PAKISTAN'S LOW PREMIUM-TO-GDP RATIO

SHAMSUL GHANI (shams_ghani@hotmail.com)
Dec 14 - 20, 2009

While the global insurance industry expanding enormously, Pakistan's share in this growth remains abysmally low.

The insurance industry of Pakistan makes a nominal premium-to-GDP contribution of 0.8 percent as against 4.8 percent in India, 8 percent in Malaysia, 7.6 percent in Singapore, and 15.3 percent in South Africa. The developed economies of Europe, Japan, and US contribute around 15 percent.

Out of the 0.8 percent contribution, only 0.3 percent comes from life insurance, while the rest 0.5 percent is contributed by non-life insurance. With such a low penetration, the industry is still at a nascent stage mainly because of a very low demand. The insurance density (premium per capita) in case of Pakistan is only $5.9 as against $38.4 in India.

The potential of this sector has not been tapped as it should have been. The deteriorating law and order situation has spurred the insurance companies to raise their tariffs. The user base has not been broadened. The sector is living in a state of dormancy from expansionary standpoint.

On the contrary, the counterpart banking sector has flourished during the same period. With the dramatic economic expansion and boom in the service sector, the insurance sub-sector remains dwarfed owing to its narrow asset and user base. Contribution from the life insurance business is also low in comparison to the non-life business. Surprisingly, India too posts a very small contribution from life insurance business.

According to the Pakistan Economic Survey 2008-09, the insurance sector in Pakistan comprises 42 insurance/takaful companies, out of which 34 belong to non-life or general whereas the rest 8 belong to the life sector. In addition, 258 insurance surveyors and 404 authorized surveying officers are engaged by the sector.

Their job is to provide independent claim assessment services to the insurance industry. Despite its small size and low penetration, the insurance sector recorded a reasonable growth in 2007 and 2008.

TOTAL ASSETS OF BANKS AND INSURANCE COMPANIES
(RS IN BILLION)

SUB-SECTOR 2002 2003 2004 2005 2006 2007 2008
Scheduled Banks 2301 2540 3003 3624 3884 4785 5332
% Growth - 10.4 18.2 20.7 7.17 23.2 11.43
Insurance Companies 129 150 173 202 245 324 NA
% Growth - 14 15.3 16.8 21.3 32.2 -
Overall growth in the value of schedules banks' assets during 2002-07 = 108%
Overall growth in the value of insurance cos' assets during 2002-07 = 151%

In this age of globalization, meaningful business partnerships can be used to achieve the goals of asset value addition on one hand and social sector uplift on the other. Our focus on service sector economy during the last six years has resulted in some structural imbalances in country's growth pattern.

With an enormous jump in the contribution of services sector to the overall economy, the manufacturing and agriculture sectors have taken the back seat, which is not a good development.

The saddest part of the story is that the mega performance of services sector, especially the financial sub-sector, has contributed little to the uplift of the downtrodden - it has rather widened the rich-poor gap and raised the poverty line a few notches up.

The services sector dominated by the banks reported a growth of 53 per cent for the year 2006-07. The insurance sector, despite recording a higher asset growth - thanks to its very small asset size - still remains a largely untapped financial sub-sector of the economy. To increase its outreach to achieve higher penetration, we will have to look for some natural partnerships. These partnerships can play a very important role in reaching both urban and non-urban segments of the society.

Any insurance other than the life insurance falls under the category of general insurance. Some examples are:

- Marine insurance in case of imported goods and machinery
- Motor vehicle insurance in case of financing by the financial institutions.
- Inventory insurance in case of bank finance under hypothecation or pledge.
- Property insurance in case of house finance.
- Business insurance against fire, theft, loot, arson etc.
- Health and medical insurance.

The owners of business, movable assets, and immovable property obtain these types of insurance. Putting aside the insurance taken out by individuals, banks and insurance companies are the natural partners in the insurance transactions. The synergy produced by their business relationship results in economies of scale to both the partners. A lot, however, still needs to be done especially by the banks, which play a dominant role in the partnership.

Banks are in an envious position to develop some insurance based products to benefit the small depositors and borrowers. This will not only register their support for the social sector programs but will also result in an increased business volume to their bank. Their huge list of customers affords them a cutting edge. What is required of them is a constant search for some innovative products based on the concept of insurance. This will not only provide a monitory shield to their customers but will also make their risk management job cost effective.

Another natural and strong partnership can be forged between the insurance sector and the government. Our agriculture sector, like insurance sector, has huge untapped potential. We can boost agricultural activities by providing insurance cover to the small crop and livestock farmers. While a lot of work has been undertaken on crop insurance by the banking sector, the outreach of agricultural insurance still remains a far cry from what it really should be.

Government needs to step in to provide monetary support to the small farmer in the shape of 100 percent premium cost subsidy. Another area for the government and insurance sector partnership is mandatory health and medical insurance for the countrymen. Takaful companies can be entrusted with the job to prevent religious backlash.

This will not only be in the true spirit of Islamic social justice, but will also alleviate the sufferings of the masses who feel exposed to the threats of disease and death in the view of ever-rising medical costs.

The idea of health and medical insurance is the main plank of developed economies' social sector policies. The developing economies too are incorporating this idea in their social policy design. India has recently implemented this idea with huge success. According to a Dawn article by Anand Kumar, "Health insurance is one of the brightest spots in the non-life insurance sector in India. The segment, which is relatively new to India, already accounts for a fifth of the total non-life sector. Health insurance premiums account for nearly 45 percent of non-life premiums. It is fast catching up with motor insurance, which has hurt the bottom-line of most non-life insurers."