Dec 14 - 20, 2009

The ongoing economic downturn is affecting non-life insurance companies in many ways. Competition has got stiff, and while premium collection is going downward, claims are on the rise. The subdued stock market has not only reduced probability of making capital gains but provisions against impairment cost further reduce the bottom line. The segment getting the worst hit is auto insurance.

Though auto sales have shown some improvement lately, yet overall volume has reduced to nearly half of the turnover achieved couple of years ago. Sector experts attribute the decline in auto sales to a number of factors that include hike in car prices and interest rates. While declining purchasing power is one of the major factors responsible for the decline in car sales, its real impact is evident from rising delinquencies. Since the financial institutions are under stress for recoveries, they are not keen in extending fresh credit.

Even if they are willing to extend credit, they follow stringent credit approval procedures. Repossession of vehicle of the defaulting clients has also made the borrowers more careful resulting in lesser number of applicants received for auto financing.

Starting with burning of cars and other immoveable properties in the aftermath of assassination of Benazir Bhutto on December 27, 2007, repeated terrorist attacks on five star hotels and destruction of huge number of vehicles in suicidal bomb attacks have taken place since then. Reinsurance companies have not only become selective in picking business from Pakistan but have also raised the tariff. Some of the mysterious fire outbreaks at industrial units have caused serious jolts to the companies involved in risk mitigation.

Pakistan Automotive Manufacturing Association (PAMA) recently released car sales data (PCs and LCVs) for the month of November 2009. Car sales registered 19% decline on MoM basis. Average daily sales (on working days) in the month of November stood at 453 cars compared to 455 in preceding month. However, on YoY basis, car sales grew 15% in the month of November 2009 primarily due to low base effect and higher demand from government institutions.

During November, total car sales recorded 9,964 as compared to 12,287 cars sold in October 2009, a decline of 19%. Segment wise analysis shows that highest decline was witnessed in 1000cc (38%) followed by 1300cc (21%). Toyota Corolla remained dominant player in 1300cc with total sales of 3,183 compared to 3,951, down 19% MoM. Like wise, sales of Suzuki Mehran dropped 25%.

As stated earlier car sale is directly related to auto financing and bulk of the auto insurance volume arises from mandatory insurance requirement by the financial institutions. In the past insurance companies managed to solicit huge business by entering into 'bulk insurance' arrangements with the financial institutions. While auto sales have declined considerably, financial institutions are not ready to increase insurance cost. Insurance companies are also content because 'something is better than nothing'.

With the growing age of cars, neither the owners nor the insurance companies are keen in getting 'comprehensive policy'. Getting insurance for vehicles older than three years is an expensive proposal for the owners and insurance companies are also not keen because of the written down value. Although market value of these vehicles is much higher than the written down value, as a policy, insurance companies abstain from issuing policies.

With the passage of time, vehicle population is on the rise but percentage of insured vehicles is on the decline. The situation should be a cause of concern for the law enforcing agencies. 'Act only' insurance is mandatory and without this, bringing the vehicle on the road is sheer violation of the law. Ironically, fake insurance companies issuing the cover right under the nose of motor registration offices fulfill the requirement and traffic police accepts these policies.

The issue has been repeatedly brought to the notice of law enforcing agencies and the Securities and Exchange Commission of Pakistan, the regulator of the insurance sector. However, to the dismal no action has been taken against these fake insurance companies. It is not only a loss for the insurance companies but the practice also deprives the government of billions of rupees of taxes. Ironically, not only the SECP has failed in taking action against such unscrupulous offices, the Insurance Ombudsman also keeps eyes closed to such activities.

Recently, Karachi Insurance Institute organized a seminar on "Riot, Strike, Civil Commotion, and Terrorism". Mahmood Lotia, Senior Deputy Managing Director, EFU General Insurance was one of the distinguished speakers and a large number of participants from the insurance sector attended the seminar. In his presentation, Lotia explained the terms Riot, Strike, Civil Commotion, and Terrorism. The subject was elaborated in the light of the December 27, 2007 incident.

The revised definition of 'Terrorism' evolving in the aftermath of 9/11 incident has changed. Insurance companies have to explain the new definition of the term to the clients.

It is believed that after the appointment of Ms Nasreen Rashid, as Executive Director at the SECP the regulator would be able to play a more proactive role. She should also recommend to the government to promulgate law for the creation of Pakistan Insurance Regulatory Authority (PIRA).