LIFE INSURANCE BUSINESS

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

Insurance should not be subject to the rigorous clerical questioning unleashed out of the perfunctory knowledge of religion and interpretations of one's own choice. Unfortunately it is not so and the business of insurance in general and life in particular has suffered in consequence of religious misgivings. There are people who undertake huge commercial transactions without benefiting from a variety of insurance options available to them for risk dilution/aversion.

Like so many other areas of concern, insurance is one important area that needs an enhanced outreach and corporate development strategy. For 2008, the insurance penetration in Pakistan has been as low as 0.75

The life insurance business in Pakistan has remained under stress particularly during 2003-05, when the number of foreign insurance companies in both life and non-life sectors decreased. Despite having immense growth potential, this sector has lagged behind for a variety of reasons. The 1972's nationalization of life insurance proved a setback to an already underperforming insurance sector. The life insurance business was opened again to the private sector in 1992 with some restrictions for foreign companies. Presently, out of 42 insurance companies in the insurance sector, only eight life insurance companies- cumulatively in public and private sectors -are in the life business.

TABLE-1: INDICATORS OF LIFE INSURANCE BUSINESS IN PAKISTAN (RS. MILLION)

PARTICULARS CY-2007 CY-2006 CY-2005 CY-2004
PRIVATE SECTOR
Share Capital & Reserves 2,461 1,360 1,090 876
Statutory Fund Balance 17,805 11,016 8,120 5,624
Total Equity & Liabilities 21,924 13,683 10,310 7,329
Cash & Bank Deposits 3,508 2,639 1,792 820
Total (Net) Investment 17,199 10,147 7,7768 5,950
Total Assets 21,924 13,683 10,310 7,329
Net Premium Income 8,101 5,887 4,205 3,260
Profit/(Loss) After Tax 1,448 375 258 206
PUBLIC SECTOR
Share Capital & Reserves NA 1,183 1,034 1,013
Statutory Fund Balance NA 137,960 122,776 108,808
Total Equity & Liabilities NA 149,449 132,017 116,570
Cash & Bank Deposits NA 14,332 14,315 9,756
Total (Net) Investment NA 118,025 101,774 93,057
Total Assets NA 149,449 132,017 116,570
Net Premium Income NA 15,992 13,819 11,015
Profit/(Loss) After Tax NA 283 134 113

INSURANCE ASSOCIATION OF PAKISTAN: YEAR BOOK 2007-08

The yearbook included no data for 2008 for both life and no-life while the public sector data for 2007 is also missing.

According to Pakistan Economic Survey of Pakistan 2008-09, life insurance sector, in 2008, posted strong gains on account of handsome gains on investment. SECP, as regulator, is devising ways and means to attract foreign investment in the two segments of insurance sector.

The data shown in table-1 suggest that private sector life insurance companies have outperformed the public sector life insurance companies. Comparing 2006 figures, it will be observed that net premium income to total assets ratio was 43 percent in case of private sector and a meager 10.7 percent in case of public sector. Similarly, the bottom lines depict the efficiency levels of two sectors - the private sector having invariably shown a better return on equity rate. This rate had tremendously improved in 2007 when the private sector recorded a net return on equity rate of 58.84 percent. In table-2, two ratios are presented.

TABLE-2 SIGNIFICANT RATIOS FOR PRIVATE AND PUBLIC LIFE INSURANCE SECTORS

. CY-2007 CY-2006 CY-2005 CY-2004

RATIOS

PRIVATE PUBLIC PRIVATE PUBLIC PRIVATE PUBLIC PRIVATE PUBLIC
Premium to Assets 36.95 NA 43.02 10.70 40.78 10.47 44.48 9.45
Net Profit to Equity 58.84 NA 27.57 23.92 23.67 12.96 23.52 11.15

Besides improving the efficiency level of public life insurance sector, we will have to look for some operational synergies to exploit the untapped potential of life insurance sector as a whole. Insurance companies and banks are best suited to develop these synergies. Our banking sector can play an important role in promoting life insurance. Banks are in an advantageous position to develop some insurance based products to benefit the small depositors and borrowers. There can be a number of innovative approaches. For example, the lives of small depositors (say up to an amount of Rs.500,000) may be insured without involving depositors in any sort of complicated documentation and formalities. The insurance companies should offer a very competitive premium rate to the banks. The premium expense should either be borne by the bank or be deducted from the amount of profit earned on deposits by individual customers.

In case of the death of depositor, an amount equal to the amount of deposit in his account at the time of death should be paid by the insurance company to the legal heirs of the deceased depositor.

This incentive will make the depositors keep maximum amount in their accounts. The cumulative effect will be an enhanced national savings rate besides a high bank deposits growth rate. A similar scheme was once launched by Habib Bank and turned out to be a booming success.

Similar free life insurance benefit may be extended to the small borrowers of all categories. Presently, such insurance is available on credit card borrowings at the expense of the credit card user, which is not fair in view of an already high charge on credit card use. The insurance should cover the outstanding amount of loan, which, in case of the death of borrower, should be written off.