actively being pursued is crop insurance. At present it is not more than credit cover for the amount extended by the financial institutions to the farmers. It is necessary to achieve the target of comprehensive crop insurance. However, it may take some time till financial institutions as well as the farmers become fully conversant of this facility. The positive point and major contribution is financial institutions bearing the cost of insurance cover of farmers with subsistence landholding. While some of the critics oppose the idea of financial institutions paying insurance cover cost. However, they do not realize that by making this small contribution they are hedging the huge risk.

With the advent of takaful operations in Pakistan insurance penetration is likely to improve substantially. Till recently those considering conventional insurance not fully compliant to Shariah covenants were declining the basic idea of risk mitigation. However, takaful offers the benefit of risk mitigation, which is Shariah compliant also. At present three general takaful and two family tafaful operators are offering Shariah compliant risk mitigation facilities. Fully cognizant of the resistance against conventional in the rural areas, takaful operators are focusing more of rural areas and the effort is also yielding results.

In an attempt to give ample time to takaful operators to overcome teething problems the Securities and Exchange Commission of Pakistan has put an embargo on the opening of takaful windows till 2010 by the conventional insurance companies. While some critics vehemently oppose imposition of any restriction on opening up of takaful windows by the conventional insurance companies; others believe that this restriction should not be extended.

The supporters of the government policy say that since foreign investors have made substantial investment and keeping in view the low insurance penetration in the country, restriction on conventional insurance to open up takaful windows is not justified. However, the opponents of the policy say that if conventional banks are allowed to establish designated Islamic banking branches, restriction on conventional insurance to open up takaful windows is not justified.

Though, the SECP does not accept its incompetence in overseeing affairs of insurance companies, experts are unanimous that the sector needs an autonomous regulatory authority. It is on record that many insurance companies are operating in the country, which are of no consequence as they hardly enjoys any significant market share. In all prudence permission to underwrite insurance business of at least a dozen companies must be cancelled immediately. The first and immediate picks should be the companies, which have been placed on the defaulters' counter of local stock exchanges. Simultaneously, all those private limited companies having dismal paid-up capital and underwriting business should be asked to voluntarily closedown their operation.

Khalid Mirza, Chairman, Competition Commission is likely to raise his eyebrows on such a recommendation because he is against cartelization. Whether he likes it or not, less than half a dozen companies control nearly 90% of the market share. There are companies which hardly underwrite a few policies during a year and allowing such companies to carry on their business is meaningless.

Mirza deserves kudos for initiating investigations against commercial banks and imposing fines on local bourses for imposing floor. However, he has not been fair because he did not impose fine on SECP for approving imposition of the floor. He must be fully aware of the operations of fake insurance companies issuing 'third party cover' of no consequence and causing billions of rupees loss to the national exchequer. This he must take this as a test case and take action against the fake insurance companies. This den operating right under the nose of motor registration office, fully supported by the law enforcing agencies needs to be busted as early as possible. Can Mirza accomplish this mission?